R.M. MEHTA, A.M. In this appeal, assessee challenges order of CIT passed under s. 263 of IT Act, in which as many as 8 grounds of appeal have been urged, but at outset, ld. counsel for assessee argued ground No. 7 which reads as under: "Without prejudice to above contention provisions of s. 40A(8) were not applicable to amount of interest paid to M/s Mehta Financiers in law, on facts and in circumstances?" original assessment in this case was framed by ITO on 21st Feb., 1983. During course of assessment proceedings, ITO observed that assessee had paid sum of Rs. 29,741 as interest to M/s Mehta Financiers. In view of provisions of s. 40A(8) question of disallowing 15 per cent of aforesaid interest alongwith certain other such payments came for consideration before ITO. However, on perusal of records and correspondence between assessee and ITO, we find that no such disallowance was made, ITO came to conclusion that aforesaid interest payment fell under cl. (b)(vii) of Explanation to s. 40A(8). ITO opined that M/s Mehta Financiers had made deposit with assessee and was acting as indemnifying agent. ld. CIT however, came to conclusion that aforesaid interest payment did not come under any of sub-clauses of cl. (b) of Explanation to s. 40A(8) of Act. He accordingly issued show cause notice under s. 263 in respect of payment to M/s Mehta Financiers as well as of in respect of certain other items of expenditure such as car expenses as well as payment of Rs. 6,000 per month paid to M/s Mehta Financiers for hire of car. written reply was filed before CIT and matter was also personally represented by counsel of assessee. This culminated in order under s. 263 whereby CIT directed ITO to disallow 15 per cent out of interest paid to M/s Mehta Financiers. proceedings in respect of other two items such as car expenses and car hire charges were dropped. ld. counsel for assessee kly contended that ITO had discussed matter on merits in his assessment order and had satisfied himself that payment came within exceptions provided by s. 40A(8). He accordingly supported action of ITO in not making any disallowance out of interest payment to M/s Mehta Financiers. According to ld. counsel case was squarely covered under sub-cl. (vii) of cl. (b) of Explanation. According to him, term 'other agent' in sub-clause was wide enough to include all types of agents including one under consideration. He also drew our attention to agreement entered into between assessee and M/s Mehta Financiers which is appended on page 18 of paper book. He drew our attention to various clauses of aforesaid agreement to urge that M/s Mehta Financiers were acting as del creder agent in terms of agreement dt. 1st Dec., 1981. He particularly drew our attention to para 7 on first page of agreement as well as to paras 2, 3 & 5, 6 of main agreement. According to him, M/s Mehta Financiers were to certify creditworthiness of various parties to whom assessee sold its goods on credit basis. It was further contended that they were also responsible for recovery of aforesaid amounts and liable to indemnify assessee in case any party failed to make payment. He drew our attention to para 5 of second page of agreement and contended that sum of Rs. 5,00,000 had been initially kept by way of security carrying interest at rate of 12 per cent per annum with clause that amount upto Rs.10,00,000 may be further kept as deposit. It was finally contended that M/s Mehta Financiers could be squarely covered under term 'other agent' and accordingly no disallowance could be made under s. 40A(8) of IT Act. ld. departmental representative, on other hand, supported order of CIT and urged that disallowance made was in order, as provisions of s. 40A(8) were clearly attracted. According to departmental representative, case did not fall within exceptions provided by aforesaid sections. We have heard arguments on both sides and have also gone through paper book filed by assessee. It is quite clear that ITO at time of framing original assessment looked into matter in detail. He duly satisfied himself about applicability of sub. cl. (vii) of cl. (b) of Explanation and himself about applicability of sub. cl. (vii) of cl. (b) of Explanation and thereafter come to conclusion that no disallowance was to be made. agreement between assessee and Mr. Mehta Financiers was also before ITO and on perusal and interpretation of various clauses, he came to conclusion that no disallowance was to be made. ld. CIT, on other hand, has gone through same agreement and interpreted various clauses and came to contrary decision. According to ld. CIT, there was no relationship of principal and agent between assessee and aforesaid firm. He further held that firm was not acting as agent of assessee in respect to any third parties. He also opined that deposit of M/s Mehta Financiers did not fall under any of exempted categories of sub-cl. (b) of Explanation to said section. He accordingly directed ITO to disallow 15 per cent of interest paid to M/s Mehta Financiers. We are of opinion that action of CIT is not proper keeping in view facts of case, agreement between parties and nature of services and duties to be performed by M/s Mehta Financiers. perusal of agreement clearly shows that M/s Mehta Financiers was in position to advise company in respect of creditworthiness of parties to whom goods were sold on credit basis. Further they would also be entrusted with job of recovery of payments from aforesaid parties. It was also mentioned in agreement that if any party failed to make payment, then M/s Mehta Financiers would have to indemnify assessee to that extent. It was further provided for in agreement that sum of Rs.5,00,000 by way of security deposit carrying interest at rate of 12 per cent per annum was to be kept with company till conclusion of agreement, which was mentioned as period of three years from date of execution. According to us, relationship between assessee and M/s Mehta Financiers is clearly that of principal and agent falling squarely within term "other agent". In view of this, we have no hesitation in reversing order of CIT whereby he has directed ITO to disallow payment of interest under s. 40A(8) to M/s Mehta Financiers. In view, we have taken, we do not adjudicate in respect of ground Nos. 1 to 6 & 8. As result, appeal is partly allowed. *** SAMIR PHARMACEUTICALS P. LTD. v. INCOME TAX OFFICER