Judgment:
Dhillon, J.
1. This order will dispose of Income-tax Cases Nos. 10 and 11 of 1975. Income-tax Case No. 11 pertains to the assessment year 1968-69, whereas Income-tax Case No. 10 pertains to the assessment year 1969-70.
2. Briefly stated the facts of this case are that the assessee is a private limited concern carrying on the business in the manufacture of nuts and bolts. During the assessment years 1968-69 and 1969-70, relevant to the accounting periods ending 31st March, 1968, and 31st March, 1969, respectively, the shareholders of the company were three sons of Dhirat Ram, Dhirat Ram himself, Smt. Sudarshan Goel and L. Lachhmi Chand. The company appointed Messrs. Bharat Sales Corporation, Jullundur City, as its sole selling agents with effect from 1st April, 1957, by virtue of an agreement for a period of 10 years. The commission agreed was at the rate of 10 per cent. On 1st October, 1968, by subsequent agreements the commission was reduced from 10 per cent. to 7 1/2 per cent. for the sales effected with effect from 1st of April, 1968, to 30th September, 1968, and from 7 1/2per cent. to 5 per cent for the sales effected with effect from 1st of October, 1968, onwards.
3. In terms of the above agreement, the assessee paid commission of Rs. 42,475 and Rs. 48,498 for the assessment years 1968-69 and 1969-70, respectively. The ITO allowed a sum of Rs. 19,791 for the payment of commission for the assessment year 1968-69 and disallowed the balance of Rs. 22,684 for the same assessment year. For the assessment year 1969-70, out of the commission of Rs. 48,498 he allowed Rs. 19,498 and disallowed Rs. 29,000 under Section 40(c) of the I.T, Act, 1961 (hereinafter called the Act).
4. Aggrieved by the order of the ITO, the assessee filed an appeal. The AAC restricted the disallowance to Rs. 11,984 for the assessment year 1968-69 and confirmed the disallowance for the assessment years 1969-70. The assessee then filed an appeal before the Tribunal. The Tribunal upheld the order of the AAC. The assessee filed two separate applications before the Tribunal with the prayer that the following questions of law which arise on the facts of the case may be got referred to this court for its opinion :
'(i) Whether, on the facts and in the circumstances of the case, there was any material to hold that the commission paid to Bharat Sales Corporation by the assessee was excessive or unreasonable having regard to the legitimate business needs of the assessee-company ?
(ii) Whether, on the facts and in the circumstances of the case, there was any material to disallow part of the commission on estimate basis ?'
5. The Tribunal having come to the conclusion that the questions sought to be referred are not questions of law refused the prayer of the assessee and, consequently, the assessee has filed two petitions referred to above under Section 256(2) of the Act praying for issuance of necessary direction to the Tribunal to refer the above-mentioned questions of law to this court for its opinion.
6. Mr. Ashok Bhan, the learned counsel for the assessee, has contendedthat in the nature of the assessee's business, the appointment of sole sellingagents and sub-agents was a genuine business necessity. The learnedcounsel on the basis of the figures of sales and commission in different yearswhich are reproduced below contended that the ITO, the AAC and soalso the Tribunal have not adopted any rationale or criteria for allowingor disallowing the amount of commission pertaining to the assessment yearsin question :
Assessment year
Total sales
Sales in which commission paid.
Total commissionpaid.
Rate agreed to.
Commission allowed by dept.
%of rate
Profit/ Loss
1966-67 (Period1-10-1965 to 31-3-1966)
3,43,908
2,43,300
11,668 (IndividualAgent
5%
11,668
5%
5,74,159 profit
1967-68
4,98,738
4,93,728
24,689 (Individualagent)
5%
24.689
5%
27,231 loss
1988-69
4,57,666
4,23,133
42,313 (Soleselling agent)
10%
30,491
7.17%
115 profit
1969-70
8,27,120
7,93,606
48,497 (Soleselling agent)7% up to 30-9-68
5% up to 31-3-69
19,497
2.45%
5,066 profit
1910-71
9,92,318
7.08.532
35,426 (Soleselling agent up to 30-12-69)
5%
26,716
3.78%
6,853 profit
7. The learned counsel contends that the income-tax authorities including the Tribunal came to the conclusion that in the nature of the assessee's business the appointment of sole agents and sub-agents was necessary. The learned counsel contends that the findings recorded by the authorities including the Tribunal that on the appointment of the sole selling agents the company did incur the expense, but the estimate of the expenses has been arrived at without any material on the record and without adopting the criteria based on the relevant material available on the record. The learned counsel with reference to the amount of commission as allowed by the department for the years 1966-67, 1967-68 and 1968-69 contends that the amount of commission allowed in the year 1969-70, when the sales had almost doubled from 1968-69, the commission was slashed to about 50 per cent. which was allowed in the preceding year, i.e., 1968-69. The learned counsel further contends that when the commission-was allowed at the rate mentioned above, there is no rational basis to cut down the commission to 2.45 per cent. for the year 1969-70. In a nutshell the contention isthat the commission for the years 1968-69 and 1969-70 is not based on any criteria but the same has been arbitrarily made and the Tribunal has committed an error in law in upholding the arbitrary action of the authorities below. Mr. Awasthy, the learned counsel for the revenue, on the other hand, contends that the disallowance of the commission for the assessment years in question to the extent to which it has been done is purely a question of fact and no question of law arises on the facts and circumstances of the case. After hearing the learned counsel for the parties and taking into consideration the material on the record, we are of the opinion that the following two questions of law do arise in this case. It is not necessary for us to express our opinion as regards the merits of the case during these proceedings, but suffice it to say. that, in our considered opinion, the following questions of law do arise on the facts and circumstances of the case :
'(i) 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 the part of the commission to the assessee for the assessment years 1968-69 and 1969-70 on estimate basis ?
(ii) 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 ?'
8. We, accordingly, direct the Tribunal to refer the above-mentioned questions of law for the opinion of this court. These cases stand disposed of accordingly, with no order as to costs.