1959 (7) TMI 63 - HC - Income Tax

Summary

Issues:
1. Taxability of salary paid to an employee in excess of the amount allowed as deduction in the assessment of the company.
2. Interpretation and applicability of Notification No. 878F dated March 21, 1922, as amended by Notification No. 8 of March 24, 1928, regarding exemption from taxation.

Analysis:
1. The case involved the taxability of the salary paid to an employee, the managing director of a private limited company, in excess of the amount allowed as a deduction in the assessment of the company for the years 1947-48 and 1948-49. The taxing authorities disallowed portions of the salary paid to the employee as they deemed it not wholly or exclusively expended for the company's business. The employee contended that the excess salary, already taxed in the hands of the employer, should not be taxed again in his hands. The Income-tax Tribunal, following precedents, held that tax cannot be levied again on the disallowed amounts in the hands of the employee.

2. The key issue revolved around the interpretation and applicability of Notification No. 878F dated March 21, 1922, as amended in 1928, which provided for exemption from tax on certain income received by an assessee from a business. The Supreme Court laid down three cumulative conditions for claiming exemption under the notification: the sum paid should be out of or determined with reference to the profits of the business, not allowed as a deduction, and income-tax should have been assessed and charged on the sum in the hands of the employer. The purpose of the notification was to prevent double taxation of the same profits.

3. The court analyzed previous judgments and observed that the salary paid to an employee must bear a direct relation to the profits of the business to be considered paid out of or determined with reference to the profits. In this case, the fixed monthly salary of the employee was not linked to the profits of the business, and the disallowance was not due to the mode of payment from profits. As the three conditions under the notification were not met, the employee could not claim the benefit of exemption.

4. The court distinguished cases where bonus payments were exempt from tax as they were directly related to profits, unlike fixed salary payments. The disallowance of the excess salary was not due to the mode of payment from profits but because it was not wholly or exclusively for the business purpose. Therefore, the court held that the principle of previous cases did not apply, and the excess salary was taxable in the hands of the employee.

In conclusion, the court ruled against the employee, holding that the excess salary paid to him was taxable as it did not meet the conditions for exemption under the notification. The employee was directed to pay the costs of the Commissioner.