Commissioner Of Excess Profits Tax vs N.M. Rayaloo Iyer and Sons

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 8 December 1960

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In the matter of Commissioner of Excess Profits Tax versus N. M. Rayaloo Iyer & Sons, pronounced on 8 December 1960, the Supreme Court of India delivered its judgment. The bench that heard the case comprised Justice J. C. Shah, Justice J. L. Kapur, and Justice M. Hidayatullah, and the opinion was authored by Justice Shah.

The Court noted that the present proceedings consisted of two separate appeals, each of which had been granted a certificate of fitness by the High Court of Judicature at Madras. Appeal No. 494 of 1958 originated from orders passed in certain excess‑profits‑tax appeals, whereas Appeal No. 495 of 1958 arose from orders passed in a combination of income‑tax references, excess‑profits‑tax appeals, and business‑profits‑tax appeals.

The respondents, identified in the judgment as the assessees, were the firm M. S. N. M. Rayaloo Iyer & Sons, which carried on a business principally dealing in dyes and chemicals. The firm served as the chief representative in South India for the products of Imperial Chemical Industries Company (India) Ltd., hereafter referred to as I C I. The dye and chemical business that formed the subject of the appeals was conducted under the name and style “Colours Trading Company.” Its head office was situated at Madura, and the firm operated thirteen branch offices in various towns throughout South India.

The business had originally been carried on as a partnership among three brothers: N. M. R. Venkatakrishna Iyer, N. M. R. Subbaraman, and N. M. R. Krishnamurti. On 13 April 1946, Subbaraman retired from the partnership, and the share belonging to Venkatakrishna Iyer was transferred to a private limited company named N. M. R. Venkatakrishna Iyer & Sons Ltd. Notwithstanding these personnel changes, the enterprise continued to operate under the original name and style.

One of the partners’ sons, N. M. R. Mahadevan, was employed by the assessees as the General Manager of Colours Trading Company. In a letter dated 17 April 1940, the assessees communicated to Mahadevan that his remuneration would consist of a fixed salary of Rs 1,800 per annum together with a commission equal to five per cent of the net profits of the concern. The net profit was to be calculated by deducting from the gross profits the amounts paid as salaries, wages, and other outgoings, but without making any deduction for capital. By a subsequent letter dated 30 March 1943, the salary of Mahadevan was increased to Rs 3,000 per annum and his commission was raised to twelve and one‑half per cent of the net profits of the Colours Trading Company.

The Court further observed that the branch offices were each managed by local managers and assistant managers, who received, in addition to their monthly salaries, annual and special bonuses and a dearness allowance. The assessees received commissions from I C I at rates varying between seven and one‑half per cent and twelve per cent on different products sold to them. With effect from 1 April 1944, I C I allowed a special emergency commission of five per cent on all dyes and dye‑stuffs sold to the assessees. This special emergency commission was subsequently increased to fifteen per cent on all sales on or after 1 March 1945, but was later reduced to

The Court observed that the special emergency commission applicable to sales was reduced to ten per cent on and after 1 September 1946. These appeals concerned the assessees’ liability to excess profits tax for the accounting periods ending 13 April 1943, 12 April 1944, 12 April 1945 and 31 March 1946, and liability to business profits tax for the periods ending 12 April 1946, 31 March 1947, 13 April 1947, 31 March 1948 and 12 April 1948. The assessees asserted that, pursuant to agreements executed from time to time, they had paid their employees a share of the special emergency commission received from the Imperial Chemical Industries during the account years 1942‑43 through 1947‑48, in addition to monthly salary, dearness allowance and general and special bonuses. The Imperial Chemical Industries, in a letter dated 24 January 1944, allowed a five per cent emergency commission and recommended that one per cent of that commission could be passed on by the assessees to their sub‑distributors. Relying on that recommendation, the assessees claimed to have paid commissions to employees at rates varying between one and one‑half per cent and four per cent. When the emergency commission was increased to fifteen per cent, the Imperial Chemical Industries, by a letter dated 23 February 1945, advised that six per cent of the commission might be passed on to sub‑distributors, and the assessees thereafter distributed commissions ranging from two per cent to seven and a half per cent, with occasional rates as high as twelve per cent. Under the service agreements, commissions were payable only if the net turnover in dyes exceeded one hundred thousand rupees in a year, yet the assessees contended that commissions were paid at generous rates even when turnover fell well below that threshold. In the account year ending 12 April 1945, the assessees revised employee salary scales, introducing a clearness allowance and a special bonus that together exceeded fifty per cent of the basic annual salary, and also granted an annual bonus equal to the basic salary. Consequently, each employee received remuneration amounting to at least two and a half times his enhanced basic salary, and, in addition, the assessees claimed to have paid a share of commission that in some instances exceeded twelve times the basic salary.

