Commercial expediency allows deduction of managing director remuneration when indirect business benefit is shown.

Excess remuneration paid to a managing director was examined as a business deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The governing test was commercial expediency: expenditure need not yield a direct benefit if it is voluntarily incurred for the ultimate benefit of the business. On the facts, the managing director's services increased the managed company's profits and, in turn, the assessee's managing agency commission; the arrangement was bona fide and connected with business advantage. The payment was therefore treated as laid out wholly and exclusively for the purposes of the assessee's business, and the disallowance could not be sustained.

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Issues: Whether the excess remuneration paid to the managing director over the earlier ceiling of Rs. 12,000 per annum was allowable as a business deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The arrangement was examined in the light of the additional materials brought on record after remand and the earlier legal principles on commercial expediency. The decisive question was not whether the assessee obtained a direct benefit, but whether the expenditure was incurred voluntarily on grounds of commercial expediency and for the ultimate benefit of the assessee's business, even if the benefit accrued indirectly. The record showed that the managing director's services to the managed company resulted in increased profits of that company and correspondingly increased managing agency commission for the assessee. The bona fides of the arrangement were not doubted, and the payment was found to be connected with the assessee's business advantage.

Conclusion: The excess remuneration was laid out wholly and exclusively for the purposes of the assessee's business and was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Final Conclusion: The reference was answered in favour of the assessee and the disallowance of the excess remuneration could not be sustained.

Ratio Decidendi: An expenditure incurred on grounds of commercial expediency is allowable as business deduction if it is for the ultimate benefit of the assessee's business, and an indirect business advantage is sufficient even without direct benefit.

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