Commercial reasonableness governs employee commission; excess profits tax need not be deducted first when testing allowability.

Commission payable to employees at a fixed percentage of profits could not be reduced by a rigid requirement that excess profits tax be deducted first. The taxing authority had to apply the statutory test of commercial reasonableness and business necessity, considering the contract, services rendered, past practice, and surrounding business conditions. A payment was not to be treated as unreasonable or unnecessary merely because it was calculated without first deducting excess profits tax. On that basis, the assessee's commission claim was preserved and the disallowance based solely on the deduction-first approach was rejected.

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Issues: (i) Whether, for determining commission payable to employees at a fixed percentage of profits, the Excess Profits Tax Officer could insist that excess profits tax be deducted before working out the commission under Rule 12 of Schedule I to the Excess Profits Tax Act, 1940; (ii) Whether commission paid without deduction of excess profits tax could be treated as unreasonable or unnecessary within Rule 12 of Schedule I to the Excess Profits Tax Act, 1940 and Section 10(2)(x) of the Indian Income-tax Act, 1922.

Issue (i): Whether, for determining commission payable to employees at a fixed percentage of profits, the Excess Profits Tax Officer could insist that excess profits tax be deducted before working out the commission under Rule 12 of Schedule I to the Excess Profits Tax Act, 1940.

Analysis: The governing inquiry was not whether the payment was legally enforceable, but whether the deduction claimed was reasonable and necessary having regard to the requirements of the business and the services rendered. The terms on which commission was payable depended on the contractual arrangement between the employer and employees, while the taxing authority's role under Rule 12 was confined to testing reasonableness in the light of business exigencies and commercial practice. A mere assumption that excess profits tax must always be deducted before computing commission could not displace the contractual basis or substitute a legal rule unrelated to the statutory test.

Conclusion: The Excess Profits Tax Officer was not justified, as a matter of law, in requiring deduction of excess profits tax before calculating commission merely on that basis.

Issue (ii): Whether commission paid without deduction of excess profits tax could be treated as unreasonable or unnecessary within Rule 12 of Schedule I to the Excess Profits Tax Act, 1940 and Section 10(2)(x) of the Indian Income-tax Act, 1922.

Analysis: Even an ex gratia payment may qualify as allowable if it is reasonable and made with reference to the needs of the business and the actual services rendered. The statutory test requires assessment in business terms, not a mechanical rejection because the payment exceeds what would result after deducting tax. The taxing authority must consider all relevant circumstances, including past practice, commercial expediency, the nature of the employment, and the surrounding business conditions, before concluding that a payment is excessive or unnecessary.

Conclusion: Commission paid on the basis followed by the assessee could not be rejected as unreasonable or unnecessary merely because excess profits tax was not first deducted.

Final Conclusion: The reference was answered in a manner that preserved the assessee's claim to deduction, and the taxing authority's disallowance based solely on deduction of excess profits tax was rejected.

Ratio Decidendi: Under the relevant income-tax and excess profits tax provisions, the allowability of commission depends on commercial reasonableness and business necessity judged on the facts of the business, and not on a rigid rule that excess profits tax must first be deducted before computing commission.

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