1963 (3) TMI 48 - SC - Income Tax

Assessee's Rs. 25,200 payment deemed taxable salary, not compensation under Indian Income-tax Act

Talwar (VD.) Versus Commissioner of Income-tax

Talwar (VD.) Versus Commissioner of Income-tax - [1963] 049 ITR (SC) 122, 1963 AIR 1583, 1964 SCR (2) 519 Issues Involved:1. Whether the sum of Rs. 25,200 received by the assessee was a revenue income liable to tax under the Indian Income-tax Act, 1922, or a capital receipt not liable to tax.Detailed Analysis:Issue 1: Nature of the Sum Received by the AssesseeThe primary issue in this case was to determine whether the sum of Rs. 25,200 received by the assessee was a revenue income liable to tax under the Indian Income-tax Act, 1922, or a capital receipt not liable to tax.The assessee, employed as the general manager of a company, had his services terminated prematurely, and in lieu of the required twelve months' notice, he was paid a sum of Rs. 25,200, which was calculated as twelve months' salary after deducting income tax. The Income-tax Officer classified this sum as a revenue receipt and thus taxable. The Appellate Assistant Commissioner, however, viewed it as compensation for loss of employment, hence not taxable. The Income-tax Appellate Tribunal reversed this decision, aligning with the Income-tax Officer's view that it was salary in lieu of notice and taxable.The High Court, upon appeal, upheld the Tribunal's decision, prompting the assessee to seek special leave from the Supreme Court.Legal Precedents and InterpretationThe Supreme Court referred to several precedents to determine the nature of the payment. In Henry (H. M. Inspector of Taxes) v. Arthur Foster and Henry (H. M. Inspector of Taxes) v. Joseph Foster, the term 'compensation for loss of office' was interpreted as a payment to the holder of an office for being deprived of profits due to an act of deprivation by the employer. The Court emphasized that if the terms of the contract allowed for such a payment upon termination, it could not be considered compensation for loss of office but rather as salary.The Court also referred to Dale (H. M. Inspector of Taxes) v. De Soissons, where it was held that a payment made under the terms of an employment contract, even if termed as compensation, was in fact a revenue receipt and taxable. Similarly, in Henley v. Murray, it was noted that the nature of a payment depends on whether it is remuneration under the contract or compensation for the surrender of rights under the contract.Application to the Present CaseApplying these principles, the Supreme Court noted that the contract between the assessee and the company included a clause allowing termination with twelve months' notice or salary in lieu thereof. The payment of Rs. 25,200 was made under this clause, indicating that it was salary in lieu of notice rather than compensation for loss of office. The Court observed that the assessee received exactly what he was entitled to under the contract, and there was no deprivation of rights that would justify treating the payment as compensation.ConclusionThe Supreme Court concluded that the sum of Rs. 25,200 was indeed a revenue receipt and taxable under section 7 of the Indian Income-tax Act, 1922. The High Court's decision was affirmed, and the appeal was dismissed with costs.Final Judgment:The appeal was dismissed, and the High Court's decision that the sum of Rs. 25,200 was a revenue income liable to tax under the Indian Income-tax Act, 1922, was upheld. The payment was not considered compensation for loss of employment but rather salary in lieu of notice, making it taxable.