1. This judgment will dispose of Income-tax References Nos. 110 of 1977 and 56 of 1979. Since the facts on the basis of which the questions of law arise in both these references are common, the same are being disposed of by a common judgment.

2. The facts as given in I.T. Ref. No. 110 of 1977, which pertains to the assessment year 1972-73, may be stated. The assessee is a private limited company and carries on the business of manufacture and sale of cycles. The previous year for the assessment year 1972-73 ended on 31st March, 1972. By an agreement dated 1st April, 1960, the assessee had appointed M/s. Hans Raj Pahwa and Brothers, Ludhiana, as its sole distributors for the sale of all its products for a period of five years from 1st April, 1960, to 31st March, 1965, and the commission was fixed at 4% on all the sales made by the company direct or through the efforts of the sole distributors. The firm of M/s. Hans Raj Pahwa and Brothers was constituted by a partnership deed dated 26th March, 1960, comprising the following partners, who agreed to share the profits and losses of the firm in equal proportion :

(1) Shri Hans Raj representing his HUF.

(2) Shri Jagat Singh representing his HUF.

(3) Shri Sohan Lal representing his HUF.

3. By a deed of partnership dated 15th February, 1963, Shri Harmohinder Singh, son of Shri Jagat Singh, was taken as a fourth partner and whereas the aforesaid three partners' share in profits and losses was fixed at 20% each, Shri Harmohinder Singh's share was fixed at 16%. By another agreement dated 30th March, 1965, the assessee again appointed M/s. Hans Raj Pahwa and Brothers, Ludhiana, as its sole selling agent for a further period of five years from 1st April, 1965, to 31st March, 1970. The rate of commission was reduced to 3% on all sales made to parties in India by the company direct or through the efforts of the sole selling agents.

4. By a deed of partnership dated 1st April, 1969, there was a change in the constitution of M/s. Hans Raj Pahwa and Brothers, inasmuch as two more persons, namely, Inderjit Singh, son of Shri Hans Raj Pahwa, and Swaranjit Singh, son of Shri Jagat Singh Pahwa, were taken as partners. The shares in the profits and losses of the firm were fixed as under :

(1) Shri Hans Raj Pahwa 18%.

(2) Shri Jagat Singh Pahwa 15%.

(3) Shri Sohan Lal Pahwa 25%.

(4) Shri Harmohinder Singh Pahwa 12%.

(5) Shri Inderjit Singh Pahwa 18%.

(6) Shri Swaranjit Singh Pahwa 12%.

5. The assessee-company again appointed M/s. Hans Raj Pahwa and Brothers as its sole selling agents for a further period of five years from 1st April, 1970, to 31st March, 1975. The sole selling agents were entitled to commission at 3% on all sales made to parties in India by the assessee direct, or through the efforts of the sole selling agents. By a deed of partnership dated 1st April, 1971, there was a change in the profit-sharing ratio of the six partners of M/s. Hans Raj Pahwa and Brothers and the share in profits and losses of the firm of each partner was fixed at l/6th. Consequent upon the aforesaid agreements the assessee-company paid commission to M/s. Hans Raj Pahwa and Brothers in different years. The figures of sales and commission, etc., during the period of ten years, from the assessment year 1963-64 to 1972-73, are as under :

Asst. year Sales Gross profit Net profit Commission 1963-64 73,77,004 16,12,508 3,25,308 3,13,458 1964-65 89,41,230 18,78,600 5,99,817 3,70,651 1965-66 1,09,71,541 19,79,474 5,23,177 4,30,952 1966-67 1,28,76,572 20,90,965 4,79,567 3,58,949 1967-68 1,62,13,761 26,64,585 7,81,631 4,40,481 1968-69 1,92,98,945 35,65,610 11,56,108 5,42,826 1969-70 2,12,86,913 35,64,651 11,98,359 6,15,853 1970-71 2,24,42,255 43,33,866 13,43,241 7,03,003 1971-72 2,98,33,123 61,54,392 16,17,284 7,84,494 1972-73 3,10,15,979 51,75,917 17,03,883 10,11,110

6. The aforesaid commission paid to M/s. Hans Raj Pahwa and Brothers as sole selling agents was allowed in all the assessment years including the assessment year 1972-73 for which the assessment was framed on 26th February, 1973.

