Madhya Pradesh High Court
Ganesh Soap Works vs Commissioner Of Income-Tax on 21 July, 1986
Equivalent citations: [1986]161ITR876(MP)
Author: J.S. Verma
Bench: J.S. Verma
JUDGMENT J.S. Verma, C.J.
1. This is a reference made under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee to answer the following question of law, namely :
"Whether, on the facts and in the circumstances of the case, disallowance of commission given by the assessee on sale bills themselves is permissible under Section 40A(2)(a) ?"
2. The assessee is a partnership firm comprising of three partners, Jhaku Bai, Smt. Narbada Bai and Smt. Rama Bai. Jhaku Bai is the main partner whose share in the partnership is one-half. It is claimed by the assessee that an amount of Rs. 66,930 was paid to Smt. Pushpa Rathore, wife of Jhaku Bhai, as sole proprietor of a selling agency towards commission at the rate of nine per cent. on the sales effected by the assessee. It was claimed that this commission of nine per cent. was deducted in the bills of sales made by the assessee showing the same as commission paid to Smt. Pushpa Rathore. This amount was claimed as a deduction towards business expenditure by the assessee. The Income-tax Officer held that Smt. Rathore being the wife of the main partner of the assessee-firm and hardly having any capital in the business and also being neither educated nor trained to carry on the business, the provision of Section 40A(2)(a) of the Income-tax Act was attracted and, therefore, the deduction claimed could not be allowed. In short, it was held that the commission which was claimed as business expenditure did not satisfy the test of commercial expediency and it could not be allowed as a permissible deduction. The Commissioner of Income-tax (Appeals) partly accepted the assessee's contention to the extent of four per cent. only which had been actually paid while making the sales and, therefore, deduction as business expenditure was allowed only to the extent of Rs. 26,500. The Tribunal has upheld this view of the Commissioner and hence this reference at the instance of the assessee in respect of the remaining five per cent. of the alleged commission which has been disallowed as permissible deduction.
3. The material part of Section 40A(2)(a) of the Act is as under :
"40A. (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in Clause (b) of this sub-section, and the Income-tax Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."
4. Admittedly, the expenditure is alleged to have been incurred by making payment to the wife of the main partner who is a person referred to in Clause (b) of Sub-section (2) of Section 40A. The only question, therefore, is whether the expenditure to the extent that it has been disallowed is excessive or unreasonable, having regard to the services or facilities for which the payment is alleged to have been made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him therefrom. It is obvious that if the same be excessive or unreasonable having regard to these specified circumstances, then to the extent that it is excessive or unreasonable, it shall not be allowed as a deduction. The finding recorded is that the amount in excess of four per cent. shown to be paid as commission is excessive or unreasonable having regard to the circumstances specified in Section 40A(2)(a). In other words, the finding clearly indicates that there was no commercial expediency attaching to the disallowed expense for the detailed reasons which are given by the Tribunal in its order. On this finding of fact, the conclusion reached by the Tribunal cannot be assailed.
5. Learned counsel for the assessee placed reliance on a decision of this court in CIT v. Udhoji Shrikrishnadas [1983] 139 ITR 827. This case is clearly distinguishable on facts. In that case, the finding of the Tribunal was that there was a real sole selling agency and the expenditure incurred by way of commission paid to the sole selling agents resulted in benefit to the business. The finding of the Tribunal in the present case is contrary to this decision and has, therefore, no application.
6. Consequently, the reference is answered against the assessee and in favour of the Revenue by holding that the Tribunal was justified in disallowing the commission in excess of four per cent. on the ground that it was not a permissible deduction. There shall be no order as to costs of this reference.