Business purpose test governs deductibility of remuneration; tax authority cannot replace management judgment with its own standard.

Expenditure is deductible under section 10(2)(xv) when it is laid out wholly and exclusively for the business, assessed from the standpoint of a prudent businessman, not by the revenue's own view of reasonableness. A tax authority may refuse deduction only where the payment is unreal, extraneous, extra-commercial, or wholly disproportionate to the business or comparable payments; it cannot merely reduce remuneration because an outsider might have worked for less. On the facts discussed, there was no evidence of lack of business purpose, so the disallowance of the managing director's remuneration was unjustified.

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Issues: Whether the Tribunal was justified in disallowing part of the managing director's remuneration under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The governing test is whether the expenditure was laid out wholly and exclusively for the purpose of the business, judged from the standpoint of a prudent businessman and not by the revenue's own view of what would be reasonable. The taxing authority may disallow payment if it is unreal, or if evidence shows that it was made for extraneous or extra-commercial considerations, or if it was wholly disproportionate to the business or comparable payments. But the authority cannot merely refix remuneration because it considers that an outsider might have been employed on a lower salary, nor can it substitute its own standard of reasonableness for that of the assessee. On the facts, there was no evidence that the company acted otherwise than in its own business interest, and the Tribunal's sole test was an impermissible comparison with a hypothetical outsider at a lower salary.

Conclusion: The Tribunal was not justified in disallowing any portion of the managing director's remuneration; the answer to the reframed question was in the negative and in favour of the assessee.

Ratio Decidendi: For allowance under section 10(2)(xv), the reasonableness of remuneration or expenditure must be assessed from the businessman's point of view, and disallowance cannot rest merely on the revenue's view that the amount was higher than what an outsider might have accepted.

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