TaxTMI 
TaxTMI 
1962 (12) TMI 58
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.... after every three years on increased salary. Subject to their works being satisfactory, the assistants so employed to become partners of the firm one day. The assessee was one such assistants who joined the firm in 1930. The original contract relating to the assessee's employment was not placed on record. What was placed on record as a specimen copy of the initial agreement was the contract with one W. J. Heygate. It was undisputed that the terms of employment regarded the assessee were the same as those of the contract with W. J. Heygate. Clause 10 of the said agreement provided that notwithstanding anything contained in it, the firm might terminate the agreement without assigning any reasons after giving the assessee one calendar moth's previous notice of its intention so to do. The assessee continued in the employment of the firm and his contract of service was renewed from time to time. On November 1, 1947, was made the last renewal. The terms of this last renewal were the same as those of J. G. Miline, a copy of whose renewed contract was placed on record. This renewal provided for a contract of service from November 1, 1947, to October 31, 1950. Under this contract the asses....
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....at the shares were given by the partnership to the members of the staff as compensation for loss of employment resulting from premature termination of their services. The Income-tax Officer, however, sought to bring the shares of the value of Rs. 2,21,000 to tax on the footing that the shares were allotted to the assessee in consideration of past services. The assessee produced before the Income-tax Officer a letter purporting to be written by one D.R.C. Hartley on October 1, 1952, on be half of the firm, in which the assessee was informed that the firm had caused 1,700 shares in Killick Industries Ltd. to be allotted as "compensation for loss of employment". In appeal to the Appellate Assistant Commissioner, the order passed by the Incometax Officer bringing to tax the amount of Rs. 2,21,000 was confirmed. Before the Income-tax Appellate Tribunal the assessee produced an affidavit dated February 22, 1954, sworn by five out of the six partners who constituted the firm in the month of January, 1948 (the sixth partner having died in the meanwhile), which affirmed the terms of a memorandum submitted to the Income-tax Officer by Messrs. Crawford Bayley & Co. on behalf of the assessee. ....
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.... no material in the record to support the view that the payment was in lieu of past services. On a difference between the two members of the Tribunal, the question was referred to the President who agreed with the Judicial Member and expressed the view that the payment was made to the assessee solely for loss of employment and it was immaterial that the assessee secured another employment, equally advantageous, under another employer on the next day after the termination of his employment with the partnership firm. Referring to the evidence adduced on behalf of the assessee, namely, the affidavit field by the partners, the President said that there was no camouflaging as suggested by the department, and both the Judicial Member and the President accepted the evidence given in support of his claim by the assessee. The present appellant then moved the Tribunal to refer the following question of law to the High Court : "Whether on the facts and circumstances of the case, the sum of Rs. 2,21,000, being the value of the shares received by the assessee free of payment is income of the assessee and assessable under section 7 of the Income-tax Act ?" The Tribunal made a reference under ....
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....of future prospects which the assessee had of becoming a partner in feature in the firm, that will not, in our judgment be regard as 'profit received in lieu of salary' within the meaning of section 7(1) o the Explanation thereto; and if such payment is not regard as salary or profits in lieu of salary, there is no other head income, profits or gains under which it will fall so as to make it taxable. In the ultimate analysis, we have to decide in his reference whether the payment can be regard as a capital receipt or a revenue receipt in the hands of the assessee; and if, on the view we have taken, it is not a revenue receipt, then it must be regarded as not liable to tax." We shall presently consider the contentions urged before us on behalf of the appellant. But, before we do so, it is necessarily to say that section 7 of the Income-tax Act, 1922, was completely recast by the Finance Act, 1955, and we are concerned with the section as it stood prior to its amendment in 1955. We may now read section 7(1) and Explanation 2 thereto (so far as it is material for our purpose) as they stood at the relevant time : "7. (1) The tax shall be payable by an assessee under the head 'Salarie....
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....sation in the sense of payment compellable at law, no further question arises as to whether the payment is related or unrelated to employment, or whether it is capital or revenue in the hands of the assessee. The argument of learned counsel is that the High Court was in error with regard to both the points stated above and, therefore, its answer to the question referred was not correct. We consider that both the points urged on behalf of the department are without substance and are not supported by decisions including decisions of this court. Let us first examine the first point. As Romer L. J. said in Henry v. Arthur Foster (1931) 6 Tax Cas. 605. 634 compensation for loss of office or employment is a well-known term; it means a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled. It should be obvious that when the deprivation is by the Legislature, there can be no question of liability or compellability to pay damages at law. The emphasis is on the act of deprivation which may or may not g....
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.... principle of income-tax which is to tax income. In other words, the question would be whether it is income or capital in the hands of the assessee. The same view was expressed by the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co (1932) L. R. 59 I. A. 206 ; [1932] 2 Comp. Cas. 276. where it held that a sum of money received as compensation for loss or cessation of oil distributing agencies was not income, profits or gains within the meaning of the Indian Income-tax Act. There is nothing in the judgment of the Privy Council which suggests that the compensation that was received by the assessee was a compensation which was compellable at law. It was pointed out that the object of the Indian Income-tax Act was to tax "income", a term which it did not define. Income, however, connoted a periodical monetary return "coming in" with some sort of regularity or expected regularity, from definite source. The ratio of the decision was stated in the judgment : "But when once it is admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain." The same question aro....
