THE COMMISSIONER OF EXCESS PROFITS TAX, MADRAS versus N. M. RAYALOO IYER & SONS.

Citation: [1961] 3 S.C.R. 60 · Decided: 08-12-1960 · Supreme Court of India · Bench: J.L. KAPUR · Disposal: Appeal(s) allowed

Judgment (excerpt)

Dece.mbef' 8. 
60 
SUPREME COURT REPORTS 
THE COMMISSIONER OF EXCESS 
PR:OFITS TAX, MADRAS 
v. 
N. M. RAYALOO IYER & SONS. 
[1961) 
(J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.) 
Excess Profits Tax-Deductions-Remuneration of managing 
agent-Percentage of net profits less outgoings-Excess Profits tax, 
if included in outgoings-Construction of agreement-Commission 
paid to branch managers-Deduction when reasonable and neces-
sary-Indian Income-tax Act, I9Z2 (II of I92Z), ss. Io(z)(xv), 
Ip(z)(x)-Excess Profits Tax Act, I940 (IS of I940), ss. 2(I6), I9, 
ZI, Sch. I, cl. (IZ). 
The respondents, a firm carrying on business in dyes and 
chemicals under the name and style of Colours Trading Com-
pany, with their head office at Madurai and thirtee_n branch 
offices in different towns, were the chief representatives in South 
India of the products of the I. C. I., a manufacturing concern. 
M was employed as the General Manager of the respondents and 
by virtue of an agreement, he was to be paid remuneration at 
the rate of Rs. 3,000 per annum and rzt% of the net profits of 
the company calculated by deducting from the gross profits of 
the business the salaries, wages and other outgoings. The 
branch offices were managed by local managers and assistant 
managers who were paid in addition to monthly, salary, annual 
and special bonus and dearness allowance. The respondents 
received from the I. C. I. commission at varying rates on the 
different prodncts sold to them and with effect from April r, 
1944, the LC.I. allowed a special emergency commission of 5% 
recommending that r% out of the commission allowed may be 
passed on by the respondents to their sub-distributors. The res-
pondents claimed to have distributed to their employees commis-
sion pursuant to the recommendation of the LC.I. at rates vary-
ing between 2% and 7!% and in some cases at a rate as high as 
rzo/o. Though under the service agreement, commission was 
payable to the employees only if the turnover exceeded 
Rs. r,00,000 net in any year, the respondents claimed to have 
paid them commission at generous rates even when the turn-
over fell far short of that amount. In the year of account 
ending April 12, 1945, there was a revision of the scales of sala-
ries of the employees, as a result of which the employees receiv-
ed an amount equal to zi times the enhanced basic salary 
and also commission sometimes exceeding rz times the basic 
salary. 
In computing the total income of the respondents for the 
years 1943-44 and r944-45 for purposes of income-tax, the 
Income-tax Officer disallowed the payment of rzi% of the net 
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3 s.c.R. SUPREME COURT REPORTS 
61 
profits to M, and for the years 1945-49 he disallowed the com-
z96o 
mission paid to the branch managers and other employees on 
--. . 
the ground that taking into account all the circumstances the The Commissiofter 
remuneration paid to the employees was adequate and that any of Excess Profits. 
additional commission paid was in excess of what was reason-
Tax, Madras 
able or necessary. The Appellate Tribunal confirmed the order 
v. 
of the Income-tax Officer except in the case of M to whom pay-
N. M. Rayaloo 
ment of 5 % of the net profits without deduction of Excess 
Iyer "" Sons 
Profits Tax or Business Profits Tax, or rz% after deduction of 
Excess Profits Tax or Business Profits Tax, whichever was 
higher, was regarded as permissible deduction. The High Court, 
on reference, took the view, inter alia, that in determining the 
net profits under the agreement with M, the excess profits tax 
could not be deducted, that in considering tbe question whe-
ther the bonus or commission paid to the employees in the pre-
sent case might be permitted as a justifiable deduction, in the 
light of s. ro(2)(x} of the Income-tax Act and r. 12 of Sch. 1 
of the Excess Profits Tax Act, the test of reasonableness of 
the expenditure was to be judged from the point of view of a 
business man and not by the application of any subjective 
standard of a taxing officer, and that on an analysis of the mate-
rials furnished, there was nothing per se unreasonable in the 
amounts of commission actually paid by the respondents to the 
branch managers and assistant managers. 
Held: (1) that the question whether in the computation of 
the taxbale income, the commission payable to M under the 
agreement entered into with him by the respondents should be 
allowed before deducting the excess profits tax, depended on the 

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