7. Below the assessment order for the year under consideration, the ITO wrote the following note which was also communicated to the assessee along with the copy of the aforesaid assessment order :

" Applicability of section 40a(4)(ii) read with the proviso was studied. This section is applicable only where payment exceeding Rs. 72,000 are made to directors or to their relatives who is an employee or a former employee. In this case commission has been paid to M/s. Hans Raj Pahwa and Brothers in which the directors are also partners. However, none of the directors was mere employee during the accounting year relevant to the assessment year 1972-73. This position also appears to be correct in view of the comments made at page 16 of the explanatory note of the relevant Finance Act, 1971."

8. After the assessment, the ITO wrote a letter dated 29th March, 1973, that in view of the amended Section 40(c) of the Income-tax Act, 1961 (hereinafter called " the Act "). with effect from 1st April, 1972, each of the six partners of M/s. Hans Raj Pahwa and Brothers was not entitled to a remuneration of more than Rs, 72,000 because Sarvshri Hans Raj, Jagat Singh and Sohan Lal were directors of the assessee-company and Sarvshri Harmohmder Singh, Inderjit Singh and Swaranjit Singh were relatives of the directors within the meaning of Section 2(41) of the Act. He, therefore, proposed to reopen the assessment and issued a notice under Section 148 of the Act and called for the assessee's objection for disallowing the following amounts :

Partners of M/s. Pahwa and Brothers Share in sole selling agency commission Salary Less amount allowed Amount proposed to be disallowed

1. Sh. Hans Raj 1,68,512 37,200 72,200 1,33,748

2. Sh. Jagat Singh 1,68,518 72,000 96,518

3. Sh. Sohan Lal 1,68,511 32,400 72,000 1,28,918

4. Sh.

Harmohinder 1,60,518 72,000 96,510 Singh

5. Sh.

Inderjit Singh 1,68,518 31,200 72,200 1,27,718

6. Sh. Swaranjit Singh 1,68,518 72,000 96,518

9. No written reply seems to have been furnished by the assessee. The assessee seems to have orally explained its position and the ITO was apparently satisfied that the amended provisions of Section 40(c) of the Act were not applicable because it is admitted that no notice came to be issued under Section 148.

10. After the completion of the assessment, the Commissioner called for and examined the records of the case and he considered that the assessment order dated 26th February, 1973, passed by the ITO was erroneous and prejudicial to the interests of the revenue inasmuch as a deduction of Rs. 10,11,110 was allowed in contravention of the amended provisions of Section 40(c) of the Act. According to the Commissioner, a part of the said commission should have been disallowed. He, therefore, issued a notice dated 18th January, 1975, under Section 263 of the Act, calling upon the assessee to show cause why the ITO's order, which was erroneous and prejudicial to the interests of the revenue, should not be rectified.

11. The assessee filed its objections vide letter dated 8th February, 1975. It was submitted that the assessee did not have any marketing organisation and accordingly entered into an agreement with M/s. Hans Raj Pahwa and Brothers, a partnership concern, which undertook to market and sell its products. It was contended that by virtue of the agreement, onerous obligations had been placed on M/s. Hanj Raj Pahwa and Brothers and in consideration of the contractual obligations, commission at 3% on the sales of the company was allowed. It was submitted that while making the assessment for the year 1972-73, the ITO having regard to the legitimate business needs of the company, did not consider that the commission paid was excessive or unreasonable. The assessee further submitted that the amended provisions of Section 40(c) of the Act did not in any way restrict the expenditure, which was incurred for the legitimate business needs of the company and was in no way excessive or unreasonable. It was submitted that the case of the assessee was not covered by the provisions of Section 40(c)(i) of the Act. It was further submitted that the share of profit of four out of six partners of the firm, belonged to. their HUFs and not to the individual directors and the HUFs, as such, could not be called relations of the directors.

