Law: Income Tax Act, 1961

Section: 40,40(c),40A(5)

Income-tax----Business expenditure ---Ceiling on expenditure ---Company--­Remuneration to Director---Commission paid to proprietary concern belonging to Director---Finding that commission paid was not excessive or unreasonable ---Commission could not be taken into account for purposes of computing ceiling under provisions of S.40(c) or S.40A(5) ---Indian 'Income Tax Act, 1961, Ss.40(c) & 40A(5). The assessee was a private limited company which was manufacturing various types of forgings, industrial fasteners and automobile spare parts including general engineering goods. P was the managing director of the assessee. He was paid a salary of Rs.5,400 per annum and perquisites. He was also the proprietor of a concern called P & Co. P & Co. was the selling agent of the products of the assessee under an agreement, dated August 23; 1974. During the assessment year 1974-75, the assessee had paid Rs.5,400 as salary to P. It had also paid commission of Rs.1,24,969 to P. & Co. The Income-tax Officer included such commission -and applied section 40A(5) of the Income Tax Act, 1961, for finding out the allowable salary. Following the earlier orders of the Income-tax Appellate. Tribunal in the case of the assessee for the years 1975-76 to 1977-78, in appeal the Commissioner of Income-tax (Appeals) held that the amount paid to P & Co., was not covered by section 40A(5). The Tribunal dismissed the appeal filed by the Revenue. On a reference: Held, that, in the instant case, there was no controversy in regard to the factum of genuineness of the payment or the reasonableness thereof having regard to the legitimate business needs of the assessee. The commission of Rs.1,24,969 paid by the assessee to P. & Co. would neither be covered under section 40A(5) nor under section 40(c). Prakash Beedies (P) Ltd. v. CIT (1993) 201 ITR 1063 (SC) applied. Pai Paper and Allied Industries (Pvt.) Ltd. v. CIT (1994) 207 ITR 410 (Bom.) fol. JUDGMENT SMT. RANJANA DESAI, J.---By this reference under section 2560) of the Income Tax Act, 1961 , the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion: "Whether, on the facts and in…

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