1980 (4) TMI 203 - AT - Income Tax

Summary

Issues:
- Validity of commission payments made by the assessee to certain agencies
- Compliance with the Companies Act, 1956 regarding the appointment of agencies
- Admissibility of commission payments under the Income Tax Act, 1961

Analysis:

The judgment pertains to two departmental appeals arising from the assessment made by the Income Tax Officer (ITO) on a company for the assessment years 1973-74 and 1974-75. The company in question is engaged in the manufacture of vegetable tanning extracts. The ITO disallowed commission payments made to certain agencies, suspecting their genuineness due to the involvement of directors/shareholders and their families in these agencies. The ITO also raised concerns about compliance with the Companies Act, specifically section 314. However, the Appellate Assistant Commissioner (AAC) allowed the appeals, deeming the payments genuine and finding no violation of the Companies Act. The Department appealed against this decision, arguing that the commission payments were not allowable, even citing a violation of section 314 of the Companies Act. The Income Tax Appellate Tribunal (ITAT) considered all arguments and material on record.

The AAC's order was comprehensive, addressing all objections raised against the claim. The ITAT noted that the Company Law authorities had confirmed that section 314 of the Companies Act was not attracted in this case, as the agencies were not sole selling agents but acted as intermediaries. The ITAT emphasized that the involvement of directors/shareholders in the agencies did not automatically render the payments non-genuine. The agreements between the company and the agencies imposed significant obligations on the agencies, indicating a genuine business relationship. The ITAT found no evidence to suggest that the agencies were not legitimate, emphasizing the need for concrete facts rather than mere suspicion for disallowance. The ITAT also dismissed the argument that the payments could be disallowed under section 40A(2) of the Income Tax Act, as the commission rates were not deemed excessive when considering the obligations borne by the agencies.

Ultimately, the ITAT dismissed the appeals, upholding the AAC's decision regarding the genuineness of the commission payments and the compliance with relevant legal provisions. The judgment highlights the importance of substantiating claims with concrete evidence and the need to assess payments in light of the obligations undertaken by the parties involved.