Shah, J.:— This Reference relates to two assessment years 1947-1948 and 1948-1949. A private limited company known as “Chindambaram Mulraj and Co.” which will hereafter be referred to as the Company was incorporated on 30-4-1943 with the object of acquiring the managing agency of Elphinstone Spinning and Weaving Mills Co. Ltd. The Company appointed the assessee Mulraj Karsondas as its managing director and agreed to pay him 25 per cent of the annual managing agency commission and also a salary of Rs. 1000/- per month. The salary was later enhanced to Rs. 2,000/- per month on the ground that Mr. Chidambaram, who was the Director-Chairman of the Company retired from active management and the assessee was “saddled with higher burden and responsibilities”. In completing the assessment of the company for the assessment year 1946-1947, the Taxing Authorities disallowed the salary paid to the assessee in excess of Rs. 1100/- as a business deduction. In the assessment years 1947-1948 and 1545-1949 the Taxing Authorities disallowed the claim of the company for Rs. 8700/- and Rs. 7500/- respectively out of the salary paid to the assessee, as in their view, it was not an expenditure laid out or expended wholly or exclusively for the company's business within the meaning of S. 10(2)(xv). In the hands of the assessee, his entire remuneration received from the company was, however, sought to be taxed. The assessee contended that the salary paid to him in excess of the amount allowed as deduction in the assessment of the Company having already been taxed in the hands of the employers was not liable to be taxed over again in his hands, and in support of that contention he relied upon the Notification No. 878F dated 21-3-1922 as amended by Notification No. 8 of 24-3-1928 issued by the Central Government issued under S. 60 of the Income-tax Act. The Income-tax Tribunal was of the view, following the judgment of this Court in Commr. of Income-tax, Bombay v. R.R Jacques, I.T Ref. No. 30 of 1953 decided on 11-3-1954 and M.K Kirtikar…Applicant; v. Commr. Of Income-Tax, Bombay City, Bombay,…., Bombay City, 1955-1928 ITR 908 : (AIR 1956 Bom 436) that on the amounts which were disallowed in the assessment of the Company tax could not be levied over again in the hands of the assessee. At the instance of the Commissioner, the Tribunal has referred the following question:

“Whether the sums of Rs. 8700/- and Rs. 7500/- were exempt from tax in the hands of the assessee for the assessment years 1947-1948 and 1948-1949 respectively, the claim for exemption being passed upon the notification No. 878F dated 21-3-1922 as amended by Notification No. 8 of 24-3-1928 issued by the Central Government under S. 60 of the Indian Income-tax Act, 1922?”

2. Mr. Joshi for the Department contends that the view taken by this Court in M.K Kirtikar's case, 1955-28 ITR 908 : (AIR 1956 Bom 436) has now been overruled by their Lordships of the Supreme Court and, therefore the judgments in I.T Ref. No. 30 of 1953, D/- 11-3-54 (Bom.) (unreported) and 1955-28 UTR 908 : (AIR 1956 Bom 436) are overruled and no reliance can be placed upon the principle of those cases in support of the view that the two amounts referred to in the question are not liable to be taxed in the hands of the assessee.

3. The notification issued by the Government of India on 21-3-1922 as amended on 24-3-1928 in so far as it is material stands as follows:

“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 purpose of the said Act:

(1) Sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered or in lieu of interest on money advanced to a person for 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'”.

4. As observed by their Lordships of the Supreme Court in Commr. of Commissioner Of Income Tax, Bombay City v. M. K. Kirtikar, 1959-36 ITR 360 at page 363 : (AIR 1960 SC 186 at p. 188) exemption from taxation in respect of the sum received by an assessee from a business on account of commission etc. would be claimed under the Notifications only on fulfilment of the following three cumulative conditions:

“(1) Where such sum has been paid out 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’”.

5. The purpose of the Notification was undoubtedly to avoid double taxation of the same profits. If the amount was paid out of or determined with reference to profits, and was assessed and charged in the hands of the employer, the same was not to be assessed and charged over again in the hands of the assessee.

6. There can be no dispute that the two amounts referred to in the question have been disallowed as permissible deductions in the computation of the profits of the company and income-tax has been, assessed and charged thereon from the company. On the scheme of the Notification, it is evident that it is only where the sum paid is out of or determined with reference to the profits of the business and that by reason of the mode of payment or determination of the sum paid, the same has not been allowed as a deduction but has been included in the profits of the business, that the benefit of the notification may be given to the assessee. The two amounts have admittedly not been allowed as deductions and have been included in the profits of the business of the Company, but the amounts disallowed have not been paid out of the profits nor determined with reference to the profits of the business, nor is the reason for the disallowance the mode of payment or determination of the amounts. The profits of the business may normally be ascertained only after deducting 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 to the profits earned must be deducted in ascertaining the profits. It is true that in case 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 may be held to be paid out of profits or determined with reference to the profits of the business. But, in this case, the salary is paid at a stipulated rate per month to the assessee and is not paid out of or determined with reference to the profits of the business. Nor can it be said that it is by reason of the mode of payment or determination of the salary so paid that the deductions have not been permitted. The three conditions under the Notification being cumulative, if one or more of the conditions are not fulfilled, evidently, the assessee cannot have the benefit of the notification.