12. The Commissioner did not accept the assessee's contention and held that since the ITO did not apply his mind to the amended provisions of Section 40(c) of the I.T. Act, 1961, effective from 1st April, 1972, and hence his action was not only erroneous but also prejudicial to the interests of the revenue. He, therefore, by his order under Section 263 dated 21st February, 1975, set aside the assessment made by the ITO on 26th February, 1973, holding that the expenditure to be allowed by the ITO to the sole selling agent should not exceed the sum of Rs. 72,000 per annum as provided in Section 40(c) of the Act. He also directed the ITO that while making the assessment de novo according to law, he should take into consideration the services rendered by the partners of the managing agency firm.

13. Aggrieved by the decision of the Commissioner, the assessee filed an appeal before the Income-tax Appellate Tribunal, Chandigarh Bench (hereinafter referred to as " the Tribunal "). The Tribunal, after hearing the parties at length and going through the record, held that:--

(1) the payment of selling agency commission to a firm could not be termed as a direct or indirect benefit to a director or a person who has a substantial interest in the company or to a relative of a director or of such other person; the Tribunal was of the opinion that Section 40(c)(i) was not applicable when the payment has been made by a company to a firm;

(2) the Tribunal did not agree with the findings of the Commissioner that the selling agency commission was covered by the words " remuneration " used in Section 40(c)(i) of the Act. The Tribunal held that there was no nexus between services rendered by the partners of the selling agency firm and the payment of commission to the firm. According to the Tribunal, the directors as directors have not rendered any services for earning the sole selling agency commission and that the share of profit received by a partner in a firm is not " remuneration ". The Tribunal observed that the expression " directly or indirectly " used in Section 40(c)(i) connected with " remuneration " and that the payment of commission to the sole selling agents does not directly or indirectly benefit the directors or a person who has a substantial interest in the company or any relative of a director or such person.

14. In support of the findings recorded in its order of the 3rd April, 1976, the Tribunal gave a number of reasons, reference to which shall be made at a later stage.

15. In an application made by the revenue, the following questions of law have been referred to this court for its opinion by the Tribunal :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of Section 40(c) as amended with effect from 1st April, 1972, by the Finance (No. 2) Act of 1971 did not govern the payment of commission by the assessee to the sole selling agency firm, M/s. Hans Raj Pahwa and Brothers and further that the expenditure on the aforementioned payment of commission did not constitute expenditure of the nature contemplated by Section 40(c)(i) of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the order of the Commissioner of Income-tax passed under section 263 of the Income-tax Act, 1961?"

16. As regards I.T. Ref. No. 56 of 1979, which pertains to the assessment year 1973-74, the facts given in I.T. Ref. No. 110 of 1977 are similar, and, therefore, the same need not be repeated. At the instance of the Commissioner, the same two questions of law as were referred for the assessment year 1972-73, in I.T. Ref. No. 110 of 1977, have been referred to this court for its opinion. The questions so referred may thus be repeated as follows :

" 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the provisions of Section 40(c) as amended with effect from 1st April, 1972, by the Finance (No. 2) Act of 1971, did not govern the payment of commission by the assessee to the sole selling agency firm, M/s. Hans Raja Pahwa and Brothers, and further that the expenditure on the aforementioned payment of commission did not constitute expenditure of the nature contemplated by Section 40(c)(i) of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the order of the Commis-cioner of Income-tax passed under section 263 of the Income-tax Act, 1961?"

