Commercial expediency test sustained for director remuneration; arbitrary disallowance of salary expenditure could not stand.

Disallowance of part of the remuneration paid to a managing director and a technically qualified director turned on whether the expenditure was wholly and exclusively for business under section 10(2)(xv) of the Income-tax Act, 1922. The court applied the commercial expediency test from the standpoint of a prudent businessman, noting the assessee's business expansion, increased responsibilities, and the need for higher remuneration. It found the disallowance arbitrary because the services rendered were not properly correlated with the amounts paid and the Tribunal had not independently evaluated the relevant facts. The questions referred were answered against the assessee and in favour of the Revenue.

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Issues: Whether the disallowance of part of the remuneration paid to the managing director and a technically qualified director was justified under section 10(2)(xv) of the Income-tax Act, 1922 as not being expenditure wholly and exclusively laid out for the purpose of the business.

Analysis: The allowance of salary expenditure under section 10(2)(xv) depends on commercial expediency and must be judged from the standpoint of a prudent businessman, not by an objective estimate of what the tax authority considers sufficient. The material on record showed expansion of the assessee's business, increased responsibilities for the managing director and the technical director, and a corresponding need for greater remuneration. The disallowance was made on an arbitrary basis without properly correlating the services rendered with the amounts paid, and the relevant facts were not independently evaluated by the Tribunal. The court held that the question was whether the expenditure was genuinely incurred for business purposes, not whether the authority would have fixed a different figure.

Conclusion: The disallowance was not sustainable on the reasoning adopted below, and the questions referred were answered against the assessee and in favour of the Revenue.

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