Profit-linked managing director commission qualifies for exemption when disallowed as a distribution of profits.

Commission paid to a managing director, though paid out of profits and linked to business profits, was disallowed by the departmental authorities on the footing that it amounted to a distribution of profits. The court held that, where the disallowance rests on that specific basis, the assessee satisfies the conditions of the exemption notification. The Commissioner had therefore misapplied the notification and committed an error apparent on the face of the record. Relief was granted, and the Commissioner was directed to restore the petition and decide it according to law.

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Issues: Whether commission paid to a managing director, which was disallowed as a deduction on the footing that it was a distribution of profits, fell within the exemption notification so as to entitle the assessee to relief.

Analysis: The commission was paid out of the profits of the business and was determined with reference to those profits. The decisive question was whether the deduction had been disallowed because the payment was treated as a division of profits. On the orders passed by the departmental authorities, the disallowance was found to rest on that very footing. Where a payment is treated as a sharing of profits and is disallowed for that reason, the conditions of the notification are satisfied. The Commissioner, therefore, failed to apply the notification correctly and also committed an error apparent on the face of the record.

Conclusion: The assessee was entitled to the exemption under the notification and to relief against the Commissioner's refusal.

Final Conclusion: The application succeeded and the Commissioner was directed to restore the petition and decide it according to law.

Ratio Decidendi: Where remuneration paid out of profits is disallowed as a deduction because it is treated as a distribution or division of profits, the assessee falls within a notification granting exemption for amounts so paid and disallowed on that ground.

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