Law:

Section:

Section 37(1) of the income-tax act, 1961-Business expenditure-Assessee-firm engaged as sole selling agents another partnership firm CSC consisting of close relatives of its partners-Assessee claimed deduction of Rs. 35,619 as commission paid to CSC under agreement-Genuineness of arrangement doubted and, Rs. 25,000 disallowed-Whether disallowance justified-Held, on facts, yes Facts The assessee, a partnership concern with four partners, viz , SG, his two sons and PC, appointed CSC on 28-12-1963 as its sole selling agents on a commission of 7½ per cent of the entire sales up to Rs. 2,50,000 in a year and 10 per cent of the entire sales in case these were pushed beyond Rs. 3 lakhs. This commission was to be inclusive of all advertisement, travelling and other incidental expenses which CSC may have to incur. The firm CSC itself came into existence on 1-1-1964 under a partnership deed with three partners, viz., RP (son of SG's sister-in-law), SG's wife and SG's mother. A minor son of SG was admitted to the benefits of partnership. The profits were to be divided among the four in the proportion 30 : 30 : 25 : 15. In its assessment for the assessment year 1965-66, the assessee claimed as deductible expenditure a sum of Rs. 35,619 as the commission paid to CSC at 10 per cent of turnover of Rs. 3,56,231. Neither the books of CSC nor any correspondence with it was produced before the ITO, and the claim was pressed only on the basis of the agency agreement. The ITO noted that as a result of this arrangement 70 per cent of the commission paid to CSC came back to the family of SG. He also noted that the assessee had its own separate stockists and that no orders were shown to have been booked by CSC. He came to the conclusion that the firm CSC had not come into existence. However, the ITO did not disallow the whole of Rs. 35,619, but allowed Rs. 10,619 which in his opinion may have been spent by the assessee for advertising and travelling for promotion of sales. In successive appeals, the AAC and the Tribunal confirmed the order of the ITO. On reference : Held The facts on record showed that the assessee', business was prospering and there was no evidence to make out that…

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