1. This is an application under article 226 of the Constitution. The petitioner, at the material time, was an employee of the Ahmedabad Jaya Bharat Cotton Mills Co. Ltd. (hereinafter referred to as the 'Mills'). Up to the year 1945-46 he was paid a salary of Rs. 400 per month. From the year 1945-46 his salary was raised to Rs. 1,500. The petitioner also happens to be the son of one of the directors of the mills, Shri Chimanlal B. Parekh, holding a substantial number of shares of the mills. The petitioner was also paid certain sums as dearness allowance and bonus during all these four years. We may take the figures of the year 1945-46 to appreciate the contentions raised by the parties. In the year 1945-46 the petitioner was paid Rs. 18,000 as salary, Rs. 789 as dearness allowance and Rs. 4,500 as bonus. The total amount paid to him during the year thus amounted to Rs. 23,289. In the assessment of the mills for the aforesaid four years, i.e., 1945-46 to 1948-49, which was subsequently completed, the Income-tax Officer disallowed the increment given to the petitioner in his salary and bonus. The findings recorded by him were that the increments allowed appeared to be for reasons other than business. The dearness allowance paid to him was, however, allowed in full. Ultimately, when the matter was taken to the Tribunal by the mills, the Tribunal allowed payment of salary to the extent of Rs. 1,000 per month and allowed payment of three months' salary as bonus to the petitioner. The excess payment made to the petitioner by the mills was disallowed by the Tribunal. Now, the petitioner had paid the tax on the entire amount received by him from the mills. When the cases of the mills for the assessment years 1945-46 to 1948-49 were concluded by the final decisions of the Tribunal, the petitioner preferred claims for refund under section 60 of the Income-tax Act. It was the petitioner's case that must get refund in respect of the amount which has been disallowed as the legitimate expense of the mills and yet has been taxed in his hands. In short, it is the petitioner's case that, in respect of the expenses disallowed to the mills, that amount has been doubly taxed-once in the hands of the mills as addition to its profits, and the second time in his hands as amounts received by him from the mills. This, according to the petitioner, is not permissible under the Notification No. 878F (I. T.) dated March 21, 1922, issued by the Finance Department under section 60 of the Income-tax Act. This contention of the petitioner has not been accepted by the income-tax authorities and the petitioner, therefore, has preferred this application, wherein he seeks to get quashed the orders of the income-tax authorities and further prays that direction be issued to the income-tax authorities to give the necessary consequential relief which the petitioner is entitled to under the aforesaid notification.
2. The question raised thus turns on the construction of the notification. The question will have to be considered in two different aspects - the first as regards amounts paid to the petitioner by way of salary and the second as regards amounts paid by the mills to the petitioner by way of bonus, which has been disallowed as allowance to the mills. The notification is in the following terms :
'The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act -
(1) Sums received by an assessee on account of salary, bonus, commission or other remuneration for the purposes of his business, where such sums have been paid out of, or determined with reference to, the profits of such business, and by reason of such mode of payment or determination have not been allowed as a deduction but have been included in the profits of the business on which income-tax has been assessed and charged under the head 'business'.'
3. It is not necessary to refer to the proviso for the purposes of this case. This notification was considered by their Lordship of the Supreme Court in Commissioner of Income-tax v. Kirtikar. At page 363 their Lordships observed :
'A perusal of the notification clearly indicates that exemption from taxation in respect of the sums received by an assessee from a business on account, inter alia, of commission can be claimed only on three conditions, namely -
(1) where such sum has been paid to of or determined with reference to the profits of the business;
(2) where by reason of such mode of payment or determination the sum paid has not been allowed as a deduction but has been included in the profits of the business; and
(3) where on the sum so disallowed in the computation of the profits of the business, income-tax has been assessed and charged under the head 'business'.
These three conditions are cumulative and all of them have to be fulfilled before the assessee can claim the benefit of exemption.'
4. In the light of these observations, the facts of this case will have to be approached. We will first see whether the first of the aforesaid three conditions has been satisfied re salary. Now, it is an admitted position that the agreement between the petitioner and the mills was not that he was to be paid a certain percentage out of the profits as his salary, but the salary payable to him was a fixed monthly sum of Rs. 1,500 per month, irrespective of the fact whether the business of the mills ultimately resulted in profits or not. It is also an admitted position that the salary was paid every month. That being the position that the salary was paid every month. That being the position, in our opinion, it is clear that the first condition is not satisfied. It cannot be said that the salary paid to the petitioner was paid out of the profits or determined with reference to the profits of the business.
5. Mr. Kola, learned counsel for the petitioner, urged that the mills had made profits to the extent of Rs. 9,00,000 and that figure is arrived at after including the amount of salary of the petitioner disallowed; and that would necessarily mean that the petitioner was paid his salary out of the profits of the mills. We find it difficult to accept this contention. It may be true that the mills had made profits for the relevant year to the extent of nine lakhs of rupees and the said sum might include the amount of the petitioner, was paid out of profits as such. The agreement between the parties being to pay the salary at a fixed rate irrespective of the fact as to whether the mills made profit or loss, it also cannot be said that the petitioner's salary was determined with reference to the profits of the business of the mills. The exemption claimed by the petitioner in respect of the amount of his salary disallowed as expense to the mills, therefore, in our opinion, is not tenable.
