Employee commission exemption under profit-linked notification upheld where statutory conditions were cumulatively satisfied on the facts.

Exemption for employee commission under the 1922 notification depended on three cumulative conditions: the payment had to be out of, or determined with reference to, business profits; it had to be disallowed in the employer's computation but included in business profits; and tax had to be assessed on the disallowed amount in the employer's hands. The third condition was admitted. On the facts, the commission was linked to sales representing trading profits, and the disallowance arose from the arrangement's tax-reduction character. The commission was therefore exempt in the assessee's hands, and the reference was answered in the affirmative.

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Issues: Whether the commission of Rs. 2,45,557 paid to the assessee was exempt in his hands under Notification No. 878-F dated 21.03.1922 as amended by Notification No. 8 dated 24.03.1928.

Analysis: The exemption under the notification depended on three cumulative conditions: the sum must be paid out of, or determined with reference to, the profits of the business; the amount must not have been allowed as a deduction but must have been included in the profits of the business; and tax must have been assessed and charged on the disallowed sum under the head 'business' in the employer's hands. The third condition was admitted. On the first condition, the commission was linked to the employer's sales, and in the factual setting of the business the sales represented profits earned from the trading transactions. On the second condition, the Income-tax Officer disallowed the amount on the footing that the arrangement was entered into to reduce income and tax liability, which brought the case within the notification.

Conclusion: The commission was exempt in the hands of the assessee, and the question referred was answered in the affirmative.

Ratio Decidendi: Where the statutory notification requires cumulative satisfaction of payment out of profits, disallowance in the employer's computation by reason of the mode of payment, and assessment of tax on the disallowed amount in the employer's hands, exemption is available to the employee if those conditions are met on the facts.

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