1983 (3) TMI 142 - AT - Income Tax

Summary

Issues:
1. Disallowance of commission paid by the respondent firm to a selling agency firm.
2. Applicability of provisions of s. 40A (2) (a) and (b) of the IT Act, 1961.

Detailed Analysis:
1. The appeal was filed by the revenue objecting to the CIT(A) order deleting disallowances of Rs. 45,000 and Rs. 15,000 out of commission paid to a selling agency firm. The revenue argued that the commission paid was excessive and unreasonable, justifying the disallowance under s. 40A (2) (a) and (b). The departmental representative supported the ITO's order, emphasizing the close connection between the respondent firm and the agency firm. The revenue contended that the commission paid was significantly higher in the relevant year compared to previous years, indicating unreasonableness. They relied on a Madras High Court decision to support their stance.

2. The respondent's counsel defended the CIT(A) order, asserting that the commission paid was not excessive or unreasonable, being essential for business expediency. They highlighted the circumstances leading to the agency agreement, which was a response to a rival organization's actions detrimental to the respondent firm. The counsel presented evidence showing benefits derived from the agreement, such as obtaining a security deposit at a lower interest rate and an increase in gross profit. They argued that the provisions of s. 40A (2) (a) and (b) were inapplicable since the payment was made between two firms, not to a partner or relative of a partner.

3. The Tribunal analyzed the applicability of s. 40A (2) (a) and (b), citing a Madras High Court decision where similar provisions were upheld due to close relationships between partners of the involved firms. However, after careful consideration, the Tribunal found that the commission paid by the respondent firm to the agency firm was not unreasonable or excessive. They noted the benefits accrued to the respondent firm, including lower interest rates, reduced expenses, and increased gross profit. The Tribunal agreed with the CIT(A) that the commission was justified and allowable as business expenditure. They emphasized that the disallowances made by the ITO were not valid, as per the terms of the agency agreement.

In conclusion, the Tribunal dismissed the departmental appeal, upholding the CIT(A) decision regarding the disallowance of commission paid by the respondent firm to the selling agency firm, as they found the expenditure to be reasonable and essential for business operations.