S. Ranganathan, J.
1. The following question has been referred to us under s. 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to hold that a sum of Rs. 25,000 out of total sum of Rs. 35,619 paid by the assessed to Chandra Sales Corporation as commission on sales was not an expenditure laid out and expended wholly and exclusively for the purpose of the business carried on by the assessed ?'
2. The reference arises out of the assessment of M/s. Precision Instrument Manufacture Co. for the assessment year 1965-66, the relevant previous year being the calendar year 1964. The assessed above named is a partnership concern. Its partners are Shri Sri Gopal, his two sons, Kailash Narain and Raj Narain, and one Prem Chand. Sri Gopal and his sons are entitled to 80 per cent. of the profits of the firm. The firm was carrying on a business in the manufacture and sale of voltmeters and ammeters. Its turnover during the calendar year 1963 came to Rs. 1,96,280.
3. It was claimed that on 28th December, 1963, the assessed had appointed M/s. Chandra Sales Corporation as their sole selling agents. A letter was addressed by the assessed on 28th December, 1963, to the above concern describing them as the sale promotion agents for the whole of India. The appointment was stated to be for a period of one year renewable if the company was satisfied with the performance of the sole selling agents. The concern was entitled to a commissioner of 7 1/2 per cent. on the entire sales in case the concern was able to push the sales to Rs. 2,50,000 in a year and to a commissioner of 10 per cent. On the entire sales in case the sales were pushed beyond Rs. 3 lakhs. The above commissioner was to be inclusive of all advertisement, traveling and other incidental expenses which the agents may have to incur in connection with the selling agency.
4. The firm of Chandra Sales Corporation itself came into existence only on 1st January, 1964, under a partnership deed of that date. The partners were Rajinder Prasad (son of Sri Gopal's sister-in-law), Smt. Shanti Devi (wife of Sri Gopal) and Smt. Chandra Wati (mother of Sri Gopal). A minor son, Adarsh Narain, of Sri gopal was admitted to the benefits of the partnership. The profits were to be divided among the three partners and the minor in the proportion of 30 : 30 : 25 : 15. The minor was not made liable for losses. This firm of Chandra Sales Corporation filed a return for the assessment year 1964-65, in respect of the previous year ending on 31st March, 1964. A commissioner income of Rs. 4,712 from the assessed-firm was disclosed and this was assessed to tax by the ITO on 2nd July, 1965, after the add back of minor items of expenditure of Rs. 550.
5. When the assessment of the present assessed for the assessment year 1965-66 was taken up, it claimed as a deductible expenditure a sum of Rs. 35,619 as the commission paid to Chandra Sales Corporation. The turnover of the assessed during the previous year was Rs. 3,56,231 and the commission was paid at 10 per cent. As stated in the agreement. The ITO, however, disallowed a part of the claim made by the assessed. He pointed out that the firm was stated to have come into existence on 1st January, 1964, and to have been dissolved on 31st December, 1964, that the firm consisted of relations of the partner, Sri Gopal, that the account books of the firm had not been produced, that Rajinder Prasad had not been produced for examination, and that apart from an agreement, the original of which was not produced, no further correspondence between the assessed and the sales promotion agent during the whole year was produced on the ground that no such correspondence existed. The only point made on behalf of the assessed was that the turnover during the previous years was double that of the earlier year. The ITO came to the conclusion that actually not firm had come into existence. Apart from the facts mentioned above, he noticed that as a result of this arrangement 70 per cent. Of the commission paid to the firm came back to the family of Sri Gopal. He also noted that the assessed had its own separate stockists and that no orders were shown to have been booked by Chandra Sales Corporation. The ITO, however, did not disallow the entire amount of Rs. 35,619. He found that, according to Chandras Sales Corporation, its net profits for the calendar year 1964 was Rs. 20,000 because, out of the commissioner of Rs. 35,619 received by it, about Rs. 16,000 had been spent on touring, advertising and establishment expenses. The ITO was of the opinion that a sum of about Rs. 10,000 may have actually been spent by the assessed for advertising and traveling for promotion of sales. He, thereforee, allowed this sum of Rs. 10,619 and disallowed Rs. 25,000 from the claim made by the assessed. The ITO also found that the firm had no assets and the investment made by the partners was very negligible.
6. The assessed preferred an appeal to the AAC who confirmed the findings of the ITO. He pointed out that Chandra Sales Corporation had three partners who did not take any active part in the conduct of the business. Even Rajinder Prasad did not have any experience in the line of business of the firm. The assessed had its own stockists through whom most of the business was done. No evidence had been produced to show that M/s Chandra Sales Corporation had booked any order for the appellant-firm or that the increase in the turnover was due to any efforts made by the selling agents. The AAC was of the opinion that in estimating the expenses incurred on sales promotion at Rs. 10,619, the ITO had acted in a faith and reasonable manner.
7. There was a further appeal to the Tribunal. It was pointed out before the Tribunal on behalf of the assessed that Chandra Sales Corporation had been assessed for the assessment year 1964-65 in the status of an unregistered firm. It was argued that the commission had been paid to the sole selling agents by virtue of an agreement entered into and that, merely because some of the partners of Chandra Sales Corporation were related in those of the assessed, a part of the commission could not be disallowed. It was urged that non-investment of capital would not also lead to an adverse conclusion. It was contended that Rajinder Prasad had rendered services by going on tour for the business of the assessed and that the firm was mainly concerned with the liaison work, for which no elaborate correspondence could possibly be produced. Emphasis was laid on the fact that the Chandra Sales Corporation had been assessed in respect of the commission received from the assessed. On the other hand, on behalf of the revenue, it was urged that the mere existence of an agreement was inconclusive, that there was no evidence for justifying the appointment of a sales promotion agent and that factually also the deposition of the partners of Chandra Sales Corporation showed that they were not qualified enough to promote the sales of the assessed. Thus both the parties relied before the Tribunal on the depositions made by the partners of Chandra Sales Corporation which, we are told, were made in connection with the assessment of Chandra Sales Corporation some time in 1969 after the AAC had passed his order.
