The Judgment of the Court was delivered by
V. Ramaswami, J.— The appellant (hereinafter called the “assessee”) carried on the business of manufacture and sale of blankets and other woollen cloth. For Assessment Year 1948-49 the assessee claimed a deduction of Rs 75,465 as commission paid to the General Manager Shri J.P Vaish. According to the terms of appointment Shri J.P Vaish was to draw a fixed salary of Rs 1000 p.m, commission of 12 ½ % on the net profits of the firm payable after the accounts had been ascertained fully by the auditors and a car allowance of Rs 250 p.m It was one of the terms of the appointment that in case the profits exceeded Rs 1 lakh the commission payable to Shri J.P Vaish was 25%. Shri J.P Vaish was also given free medical facility for himself and the members of his family. In terms of the letter of appointment Shri Vaish got no commission in the first year as the mill suffered a loss. In the next year the profit being less than Rs 1 lakh, Shri Vaish received a sum of Rs 4063 as commission. For Assessment Year 1948-49, the assessee paid a sum of Rs 75,465 as commission to Shri J.P Vaish calculated at the rate of 25% on the profits. The assessee claimed deduction of the said amount from the assessable income. By his assessment order dated June 30, 1949, the Income Tax Officer disallowed the claim on the ground that it was excessive and quite unreasonable looking to the salary paid to Shri Vaish. He also found that no general practice of giving commission at the rate of 25% existed in the assessee's line of business. Taking into account the circumstances of the case, the Income Tax Officer determined a sum of Rs 5000 as a reasonable amount payable as commission. Against the disallowance of Rs 70,465 paid as commission to the General Manager, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income Tax who by his order dated October 31, 1949 found that Rs 5000 was not sufficient and it was reasonable to allow the payment of commission at the rate of 121/2%. He accordingly increased the commission payable from Rs 5000 to Rs 37,732 in that year. The assessee took the matter in appeal to the Income Tax Appellate Tribunal which by its order dated July 10, 1950 dismissed the appeal. As directed by the High Court, the Appellate Tribunal submitted a statement of case under Section 66(2) of the Income Tax Act, 1922 on the following question of law:
“Whether in the circumstances of the case, the sum of Rs 37,733 paid to the General Manager Shri J.P Vaish, which has been disallowed by the Income Tax Appellate Tribunal was an amount laid out or expended wholly or exclusively for the purpose of the business of the assessee?”
2. By its judgment dated May 22, 1962, the High Court answered the question against the assessee. Against the judgment of the High Court the present appeal is brought by special leave.
3. Section 10(2)(x) and 10(2)(xv) of the Income Tax Act. 1922 at the relevant time read as follows:
“10.(2)(x) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:
4. Provided that the amount of the bonus or commission is of a reasonable amount with reference to—
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business, profession or vocation for the year in question; and
(c) the general practice in similar business, profession or vocations;
10. (2)(xv) Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively for the purpose of such business, profession or vocation.”
