1977 (2) TMI 51 - AT - Income Tax

Summary

Issues:
Disallowances under section 40A(2)(b)(ii) and (iii) of the IT Act, 1961.

Detailed Analysis:

1. Background and Disallowances:
The appeals by the Revenue were against the AAC's order deleting disallowances made under section 40A(2)(b)(ii) and (iii) of the IT Act, 1961. The assessee, a Registered Firm, had appointed an individual as a Sales-Manager with a fixed commission on turnover. The ITO disallowed a significant portion of the commission, considering it excessive and invoked section 40A(2) to allow only a minimal sum as adequate remuneration, adding back the rest to the total income of the assessee for the relevant assessment years.

2. Appeal and Contention:
The assessee appealed to the Appellate Assistant CIT, arguing that the individual in question did not fall under the definition of a relative as per section 40A(2)(b) of the Act. The AAC accepted this contention, holding that section 40A(2) was not applicable, and the disallowances could not be sustained.

3. Revenue's Justifications and Arguments:
The Revenue, in the appeals before the Tribunal, tried to justify the disallowances made by the ITO under section 40A(2)(a)(iii) of the Act, claiming that the individual had a substantial interest in the business. Additionally, it was argued that the commission payment should be tested under section 37 of the Act, contending that a major portion of it should be disallowed as not laid out for the purpose of the business.

4. Tribunal's Decision and Reasoning:
After considering the submissions, the Tribunal found that the Revenue's arguments were not valid. It was noted that the remuneration paid to the employee was not excessive and was commensurate with the services rendered. The Tribunal highlighted that the payment was based on an agreement from 1963, and the total remuneration had increased over the years due to the turnover-based commission structure. The Tribunal rejected the Revenue's contentions of extra commercial considerations, emphasizing that the payment was in line with the employee's services. As a result, the Tribunal dismissed the appeals and confirmed the AAC's order.

5. Conclusion:
Ultimately, the Tribunal dismissed the appeals, upholding the AAC's decision to delete the disallowances under section 40A(2)(b)(ii) and (iii) of the IT Act, 1961. The Tribunal found that the remuneration paid to the employee was reasonable and linked to the services provided, thereby rejecting the Revenue's arguments for disallowance.