17. The main question which calls for determination in this case is whether the provisions of Section 40(c) or Section 40A of the Act are attracted keeping in view the facts and circumstances of the case. The provisions of Section 40 (b) and (c) are as follows:

" 40. otwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession,--

(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm ;

(c) in the case of any company-

(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case, may be,

(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in Sub-clause (i) shall, in no case, exceed-

(A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees;

(B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period ;

Provided that in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of sub-section (5) of section 40a shall not be taken into account for the purposes of Sub-clause (A) or Sub-clause (B), as the case may be.

Explanation.--The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in Sub-clause (i)."

18. The provisions of Section 40A, Sub-section (1), (2)(a), (b) and Sub-section 5(a) are as follows :

" 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ' Profits and gains of business or profession '.

(2)(a). Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Income-tax Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction I Provided that the provisions of this Sub-section shall not apply in the case of an assessee being a company in respect of any expenditure to which Sub-clause (i) of clause (c) of section 40 applies.

(b) The persons referred to in clause (a) are the following, namely :

(i) Where the assessee in an individual any relative of the assessee;

(ii) Where the assessee is a company, firm association of persons or Hindu undivided family any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or memeber;

(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;

(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;

(v) a company, firm, association of persons, or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member ;

(vi) any person who carries on a business or profession-

(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation.--For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,--

(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent, of the voting power ; and

(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent, of the profits of such business or profession...

(5)(a) Where the assessee-

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction :

Provided that where the assessee is a company, so much of the aggregate of-

(a) the expenditure and allowance referred to in Sub-clauses (i) and (ii) of this clause; and

(b) the expenditure and allowance referred to in Sub-clauses (i) and (ii) of clause (c) of section 40, in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy-two thousand rupees, shall in no case be allowed as a deduction :

Provided further that in computing the expenditure referred to in Sub-clause (i) or the expenditure or allowance referred to in Sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely;--

(i) the value of any travel concession or assistance referred to in clause (5) of section 10 ;

(ii) passage moneys or the value of any free or concessional passage referred to in Sub-clause (i) of clause (6) of section 10 ;

(iii) any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36 ;

(iv) any expenditure referred to in clause (ix) of sub-section (1) of section 36..."

19. The reading of the provisions of Section 40(c) and Section 40A would go to show that in case the provisions of Section 40(c) are applicable, the provisions of section 40a will not apply. This is so because of the proviso to section 40a, sub- section (2}(a). It may further be observed that where a director is also getting salary as an employee, in his case, the expenditure of the nature referred to in Clauses. (i) to (iv) of the second proviso to sub-section (5)(a) of section 40a would not be taken into account for the purpose of Sub-clause (A) or (B), as the case may be. In the case of expenditure incurred directly or indirectly on the payment of any salary to an employee or a former employee the same is covered by the provisions of Sub-section (5)(a)(i) of Section 40A.

20. We are called upon to examine whether the payment of commission to a firm which undertook the responsibility of being the sole distributors of the company, is a remuneration or benefit within the terms of the provisions of Section 40(c). As is clear from the facts narrated in the earlier part of the judgment, the firm had partners having specified shares in the firm. It is no doubt true that the partners of the firm, who undertook to act as sole distributors for the sale of products of the company, are directors or their relatives within the meaning of Section 2(41) of the Act, but the question to be determined is whether the payment of the commission falls within the mischief of remuneration or benefit as envisaged under Section 40(c) of the Act. Further, it has to be found that where the expenditure in question is payment by way of remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company, or to a relative of the director or such person, as the case may be. As to what is the substantial interest, has been defined in Section 2(32) of the Act. As is clear from the plain language of the section, the provisions will be attracted only if the payment is made to a person who has a substantial interest in the company. It cannot be disputed that the payment of commission to the firm by the company is a payment to a person within the meaning of Section 2(31) of the Act, but certainly the firm, as it is, cannot be said to be having a substantial interest in the company. The firm itself is not a director or a person who has a substantial interest in the company or a relative of a director. The ingredients of Section 40(c) can be satisfied only if the expenditure results directly or indirectly in the provision of remuneration or benefit or amenity to a, director or to a person who has a substantial interest in the company or to a relative of the director or such other person, as the case may be. There is no nexus between the services rendered by the partners of the firm and the payment of commission to the firm. We are, therefore, of the opinion that the payment of commission made to a firm by the company cannot fall within the mischief of this provision.