For the purpose of income‑tax assessment, the Income‑Tax Officer computed the assessees’ total income for the years 1943‑44 and 1944‑45 and disallowed the payment of twelve and a half per cent of the net profits of the Colours Trading Company to Mahadevan. The Officer also disallowed, for the assessment years 1945‑46, 1946‑47, 1947‑48 and 1948‑49, the commissions paid to branch managers and other employees. On appeal, the Appellate Assistant Commissioner set aside the order that had disallowed the commission paid to Mahadevan. Following a decision of the Income‑Tax Appellate Tribunal in related excess profits tax appeals, the Appellate Assistant Commissioner allowed a deduction of five per cent of the net profits without any further deduction, thereby modifying the earlier disallowance.

In that case the order that allowed a deduction of either excess profits tax or business profits tax, or twelve and one‑half percent after deduction of whichever tax was higher, was affirmed by the Income‑tax Appellate Tribunal. The Tribunal also affirmed the order that disallowed the emergency commission paid to the branch managers and other employees, and it added back all those payments in the computation of taxable income for the purposes of Income Tax, Excess Profits Tax and Business Profits Tax. At the request of the assessees the Tribunal referred two sets of questions to the High Court under section 66(I) of the Income Tax Act read with section 21 of the Excess Profits Tax Act. The first set of questions, recorded in Referred Case No. 44 of 1953, asked: (1) whether, while allowing a deduction under section 10(2)(xv) of the Income‑tax Act, the Income‑tax Officer was barred from examining whether the amount was paid wholly and exclusively for the purpose of the assessee’s business; (2) whether any material existed before the Tribunal to conclude that the commission payment to N. M. R. Mahadevan at twelve and one‑half percent before deduction of excess profits tax or business profits tax was not wholly and exclusively laid out for the purpose of the assessee’s business; and (3) whether the commission payment to the branch managers, assistant managers and other employees constituted an expenditure laid out wholly and exclusively for the purpose of the business. The second set of questions, recorded in Referred Case No. 53 of 1952, asked: (1) whether the Appellate Tribunal erred in law in holding, in accordance with the terms of letters dated 17 April 1940 and 30 March 1943 and the conduct of the parties, that the excess profits tax payable by the assessee should be deducted from profits before calculating the commission of twelve and one‑half percent payable to N. M. R. Mahadevan; (2) whether sufficient evidence existed for the Tribunal to hold that the commission of twelve and one‑half percent on profits paid to Mahadevan was unreasonable within the meaning of rule 12 of Schedule 1 of the Excess Profits Tax Act; and (3) whether, on the facts and circumstances of the case, the disallowance by the excess profits tax authorities of the commission paid to branch managers was justified under rule 12 of Schedule 1 of the Excess Profits Tax Act. The High Court noted that the substantive provisions concerning allowances under the Excess Profits Tax Act and the Business Profits Tax Act, which had replaced the former on 30 March 1946, were essentially identical for the questions raised in this litigation; consequently any reference to the Excess Profits Tax Act with respect to the period after that date was to be treated as a reference to the Business Profits Tax Act. In the view of the High Court, when computing the taxable income, the deductions claimed by the assessees fell to

