Appeal No 591 of 1967
Appeal by special leave from the judgment and order dated May 22 1962 of the Allahabad High Court in Income tax Reference No 424 of 1958
MC Chagla and BP Maheshwari for the appellant
B Sen BD Sharma and RN Sachthey for the respondent
The Judgment of the Court was delivered by Ramaswami J
The appellant hereinafter called the assessee  carried on the business of manufacture and sale of blankets and other woollen cloth
For the assessment year 1948 49 the assessee claimed a deduction of Rs 75465 as commission paid to the General Manager Shri JP Vaish
According to the terms of appointment Shri JP Vaish was to draw a fixed salary of Rs 1000 pm commission of 12 12 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 pm
It was one of the terms of the appointment that in case the profits exceeded Rs 1 lakh the commission payable to Shri JP Vaish was 25
Shri JP 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 the assessment year 1948 49 the assessee paid a sum of Rs 75465 as commission to Shri JP 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 70465 paid as commission to the General 527 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 1212
He accordingly increased the commission payable from Rs 5000 to Rs 37732 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 662 of the Income Tax Act 1922 on the following question of law  Whether in the circumstances of the case the sum of Rs 37733 paid to the General Manager Shri JP 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  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
Section 102x and 102xv of the Income Tax Act
1922 at the relevant time read as follows 102 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 Provided that the amount of the bonus or commission is of a reasonable amount with reference to a the pay of theemployee and the conditions of his service b the profits of the business
profession or vocation for the year in question and e the general practice in similar business professionor vocations 102xv 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
 It was contended on behalf of the assessee that in the circumstances of this case the amount of Rs 37733 paid to Shri J P 528 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 JP 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 JP 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 JP 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 qualifies 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 18000 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
Tiffs post carried a remuneration of Rs 18000 plus Rs 6000 ie a total remuneration of Rs 24000 per annum and therefore the commission paid to Shri Vaish in excess of tiffs 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 JP 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
the succeeding year he was able to secure an order from the 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 Dehra Dun and thereafter studied at the Benaras College and at the Engineering COllege of the Benaras Hindu University for Electrical and Mechanical Engi 529 neering and then joined the Commerce College at Delhi
After hat he had training in the Aluminium Corporation of India Ltd Lakshmi Rattan Cotton Mills Ltd and the Road Products Ltd
Ramput
ln view of the circumstances of the case it was urged on behalf of the assessee that the entire amount of Rs 75465 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 102xv of the Income Tax Act 1922
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 102 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 JP Vaish under section 102xv and not under
section 102 x of the Act
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 102Xv 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 vs CIT UP1 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 1212  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 JP 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 Bombay vs Walchand  Co Private Ltd 2 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 1 2  530 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 75465 paid to the General Manager Shri JP Vaish was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee
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
Appeal allowed


Summary:
The assessee a Mill appointed V as its General Manager on a salary of Rs 1000 pm and car allowance of Rs 250 pm plus commission of 1212  on the net profits of the firm and in case the profits exceeded Rs 1 lakh the commission payable was 25
In the first year of the appointment the mill suffered loss next year commission was paid at of the profits and the next year commission paid was 25 as the profits exceeded the figure stipulated
After the death of V one of the Directors was appointed to manage its affairs and given a total remuneration of Rs 24000 per annum and the post of General Manager was abolished
The assessee claimed deduction from its assessable income the amount paid to V at the rate of 25 of the profits
The Income tax Officer disallowed the claim and determined Rs 5000 as reasonable amount payable
Against the amount disallowed the assessee appealed to the
Appellate Assistant Commissioner who allowed payment of commission at 1212 as in its view that rate was reasonable considering the practice in similar business concerns
The assessee appealed to the Appellate Tribunal and the appeal was dismissed
The Tribunal took the view that the  General Manager carried responsibility equal to that of the Director the commission paid to V in excess of Rs 24000 per annum ie the amount paid as total remuneration to the Director was not really paid
wholly for the purpose of carrying on business
On reference the High Court answered the question against the assesaee
The assessee in appeal to this Court contended that the higher rate of commission on profits was inserted to create the interest of V who had special aptitude and experience in the line and the mill was running at a loss and it was only after sometime of V s taking over that the mill made large profits so the amount paid to V was an amount laid out or expended wholly or exclusively for the purpose of the business of the assessee and it was wrongly disallowed
HELD In the circumstances established by the assessee the entire amount paid to V was an amount laid out or expended wholly and exclusively for the purpose Of the assessee
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
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 526 the business and a host of other related circumstances
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 102 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 the final conclusion on the admissibility of an allowance is one of law
529 D 529H 530 C CIT Bombay vs Walchand  Co Private Ltd 65 ITR 381 applied to
Swadeshi Cotton Mills Co Ltd vs
CIT UP  referred to