1981 (6) TMI 73 - AT - Income Tax

Summary

Issues:
1. Disallowance of commission paid to a marketing company.
2. Disallowance of service charges paid to a related party.
3. Disallowance of capital expenditure on the purchase of blocks.

Analysis:

Issue 1: Disallowance of Commission Paid to a Marketing Company
During the assessment year 1975-76, the Income Tax Officer (ITO) disallowed a commission paid by the assessee to a marketing company. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed a reduced commission payment. In the subsequent year, a new agreement was made, changing the payment structure. The ITO disallowed a significant portion of the payment, including service charges. The CIT(A) upheld the disallowance of service charges under section 40A(2) due to close relations between the parties. The Appellate Tribunal found the payment reasonable based on business needs and allowed the deduction, overturning the CIT(A)'s decision.

Issue 2: Disallowance of Service Charges Paid to a Related Party
The ITO disallowed a portion of the payment made by the assessee to a related party under a new agreement, citing capital expenditure and invoking section 40A(2). The CIT(A) upheld the disallowance of service charges, stating the payment was excessive and served no business purpose. However, the Appellate Tribunal found the service charges to be reasonable, representing only 2 1/2% of total sales, and allowed the deduction as legitimate business expenditure, contrary to the CIT(A)'s decision.

Issue 3: Disallowance of Capital Expenditure on Purchase of Blocks
The ITO disallowed a sum as capital expenditure on the purchase of blocks, which was upheld by the CIT(A). The Appellate Tribunal directed a review of depreciation allowance on these purchases as per rules, as the ITO had not considered this aspect. The tribunal allowed the appeal, subject to the observation on the depreciation allowance.

In conclusion, the Appellate Tribunal allowed the appeal, overturning the disallowance of service charges paid to the marketing company and directing a review of depreciation on capital expenditure. The decision emphasized the reasonableness of the payments based on business needs and legitimate expenditures, contrary to the initial disallowances made by the lower authorities.