7. But, Mr. Mehta who appears on behalf of the assessee, contends that their Lordships of the Supreme Court in 1959-36 ITR 360 at p. 364 : (AIR 1960 SC 186 at p. 189) did not decide the question whether salary paid at a stipulated rate to an assessee can be regarded as a sum paid out of or determined with reference to the profits of the business; and we are bound by the decision in I.T Ref. No. 30 of 1953 D/- 11-3-1954 (Bom) in which it was held that payment of bonus to an employee is by virtue of the notification of the Government of India exempt from tax if the same or a part thereof has been taxed in the hands of his employer.

8. In (1955) 28 ITR 908 : (AIR 1956 Bom 436) this Court was called upon to consider whether certain amounts paid to an employee as commission which were disallowed as permissible deductions under S. 10(2)(xv) in assessing the tax payable by the employer, were liable to be taxed in the hands of the employee. In that case, the employers of the assessee had paid certain commission to their employees beside a stipulated monthly salary. In the assessment proceedings of the employers of the assessee, a part of this commission was disallowed. Thereafter, the employers ceased doing business and the business was transferred to a limited company and by reason of S. 25(4) of the Income-tax Act, the business having been charged to income-tax, though the tax was not paid, it was held that the employees were entitled to claim exemption on the commission received by them under the Notification. It was held by the court in that case that the commission was paid out of the profits and the tax was charged to the employer, though they were exempted from paying the same. In appeal, their Lordships of the Supreme Court referred to the three component conditions for the application of the Notification, and observed that on the view that they took it was not necessary to express any opinion on the question whether the commission had been paid out of the profits and it was also unnecessary to consider whether the second condition was fulfilled, but, in their view, the third condition not having been fulfilled, the assessee could not claim any relief under the Notification. Evidently, this case does not decide the question whether to the salary paid to an assessee by his employer, which is disallowed in the assessment of the employer by the Income-tax department, exemption granted by the Notification will be attracted.

9. In I.T Ref. No. 30 of 1953 decided on the 11th of March 1954, Chagla C.J in delivering the judgment of the Court observed that

“the expression “profits” in the notification is not used in the sense of taxable profits, but is used in the commercial sense. If a company makes profits and then out of those profits decides to pay a certain amount to its employee for the work done by him, the employer is undoubtedly paying the bonus out of the profits of the business”.

10. Relying upon these observations, Mr. Mehta contends that in this case also the salary was part of the commercial profits of the company and tax having been levied on the company, the Notifications relied upon are attracted. Undoubtedly, exemption from payment of tax under the Notification is claimable in respect of sums paid out of or determined with reference to the commercial profits, but in computing even the commercial profits, the salaries paid to the employees must be taken into account. It is only after the expenses incurred for earning the profits are deducted that the commercial profits of a business can be ascertained, and if for ascertaining the commercial profits, the salary paid to the employee is deducted, the salary will not be a sum paid out of or determined with reference to the profits of the business. In Jacques's case, I.T Ref. No. 30 of 1953, D/- 11-3-1954 (Bom) the court came to the conclusion that the amount paid to the assessee was not liable to be taxed in his hands, but the amount sought to be taxed was received by the employee as bonus and not as salary. Payment by the employer of a sum of money to his employee as bonus is in its very nature gratuitous. It is made as a payment ex gratia having regard to the profits earned by him in his business and the services rendered by the employee, and in its very nature bonus is a payment out of the profits or determined with reference to the profits and is related directly to profits and is not deducted before ascertainment of the profits. R.R Jacques's case, I.T Ref. No. 30 of 1953, D/- 11-3-1954 (Bom.) is clearly, therefore, distinguishable from the facts of the present case. In the present case, if the salary paid to the assessee is to be deducted out of the gross earnings of the company before ascertaining the commercial profits, the payment to the assessee is not out of or determined with reference to the profits of the business. Again, the disallowance of amount is not by reason of the mode of payment or determination of the salary out of the profits of the business; it is because it is not an expenditure laid out or expended wholly or exclusively for the purpose of the business. In that view of the case, the second condition is also not fulfilled. We are, therefore, of the view that the principle of the case of R.R Jacques's, I.T Ref. No. 30 of 1953 D/- 11-3-1954 (Bom.) is not applicable to the facts of the present case.

11. On that view of the case, the answer to the question will be in the negative.

12. Assessee to pay the costs of the Commissioner.

BD/D.H.Z

Answer in the negative.