The Court held that the deduction claimed by the assessees should not be placed under section 10(2)(xv) of the Income‑tax Act but correctly under section 10(2)(x), which specifically governs deduction of commissions or bonuses paid to an employee. It observed that, when assessing liability to excess profits tax, the bonus or commission paid to the taxpayer’s employees could be allowed as a deduction in accordance with section 10(2)(x) of the Income‑tax Act and rule 12 of Schedule 1 to the Excess Profits Tax Act. In the matter of Mahadevan, the Court found that the case presented little difficulty; the sole issue to be resolved was whether, in permitting a commission deduction at the rate of twelve and one‑half per cent on net profits, the excess profits tax already paid by the assessees should be taken into account. Citing the Punjab High Court decision in Commissioner of Income‑tax, Delhi v. Delhi Flour Mills Ltd., the Court noted that excess profits tax cannot be deducted in computing net profits, yet the record did not allow a definitive answer on whether the commission paid to branch managers and other employees was properly deductible. Consequently, the Court directed the Tribunal to provide a supplementary statement of facts and obtained that material for further consideration. After reviewing the supplementary statement, the Court concluded that the assessees had undeniably distributed substantial sums from the emergency commission to branch managers and assistant managers at rates exceeding the minima recommended by the I C I, although those rates remained within the percentages permitted by the I C I; the balance retained by the appellants from the emergency commission was also considerable. The Court indicated that the Tribunal ought to examine three matters: first, the reasonableness of the commission under the conditions set out in section 10(2)(x); second, the reasonableness of percentages that surpass the I C I’s minima; and third, the necessity of preserving the I C I’s reputation and that of the distributor during a period when black‑marketing was widespread. It further observed that the Tribunal had failed to genuinely analyse the evidence to justify its conclusion that only the I C I‑recommended minima, and nothing above, satisfied the reasonableness test under rule 12, Schedule 1 of the Excess Profits Tax Act. Finally, the Court affirmed that whether reasonableness is measured by the standard in section 10(2)(x) of the Income‑tax Act or by commercial expediency under rule 12, Schedule 1, the expenditure must be evaluated from the standpoint of a businessman, not by a subjective standard of a tax officer, and that an examination of the furnished materials revealed no inherent unreasonableness in the commissions actually paid to the branch managers and assistant managers.

The High Court referred to the decision reported in 1953 23 I.T.R. 167 and stated that, after scrutinising the material furnished by the parties, it could not identify any element that was intrinsically unreasonable in the commissions that the assessors had actually paid to the branch managers and assistant managers of the business. The Court further observed that the minimum rates suggested by the I.C.I. could not be treated as the sole or absolute yardstick for assessing the reasonableness of the payments made. In its discussion the Court recorded the following observation: “No doubt, the employees of the assessee were in receipt of regular salaries and bonuses. But then, a sub‑distributor, if he had not been paid a salary, would have had to be paid a share of the basic commission itself. What the assessee got in the years in question was in the nature of a windfall. It shares it with its employees. It had been instructed to share it. The emergency commission was allowed by the I.C.I. so that the distributors could maintain the reputation of the I.C.I. in the market even under the disturbed conditions that prevailed in those years. If, to maintain that reputation and to maintain its own, the assessee paid to its employees, even on a liberal basis, a share of that emergency commission, it is a little difficult to hold that, while receipt of the emergency commission was reasonable, sharing it beyond a particular point would be per se unreasonable, in the sense that no prudent businessman in that line of business, in those years, and in the market conditions that prevailed then, with ample scope for black‑marketing, would have paid out commission on such a basis.” The Court then concluded that, although the onus lay on the assessee to demonstrate entitlement to the deductions claimed under section 10(2)(x) of the Income‑Tax Act and rule 12 of Schedule 1 of the Excess Profits Tax Act, the record contained no basis for showing that, from the viewpoint of a businessman, payments exceeding the I.C.I. minima were unreasonable. Consequently, the Court held that the entire claim should have been allowed both under section 10(2)(x) of the Income‑Tax Act and under rule 13 of Schedule 1 of the Excess Profits Tax Act, because the statutory requirements had been satisfied. Accordingly, the High Court answered the question of whether the disallowance of commission paid to the assessee’s employees was justified under rule 12, Schedule 1 of the Excess Profits Tax Act in the negative. In response to those orders, two appeals were filed, each accompanied by a certificate of fitness from the High Court. The first issue for consideration was whether, in computing taxable income for the purposes of income tax and excess profits tax, the commissioner’s allowance to Mahadevan at twelve and one‑half per cent should be allowed after deduction of the excess profits tax paid.

According to the agreement dated 17 April 1940, as later modified by the agreement dated 30 March 1943, Mahadevan was to receive a fixed remuneration of Rs 3,000 per year together with a commission equal to twelve and one‑half percent of the net profits of the Colours Trading Company. The High Court, while determining the meaning of “net profits” under the agreement, held that the calculation should be performed in accordance with the principles of commercial accountancy and the principles laid down in the Excess Profits Tax Act. In that view, the Court concluded that the Excess Profits Tax, being a tax on profits, could not be deducted in arriving at the net profits. The point before this Court was whether that conclusion correctly interpreted the terms of the agreement. The agreement required Mahadevan’s commission to be calculated on the net profits of the Colours Trading Company after deducting from the gross profits the salaries, wages and other outgoings. The term “outgoings” was not confined to ordinary business or commercial outgoings. Although the agreement expressly prohibited the deduction of capital expenditure, it contained no indication that “outgoings” were limited to business outgoings alone. There was also no language in the agreement or in the surrounding context that suggested the outgoings excluded the Excess Profits Tax paid by the assessee. Consequently, the Court found that the High Court’s interpretation was not supported by the wording of the contract.

