1983 (4) TMI 99 - AT - Income Tax

Summary

Issues: Disallowance of commission payment under section 40A(2)(a) of the Income Tax Act.

Analysis:
The appeals were filed by the revenue challenging the disallowance of commission payment made by the assessee to a relative under section 40A(2)(a) of the Income Tax Act. The Income Tax Officer (ITO) had disallowed a portion of the commission paid to the relative, considering it excessive and unreasonable compared to the rate paid to another financier. The Assessing Officer noted that the relative provided the loan without security or guarantor, and the commission rate was fixed at 3 1/2 per cent of gross receipts. The ITO estimated the commission at 2 per cent of the total finance and allowed only a partial deduction, adding the rest to the income. The matter was taken up before the Appellate Authority Commissioner (AAC), who allowed the claim, leading to the appeals by the revenue.

The revenue contended that the AAC erred in law and fact by deleting the disallowance, arguing that the payment of commission to a relative was unusual and should have been disallowed under section 40A(2)(a). It was emphasized that the relative's relationship with the assessee was ignored by the AAC, contrary to the provisions of the Act. The revenue urged that the ITO's decision should be upheld, and the disallowance restored. On the other hand, the assessee's counsel supported the AAC's order, highlighting that similar payments were accepted in previous years, and the need for financial assistance due to the nature of the business. The counsel argued that the ITO had previously accepted the commission payments and stressed the legitimate business needs for borrowing from the relative. The counsel urged that the AAC's decision be upheld based on the facts and circumstances of the case.

Upon reviewing the orders and arguments, the Appellate Tribunal found that the commission payment to the relative was disputed as excessive and unreasonable by the revenue, leading to the partial disallowance by the ITO. However, the Tribunal noted that the rate of commission paid to another financier was considered reasonable, indicating inconsistency in treatment. The Tribunal agreed with the AAC's reasoning that the commission rate should be considered reasonable based on the extent of the loan and the risk involved for the relative. The Tribunal observed that the bank rate used by the ITO as a guide was not applicable in this case, as different criteria apply to bank loans with securities. Consequently, the Tribunal upheld the AAC's decision to delete the disallowance and directed the ITO to allow the commission payment as per the agreement. The Tribunal found no grounds to interfere with the AAC's order and dismissed the appeals by the revenue.