Reasonableness of commission deductions and non-applicability of res judicata to later tax periods in successive assessments.

Commission paid to directors and managers under Rule 12(1) of Schedule 1 of the Excess Profits Tax Act could be disallowed where, on the facts, the expenditure was not shown to be reasonable and necessary having regard to the business needs and actual services rendered. A board resolution fixing commission on profits without deducting excess profits tax did not control the statutory test, and payment under an agreement did not prevent disallowance if the allowance conditions were unmet. A tax decision for one accounting period did not operate as res judicata for later periods; in successive assessments, the governing principle is ordinarily stare decisis rather than finality by res judicata.

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Issues: (i) Whether the commission paid to directors and managers, calculated without deducting excess profits tax, was liable to be disallowed under Rule 12(1) of Schedule 1 of the Excess Profits Tax Act. (ii) Whether the decision in the earlier reference operated as res judicata in respect of the subsequent chargeable accounting periods.

Issue (i): Whether the commission paid to directors and managers, calculated without deducting excess profits tax, was liable to be disallowed under Rule 12(1) of Schedule 1 of the Excess Profits Tax Act.

Analysis: Deduction under Rule 12(1) depends on whether the expenditure is reasonable and necessary having regard to the requirements of the business and the actual services rendered. The Board resolution fixing commission on profits without provision for excess profits tax did not control that statutory test. The Excess Profits Tax Officer was entitled to examine whether, in the circumstances of the business and the services rendered, the higher commission was unreasonable or unnecessary. The fact that the commission was paid under a resolution or agreement did not prevent disallowance under the rule if the statutory conditions for allowance were not met.

Conclusion: The disallowance was justified and the issue was decided against the assessee.

Issue (ii): Whether the decision in the earlier reference operated as res judicata in respect of the subsequent chargeable accounting periods.

Analysis: A tax assessment is final only for the particular year or period for which it is made. A decision on one accounting period does not, merely by reason of similarity of issue, conclude the liability for a later period unless the same adjudicated right or title is in question. The earlier reference had turned on the grounds on which the authorities had acted in that case and did not finally determine a general right that would bind later assessments. In taxation matters, the controlling principle is ordinarily stare decisis rather than res judicata for successive periods.

Conclusion: The earlier decision did not operate as res judicata.

Final Conclusion: The reference was answered in favour of the Revenue, upholding the disallowance of the commission and rejecting the plea of res judicata for the later assessment periods.

Ratio Decidendi: Under Rule 12(1), an expense may be disallowed if either its reasonableness or necessity is lacking, and a tax decision for one assessment period does not operate as res judicata for a subsequent period in the absence of a finally adjudicated right that is identical for both periods.

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