Deductibility of employee commission and net profit computation clarified: excess profits tax is not deducted first.

Commission paid to an employee was governed by the specific deduction rule for bonus or commission for services rendered, rather than the residuary expenditure clause, and its allowance depended on reasonableness judged by pay, service conditions, business profits and comparable commercial practice. For excess profits tax, the relevant test permitted only expenditure that was reasonable and necessary for the business, reflecting commercial expediency. In computing net profits for the commission, excess profits tax was not deductible first because it was a charge on profits, not an outgoing incurred to earn them. The commission was therefore allowable, and it had to be worked out on net profits without reducing those profits by excess profits tax.

---

---

Issues: Whether the commission payable to Mahadevan was deductible under the Income-tax Act and the Excess Profits Tax Act, and whether excess profits tax was to be deducted in computing the net profits on which the commission was payable.

Analysis: The commission to an employee fell within the specific provision governing bonus or commission paid for services rendered, and that provision controlled the allowance of such expenditure rather than the general residuary deduction clause. The reasonableness of the commission had to be judged with reference to the employee's pay, the conditions of service, the profits of the business, and the general practice in similar businesses. For excess profits tax purposes, the governing rule permitted only such expenditure as was reasonable and necessary having regard to the requirements of the business, a test substantially aligned with commercial expediency. On the computation of net profits, excess profits tax was not an item to be deducted before arriving at net profits, because it was a charge on profits and not part of the expenditure required to earn them.

Conclusion: The commission paid to Mahadevan was allowable, and it had to be calculated on net profits without first deducting excess profits tax.

---