Commercial expediency test governs deductibility of managerial commission paid as profit-linked remuneration.

Commission paid to managers under an agreement was to be tested for deductibility by statutory reasonableness and commercial expediency, viewed from the standpoint of a prudent businessman, not by a purely subjective revenue assessment. The relevant factors were the employees' remuneration, conditions of service, business profits, and prevailing practice in similar businesses; linking managerial pay to net profits could be a proper incentive and was not unreasonable merely because duties remained managerial or the amount was computed by reference to profits. Applying that standard, the commission was held to be a reasonable business expenditure and allowable as a deduction, and the reference was answered in favour of the assessee.

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Issues: Whether the commission paid to the managers under the agreements was a reasonable and deductible expenditure under the Income-tax Act, 1922.

Analysis: The commission formed part of the managers' remuneration and had to be judged by the statutory test of reasonableness, not by a purely subjective view of the revenue authorities. The relevant inquiry was whether the payment was commercially expedient from the standpoint of a normal prudent businessman, having regard to the pay of the employees, the conditions of service, the profits of the business, and the general practice in similar businesses. Linking a manager's remuneration to net profits could operate as a proper business incentive and was not rendered unreasonable merely because the managers' duties continued to be managerial or because the amount was calculated as a percentage of profits. The Tribunal had focused on the absence of comparable practice and on the fact that no commission was permissible at all, rather than applying the correct commercial expediency standard.

Conclusion: The commission was a reasonable expenditure and was allowable as a deduction; the question referred was answered in the negative and in favour of the assessee.

Ratio Decidendi: In determining whether commission paid to an employee is reasonable and deductible, the decisive test is commercial expediency judged from the standpoint of a prudent businessman, with reference to the statutory factors, and not a subjective assessment by the taxing authority.

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