- (1.) HEMCO Industries (P.) Ltd. Company, the assessee, carried on the business of manufacture of nuts and bolts. The company appointed Bharat Sales Corporation as its sole selling agent and during the period relevant to the assessment years 1968-69 and 1969-70, the assessee paid commission to the sole selling agent amounting to Rs. 42,476 and Rs. 48,498, respectively. During the assessment proceedings, the Income-tax Officer found that one of the partners of Bharat Sales Corporation was a director of the assessee-company and other partners were related to the shareholders of the assessee-company. In view of this, he applied Section 40 (c) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and for the first year disallowed the commission to the extent of Rs. 22,694 and for the next year disallowed Rs. 29,000. On the assessee's appeal, the Appellate Assistant Commissioner restricted the disallowance for the first year to Rs. 11,984 and maintained the disallowance for the subsequent year. The order of the Appellate Assistant Commissioner was confirmed by the Income-tax Appellate Tribunal, Amritsar.
(2.) AT the instance of the assessee, the following two common questions have been referred for the opinion of this court: " (1) Whether, on the facts and in the circumstances of the case, the Tribunal has erred in law in upholding the order of the Appellate Assistant Commissioner disallowing part of the commission to the assessee for the assessment years 1968-69 and 1969-70 on estimate basis ? (2) Whether, on the facts and in the circumstances of the case, there was any material to hold that the commission paid by the assessee to the Bharat Sales Corporation was excessive or unreasonable having regard to the legitimate business needs of the assessee-company ?"
(3.) THE sole point for consideration is whether Section 40 (c) of the Act applies to the facts of the case and if it does, the Income-tax Officer had the jurisdiction to consider whether the expenditure was excessive or unreasonable and in case it was so, to disallow the unreasonable part, but in case Section 40 (c) of the Act does not apply, the Income-tax Officer will have no jurisdiction to disallow any part of the commission as excessive or unreasonable. On this matter, probably, there can be no dispute.;