The main legal point established in the judgment is that the amount paid by an employer to employees must be wholly and exclusively for the purpose of the business, and the Income-tax Officer has the discretion to determine this based on various factors.

FACTS :- The following questions were referred to the High Court.

Whether on a true construction of S. 10(2)(xii) of the Act and in the circumstances of the case the applicants are entitled to a deduction of the entire amount of Rs. 12,000 paid by them to Jamnadas Yallabhdas and Purshottam Manmohandas the two employees ?

Whether on a true construction S.12 read with R. 1 of Sch. 1, Excess Profits Tax Act, the Excess Profits Tax Officer was bound to obtain the prior authority of the Commissioner of Excess Profits Tax before disallowing the applicants the balance of the sum of Rs. 11,000 out of the total amount of Rs. 12,000 by the applicants ?

The facts leading to these questions will be found in the judgment of the High Court.

Chagla, C.J. :- The question that arises on this reference is whether a certain amount paid by an employer to his employees is a valid deduction under S. 10(2)(xv), Income-tax Act, 1922, and in order to determine it we have got to consider whether it is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. The assessee employed two persona by the name of Jamnadas and Purshottamdaa to attend to a branch business of his. Jamnadas was employed in samrat year 1993 on a salary of Rs. 125, and Purshottamdas was employed in samvat year 1995 on a salary of Rs. 111. On 1st September 1940, the assessee agreed to pay to each of these employees a commission of 20 per cent. on the net profits of the branch in addition to their respective salaries, and pursuant to this agreement each of the employees was paid Rs. 6000 in the year of account. The Income-tax Officer considered the claim and allowed only a sum of Rs. 1000 in all for both the employees and the balance of Rs. 11,000 was disallowed by him. The tribunal came to the conclusion that the sum of Rs. 11,000 was rightly disallowed by the Income-tax Officer, as according to the view of the Tribunal only one thousand rupees had been expended wholly and exclusively for the purpose of the assessees business.

2. Now, Sir Jamshedjis contention is that it is for the employer to determine what remuneration he should pay to his employees for the services rendered by him. In this case, it is not disputed that there was an agreement between the employer and the employees to pay 20 per cent. of the net profits of the business. Nor is it disputed that in fact the sum of Rs. 6000 was paid to each of the employees. From these admitted facts, Sir Jamshedji contends that the quantum of the payment should be left to be determined by the employer and should not be considered by the Income-tax Officer. Sir Jamshedji contends that an Income-tax Officer can never be in a position to judge as to how and in what manner employers should remunerate their employees. It is a matter of business and businessmen know these things better than the Department does. I agree with Sir Jamshedjis contention that it must be left in every case to an employer to determine for himself, taking all circumstances into consideration, in what manner be should remunerate his employee who is rendering certain services to him. But the section requires that whatever amount be pays to his employee must be paid wholly and exclusively for the purposes of his business, and it is for the Income-tax Officer to decide whether any remuneration paid by the employer to his employee was wholly and exclusively expended for the purpose of his business. In my opinion, it is erroneous to contend that as soon as an assessee has established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income-tax Officer to take into consideration vario