Deductibility of fixed salary paid for services rendered: tax authorities cannot cut down business expenditure on a reasonableness view alone.

Business expenditure is deductible where the payment reflects its real commercial character and is made under the terms of employment for services actually rendered. A tax authority cannot substitute its own view of a "reasonable" salary and disallow part of a fixed remuneration merely because a different remuneration basis was used in earlier years. An employee's alternative right to a share of profits does not control the deduction once the employee validly elects to take fixed salary. On those principles, the entire salary paid to the general manager was allowable as expenditure laid out wholly and exclusively for the purposes of business.

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Issues: Whether the whole salary paid to a general manager was deductible as expenditure laid out wholly and exclusively for the purposes of business under the Income-tax Act.

Analysis: The allowance of business expenditure depends on the real character of the payment and not merely on the fact that the amount was paid. Where remuneration is fixed under the terms of employment and is paid on commercial considerations for services actually rendered, the taxing authority cannot substitute its own view of what is a reasonable salary and disallow part of the payment merely because a different basis of remuneration had been adopted in earlier years. An alternative right to receive a share of profits did not control the claim once the employee had validly elected to take fixed salary, and no rational ground was shown for reducing the deduction.

Conclusion: The entire salary was allowable as business expenditure, and the question was answered in the negative in favour of the assessee.

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