The Court then referred to the decision in Commissioner of Income‑tax v. Delhi Flour Mills Co. Ltd., where it was observed that, although the Excess Profits Tax formed part of the profits, it was not intended to be part of the net profits contemplated by the parties. The Court explained that if the tax were to be deducted in arriving at the net profits, the resulting amount would represent the divisible profits that the parties had in mind; therefore, by construction, “net profits” meant the divisible profits after deducting the Excess Profits Tax. Counsel for the Revenue did not contest the High Court’s finding that, for the purpose of computing taxable income under the Income‑tax Act, the commission paid to various employees was a permissible deduction under section 10(2)(x) of that Act. Hence, the only remaining issue on that aspect was whether the same deduction could be allowed when assessing the Excess Profits Tax. Section 21 of the Excess Profits Tax Act, together with the provisions of section 10 of the Income‑tax Act as modified, applied the Income‑tax provisions to the Excess Profits Tax with the necessary alterations. Section 2(19) defined “profits” as those determined in accordance with Schedule 1 of the Act, which set out the rules for computing profits for the Excess Profits Tax. Rule 12 of Schedule 1, introduced by section 4 of the Excess Profits Tax Ordinance, 1943, provided that in computing profits for any chargeable accounting period no deduction would be allowed for expenses exceeding what the Excess Profits Tax Officer regarded as reasonable and necessary for the business, and that any disallowance required prior authority of the Commissioner of Excess Profits Tax.

The rule provides that no deduction shall be permitted for any expense that exceeds the amount which the Excess Profits Tax Officer regards as reasonable and necessary, having regard to the requirements of the business. In cases where the expense consists of directors’ fees or other payments for services, the allowance is further limited to the actual services rendered by the person concerned. The rule also stipulates that the Officer may not disallow any expense under this provision unless he first obtains prior authority from the Commissioner of Excess Profits Tax. The rule further provides that any person who is dissatisfied with the Officer’s decision may file an appeal, within the prescribed time and manner, to the Appellate Tribunal. Additionally, for chargeable accounting periods ending after 31 December 1942, the Central Government is empowered to make rules that determine the extent to which deductions may be allowed in respect of bonuses or commission paid. The Court was informed at the bar that, although the Central Government had the authority to make such rules, it had not issued any rules governing the extent of deductions for bonuses or commissions. Consequently, the statutory framework remained without detailed governmental guidance on this specific point.

The Excess Profits Tax Act was subsequently replaced, effective from the year 1946, by the Business Profits Tax Act, 1947. Under section 2, clause (16) of that Act, the term “profits” is defined as profits determined in accordance with Schedule 1. Section 19 incorporates the provisions of the Indian Income‑tax Act as they apply to the Excess Profits Tax, through sections 21 and 21A, to the extent that they are not inconsistent with the Business Profits Tax Act. Clause (3) of Schedule 1 introduces a provision that is substantially similar to clauses (1) and (2) of rule 12 of the earlier Excess Profits Tax Act. For purposes of the Business Profits Tax, profits of a business must be computed by reference to section 10 of the Income‑tax Act, modified as directed by Schedule 1 of the Excess Profits Tax Act. Clause 12 of Schedule 1 expressly disallows any deduction for expenses that exceed the amounts the Officer deems reasonable and necessary, considering the business requirements and, where relevant, the actual services rendered. The Court noted that the allowance of a deduction does not depend on the Officer’s subjective judgment but on objective standards of reasonableness and necessity. Finally, the Court affirmed that the order of the Excess Profits Tax Officer is subject to review by the Tribunal, and an aggrieved party may appeal that order to the Tribunal.

