9911796707
TMI Blog1981 (6) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... he ITO totally disallowed a commission of Rs. 50,000 paid by the assessee in that year. On appeal, the CIT(A) allowed commission @ 15 per cent on the sales and thereby allowed a commission payment of Rs. 30,500 as against the claim of Rs. 50,000 made by the assessee. 2. During the asst. yr. 1976-77, the assessee entered into a new agreement with the Bombay company on 19th April, 1975. Under the new agreement, the system of payment of commission was changed. The assessee was to reimburse the Bombay firm the entire expenditure made by it in connection with the sales made by the assessee through the said Bombay firm. However, over and above the reimbursement of expenditure, the assessee was required to pay 15 percent of the total expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the detailed reasons recorded in my appellate order dt. 11th April, 1980 in Appeal No. IT-798/78-79/8, it was held that the provisions of s. 40A(2) are attracted. The ITO is, therefore entitled to "look into the legitimate needs of the business carried on by the appellant firm and determine whether the payment made to the Bombay firm is excessive or unreasonable. The ld. counsel for the appellant stated that the only reason for incurring business expenditure through the Bombay firm is that the manufacturers of Indore had a bad name in the Bombay market. As the name of the selling agent located at Bombay also appears on the packages, the, name of the Indore manufacturers would still be there. I am not prepared to believe that the customer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eep fall in the turnover during the asst. yr. 1975-76. It was pointed out that by making this arrangement the assessee s sales during the asst. yr. 1976-77 went up to 41.9 lakhs as compared to the sales of Rs. 29.17 lakhs in the immediately preceding year. It was submitted that the service charges of Rs. 97,275 paid to the Bombay firm represented only 2 1/2 per cent of the total sales and the Bombay firm only earned a net sales and the Bombay firm only earned a net profit of little over Rs. 20,000 during the relevant assessment year. It was further pointed out that the arrangement with the Bombay firm was made entirely for the purposes of business and commercial expenditure and even during the asst. yr. 1975-76 the CIT(A) allowed a deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,500 was allowed as a deduction in the earlier year goes to show that the expenditure incurred by the assessee was in the connection with its business, and therefore, it cannot be said that the entire service charges paid by the assessee during the relevant assessment year does not serve any business purpose as observed by the CIT(A). We have also perused the P L Account of the Bombay firm for the relevant assessment year and find that the net profit to the said firm was only to the extent of a little over Rs. 20,000. In these circumstances, it cannot be said that they payment of service charges to the Bombay firm made by the assessee was only with a view to divert its profits. Although, technically., the provision of the s. 40A(2) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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