M.S. Menon, J.
1. This is a reference by the Income-tax Appellate Tribunal, Madras Bench 'B', under Section 66(1) of the Indian Income-tax Act, 1922. The questions referred are:
'(1) Whether the Commissioner of Income-tax was right in acting under the provisions of Section 33-B of the Act in respect of one issue; when an appeal against the assessment in respect of a different issue is pending befeore the Appellate Assistant Commissioner.
(2) Whether there was material on the record for the Tribunal restricting the allowance to the Managing Director, on the facts and circumstances of the case, to 12 1/2 per cent.
(3) Whether the Commissioner of Income-tax was justified in disallowing the entire commission paid to N.S. Krishnan, the ex-Managing Director.'
The assessee is the Star Tile Works Limited, Kallai, and the reference relates to the assessment year 1951-52 (accounting period: year ended 31-12-1950).
2. Question No. (1), Counsel for the assessee submits that in view of Commr. of Income-tax, Bombay v. Amrit Lal Bhogilal and Co. : 34ITR130(SC) , he is not requesting us to deal with this question and it is not dealt with in this judgment.
3. Question No. (3). Counsel for the Department has assured us that there has been no disallowance of the pension or retiring allowance of Rs: 150 per mensem paid to the ex-Managing Director and in view of that counsel for the assessee submits that he is not inviting a decision on the question. This question also is not hence dealt with in this judgment.
4. Question No. (2). Sub-section (1) of Section 10 -of the Indian Income-tax Act, 1922, provides; .
'The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him.'
and Sub-section (2) that such profits or gains shall be computed after making the allowances specified in that sub-section. Sub-section (2) (xv) embodies the residuary head of revenue expenditure and is in the following terms:
'any expenditure (not being an allowance of the nature described in any of the Clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
5. There is no doubt that the Department has treated the allowance claimed as a claim under Section 10 (2) (xv). The order of the Commissioner of Income-tax, Madras, under Section 33-B, dated 17-11-1953 & the order of the Income-tax Appellate Tribunal Madras Bench 'B', dated 14-7-1954, both proceed on that assumption. In new of this it is unnecessary for us to consider whether the conclusion is right or not and we have naturally to deal with the question referred on the assumption that the claim concerned is a claim under that head.
6. The payment -- Rs. 35,784 -- was made to the Managing Director jn accordance with the provisions of an agreement dated 28-2-1950 (Annexure A). The relevant portion of the agreement reads as follows:
'..... the Managing Director shall be paid a commission of 15 per cent, on the net profits when the company declares a dividend of 6 per cent, or when the net profits- earned during the year less an amount equivalent to 22 1/2 per cent. of the said net profits and also less the amount payable as income-tax thereon are not less than 6 per cent, of the paid up capital of the company; 20 per cent, of such profits when the net profits turned during the year less an amount equal to 30 per cent, said profits and also less an amount payable as income-tax thereon are not less than 9 per cent, of the paid up capital of the company; and 25 per cent, of such profits when the net profits earned during the year less an amount equivalent to 37 1/2 per cent, of the said profits and also less an, amount payable as income-tax thereon are not less than 12 per cent, of the paid up capital of the company. (Net profits shall have the same meaning as defined in Section 87-C, Clause 3 of the Indian Companies Act)'.
7. The reality of the payment is not disputed. The trading results of the year entitled the Managing Director to 25 per cent, of the net profits according to the agreement dated 28-2-1950 (Rs. 35,784) and so far as we can see there is nothing on record to justify a reduction of that percentage to 12 1/2 per cent, as ordered by the Commissioner of Income-tax, Madras, and affirmed by the Appellate Tribunal. The Department has certainly got the right to decide whether the expenditure was laid out or expended wholly and exclusively for the purpose of the business; hut it has no power to enquire into the reasonableness or otherwise of any particular expenditure incurred in the business. Newton Studios Ltd., Madras v. Commr. of Income-tax, Madras, (S) AIR 1955 Mad 646 and Veeraiah Reddiar v. Commr. of Income-tax Travancore-Cochin : 38ITR152(Ker) .
8. The statement of the case says:
'From the assessment year 1943-44 upto 1948-49, the assessee had claimed payment of commission to the Managing Director at varying rates; i. e.. 25, 20 and 15 per cent, but uniformly only 10 per cent, had been allowed by the department. For the assessment year 1949-50, such payment was claimed at the rate of 20 per cent., but 10 per cent., only was ultimately allowed by the Appellate Assistant Commissioner. There were no appeals to the Appellate Assistant Commissioner in the first batch of years and from that of the Appellate Assistant Commissioner in 1949-50, i. e., the assessee acquiesced in the allowance of 10 per cent. In the assessment year 1950-51, the assessee claimed allowance for the payment of commission at 25 per cent., but only 12 1/2 per cent, was allowed by the Appellate Assistant Commissioner, to whom it had gone on appeal.'
According to the table given by the Commissioner of Income-tax in his order under Section 33B no allowance at all was given in respect of the assessment year 1943-44 though 25 per cent, was claimed by the assessee.
9. The fact that the assessee's claim in respect of another Managing Director working under a different agreement was thus dealt with in prior years cannot possibly be 'sufficient material' for the reduction effected in this case.
10. As pointed out by Kanga in his Commentary to Section 10 (2) (xv):
'The judgment of the Supreme Court in Eastern Investments Ltd. v. Commr. of Income-tax, West Bengal : 20ITR1(SC) , establishes that in the absence of fraud, the questions whether a transaction had the effect of diminishing the assessee's taxable income, whether it was a prudent or wise transaction, and whether it was necessary for the assessee to enter into that transaction, are irrelevant in determining whether expenditure relating to that transaction should be allowed under Section 12 (2); and the same considerations would apply under this clause.' (4th Edition Vol. I, page 371).
11. It follows that question No. (2) has to be answered in the negative and we do so. No costs.
12. A copy oi this judgment under the seal ofthe Court and the signature of the Registrar willbe sent to the Appellate Tribunal as provided bySub-section (5) of Section 66 of the Indian Income-tax Act,1922.