In determining whether a deduction claimed under the Excess Profits Tax Act is proper, the primary responsibility rests with the Excess Profits Tax Officer, as assigned by the Legislature. It is the Officer’s duty, subject to later review by the Tribunal, to examine whether the deduction is reasonable and necessary in view of the business requirements and, where the payment is for services, whether it corresponds to the actual services rendered. The role of the High Court on matters referred to it under the Excess Profits Tax Act is limited to an advisory function; the Court does not sit in appeal of the taxing authority’s decision. Consequently, when the taxing authority, after considering the facts, concludes that an expense claimed as a deduction is not reasonable or necessary, the High Court cannot replace that conclusion with its own judgment on what is reasonable or necessary. Even if the High Court finds that the taxing authority has erred in law by misinterpreting evidence, by applying an incorrect test, or by acting perversely, the Court may only set out the correct legal principles that govern the identification of allowable deductions. The Court must then leave it to the taxing authority to apply those principles to decide, in the context of the business’s needs, whether the particular expense meets the standard of reasonableness and necessity. In the present case, the Excess Profits Tax Officer made several findings. First, he concluded that the assessees’ employees received ample remuneration for the work performed, consisting of a satisfactory salary, a generous dearness allowance, and an annual bonus equal to the basic salary. Second, he observed that the employees’ emoluments had been increased each year and that there was no evidence showing that the employees had persistently demanded higher remuneration. Third, he noted that commissions were credited to the employees’ accounts at the end of the year, were carried forward, and that no actual payments were made to the employees. Fourth, he held that the agreements produced by the assessees were fabricated with the intention of reducing tax liability. Fifth, he determined that the claimed expenditure had not been demonstrated to have been incurred wholly and exclusively for the purpose of the business. Taking all these circumstances into account, the Officer concluded that the salaries paid to the employees were sufficient and that any additional commission paid exceeded what could be regarded as reasonable and necessary. The assessees, through their counsel, challenged only one aspect of the Officer’s reasoning. They argued that the Officer erred when he stated that, according to the profit and loss account of the firm, the net profit for the year was Rs 20,487, leaving a share of Rs 6,800 to each partner, while some managers received amounts greater than this share. The assessees pointed out that the profit figure for Colours Trading Co. for the year 1945‑46, as shown in the assessment order, was Rs 99,435 and not Rs 20,487. The Officer’s statement therefore contained a factual mistake, although this mistake did not affect the overall conclusion reached by the Officer.

In this case, the Court noted that the mistake concerning the profit figure in the earlier assessment did not alter the final conclusion reached by the Excess Profits Tax Officer. The books of account of the assessees for the fiscal year 1943‑44, when the business was engaged in the trade of dyes, recorded profits amounting to Rs 99,435. From those profits the assessees asserted that they had distributed an emergency commission of Rs 1,00,715 to their employees. The Court observed that this claimed commission was, on its face, wholly disproportionate to the amount of profit actually earned by the firm. The order originally passed by the Excess Profits Tax Officer was subsequently affirmed on appeal by the Appellate Tribunal. The Tribunal held that, during the years in question, no additional incentive was required to promote the sale of dyes and chemicals because those commodities were in short supply and demand for them had risen markedly. Referring to a detailed table that set out the distribution of dearness allowance, bonus and salary among the employees for the relevant years, the Tribunal remarked that the payment of the large sum appeared to be a device for dissipating profits. It further observed that, when the alleged commission was added to the other emoluments, the total remuneration amounted to roughly twelve times the basic annual salary in some instances, and that such remuneration was entirely unnecessary for the purposes of the business.

The Tribunal also pointed out that the assessees did not have any sub‑distributors, and that the direction issued by the Indian Copper Industries (I.C.I.) did not obligate the assessees to “pass on” any commission to their employees. Consequently, the Tribunal concluded that the expenditure claimed as commission was neither reasonable nor necessary within the meaning of rule 12, Schedule 1 of the Excess Profits Tax Act. For the four assessment years under consideration, the Tribunal’s statement of case incorporated a table showing the emergency commission received by the assessees and the total amount paid to employees as commission. In 1945‑46 the assessees received an emergency commission of Rs 1,28,533 and paid Rs 1,00,715 as commission; in 1946‑47 the figures were Rs 3,20,391 received and Rs 2,44,698 paid; in 1947‑48 the amounts were Rs 3,15,934 received and Rs 1,28,506 paid; and in 1948‑49 the figures were Rs 3,70,964 received and Rs 1,75,079 paid. The Tribunal framed this distribution within three specific circumstances: first, although the I.C.I. had recommended commissions for sub‑distributors and the assessees had none, they nonetheless paid commissions to employees at rates exceeding the minimum rates recommended by I.C.I.; second, the commissions were paid in branches whose annual turnover did not exceed Rs 1,00,000, despite the agreements expressly limiting commission payment to branches whose turnover exceeded Rs 1 lakh; and third, the basic salaries of the employees had been substantially increased over time and, in addition to the annual bonus, generous dearness allowances and Deepavali bonuses were also granted, further underscoring the excessive nature of the payments.

