Profit-linked remuneration exemption fails where employer's deduction is denied for excessiveness, leaving the amount taxable in employee hands.

Exemption under Notification No. 878-F applied only where remuneration was received for services, paid out of the business profits, and disallowed in the employer's assessment because of that mode of payment. The employer's deduction was rejected instead on the independent ground that the remuneration was excessive and not wholly and exclusively laid out for business purposes under the Income-tax Act, 1922. Since the disallowance did not arise from payment out of profits or a profit-linked character of the sum, the notification's conditions were not satisfied. The disallowed portion of the remuneration therefore remained taxable in the employee's hands.

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Issues: Whether the assessee was entitled, under Notification No. 878-F dated February 21, 1922, to exclude from taxable income the portion of remuneration paid to him by his employer which had been disallowed as a deduction in the employer's assessment.

Analysis: The exemption under the notification depended on cumulative requirements, namely that the sums were received as remuneration for services, were paid out of the profits of the business, and were disallowed as a deduction by reason of that very mode of payment. The employer's claim had been rejected not because the payment was an allocation of profits, but because the remuneration was held to be excessive and not wholly and exclusively laid out for business purposes under section 10(2)(xv) of the Income-tax Act, 1922. Since the disallowance was founded on lack of business necessity rather than on payment out of profits or determination with reference to profits, the statutory conditions for exemption were not met.

Conclusion: The assessee was not entitled to the exemption, and the disallowed portion of remuneration remained taxable in his hands.

Ratio Decidendi: An exemption requiring that remuneration be paid out of profits and disallowed by reason of that mode of payment is not attracted where the employer's deduction is refused on the independent ground that the expenditure was not laid out wholly and exclusively for business purposes.

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