21. The matter may be looked from another angle. The firm which took the responsibility of being the sole distributor for the sale of the products of the company, has definitely entered into a business activity by entering into a business contract. The sole distributing agent has to incur expenditure on many items for performing the duties which have been entrusted to it under the agreement between the company and the. firm. It is in lieu of the services rendered that the commission has to be paid. The firm is liable to pay income-tax on the income of the firm and as and when the partners got income as profit from the profits of the firm itself, they are also liable to pay tax. The activity of the firm is in the nature of a business. The directors of the company, who are partners of the firm, if they get shares from the profits of the firm, got the same as partners of the firm and this money cannot be said to be remuneration paid by the company to the directors or their relatives directly or indirectly. In a given assessment year, the firm may run into a loss. The question will further arise that if the payment of the commission amount is to be taken as remuneration, as postulated under Section 40(c), what would happen regarding the amount of expenditure incurred by the firm for fulfilling its obligations under the agreement with the company ? The commission includes in the payments by the company to the firm, all expenditure which the firm shall have to incur to discharge its obligations. A profit from the business activity of the partners of the firm, cannot be held to be remuneration paid by the company directly or indirectly to the director or a person who has a substantial interest in the company or a relative of a director or of such person, as the case may be. It is a well-established principle of law that the share of a partner of a firm from the profits of the firm is a share of profits, which is a business activity and the said income has to be assessed under the heading "Income from business". In this view of the matter, the commission paid to the firm by the company certainly is a payment in connection with the business activity of the firm and the receipt of the profits, if any, by the partners of the firm cannot fall within the mischief of Section 40(c).

22. The word "remuneration", in its ordinary meaning, connotes, " reward, recompense, pay, wages or salary for service rendered ". The commission paid to a firm is in lieu of the services rendered by the firm in its business activity and cannot be said to be payment of reward, recompense, pay, wages or salary for the services rendered by a director or a person who has a substantial interest in the company or a relative of a director or of such person, as the case may be. The director or the person mentioned in Section 40(ii) as such has not rendered any service to the company.

23. It may be observed that in Section 40(b), the Legislature used the words "any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm ". If the word " remuneration " also connotes the concept of commission, it was not necessary for the Legislature to have used the word " commission " in Clause (b) of Section 40. The Legislature advisedly did not use the word " commission " in Clause (c) of Section 40 of the Act. This is another indication that the word "remuneration." does not connote the concept of commission paid to a firm.

24. It is a well-settled proposition of law that if there is any ambiguity in a particular provision of the I.T. Act, the statement of the Finance Minister, which formed the basis for the introduction of the bill can also be taken into account. Reference in this connection may be made to the decisions of their Lordships of the Supreme Court in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 and Indian Chamber of Commerce v.. CIT [1975] 101 ITR 796. The Finance Minister in his speech gave reasons for the proposed amendment in Clause (ix) of the Finance (No. 2) Bill, 1971, by which the provisions of Section 40(c) of the Act were sought to be amended in the following words (see [1971] 80 ITR (St.) 93, 96) :

" I am firmly of the view that the fiscal instrument must be deployed to discourage payment of high salaries and remunerations which go ill with the norms of egalitarian society. I accordingly propose to impose a ceiling on the remuneration of company employees which would be deductible in the computation of taxable profits. The ceiling is being set at Rs. 5,000 per month. Together with the existing ceiling of Rs. 1,000 per month in the case of perquisites, the allowable overall ceiling on remuneration and perquisites, for purposes of taxation, will be at Rs. 6,000 per month. In addition, I am proposing to reduce the tax deductible limits of daily allowance to employees while on tour."

