Agency payment and TDS disallowance: payment through an established agent did not justify section 40(a)(ia) disallowance.

Where an assessee proves that a payment was made through an established agent, disallowance under section 40(a)(ia) was not justified merely because the Assessing Officer treated the payment as one attracting tax deduction at source. The Court accepted that agency can arise without consideration under section 185 of the Contract Act, and the absence of a profit motive in the agent's acting on behalf of the assessee did not negate the agency relationship. On that basis, the finding that the amount was paid through an agent was upheld and the expenditure was not disallowed.

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Issues: Whether the disallowance under section 40(a)(ia) of the Income-tax Act was sustainable where the amount was paid through an agent and the existence of agency was established.

Analysis: The Assessing Officer treated the payment as one attracting tax deduction at source and disallowed the expenditure under section 40(a)(ia). The appellate authority and the Tribunal found that the assessee had proved that the payment was made by the agent on its behalf and that the transaction was not one requiring disallowance on that basis. The Court noted that section 185 of the Contract Act makes consideration unnecessary for creation of an agency, and the absence of profit motive in the agent's acting on behalf of the assessee did not, by itself, negate the agency relationship.

Conclusion: The disallowance under section 40(a)(ia) was not justified, and the finding that the payment was made through an agent was upheld.

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