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[2007] 293 ITR 451 [2007] 160 TAXMAN 244 (KAR.) HIGH COURT OF KARNATAKA Deputy Commissioner of Income-tax (Assessment) Special Range-6, Bangalore* v. Microtex Separators Ltd. R. GURURAJAN AND N. ANANDA, JJ. IT APPEAL NOS. 63, 64, 66 AND 82 OF 2000 DECEMBER 22, 2006 Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments - Assessment years 1991-92 to 1994-95 and 1996-97 - Assessee-company had paid 10 per cent commission on its sales turnover to its sister concerns as sole selling agents - Assessing Officer applying provisions of section 40A(2) restricted commission at 6 per cent - Tribunal observed that sister company was sole selling agent for several years and it had earned reputation of sole selling agent of assessee-company; agreement for payment of commission at 10 per cent not on entire amount but after giving deductions; and there was no intention to avoid tax and allowed assessee's claim - Whether Tribunal was justified in doing so - Held, yes FACTS The assessee-company paid a commission of 10 per cent on its sales turnover to the sister concern in consideration of the services rendered by the latter as the sole selling agents of the assessee under the sole selling agency agreement. The Assessing Officer observed that the commission paid at the rate of 10 per cent was highly excessive and unreasonable in comparison to the meagre services rendered by the commission agents. Thereafter, the assessing authority applied provisions of section 40A(2) and restricted the payment of commission to 6 per cent. On appeal, the Commissioner (Appeals) upheld the assessment. On further appeal, the Tribunal held that the payment of 10 per cent commission would not attract section 40A(2). It held that the disallowance of 4 per cent was not proper and commission as claimed was required to be allowed. On appeal : HELD From the various case laws, it is clear that the department would be justified in interfering with the claim of commission in the event of no evidence or in the event of the said commission being made over just to benefit the kith and kin in terms of section 40. [Para 14] In the instant case, it was seen that the…

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