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Issues Involved:
1. Applicability of Section 10(2)(x) vs. Section 10(2)(xv) of the Indian Income-tax Act, 1922. 2. Reasonableness of commission paid to an employee under Section 10(2)(x). Issue-wise Detailed Analysis: 1. Applicability of Section 10(2)(x) vs. Section 10(2)(xv) of the Indian Income-tax Act, 1922: The core issue is whether the commission paid to an employee should be assessed under Section 10(2)(x) or Section 10(2)(xv). Section 10(2)(x) allows deductions for sums paid as bonus or commission to an employee, provided the amount is reasonable with reference to the pay of the employee, the profits of the business, and the general practice in similar businesses. Section 10(2)(xv) permits deductions for any expenditure laid out wholly and exclusively for business purposes, excluding those described in clauses (i) to (xiv). The assessee contended that the deduction should be considered under Section 10(2)(xv), arguing that the commission was a necessary business expenditure. However, the Tribunal and the court concluded that since the commission was paid over and above the salary, it fell within the purview of Section 10(2)(x). The court rejected the argument that Section 10(2)(x) applied only to ex gratia payments, clarifying that both bonus and commission could be contractual obligations. The court held that the commission paid to Kevalchand was an emolument over and above his salary, thus necessitating evaluation under Section 10(2)(x). 2. Reasonableness of Commission Paid to an Employee under Section 10(2)(x): The Tribunal disallowed half of the commission paid to Kevalchand, deeming it unreasonable. The Tribunal's decision was based on the fact that the nature of Kevalchand's work remained unchanged before and after the agreement. The Tribunal concluded that no special circumstances justified the large commission, and the amount paid was excessive compared to his salary. The court, however, found this approach flawed. It emphasized that the reasonableness of the commission should be judged from the perspective of commercial expediency, considering all relevant circumstances. The court noted that Kevalchand was indispensable for the assessee-firm due to his experience and familiarity with the business. The agreement to pay commission was a business necessity, especially after Kevalchand ceased to be a partner in another firm and sought either partnership in the assessee-firm or relief to join another firm. The court highlighted that the profit of the assessee-firm for the relevant year was Rs. 1,24,712, making the commission of Rs. 16,334 reasonable. Furthermore, the Tribunal failed to consider the profit factor and misinterpreted the relationship between salary and commission. The court concluded that the Tribunal ignored essential circumstances and misapplied the test of reasonableness. Conclusion: The court held that the commission paid to Kevalchand was a reasonable business expenditure under Section 10(2)(x) and allowed the full deduction. The Tribunal's decision to disallow half the commission was set aside, and the question was answered in the negative, favoring the assessee. The Commissioner was directed to pay the costs of the reference to the assessee.
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