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Issues Involved:
1. Whether the disallowance by the Excess Profits Tax authorities of the commission paid to branch managers is justified under rule 12 of Schedule I of the Excess Profits Tax Act. 2. Whether the commission payment to the branch managers, assistant managers, and other employees is an expenditure laid out wholly and exclusively for the purpose of the business under section 10(2)(x) of the Income-tax Act. Issue-wise Detailed Analysis: Issue 1: Disallowance by Excess Profits Tax Authorities The first issue revolves around whether the Excess Profits Tax authorities were justified in disallowing the commission paid to branch managers under rule 12 of Schedule I of the Excess Profits Tax Act. The Tribunal had agreed with the taxing authorities in disallowing the special commission claimed by the assessee for its managers and assistant managers. The Tribunal's decision was based on the premise that the payments made were above the minima recommended by the Imperial Chemical Industries (I.C.I.), and hence, not reasonable. The Tribunal did not find any consideration other than business purposes for these payments but still restricted the claim to the minima suggested by the I.C.I. The Court observed that the Tribunal made no real attempt to analyze the evidence before it or justify its conclusion that only the minima recommended by the I.C.I. satisfied the requirements under section 10(2)(x) of the Income-tax Act or rule 12 of Schedule I of the Excess Profits Tax Act. The Court emphasized that the reasonableness of the expenditure should be judged from the viewpoint of a businessman, not by a subjective standard of a taxing officer. The Tribunal's reliance on the minima suggested by the I.C.I. was found to be misplaced as it was only a minimum recommendation and not an absolute standard. Issue 2: Commission Payment as Business Expenditure The second issue pertains to whether the commission payments to branch managers, assistant managers, and other employees were expenditures laid out wholly and exclusively for the purpose of the business under section 10(2)(x) of the Income-tax Act. The Court directed the Tribunal to reconsider this question under section 10(2)(x) instead of section 10(2)(xv). The Tribunal was also asked to consider the reasonableness of the commission in light of the conditions laid down in section 10(2)(x), which include the pay of the employee and the conditions of his service, the profits of the business for the year in question, and the general practice in similar businesses. The Court noted that the Tribunal had failed to provide an adequate explanation for why the payments in excess of the minima recommended by the I.C.I. did not satisfy the test of reasonable expenditure. The Court found nothing per se unreasonable in the percentages adopted by the assessee for payment to its managers and assistant managers, even though they were in excess of the minima recommended by the I.C.I. The payments were made to maintain the reputation of the I.C.I. and the distributor in the market conditions that prevailed during that period, which included ample scope for black-marketing. The Court concluded that the entire claim should have been allowed both under section 10(2)(x) of the Income-tax Act and under rule 12 of Schedule I of the Excess Profits Tax Act. Conclusion: The Court answered the first question in the negative and in favor of the assessee, indicating that the disallowance by the Excess Profits Tax authorities was not justified. The second question was answered affirmatively, stating that the commission payments were reasonable and laid out wholly and exclusively for the purpose of the business. The assessee was entitled to its costs in each of the two references.
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