The test prescribed by Section 10(2)(xv) of the Income-tax Act, because, in our opinion, there is not much difference in principle between the test laid down there and that laid down by Rule 12 of the Excess Profits Tax Act.

Headnote:
INCOME TAX - Excess Profits Tax - Deduction - Commission paid to employees - Whether wholly and exclusively laid out for the purpose of the assessee's business - Whether the Appellate Tribunal erred in law in holding that in accordance with the terms of the letter dated 17th April, 1940, and 30th March, 1943, and the conduct of parties, the excess profits tax payable by the assessee should be deducted from the profits before the commission of 12 1/2 per cent. payable to N. M. R. V. Mahadevan is calculated - Whether commission payments to the branch managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business.
Fact of the Case:

The assessee is Rayaloo Iyer and Sons, Madurai. We are concerned in these references with the assessment years 1943-1944 to 1948-1949, the accounting year being the corresponding Tamil year; and under the Excess Profits Tax Act, we are concerned with the chargeable accounting periods ending with 13th April, 1943, 12th April, 1944, 12th April, 1945, and 31st March, 1946, and under the business profits assessment, with chargeable accounting periods, 1st April, 1946, to 12th April, 1946, 13th April, 1946, to 31st March, 1947, 1st April, 1947, to 13th April, 1947, 14th April, 1947, to 31st March, 1948, and 1st April, 1948, to 12th April, 1948.
Finding of the Court:

1. The commission deduction under the Income-tax Act and under the Excess Profits Tax Act, and whether in arriving at the commission of 12 1/2 per cent. payable to Mahadevan the amount is to be calculated on the profits with or without deducting excess profits tax. 2. Whether the commission paid to branch managers and sub-managers is a justifiable deduction under the Income-tax Act and the Excess Profits Tax Act.
Issues: 1. Whether in allowing a deduction under Section 10(2)(xv) of the Income-tax Act the Income-tax Officer is precluded from going into the question whether the amount was paid wholly and exclusively for the purpose of the assessee's business. 2. Whether the Appellate Tribunal erred in law in holding that in accordance with the terms of the letter dated 17th April, 1940, and 30th March, 1943, and the conduct of parties, the excess profits tax payable by the assessee should be deducted from the profits before the commission of 12 1/2 per cent. payable to N. M. R. V. Mahadevan is calculated. 3. Whether there was any material before the Tribunal to hold that the commission payment to N. M. R. V. Mahadevan at 12 1/2 per cent, before deduction of excess profits tax or business profits tax was not wholly and exclusively laid out for the purpose of the assessee's business, and 4. Whether the commission payments to the branch managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business ?
Ratio Decidendi: 1. Section 10(2)(x) of the Income-tax Act is a specific provision, which relates to the bonus or commission paid to an employee for services rendered by him. It is follows :- "Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : Provided that the amount of the bonus or commission is of a reasonable amount with reference to - (a) the pay of the employee and the conditions of his service; (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar businesses, professions or vocations." 2. Section 10(2)(xv) of the Income-tax Act is as follows : "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out, or expended wholly and exclusively for the purposes of such business, profession or vocation." 3. Rule 12 of Schedule 1 of the Excess Profits Tax Act, 1940, is as follows :- "1. In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned :- Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commission of Excess Profits Tax. 2. Any person who is dissatisfied with the decision of the Excess Profits Tax Officer under this rule may appeal in the prescribed time and manner to the Appellate Tribunal." 4. The test of commercial expediency is not germane to an enquiry into a claim under Section 10(2)(x), but it is a very relevant consideration in the application of Rule 12 of Schedule 1 of the Excess Profits Tax Act. 5. The net profits should be calculated without deducting excess profits tax, and that in the case of Mahadevan, 12 1/2 per cent. of that should be allowed both under the Income-tax Act and under the Excess Profits Tax Act.
Final Decision: Case remitted.

Judgment :-

SATYANARAYANA RAO, J.

These two referred cases relate to the same assessee. R. C. No. 44 of 1953 relates to income-tax, and R. C. No. 53 of 1952 relates to excess profits tax. Questions Nos. 2 and 3 are common in the two referred cases, and question No. 1 in R. C. No. 44 of 1953 is :-

"Whether in allowing a deduction under Section 10(2)(xv) of the Income-tax Act the Income-tax Officer is precluded from going into the question whether the amount was paid wholly and exclusively for the purpose of the assessee's business." *

Question No. 1 in the connected reference is :-

"Whether the Appellate Tribunal erred in law in holding that in accordance with the terms of the letter dated 17th April, 1940, and 30th March, 1943, and the conduct of parties, the excess profits tax payable by the assessee should be deducted from the profits before the commission of 12 1/2 per cent. payable to N. M. R. V. Mahadevan is calculated." *

Question No. 2 is :-

"Whether there was any material before the Tribunal to hold that the commission payment to N. M. R. V. Mahadevan at 12 1/2 per cent, before deduction of excess profits tax or business profits tax was not wholly and exclusively laid out for the purpose of the assessee's business, and

3. Whether the commission payments to the branch managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business ?" *

Question No. 2 in Referred Case No. 53 of 1952 is :-

"Whether there is any material on evidence sufficient in law for the Appellate Tribunal to hold that the commission of 12 1/2 per cent. on profits paid to Mahadevan was unreasonable within the meaning of Rule 12 of Schedule 1 of the Excess Profits Tax Act." *

Question No. 3 relates to the payment of commission to branch managers.

In both the references, on ultimate analysis, the questions really are, whether the commission deduction under the Income-tax Act and under the Excess Profits Tax Act, and whether in arriving at the commission of 12 1/2 per cent. payable to Mahadevan the amount is to be calculated on the profits with or without deducting excess profits tax. The second question both under the Income-tax Act and the Excess Profits Tax Act is whether the commission paid to branch managers and sub-managers is a justifiable deduction under the Income-tax Act and the Excess Profits Tax Act.

The facts relevant and as found in the statement of the case in the two references may be stated as follows. The assessee is Rayaloo Iyer and Sons, Madurai. We are concerned in these references with the assessment years 1943-1944 to 1948-1949, the accounting year being the corresponding Tamil year; and under the Excess Profits Tax Act, we are concerned with the chargeable accounting periods ending with 13th April, 1943, 12th April, 1944, 12th April, 1945, and 31st March, 1946, and under the business profits assessment, with chargeable accounting periods, 1st April, 1946, to 12th April, 1946, 13th April, 1946, to 31st March, 1947, 1st April, 1947, to 13th April, 1947, 14th April, 1947, to 31st March, 1948, and 1st April, 1948, to 12th April, 1948. The excess profits tax and the business profits tax were treated as consequential to the income-tax.

The assessee firm consists of three partners, who are divided brothers, and it came into existence after the partition in the family between the members on 13th April, 1940. On 13th April, 1946, Subbaraman, one of the brothers, ceased to be a partners, and the partnership continued with the two partners. With effect from 14th April, 1947, the share of Venkatakrishna Ayyar was taken over by Venkatakrishna Ayyar and Son, Ltd., which became a partner in the assessee firm. The partnership carried on business in dyes and chemicals in the name and style of Colours Trading Company, for which separate books of account were maintained. They were the agents for the Imperial Chemical Industries Ltd., Bombay, and were paid a commission in the first instance varying from 7 1/2 per

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Judicial Analysis