Law:

Section:

Section 40(c) of the Income-tax Act, 1961 - Business disallowance - In case of any company - Assessment year 1968-69 and 1969-70 - Assessee-company paid certain commission to its sole selling agent, a partnership firm - One of partners of said partnership firm was a director and other partners were related to shareholders of assessee-company - ITO by applying provision of section 40(c) disallowed a part of commission so paid - Whether payment of commission to said partnership-firm was not covered by section 40(c) and, consequently, no part thereof could be disallowed - Held, yes FACTS The assessee-company, a manufacturer of nuts and bolts, had appointed a partnership-firm, namely, B as its sole selling agent. During the period relevant to the assessment years 1968-69 and 1969-70 the assessee paid certain commission to B. In the assessment proceedings, the ITO having found that one of the partners of firm B was a director of the assessee-company and other partners were related to the shareholders of the assessee-company, disallowed a part of the commission by applying section 40(c). On appeal, the AAC gave certain relief for year 1968-69 but maintained the disallowance for the second year. On second appeal, the Tribunal confirmed the orders of the AAC. On reference: HELD Section 40(c) gets attracted only when any payment is made by way of remuneration or benefit or amenity to a director or to a person who has substantial interest in the company or to a relative of the director or of such other person as the case may be and not otherwise. In the present case, the partnership concern, which was a separate legal entity, was appointed as the sole selling agent. It was true that in the partnership concern one of the partners was also the director of the assessee-company and other partners were relatives of the shareholders of the company. The payment of commission to the partnership concern by way of commission as a sole selling agent did not amount to directly or indirectly giving remuneration or benefit or amenity to a director or relatives of the shareholders of the assessee-company. The matter may have been different if a finding had been recorded that there was…

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