Profit-linked managing agency remuneration is deductible on a pro rata basis for services rendered before cessation.

Contractual remuneration linked to annual net profits remained deductible as business expenditure for the period of actual service rendered before the managing agency ceased by operation of law. The absence of final year-end quantification did not defeat the entitlement for services already performed, and the assessing authority could not substitute a minimum-remuneration basis on an assumed absence of profits once profits were found to have been earned. The appropriate computation was on the contractual percentage of net profits, apportioned pro rata to the period of service, and the disallowance on a full-restriction basis was unsustainable.

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Issues: Whether the remuneration paid to the managing agents for the period up to the termination of the managing agency was allowable in full as a business expenditure, or whether it had to be restricted by applying a proportionate minimum remuneration basis.

Analysis: The managing agency came to an end by operation of law during the accounting year, but the agents had in fact rendered services up to that date. The right to quantify the remuneration arose only at the end of the accounting year because it was linked to net profits, yet the absence of final quantification during the year did not destroy the entitlement for the period of service already rendered. The basis adopted by the assessing authority, namely, treating the company as having earned no profits and substituting the minimum remuneration clause, was not justified once profits were found to have been earned for the year. A reasonable method was to compute the remuneration on the contractual percentage of net profits and apportion it pro rata to the period of actual service.

Conclusion: The full amount paid for the period of service was deductible, and the disallowance was unsustainable.

Ratio Decidendi: Where contractual remuneration tied to annual profits cannot be finally quantified until year-end, but the recipient has rendered service for only part of the year before cessation by law, the allowable expenditure must be computed on a reasonable pro rata basis on the contractual profit-linked remuneration, and not on an assumed absence of profits.

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