5. It was contended on behalf of the assessee that in the circumstances of this case the amount of Rs 37,733 paid to Shri J.P Vaish was an amount laid out or expended wholly or exclusively for the purpose of the business of the assessee and was wrongly disallowed by the Income Tax Appellate Tribunal. It was pointed out that Shri J.P Vaish was in no way related to the proprietors of the firm and the commission on profits clause was inserted to create the interest of Shri J.P Vaish in the running of the mill which was “old and unbalanced” and had never worked continuously or satisfactorily before it was taken over by the assessee. During the first 14 months the mills made no profit and Shri J.P Vaish was paid nothing beyond his salary and car allowance. In the next 12 months he succeeded in securing an order for Lohis from Government and so the mill made some profit and the amount of the Manager's commission was proportionately very small in terms of the agreement. The large profit in 1946-47 was made due to new design of civilian rugs Shri Vaish introduced for the first time in the mill after studying public tastes and the qualities and designs prevailing in the market. It was also said that Shri Vaish had a special aptitude to show in his work so far as the marketability of the goods was concerned. After the death of Shri Vaish in July 1947, the firm was converted into a company and the post of the General Manager was abolished and one of the Directors who managed the affairs of the company was given Rs 18,000 per annum as remuneration and Rs 6000 per annum as allowance for the accounting year 1947-48. The Appellate Tribunal took the view that the post of General Manager carried the responsibility equal to that of the Director who was given the charge of the conduct of business after the death of Shri Vaish, the General Manager. his post carried a remuneration of Rs 18,000 plus Rs 6000 i.e a total remuneration of Rs 24,000 per annum and therefore the commission paid to Shri Vaish in excess of this amount was not really paid wholly for the purpose of carrying on business. But it was pointed out on behalf of the assessee that Shri J.P Vaish had taken over the mill at a time when it was old and dilapidated and in the first 14 months the mill made no profit and Shri Vaish was paid nothing beyond the salary and car allowance. In the succeeding year he was able to secure an order from the Government on account of which the mill made some profit. Shri Vaish introduced for the first time a new design of civilian rugs in the year 1946-47 during which a large profit was made. It was therefore contended on behalf of the assessee that the position of Shri Vaish who worked in the mill at the initial stage and of the Managing Director was not comparable and the Appellate Tribunal was wrong in taking this circumstance into consideration. Counsel for the assessee also pointed out that Shri Vaish was educated in a Public School at Dehradun and thereafter studied at the Benaras College and at the Engineering College of the Benaras Hindu University for Electrical and Mechanical Engineering and then joined the Commerce College at Delhi. After that he had training in the Aluminium Corporation of India Ltd. Lakshmi Rattan Cotton Mills Ltd., and the Road Products Ltd., Rampur. In view of the circumstances of the case it was urged on behalf of the assessee that the entire amount of Rs 75,465 paid to Shri Vaish was an amount laid out wholly and exclusively for the purpose of the business of the assessee within the meaning of Section 10(2)(xv) of the Income Tax Act, 1922.
6. We should make it clear that in this case we are not called upon to decide whether the Income Tax Officer could exercise the power he exercised under Section 10(2)(x) of the Income Tax Act. The question referred by the Tribunal and answered by the High Court only deals with the claim of deduction of the amount paid to Shri J.P Vaish under Section 10(2)(xv) and not under Section 10(2)(x) of the Act.
7. The question as to whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of business, profession or vocation as required under Section 10(2)(xv) of the Income Tax Act has to be decided on the facts and in the light of the circumstances of each particular case. But, as observed by this Court in Swadeshi Cotton Mills Co. Ltd. v. CIT the final conclusion on the admissibility of an allowance is one of law. In the present case, both the Appellate Assistant Commissioner and the Appellate Tribunal rejected the view of the Income Tax Officer that the rate of commission paid to Shri Vaish was not fixed on account of business considerations but there was some collateral reason. But considering the practice in similar business concerns, the Appellate Assistant Commissioner expressed the view that the rate of 12 ½ % commission was reasonable and the allowance was therefore restricted to half of the amount claimed by the assessee. The view of the Appellate Assistant Commissioner has been affirmed by the Income Tax Appellate Tribunal. The case of the assessee, however, is that a higher rate of commission of 25% was fixed for Shri J.P Vaish because the mill was old and dilapidated and it never made profit of even a lakh of rupees in the past and that the rate of 25% was fixed in order to create special interest of the General Manager for accomplishment of the task entrusted to him. In our opinion, neither the High Court nor the Appellate Tribunal has applied the proper legal test in this case. As pointed out by this Court in CIT v. Walchand & Co. Private Ltd. 1967-65 ITR 381 = (AIR 1967 SC 1435) in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. It is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. It was also pointed out in that case that an employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed and the special aptitude of the employee, future prospects of extension by the business and a host of other related circumstances. In our opinion, the principle of this decision applies to the present case and it must accordingly be held that in the circumstances established by the assessee the entire amount of Rs 75,465 paid to the General Manager Shri J.P Vaish was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee.
8. For the reasons expressed we hold that the question of law referred to the High Court must be answered in the manner indicated and this appeal is accordingly allowed with costs.