1. This appeal by the department relates to the assessment year 1976-77, for which the previous year ended on 31-3-1976.
2. The original assessment in the case was completed on 20-12-1976 and in the same a commission of Rs. 1,08,598.19 paid to the sole selling agent Shri P.G. Oommen was allowed as an item of expenditure. The assessment was reopened by the ITO under Section 147(b) of the Income-tax Act, 1961 ('the Act') on receipt of information from the audit party that Shri P.G. Oommen is the son of Shri P.O. George, who was substantially interested in the assessee-company. It was pointed out by the audit that Section 40(c) of the Act was attracted to the payment and that the commission paid in excess of Rs. 72,000 should have been disallowed. The excess amount was brought to tax by the ITO in the reassessment made by him.
3. Before the Commissioner (Appeals), the assessee questioned the validity of the reopening of the assessment and also contended that Section 40(c) was not attracted to the payment of commission. The Commissioner (Appeals) accepted the contention of the assessee that the fact that Shri P.G. Oommen was a relative of the shareholders was disclosed to the ITO even at the time of the original assessment. He, therefore, held that there was no information which would confer jurisdiction on the ITO to reopen the assessment. He, therefore, annulled the reassessment. He did not record his finding on the contention of the assessee that Section 40(e) was not attracted to the case. Aggrieved by the same, the department has come up in appeal.
4. After having heard both sides and having considered the matter, we are unable to uphold the order of the Commissioner (Appeals). The assessee did not place before us any materials to show that at the time of original assessment, the assessee had disclosed the relationship of Shri P.G. Oommen with the shareholders of the company. The balance sheet and the profit and loss account would not have disclosed the relationship. In the statement of details of sundry expenses furnished by the assessee, the relationship was not disclosed. Under the circumstances, there was no scope for disclosing the relationship unless the ITO had put some queries in the matter. There are no materials to show that such queries were put. It was argued by the learned representative for the assessee that the audit party which pointed out the relationship, must have known about the fact only from the assessment record. It is not safe to draw up such a conclusion. As pointed out by the learned departmental representative, the audit party gets information from various sources including the assessment files in the companies circle as well as other assessment wards. It is also found that shortly after receipt of the audit note, the ITO sent a letter to the assessee on 21-4-1980 asking for particulars about Shri P.G. Oommen including his relationship. A reply was furnished by the assessee by the letter dated 14-5-1980. It is significant that in this letter the assessee makes no mention about the fact that these particulars had been already furnished at the time of original assessment. It was after ascertaining the particulars that the assessment was reopened. This will indicate that the ITO was not aware of the relationship earlier. We are, therefore, unable to accept the contention of the assessee that at the time of the original assessment, the ITO was aware of the relationship and that the reopening of the assessment was on the basis of a mere change of opinion.
5. Alternatively, it was contended by the learned Counsel for the assessee that in any case no income had escaped assessment as Section 40(c) was not attracted to payment of commission to a sole selling agent. In support of the position the learned Counsel relied upon two decisions. In T.T. (P.) Ltd. v. ITO  121 1TR 551, it was held by the Karnataka High Court that the payment of commission to an independent selling agent, who is not subject to the control or supervision by the assessee, will not be hit by the provisions of Section 40(c). In CIT v. Avon Cycles (P.) Ltd.  126 ITR 448, the Punjab and Haryana High Court, following the decision of the Karnataka High Court, held that where a company pays commission to a firm as its sole selling agent and the partners of the firm are directors of the company and their relatives, there is no nexus between the services rendered by the partners of the firm and the payment of commission by the company to the firm, that the commission paid to the firm in lieu of services rendered by the firm in its business activity cannot be said to be payment of reward, recompense, pay, wages or salary and that such payments will not be hit by Section 40(c).
6. It was pointed out by the learned departmental representative that in the two cases, the selling agents were firms and that in the present case the selling agent is an individual. This does not seem to be material. The reason is that the department has no case that Shri P.G.Oommen was not an independent selling agent and that he had no organisation or establishment of his own in functioning as a sole selling agent. In the decisions referred to above, it has been pointed out that a sole selling agent will have to perform several functions and to organise several things for carrying on business as sole selling agent and that payments made to such a selling agent cannot be treated as an 'expenditure' which is referred to in Section 40(c), It was also suggested by the department that this case law had not developed at the time of reopening the assessment. There is no merit in the contention, because the decision of the Karnataka High Court was prior to the reopening of the assessment. Even otherwise, as rightly pointed out by the learned Counsel for the assessee, the decisions only declare the law and do not lay down any law.
7. Lastly, it was contended by the learned departmental representative that the decision of the Supreme Court in Gestetner Duplicators (P.) Ltd. v. CIT  117 ITR 1, has a bearing on the issue and that this decision has not been considered by the Karnataka and the Punjab and Haryana High Courts. The question for consideration before the Supreme Court was whether the expression 'salary' as defined in Rule 2(h) of Part A of the Fourth Schedule to the Act includes commission payable by an assessee to his or its employees in terms of their contracts of employment. The Fourth Schedule related to recognised provident funds.
The employees in that case were entitled to salary and also commission.
The dispute was whether the employer-assessee's contributions relating to the commission portion was allowable as a deduction. The issue as arising in the present case has not been considered by the Supreme Court. Further, in the present case, the department has no case that Shri P.G. Oommen was an employee of the assessee-company. In fact, a specific query was made by the ITO to the assessee in the letter dated 21-4-1980 as to whether there was employer-employee relationship between Shri P.G. Oommen and the company. In the reply dated 14-5-1980, the assessee clearly stated that there was no such relationship. No attempt has been made by the department to establish that there has been any such relationship. The issue involved in the present case is, therefore, squarely covered by the decisions of the Karnataka and the Punjab and Haryana High Courts. It follows that no income had escaped assessment in the original assessment. The order of the Commissioner (Appeals) has, therefore, to be upheld though for different reason.