8. The Tribunal considered the arguments addressed on both sides and came to the conclusion that a certain part of the amount paid to Chandra Sales Corporation had rightly been held not to be expenditure incurred wholly and exclusively for the purposes of the business of the assessed and that the revenue was perfectly right in disallowing Rs. 25,000 as not having been made out of commercial expediency. The Tribunal pointed out that the mere existence of an agreement was not enough to justify the claim for deduction. The Tribunal appears to have been under the impression that the entire payment of commission to Chandra Sales Corporation had been allowed in an earlier year but it pointed out that there was no estoppel in income-tax proceedings that the allowance of the amount earlier could not preclude the department from disallowing the claim made by the assessed this year 'from the standpoint f prudent commercial practice and normal method of commercial principle of accountancy'. In the result, the disallowance made by the ITO and affirmed by the AAC was sustained by the Tribunal.
9. At the instance of the assessed, the reference had been made to us for an opinion on the question which has been set out earlier.
10. It appears to us that the question as to whether the disallowance of Rs. 25,000 was justified or not is purely a question of fact, and that in sustaining this disallowance, the Tribunal has taken into account all the facts and circumstance of the case. The material facts have been referred to earlier and need not be repeated. It is sufficient to mention briefly that before the ITO the assessed had not produced any evidence either in the shape of the account books or the statements of the partners of the sole selling agency firm. It merely took up a stand that because there was an agreement the commission should be allowed. Before the AAC also no further evidence was produced. The facts on record show that the assessed's business was prospering and there was no evidence to make out that the increase in turnover from about Rs. 2 lakhs of the earlier year to Rs. 3.5 lakhs in the year under appeal was due to the efforts of the sale promotion agents. On the other hand, the assessed had its own stockists and there was no evidence to show that the partner of the agency firm had rendered any services to the assessed for promoting its business. The statements made by Shanti Devi and Rajinder Prasad also reinforced the same opinion. Rajender Prasad had passed his B.A. examination in April, 1963, and he stated that he was a part-time accountant with the assessed and another firm on a stipend of Rs. 50. Though he claimed that he had rendered certain services to the firm, the concurrent finding of the authority is that there is no evidence to show that any orders had been booked by the agency firm. In fact, even Rajinder Prasad himself admitted that he did not book orders though he claimed he canvassed for orders. The partner of the selling agency firm are closely related to Sri Gopal, who is the main partner of the assessed-firm. It is no doubt true that the assessed-firm had an outside partner entitled to 20 per cent of the profits but the major share in the profits is that of the family of Sri gopal and the constitution of the selling agency firm also indicates that the arrangement was entered into on other than business considerations. Having regard to all these circumstances it is difficult to see where the Tribunal has erred in coming to the conclusion that the commission had been disallowed rightly by the ITO.
11. Mr. Bishamber Lal, learned counsel for the assessed contended that the Tribunal had not given any specific finding that arrangement was not genuine. He is perhaps right in saying that the finding is not there in the order of the Tribunal in so many words. But the Tribunal has affirmed the findings of the ITO and the AAC whose findings are quite categorical and they have also expressed the conclusion based on the orders of the lower authorities that the amount disallowed was not expenditure incurred wholly and exclusively for the purposes of the business. Mr. Bishamber Lal also contended that the fact that the ITO and the AAC allowed a part of the expenditure showed that the genuineness of the arrangement could not have been doubted by them. We are unable to agree. Though the ITO and the AAC came to the conclusion that the selling agency firm was not genuine and that the arrangement entered into with that firm was not genuine, the ITO has pointed out that certain expenses incurred by the assessed in respect of advertisement and traveling expenses had been accounted for in the name of the firm. It is for this reason that he has allowed a part of the claim made by the assessed. In any event, the department is not is appeal or reference against the allowance of that part. We are unable to say that the partial allowance was in any way inconsistent with the conclusion of the ITO on the basis of which the amount paid to the selling agents has been disallowed to the extent of Rs. 25,000.
12. Learned counsel also referred to two decisions. The decision of the Punjab High Court in the case of Patiala Biscuit manufacturers P. Ltd. v. CIT , is not in point. That case dealt with a totally different situation and pointed out that where an assessed grants a rebate and sells its goods at a concessional rate or reduced rate, it cannot be said to have made any income and the department cannot disallow a part of the rebate on the ground that in the hands of recipients it came to be ultimately distributed for the benefit of certain shareholders or directors of the assessed-firm itself. The other case referred to by the counsel was that in the case of Chairman, Income-tax Appellate Tribunal v. Y. E. Aboo  30 ITR 27 . In that case, it was held that once the ITO accepts the genuineness of an item of expenditure, it is not competent for him to increase or reduce the amount by adopting his own standard of reasonableness in substitution for the assessed's standard. This is a well-established principle and, if in the present case the ITO has disallowed the sum of Rs. 25,000 on the ground that it was excessive or unreasonable, there might be something to be said for the assessed but, as we have already pointed out, the disallowance of Rs. 25,000 was not on this ground. A part of the expenditure has been allowed not as part of the commission paid to the sole selling agent but as representing the expenditure that had been actually incurred by the assessed towards advertisement and travel though such expenditure was claimed to have been incurred by a firm which was found to be non-genuine.
13. For the reasons above mentioned, we are of the opinion that the question referred to us has to be answered in the affirmative and in favor of the department. As the assessed has failed, he will pay the costs to the Commissioner. Counsel's fee Rs. 300.