Commercial commission under an agency agreement was deductible business expenditure, not the assessee's share of profits.

A payment described as 50% commission under an agency agreement was held deductible as business expenditure because it was incurred on a commercial basis to secure finance and support production and sales. The court construed the agreement by its covenants and surrounding commercial circumstances, and found that the agreed commission formula did not, by itself, convert the arrangement into a true profit-sharing joint venture. Heavy financial participation, control over the plant, and an undertaking to bear losses were insufficient to show that the amount was the assessee's own share of profits. The amount was therefore deductible under section 10(2)(xv) and not taxable as profit in the assessee's hands.

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Issues: Whether the amount paid as 50% commission under the agency agreement was a deductible business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, or represented the assessee's share of profits in a joint venture and was therefore taxable in its hands.

Analysis: The agreement had to be construed in the light of its covenants and the surrounding commercial circumstances. The commission was calculated on a conventional and agreed basis, not on the basis of commercial accounting or the income-tax computation of profits. The agents' heavy financial participation, control over the working of the plant, and agreement to bear losses did not by themselves convert the arrangement into a true profit-sharing adventure. The decisive question was whether the amount was itself profit or was an outgoing laid out wholly and exclusively for the purposes of earning profits. On the facts, the amount was incurred as part of the assessee's business arrangement to secure finance and to carry on production and sales.

Conclusion: The amount was a legitimate deduction under section 10(2)(xv) and was not taxable as the assessee's share of profits; the answer was in favour of the assessee.

Ratio Decidendi: Where a payment is made on a commercial basis as part of the business arrangement for earning profits, and the so-called profit figure is only a conventional basis for computing remuneration, the payment is deductible if it is wholly and exclusively laid out for the purposes of the business and is not the assessee's own profit share.

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