Reassessment reopening and commission to sole selling agent: undisclosed material facts justified reopening, while independent agency commission fell outside section 40(c).

Reassessment under section 147(b) was upheld because the material fact concerning the relationship between the selling agent and an interested shareholder had not been disclosed at the original assessment, so the reopening was not a mere change of opinion. Commission paid to an independent sole selling agent was also held outside section 40(c) because it represented business service expenditure, not remuneration of the kind targeted by that provision, and there was no employer-employee relationship or equivalent control. As a result, the department's challenge failed and the relief granted to the assessee was left undisturbed.

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Issues: (i) Whether the reassessment was validly reopened under section 147(b) of the Income-tax Act, 1961; (ii) Whether commission paid to the sole selling agent was hit by section 40(c) of the Income-tax Act, 1961.

Issue (i): Whether the reassessment was validly reopened under section 147(b) of the Income-tax Act, 1961.

Analysis: Reopening under section 147(b) requires information indicating escapement of income. The record did not show that the relationship between the selling agent and the interested shareholder had been disclosed at the original assessment stage. The later query by the Income-tax Officer and the assessee's reply supported the view that the officer had not earlier been aware of the relationship. On these facts, the reopening was not a mere change of opinion.

Conclusion: The reassessment was validly reopened.

Issue (ii): Whether commission paid to the sole selling agent was hit by section 40(c) of the Income-tax Act, 1961.

Analysis: Section 40(c) applies to specified payments in the nature of reward, remuneration, salary, wages or similar expenditure. Commission paid to an independent sole selling agent was treated as payment for business services and not as expenditure of the kind covered by section 40(c). The absence of an employer-employee relationship was material, and the agent was not shown to be under the company's control in a manner that would attract the provision.

Conclusion: The commission was not hit by section 40(c).

Final Conclusion: The department's appeal failed because the reassessment survived and the commission claim was not disallowable under section 40(c), leaving no basis to disturb the relief granted to the assessee.

Ratio Decidendi: Reassessment may be sustained where the original assessment did not disclose the material fact relied on for reopening, and commission paid to an independent sole selling agent is not disallowable under section 40(c) in the absence of an employer-employee relationship.

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