Extra-commercial purpose in business expenditure upheld where styron was bought above market price from related concern.

In determining whether expenditure is laid out for business purposes, the assessee's commercial judgment is ordinarily respected, and the taxing authority cannot replace it with its own view of reasonableness where the transaction is genuine. That principle does not apply where surrounding circumstances show an oblique or extra-commercial purpose. Here, the assessee purchased styron from a concern with identical partners at a price far above the market rate paid to another supplier, and the arrangement resulted in deflation of profits. The explanation that the other concern was closing down did not displace the inference from those circumstances. The Tribunal was justified in holding that the higher price was paid for extra-commercial reasons.

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Issues: Whether the Tribunal was justified in holding that the assessee paid a higher price for 68,208 lbs. of styron for extra-commercial reasons.

Analysis: The governing principle is that the taxing authority cannot substitute its own standard of reasonableness for that of the assessee where the transaction is genuine and the payment is truly made for business purposes. That principle yields where the transaction is not straightforward, where considerations other than business purpose are shown, or where the payment is made for an oblique purpose outside the course of business. On the facts, the assessee bought the same material from a concern with identical partners at a price far above the market price paid to another supplier, and the transaction resulted in deflation of the assessee's profits. The explanation that the other concern was closing down did not displace the inference drawn from the surrounding circumstances.

Conclusion: The Tribunal was justified in holding that the assessee paid the higher price for extra-commercial reasons, and the answer is in the affirmative.

Ratio Decidendi: In determining deductibility or the true character of business expenditure, the assessee's own commercial judgment is ordinarily respected, but a finding of extra-commercial purpose may be sustained where the transaction is not genuine in substance or where surrounding circumstances show that the payment was made for reasons other than business expediency.

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