Business expenditure for employee commission must be judged by prudent businessman standard, not by a third party's suggested minimum.

Commission paid to branch managers and assistant managers was treated as allowable business expenditure because it was actually paid, commercially connected with abnormal trading conditions, and not shown to be motivated by non-business considerations. The excess over the minimum suggested by the supplier did not by itself make the payment unreasonable; the test was whether a prudent businessman would regard the outlay as justified by business needs. On those facts, the payments were not disallowed as excessive and satisfied the requirement of expenditure laid out wholly and exclusively for business purposes.

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Issues: (i) Whether the commission paid to branch managers and assistant managers could be disallowed as unreasonable under section 10(2)(x) of the Income-tax Act and rule 12 of Schedule I of the Excess Profits Tax Act; (ii) Whether the commission payment was expenditure laid out wholly and exclusively for the purpose of the business and therefore allowable as a deduction.

Issue (i): Whether the commission paid to branch managers and assistant managers could be disallowed as unreasonable under section 10(2)(x) of the Income-tax Act and rule 12 of Schedule I of the Excess Profits Tax Act.

Analysis: The commission arose out of an emergency additional commission granted by the principal supplier for a limited period and the assessee shared that amount with its branch staff. The payments were actually made, were not shown to be motivated by any non-business consideration, and were to be judged from the standpoint of a prudent businessman. The fact that the payments exceeded the minimum suggested by the supplier did not by itself make them unreasonable, especially when the assessee still retained a substantial balance of the additional commission.

Conclusion: The disallowance was not justified and the issue is answered in favour of the assessee.

Issue (ii): Whether the commission payment was expenditure laid out wholly and exclusively for the purpose of the business and therefore allowable as a deduction.

Analysis: The payments were made to employees in connection with the conduct of the business during abnormal market conditions, when maintaining trade reputation and sales was commercially important. The reasonableness of the expenditure had to be assessed with reference to the business needs of the assessee, not by a subjective standard applied by the taxing authority. On the materials, there was no basis to treat the payments as excessive or unrelated to business purposes.

Conclusion: The commission payment satisfied the statutory test and is allowable as a business deduction in favour of the assessee.

Final Conclusion: The commission paid to the branch managers and assistant managers was held allowable under the relevant taxing provisions, and the assessee succeeded in both references.

Ratio Decidendi: Deductibility of employee payments depends on whether, viewed from the standpoint of a prudent businessman, the expenditure is reasonable and commercially connected with the business; a minimum suggested by a third party is not an absolute ceiling on allowable deduction.

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