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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether the disallowance of commission paid to directors under rule 12(1) of Schedule I of the Excess Profits Tax Act was justified merely because the commission was calculated before deduction of excess profits tax, without examining whether the payments were reasonable and necessary having regard to the requirements of the business and the services rendered.
Analysis: The payments were rejected by the taxing authorities on the footing that, under the agreement, commission should have been computed only after deducting excess profits tax. The controlling test, however, was not whether the payments conformed to the contractual method of computation, but whether they were reasonable and necessary in the light of ordinary commercial practice, commercial expediency, the exigencies of the business, and the actual services rendered. The record showed no finding by the Tribunal on these relevant matters. The disallowance rested only on the supposed breach of the contractual basis of payment, which was an insufficient ground.
Conclusion: The disallowance could not be sustained and the question was answered in the negative, in favour of the assessee.
Ratio Decidendi: For disallowance under rule 12(1) of Schedule I of the Excess Profits Tax Act, the authority must determine reasonableness and necessity of the payment by reference to business exigencies, commercial expediency, and the services actually rendered; a mere departure from the contractual mode of calculating commission is not enough.
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