In the present case, the Court examined annexure “L” that formed part of the Tribunal’s supplemental statement of case. That annexure revealed several striking examples of commissions paid to employees that were disproportionate to their basic salaries. For instance, an employee named Themaswamy received an annual commission that ranged between fifteen thousand rupees and twenty‑three thousand rupees while his basic salary for the year was only two thousand one hundred rupees. Similarly, an employee identified as K. N. Rajagopalachari was paid commissions varying from sixteen thousand rupees down to twelve thousand rupees, although his basic annual salary was one thousand two hundred sixty rupees. A further example involved S. L. Radhakrishnan, who earned commissions that fluctuated from five thousand seven hundred rupees to thirteen thousand rupees while his salary changed between five hundred sixteen rupees and six hundred thirty‑six rupees per year. Finally, K. R. Rama Rao received commissions ranging from four thousand six hundred rupees to ten thousand five hundred twenty rupees, with his basic salary initially being four hundred ninety‑two rupees and later increased to six hundred twelve rupees. The Court observed that these figures provided ample factual support for the conclusion reached by the Excess Profits Tax Officer, a conclusion that was subsequently affirmed by the Tribunal.

The Court further explained that it is the exclusive responsibility of the Excess Profits Tax Officer and the Tribunal to determine which deductions are permissible, taking into account the reasonableness and necessity of such deductions in light of the business’s actual needs. Interference with that determination is justified only when the tax authority’s view is tainted by an error of law, lacks any evidential basis, or arrives at a conclusion that no legally trained person could reach. While assessing whether a deduction claimed for bonus or commission payments to employees may be allowed, the tax officer must consider the specific provisions of section ten, clause two, sub‑clause (x) of the Income‑Tax Act and clause twelve of Schedule 1 of the Excess Profits Tax Act. In evaluating reasonableness, the officer may rightly take commercial expediency into account, but such expediency must be examined in relation to the genuine requirements of the business and the actual services performed by the employees; an abstract or theoretical consideration of commercial expediency is inappropriate. Regarding the High Court’s intervention, the Court held that the High Court was not authorized to re‑appraise the evidence that underpinned the Tax Officer’s conclusion, which the Tribunal had confirmed. The High Court’s function was advisory, limited to answering the specific questions posed for opinion based on the facts found. If the High Court believed the tax authority had erred in law, applied an incorrect test, or misinterpreted the evidence, it could point out the error to the appropriate committee, but it could not overturn the tax authority’s decision merely by reassessing the evidence. Moreover, even if the High Court found the complete disallowance of the deduction unjustified, it could not substitute its own judgment on what constituted a reasonable and necessary deduction.

The Court observed that the High Court, even when it disagreed with the taxing authorities, was required to answer the specific questions that had been referred to it and could not substitute its own view for that of the Excess Profits Tax Officer. The High Court therefore had to leave it to the officer to decide, in the particular circumstances of the case, what expenses were reasonable and necessary.

The counsel for the assessee argued that, because the Tribunal had stated in its supplementary statement of case that any payment exceeding the amount recommended by the Indian Council of Industrialists (I.C.I.) was unjustified, the Court might alter the High Court’s order to treat the amounts recommended by the I.C.I. as permissible deductions. The I.C.I. had suggested that a certain percentage of the emergency commission be distributed to sub‑distributors; however, the assessee’s organisational structure did not include any sub‑distributors, and the business was conducted exclusively through paid employees. Consequently, the recommendation of the I.C.I. had no practical application to the assessee. The counsel further submitted that, even though the assessee did not employ sub‑distributors, payments made to its employees could be deductible if they were reasonable and necessary for the business, but that such a determination was a matter for the taxing authorities, not for the Court. The Tribunal had concluded that no additional payment beyond salary, the annual bonus and the special bonus was justified, and the Court held that any contrary opinion expressed in the supplementary statement could not alter the Tribunal’s original conclusion.

The Court concluded that the question of whether the excess profits tax authorities were justified in disallowing the commission paid to branch managers under Rule 12, Schedule 1 of the Excess Profits Tax Act should be answered affirmatively. Accordingly, the Court allowed Appeal No. 494 of 1958 without ordering any costs, allowed Appeal No. 495 of 1958 with costs, and thus allowed both appeals.