Law:

Section:

Section 40(c) of the income-tax act, 1961 [as amended with effect from 1-4-1972 by the finance (no. 2) act, 1971]-Amounts not deductible-Expenditure and other allowance in case of companies-Assessee-company appointed a firm, constituted by partners representing respective HUFs, as sole selling agents and paid commission of Rs. 10,11,110 during assessment year 1972-73-Some partners were directors and some were relatives of directors in assessee-company-ITO allowed deduction of entire commission-Commissioner set aside under section 263 impugned assessment order, holding that commission payment exceeding Rs. 72,000 was not deductible under amended section 40(c)-Tribunal cancelled commissioner's order holding that amended section 40(c) did not govern payment of commission by assessee-company to sole selling agency firm and that impugned payment of commission did not constitute expenditure of nature contemplated by section 40(c)( i)-Whether tribunal justified-Held, on facts, yes Facts HRP & Bros., a partnership firm, was sole distributors for the assessee-company. In terms of the sole selling agency agreement, the firm was entitled to commission on the sales made by it direct or through them. It was initially appointed in April 1960 for five years and appointment was renewed from time to time, last renewal was to expire on 31-3-1975. As on 1-4-1969, the firm was comprised of six partners some of whom represented their respective HUFs and some partners were also directors or relatives of directors in the assessee-company. The commission was allowed in all the assessment years right from 1963-64 to 1972-73. For the assessment year 1972-73, the assessment was completed on 26-2-1973 and the ITO appended to the assessment order a note to the effect that section 40(c) is not applicable. However, after the assessment was completed, the ITO wrote a letter proposing to reopen the assessment on the ground that some of the partners of the firm were either directors or relatives of directors in the assessee-company and as such commission paid to the firm would entail disallowance in view of section 40(c) as amended by the Finance (No. 2) Act, 1971. However, on assessee's…

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