Profit-linked remuneration exemption depends on cumulative conditions; fixed salary disallowed as business expenditure remained taxable.

Exemption under the section 60 notification applied only where remuneration was paid out of profits or determined with reference to profits, the disallowance arose because of that mode of payment, and tax had been charged in the employer's hands; these conditions were cumulative. Fixed monthly salary did not satisfy that test because it was not shown to be linked to profits, and its disallowance as business expenditure did not make it exempt in the employee's hands. The bonus precedent was distinguished because bonus is inherently a profit-linked payment. The result was that the fixed salary remained taxable in the employee's hands.

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Issues: Whether sums paid by the employer as salary, though disallowed as a business deduction in the employer's assessment, were exempt from tax in the employee's hands under the exemption notification issued under section 60 of the Indian Income-tax Act, 1922.

Analysis: The notification exempted remuneration only where the sum was paid out of, or determined with reference to, the profits of the business, where by reason of that mode of payment it was not allowed as a deduction but was included in the business profits, and where income-tax had been assessed and charged on that amount in the employer's hands. These conditions were cumulative. The salary in question was fixed monthly remuneration and was not shown to have been paid out of profits or determined with reference to profits. The disallowance arose because it was not expenditure laid out wholly and exclusively for the business, not because of the mode of payment. The earlier decision concerning bonus was distinguishable, since bonus is in its nature a payment out of profits, whereas salary paid at a fixed rate is not.

Conclusion: The sums were not exempt in the employee's hands. The answer to the referred question was in the negative.

Final Conclusion: The exemption notification did not apply to fixed salary disallowed in the employer's assessment, and the amounts remained taxable in the employee's hands.

Ratio Decidendi: Exemption under the notification is available only when the remuneration is paid out of, or determined with reference to, profits and all prescribed conditions are satisfied cumulatively; fixed salary disallowed as business expenditure does not satisfy that test.

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