Profit-linked bonus and provident fund payments remain subject to tax authority scrutiny for reasonableness under rule 12(1).

A contractual obligation to pay bonus or make provident fund contributions calculated by reference to profits does not exclude the Excess Profits Tax Officer's discretion under rule 12(1) of the First Schedule to the Excess Profits Tax Act, 1940. The Officer may examine whether the amounts claimed are reasonable and necessary having regard to the business needs and the services rendered, and may disallow or limit deductions that are excessive or unreasonable. On the material considered, including the disparity between salaries and the claimed payments and comparative business practice, the payments were found excessive, and the restriction of the deduction was sustained.

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Issues: Whether, where the employer was under an obligation to pay bonus or make provident fund contributions calculated by reference to profits, the Excess Profits Tax Officer was bound to allow the amounts as deductions and was precluded from exercising discretion under rule 12(1) of the First Schedule of the Excess Profits Tax Act, 1940.

Analysis: The payment structure in the agreements and provident fund rules did not deprive the Excess Profits Tax Officer of the power conferred by rule 12(1). The Court held that the Officer could examine whether the amounts claimed were reasonable and necessary having regard to the requirements of the business and the services rendered. On the material before the Tribunal, including schedules showing the disproportion between salaries and the bonus or contributions claimed and comparative business practice, there was evidence to support the finding that the payments were excessive and unreasonable. The Officer was therefore entitled to treat the payments as falling within the mischief of rule 12(1) and to limit the deduction accordingly.

Conclusion: The Excess Profits Tax Officer was not bound to allow the payments as deductions merely because they arose under contractual or provident fund obligations, and his disallowance under rule 12(1) was upheld.

Final Conclusion: The statutory discretion under rule 12(1) prevailed over the contractual basis of the payments, and the disallowance of the claimed deductions was sustained.

Ratio Decidendi: A contractual obligation to make profit-linked payments does not oust the taxing authority's power under rule 12(1) to disallow amounts that are unreasonable or unnecessary having regard to the requirements of the business.

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