1960 (11) TMI 21 - SC - Income Tax

Tax deduction at source does not apply to judgment debts combining salary and compensation absent salary liability or prior assessment.

Whether a decree comprising arrears of salary and compensation for wrongful termination attracts the statutory obligation of tax deduction at source was ... Liability to deduct tax at source on salary - judgment debt versus salary - requisition under section 46(5) of the Income-tax Act - execution of decree subject to Code of Civil Procedure adjustments - assessee in default for failure to deductLiability to deduct tax at source on salary - judgment debt versus salary - assessee in default for failure to deduct - Whether the appellant company was bound to deduct income-tax at source from the amount payable under the civil court's decree as if it were salary payable to the respondent. - HELD THAT: - The Court held that the statutory duty to deduct tax at source arises only where an amount is due and payable as salary; the determinative question is the character of the amount as between employer and employee. The decree in favour of the respondent merged claims for compensation for wrongful termination, arrears of salary, and other items into a judgment debt which must be executed according to its tenor subject to deductions and adjustments permissible under the Code of Civil Procedure. No assessment of tax had been made against the respondent and, therefore, the Income-tax Officer had no authority under the statute to issue a requisition requiring deduction under section 46(5). The Court distinguished authorities relied upon by the appellant: Westminster Bank Ltd. v. Riches was inapplicable because that case concerned the characterisation of an interest award for tax purposes and was not concerned with execution of a judgment debt under the Civil Procedure Code; Manickam Chettiar was inapplicable because there tax had been assessed and proceedings for recovery of assessed tax were before the court. Consequently, the appellant could not, before payment of the decretal amount, treat it as salary and deduct tax at source in the absence of an assessment or a provision in the decree permitting such deduction.The decretal amount was a judgment debt and not salary for the purpose of imposing a statutory duty on the appellant to deduct tax at source; the Income-tax Officer's requisition under section 46(5) was without authority in the absence of an assessment.Final Conclusion: The appeal is dismissed. The appellant was not entitled to deduct income-tax at source from the amount payable under the decree; execution of the decree must proceed as a judgment debt subject to the ordinary adjustments under the Code of Civil Procedure. Issues: Whether the amount decreed in the civil suit, claimed to be in part salary and in part compensation for wrongful termination, constituted salary payable by the employer so as to attract the statutory duty of deduction of income-tax at source under Section 18 of the Income-tax Act, thereby entitling the employer to deduct tax before payment of the judgment debt.Analysis: The statutory duty to deduct tax under Section 18 arises only where an amount is due and payable as salary. Where a claim for arrears of salary and for compensation for wrongful termination is merged in a court decree, the decretal amount assumes the character of a judgment debt. Section 46(5) permits deduction on requisition by an Income-tax Officer only when tax has been assessed and remains unpaid; no assessment had been made here. Execution of a decree must follow the tenor of the judgment and be subject only to deductions or adjustments permitted by the Code of Civil Procedure, including claims of set-off or competing third-party claims when raised in execution. Authorities applying where tax had been assessed or sale proceeds stood to the credit of the decree-holder are distinguishable because they involved recovery of an assessed tax or court-credited funds. The decretal sum here contained a substantial element of compensation and could not be treated, as between employer and employee, simply as salary payable so as to trigger an obligation of deduction at source under Section 18.Conclusion: In favour of Respondent. The decretal amount is a judgment debt and the appellant was not entitled to deduct income-tax at source under Section 18 of the Income-tax Act, 1922 before paying the respondent.Ratio Decidendi: A court decree converting claims for salary and compensation into a judgment debt does not, without assessment or a statutory provision to that effect, transform the judgment creditor's entitlement into a sum from which the judgment debtor may deduct income-tax under Section 18; statutory deduction obligations arise only where the payment is legally due as salary or where tax has been validly assessed and a requisition under Section 46(5) is properly made.