6. We find support for the view taken by us above in a decision of the Division Bench of this court in Commissioner of Income-tax v. Mulraj Karsondas. At page 565 it is observed :
'The profits of the business may normally be ascertained only after deducing therefrom the outgoings for the purpose of earning the profits. The gross receipts of a businessman are not his profits; from the gross receipts deductions of necessity are to be made of the various outgoings which contributed to the earning of the profits. Salary paid to an employee for conducting the business in which the profits are earned if it bears no direct relation thereto must be deducted in ascertaining the profits. It is true that in cases when it is so stipulated the quantum of salary may be determined by reference to the quantum of profits made by an employer. In such cases, the salary maybe held to be paid to of profits or determined with reference to the profits of the business. But, in this case, the salary is paid at a fixed rate per month and is not paid out of or determined with reference to the profits of the business.'
8. This decision of our court has been followed and a similar view has been taken by the Madras High Court in Narayanaswami Iyer v. Commissioner of Income-tax. Mr. Kola, however, contends that this decision of the Division Bench is in conflict with a prior decision of this court reported in Kirtikar v. Commissioner of Income-tax and that is a preferable view. The facts of that case were that the assessee was an employee of Messrs. Dadajee Dhackjee & Co. in the assessment year 1945-46, and, in this year of account, he received from his employers commission at the rate of one per cent. on the turnover of the company in its colour department. Apart from the assessee two other employees also received similar commission and the total commission paid came to Rs. 84,540. Dadajee Dhackjee & Co. were assessed to tax in the assessment year 1945-46, and in its assessment order, out of Rs. 84,540 paid as commission to its employees by the company, Rs. 55,360 was disallowed. Dadajee Dhackjee & Co. was charged to tax in respect of Rs. 56,360, although it had paid that amount as commission. The assessee, therefore, in his own assessment claimed exemption from tax on Rs. 18,787 which represented his 1/3rd share. The claim of the assessee was allowed by this court. The decision turned on the absence of a finding that the commission was not paid out of profits. This decision may to a certain extent be of assistance to the petitioner, on an assumption that commission was not paid out of profits inasmuch as it was paid on the gross turnover. This decision, however, is distinguishable on facts, The commission does not appear to have been paid every month, but appears to have been paid at the end the year, may be, after the profits had been ascertained. We see no good reason to take a view different from that taken by this court in commissioner of Income-tax v. Mulraj Karsondas, which is an authority directly on the point. The contention of the petitioner, therefore, as regards the refund of tax on the amounts of salary paid to him, but disallowed as expense to the mills, must fail.
9. Proceeding next to the question re : disallowed amounts of bonus, it has to be noticed that we are dealing with the assessment years 1945-46 to 1948-49, and it can safely presumed that payment of the bonus made during those years was made during those years was made out of the profits. Mr. Joshi contends that there is no finding in the instant case recorded by any of the income-tax authorities that the amount of bonus paid to the petitioner came out of the profits. As already stated, in our opinion, a presumption arises in favour of the petitioner in the absence of any finding recorded by the income-tax authorities to the contrary. The first condition mentioned in the Supreme Court case is, in our opinion, satisfied.
10. Mr. Joshi next contends that, even assuming that the amounts paid to the petitioner by way of bonus were paid out of the profits, disallowance to the mills was not by reason of such mode of payment, but was a disallowance because the income-tax authorities considered it to be not a permissible deduction under section 10 (20 (XV) of the Income-tax Act. There is no clear, specific finding of any of the income-tax authorities that the disallowance was on the ground that it was not a permissible deduction under section 10 (2) (XV) of the Act. On the other hand, we find that the Tribunal has allowed payment of an amount equivalent to three months' salary as bonus to the petitioner as a permissible deduction. An amount equivalent to three months' salary was paid to him, i.e., at Rs. 1,500 per month. The income-tax authorities fixed the salary at Rs. 1,000. As a necessary consequence of this order, the excess payment of Rs. 1,500 made to the petitioner in a year by way of bonus came to be a disallowable expense. These being the facts of the present case, and our finding being that the bonus in the instant case was paid out of profits, the second of the aforesaid conditions mentioned in the Supreme Court case. in our opinion, also is satisfied.
11. As regards the third condition, it is not in dispute that the mills have been assessed and charged to tax in respect of these amounts disallowed as expense to the mills. The petitioner's contention, therefore, that he should get refund in respect of the amounts of bonus received by him, but which were not allowed to the company as permissible expense and, therefore, taxed in the hands of the mills, is well founded and the petitioner is entitled to the relief on this ground. We find support in the view taken by us in a decision of this court in I. T. Reference No. 30 of 1953 decided on March 11, 1954.
12. The petition, therefore, partly succeeds. The income-tax authorities are directed to grant relief to the petitioner to the extent stated above.
13. The petitioner shall pay 2/3rd of the costs to the respondent.
14. Petition allowed in part.