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TMI Blog1983 (3) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO and contended that the disallowance aggregating at Rs. 60,000 was validity made by the ITO acting in accordance with the provisions of s. 40A (2) (a) and (b). According to him there was a close connection between the respondent firm and M/s Ambica Textile Mills and since the commission paid by the former to the latter was highly excessive or unreasonable having regard to the services rendered by the selling agency firm, the ITO had every justification to invoke the provisions of s. 40A(2) (a) and (b) and disallow 50% of the commission paid to M/s. Ambica Textile Mills. Besides justifying the disallowance of Rs. 45,000 (the correct figure of disallowance by ITO is Rs. 45,030), the ld. departmental representative also supports the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the provisions of s. 40A (2) and (b) applied, the ld. departmental representative has relied on the decision of the Madras High Court in the case of CIT vs. A. K. Subbaraya Chetty and Sons (1980) 16 CTR (Mad) 252 : (1980) 123 ITR 592 (Mad). 3. On the other hand the ld. counsel for the respondent has supported the order passed by the CIT(A). According to him, the provisions of s. 40A (2) (a) and (b) did not apply to the facts of the case and that in any case. The expenditure by way of commission to M/s Ambica Textile Mills was neither excessive nor unreasonable and that the expenditure having been incurred on grounds of business expediency and wholly and exclusively for the purpose of business was rightly allowed by the CIT (A). The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Krishna Kumar Pacheriwala who is the son of Shri Parmeshwarlal Pacheriwala, one of the two partners of the respondent firm had actually become a rebel and had started running a parallel business which eroded the profit of the respondent firm and, therefore, it was decided to work in collaboration with the organization of Shri Krishna Kumar Pacheriwala which had by that time been converted into a firm consisting of Shri Krishna Kumar Pacheriwala and his sister Smt. Manju Devi. In these circumstances, according to the counsel it had become imperative on the part of the respondent firm to agree in the terms of agreement entered into and that the commission paid as a result of that agreement was wholly allowable as business expenditure. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g regard to the close relationship between the partners of the two firms the provisions of s. 40A (2) (a) and (b) would apply. Since that is that only decision by the Hon ble High Court on the subject we would respectfully follow it and hold that the provisions of s. 40A (2) (a) and (b) could be validly applied by the ITO if the circumstances so warranted. We have now to see as to whether the facts and circumstances of the case warranted any such finding that the expenditure by way of commission paid by the respondent firm to M/s Ambica Textile Mills was unreasonable or excessive having regard to the services rendered by them. Even though it is correct as pointed out by the ITO and by the ld. departmental representative that the sales which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lined to act in the manner in which the respondent firm acted. By paying a higher commission of 3% the respondent firm was able to economise on expenses on travelling and salary and was at the same time able to earn an increased gross profit of 7.04% which was nearly 2.5% higher than the profit earned in the immediately preceding assessment. We are, therefore, inclined to agree with the finding given by the ld. CIT (A) and we would hold that the expenditure by way of commission was, in the facts and circumstances of the case, neither excessive nor unreasonable having regard to the services rendered by the agency firm. The payment by way of commission having not been doubted, the entire expenditure so claimed was allowable business expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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