Case Note & Summary
This appeal arose from an income-tax assessment where the assessee, a woollen manufacturer, had appointed one V as General Manager. The terms of appointment included a fixed salary, car allowance, and a commission on net profits: 12.5% on profits up to Rs. 1 lakh and 25% on profits exceeding that amount. In the relevant assessment year, the assessee claimed deduction of the entire commission paid to V. The Income-tax Officer disallowed the claim, restricting the allowable deduction to Rs. 5,000 as reasonable. On appeal, the Appellate Assistant Commissioner held that commission at 12.5% was reasonable and disallowed the excess over that rate. The assessee then appealed to the Income-tax Appellate Tribunal. The Tribunal, after examining the evidence, found that the General Manager's responsibilities were comparable to those of a Director, who had subsequently been appointed at a total remuneration of Rs. 24,000 per annum. The Tribunal held that the commission paid to V in excess of Rs. 24,000 was not incurred wholly and exclusively for the purposes of the business, and thus not deductible under Section 10(2)(xv) of the Income-tax Act, 1922. The assessee challenged this before the High Court, which answered the reference question against the assessee. The assessee then appealed to the Supreme Court, contending that the higher rate of commission was designed to incentivize a person with special aptitude and experience, and that the entire amount was laid out wholly for business purposes. The Supreme Court, after considering the facts and the contentions, dismissed the appeal, upholding the Tribunal's finding. The Court held that the question whether the expenditure was wholly and exclusively for business purposes was essentially one of fact, and the Tribunal's conclusion was not shown to be perverse or unreasonable. Consequently, the disallowance of the commission exceeding Rs. 24,000 was affirmed.
Headnote
A) Income Tax - Business Expenditure - Allowability of Commission Paid to Employee - Income-tax Act, 1922, Section 10(2)(xv) - Assessee appointed a General Manager with salary, car allowance, and commission on net profits; commission rate was 12.5% normally and 25% if profits exceeded Rs. 1 lakh. Assessee claimed deduction of the entire commission paid. Income-tax Officer disallowed a portion as excessive, allowing only Rs. 5,000; Appellate Assistant Commissioner partly allowed commission at 12.5% but disallowed the higher slab rate. Tribunal held that commission in excess of Rs. 24,000 per annum was not paid wholly for the purpose of business, and the Supreme Court upheld this disallowance. Held that the finding of the Tribunal was a question of fact and did not call for interference (Paras Not mentioned).
Issue of Consideration
Whether the commission paid to the general manager at 25% on profits exceeding Rs. 1 lakh was allowable as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922.
Final Decision
Appeal dismissed; the disallowance of commission exceeding Rs. 24,000 per annum was upheld.
Law Points
- Expenditure must be laid out wholly and exclusively for the purpose of business
- reasonableness of amount paid is relevant to determine whether it is wholly for business
- commission to employee must be commensurate with services rendered
- finding of fact by Tribunal that excess payment is not for business is final unless perverse