25. The note on this clause of the Finance (No. 2) Bill, 1971, is as follows ([1971] 80 ITR (St.) 143, 146) :

" Sub-clause (b) seeks to amend Section 40(c) under which expenditure incurred by a company on the provision of any remuneration or benefit or amenity to directors, persons who have a substantial interest in the company and their relatives and the expenditure or allowance in respect of any assets of the company which are used by such persons for their own purposes or benefit is not allowed as a deduction to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. Under the amendment, the deduction on account of such expenditure or allowance will be further subject to an overall ceiling limit of Rs. 72,000 in respect of any one director or a person who has a substantial interest in the company or a relative of a director or of such person."

26. The speech of the Finance Minister and the note would suggest that the provisions were amended to discourage the payment of high salaries and remunerations to the persons mentioned in the section. There is no indication that the payment of commission made to a firm by a company in discharge of the contractual obligations for the services rendered by the firm in its business activity, is also to be covered under Section 40(c) of the Act.

27. It may be observed that with a view to see whether the provisions of Section 40(c) are attracted or not, the nature of the transaction between the company and the firm, which resulted in the firm having become the sole distributors for the sale of the products of the company, has to be seen in the background of the relevant provisions of law. We have already come to the conclusion that the payment of commission to the firm is in lieu of the business activity of the firm and not by way of remuneration or benefit to a director or to a person who has a substantial interest in the company or a relative of a director or of such person, as the case may be. That being so, the mere fact that the partners of the firm happened to be directors or the relatives of the directors of the company, would not change the nature of the original transaction between the company and the firm which acted as the sole distributing agency of the company.

28. The payment of commission cannot also fall within the ambit of the word " benefit " used in Section 40(c). We would like to observe that the Tribunal in its order categorically held as follows :

" It is nobody's case that the sole selling agents' commission is a benefit or amenity to the directors because the Commissioner of Income-tax has only held that it is ' remuneration '."

29. It has further been brought to our notice that the revenue put in an application for the amendment of the statement of the case before the Tribunal so as to raise the plea that the payment of commission to the sole selling agents also falls within the ambit of benefit, but that application was rejected by the Tribunal. In any case, for the same reasons as advanced by us while considering the import of the word " remuneration ", the payment of commission to the sole selling agents by the company, cannot in any case, be held to be a benefit given by the company directly or indirectly to the director or a person who has a substantial interest in the company or a relative of a director or of such person, as the case may be. We may observe that it is not disputed that the selling agency commission has been paid to M/s, Hans Raj Pahwa and Brothers, which is a genuine and valid partnership concern. The commission has been paid to a firm and not to any individual.

30. We may further observe that the partners of the firm were HUFs represented by their respective kartas. The share of profit of the partners of the firm is a share of the HUF and not that of the director in his individual capacity.

31. The view which we are taking finds support from the decision of the Karnataka High Court in T. T. Pvt. Ltd. v. ITO [1980] 121 ITR 551. On similar facts, as in the present case, their Lordships of the Karnataka High Court came to the conclusion that the payment of commission made to the selling agents by a company does not fall within, the mischief of i. 40(c) of the Act. It was held that the same would be covered under the provisions of section 40a(2)(a). We entirely agree with the view taken in T. T. Pvt. Ltd.'s case [1980] 121 ITR 551 (Kar). It may be observed that the provisions of section 40a(2)(a) of the Act are wide enough to cover the cases where payment is made in respect of the expenditure to any person referred in Clause (b) of that section, if the ITO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the asssssee or the benefit derived by or accruing to him therefrom, is excessive. Sub-section (2)(b) of Section 40A defines the persons, and includes the assesses as an individual, as a company or firm consisting of persons or HUF.

32. For the reasons recorded above, the questions of law referred to us in both these references are answered in the affirmative, i.e., in favour of the assessee and against the revenue, with costs.