1968 (8) TMI 15 - SC - Income Tax

Business Expenses Ruling: Commissions Can Be Fully Deducted as Legitimate Business Expenses.

The Supreme Court ruled in favor of the appellant, allowing the deduction of the full commission paid to the general manager as a legitimate business ... Commission paid by the assess to general manager was amount laid out wholly or exclusively for the purpose of business - deduction allowed - Assessee's appeal allowed Issues:Interpretation of Sections 10(2)(x) and 10(2)(xv) of the Income-tax Act, 1922; Deductibility of commission paid to general manager as a business expense.Analysis:The appellant, engaged in the manufacture and sale of blankets and woollen cloth, claimed a deduction of commission paid to the general manager for the assessment year 1948-49. The commission was calculated at 25% of profits, amounting to Rs. 75,465. The Income-tax Officer disallowed the claim as excessive, determining Rs. 5,000 as a reasonable amount. The Appellate Assistant Commissioner increased the allowable commission to Rs. 37,733, while the Income-tax Appellate Tribunal dismissed the appeal. The High Court upheld the disallowance, leading to the present appeal before the Supreme Court.The appellant contended that the commission paid was wholly for business purposes, emphasizing the general manager's role in turning around an old, unprofitable mill. The appellant argued that the commission was based on business considerations, aiming to align the manager's interests with the company's success. The Tribunal and High Court focused on the reasonableness of the commission rate, but the Supreme Court stressed that commercial expediency should guide such assessments.Referring to precedent, the Court clarified that the reasonableness of business expenses should be viewed from a businessman's perspective, not solely from an income-tax standpoint. The Court emphasized that employers have the discretion to set remuneration based on various factors, including business needs and employee capabilities. Applying this principle, the Court held that the full commission paid to the general manager was a legitimate business expense, overturning the lower court's decision.In conclusion, the Court ruled in favor of the appellant, allowing the deduction of the full commission amount as a business expense. The judgment underscores the importance of considering commercial realities and business dynamics when assessing the deductibility of expenses under tax laws.