Law: Income Tax Act, 1922

Section: 10(2)(xv)

(Appeal by special leave from the judgment and order of the Allahabad High Court, dated May 22, 1962, in Income-tax Reference No. 424 of 1958), Income tax-----Business expenditure Manufacture and sale of blankets and other woollen cloth-General Manager-.Commission ,a profits-Disallowance of part-Whether permissible-Indian Income-tax Act, 1922, S. 10(2)(xv)-[J. K. Wooden Manufacturers (Pvt.) Ltd. v. Commissioner of Income-tax (1963) 48 I T R 346 reversed]. In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee's business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Income-tax Department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purposes of the business of the assessee and to disallow it. It is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. The appellant, a firm which carried on the business of manufacture and sale of blankets and other woollen cloth, had appointed V as its general manager at a salary of Rs. 1,000 per month and commission of 12 per cent. on the net profits and certain other benefits. In case the profits exceeded Rs. 1 lakh the commission was payable at 25 per cent. V got no commission in the first year as the appellant suffered a loss. In the next year V earned a commission of Rs. 4,063. In the year relevant to the assessment year 1948-49 V was paid a commission of Rs. 75,465 (at 25 per cent. of the profits). After the death of I -the firm was converted into a company and the post of general manager abolished and a director, with a total remuneration of Rs. 24,000 per annum, managed the affairs of the company. . The Income-tax Officer allowed only a sum of Rs. 5,000 as reasonable commission and disallowed the balance of Rs. 70,465. The Appellate Assistant Commissioner held that commission at 121 per cent.…