G.P. Singh, C.J.
1. This is a reference made by the I.T. Appellate Tribunal, referring for our answer the following question of law :
'Whether, on the facts and in the circumstances of the case, the I.T. Appellate Tribunal was justified in holding that the provisions of Section 40A(2) are not applicable with regard to the additions of Rs. 6,81,987 and Rs. 70,257 made by the ITO ?'
2. The relevant assessment year is 1971-72, the accounting period for which ended on Diwali, 1970. The facts briefly are that the assessee appointed another firm, M/s. Lalchand Shyamsunder, as the sole selling agent for the bidis manufactured by it. There is yet another firm bearing the name M/s. Mohanlal & Company from which the assessee purchased tobacco. It was conceded before the Tribunal that both these firms could be persons within Section 40A(2)(a) in the light of Section 40A(2)(b).
3. M/s. Lalchand Shyamsundar, the firm of sole selling agents, was to receive 10% as commission on the sales of bidis under an agreement dated February 15, 1967. It was found by the ITO that in addition to the commission of 10% received from the assessee, the firm of M/s. Lalchand Shyamsunder earned a gross profit of Rs. 6,81,387 on the sale of bidis. The ITO was of the view that as the firm, as selling agents, was to receive payment only as commission, it could not have made any profit on the sale of bidis in addition to the commission and that this amount of gross profits must be taken to be payment of additional commission by the assessee-firm. In this view of the matter, this amount was added under Section 40A(2) to the income of the assessee.
4. As regards the purchase of tobacco made by the assessee from the firm of M/s. Mohanlal & Company, the ITO was of opinion that the assessee made the purchase at a rate higher than the market rate to favour that firm and that in this way a sum of Rs. 70,257 more was paid to that firm. This amount was also added to the assessee's profits under Section 40A(2). The AAC deleted these additions and the Tribunal confirmed that order.
5. The Tribunal's finding is that in addition to the payment of 10% of commission to the firm of M/s. Lalchand Shyamsunder, the assessee sold the bidis at a rate less than the market rate to enable that firm to earn additional profit. The finding that there was a sale of bidis by the assessee to the firm of M/s. Lalchand Shyamsunder is a finding of fact. It is only by accepting this finding that we have to answer the question referred. On the finding so reached, it is clear that the amount of profit earned by M/s. Lalchand Shyamsunder on the sale of bidis cannot be taken to be an expenditure incurred by the assessee within the meaning of Section 40A(2). The expenditure incurred by the assessee was the commission. Even if the assessee sold bidis to the sole selling agents at a price less than the market rate, the difference between the market rate and the price at which the bidis were sold cannot, in our opinion, be termed as expenditure incurred by the assessee. On the finding reached by the Tribunal, it has to be held that the ITO was not right in adding Rs. 6,81,987 under Section 40A(2).
6. As regards the purchase of tobacco from M/s. Mohanlal & Company, the finding of the Tribunal is that there is no adequate material to hold that the purchase was not made at the market rate. In view of this finding it cannot be held that the payment of price made by the assessee to this firm was either excessive or unreasonable. Section 40A(2)(a) is, therefore, clearly not attracted.
7. For the reasons given above, we answer the question referred to us in the affirmative in favour of the assessee, and against the Department. There will be no order as to costs of this reference.