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.... company whereby the assessee was given a discount not only on the goods sold in the Hyderabad State but on all goods sold outside the Hyderabad State. In 1950, the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 by way of compensation for the loss of agency outside the Hyderabad State. The question was whether the money received by the assessee was a revenue receipt assessable to income-tax or a capital receipt not so assessable. One of the points canvassed before this court with some force was that there was no enforceable agreement as between the assessee and the company which could be made the subject-matter of a legal claim for damages for compensation at his instance in the event of its termination or cancellation by the company. The agency agreement in that case was terminated at the will of the company and if the company chose to do so, the assessee had no remedy at law in regard to the same. The argument was that, therefore, there was no enforceable agreement between the assessee and the company which could be made the subject-matter of a legal claim fo....
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....in which learned counsel for the department has put it, can be accepted as correct. In Mahesh Anantrai Pattani v. Commissioner of Income-tax [1961] 2 S. C. R. 742 ; [1961] 41 I. T. R. 481 this court had to consider section 7(1) of the Act and Explanation 2 thereto, as they stood prior to the amendments in 1955. The facts of that case were these. M. A. Pattani who was the Dewan of the State of Bhavnagar was granted a monthly pension of Rs. 2,000 by the Maharajah of the State by an order dated January 15, 1948. On March 1, 1948 the State of Bhavnagar merged in the United State of Saurashtra and the Maharajah ceased to be the ruler of the State. Subsequently on May 31, 1950, the Maharajah directed his banker in Bombay to pay Pattani a sum of Rs. 5,00,000 and said that the payment was made in consideration of the loyal and meritorious services which Pattani had rendered to the State. The question which arose for decision was whether the aforesaid payment of Rs. 5,00,000 was liable to tax under section 7(1) read with Explanation 2. This court held that the sum of Rs. 5,00,000 was given to Pattani not as a payment in consideration of the services already rendered by Pattnai as the Dewan ....
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....(1) reads : "A payment due to or received by an assessee from an employer or former employer.....is....a profit received in lieu of salary for the purposes of this sub-section, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services." Mr. Sastry contends that the sum of Rs. 2,21,000 was received by the assessee from his employer, Killick Nixon & Co., on January 30, a day before the termination of his services by that company, that it will be deemed to be profits received in lieu of salary unless the payment can be said to be made by the employer solely as compensation for loss of employment and not by way of remuneration for past services and that amount was not paid solely as compensation for loss of employment. He has submitted that the expression "compensation" means what is legally payable as a monetary equivalent of the damage suffered by the wrongful termination of service, that the amount of compensation is usually equivalent to the loss of earnings under the contract which had come to an minus the expected reimbursement from any fresh employment. Mr. Palkhivala, for the assessee, has urged that the intenti....
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....ferred to a number of cases by learned counsel for the appellant, in support of the proposition that one can get compensation only when one is entitled to it and, even then, the amount of compensation is not to deviate much from the damages he is likely to get, on account of any injury to his right. The contention for the respondent is that, for the purposes of the Act, it is not necessary for a payment to amount to compensation that the recipient be entitled to it under the law and that the principles applying for the determination of the amount of damages in civil suit will not apply to the determination of the compensation for loss of office. It may be assumed, without deciding, that the contention for the respondent is correct. This, by itself does not solve the problem. The expression "compensation" by itself connotes some payment to make up certain loss suffered by the person getting the compensation. If no loss is suffered, no occasion for getting compensation arises. If follows that if an employee, by the terms of his employment, is not entitled to any relief on the termination of his service in accordance with the terms of the contract, there can arise no occasion for his....
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....case seem to me to be wholly misleading." It is obvious from these observations that when under a contract the employee has no further claim to salary or profits on the termination of his service in terms of the contract, any payment made to him annot be a payment as compensation for loss of office and that therefore what Romer L.J. meant by the meaning given to the expression "compensation for of office" was that that expression meant such payment which the holder of the office was entitled in law to get on account of his being, against his will, deprived of the profits to which as between himself and his employer he was entitled. If he was not entitled to any such profits on the cessation of office, any payment to him could not be compensation for loss of office. We have been referred, for respondent, to a number of cases in support of the contention that the amount received by the assessee is covered by the expression "compensation for loss of office" which may be taken to be synonymous with "compensation for loss of employment". I may now deal with those cases. The case reported as Compensation of Income-tax v. Shaw Wallace & Co. (1932) L. R. 59 I. A. 206 ; [1932] 2 Comp. Ca....
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....ioner of Income-tax v. Vazir Sultan & Sons [1959] Supp. 2 S. C. R. 375 ; [1959] I. T. R. 175,the assessee received certain amount as compensation for the termination of his agency over a certain area, even though it continued over other areas. It was held that the sum sought to be taxed was a capital receipt in the hands of the assessee and was not income from business which was to be taxed under section 10 of the Income-tax Act. We are not really concerned with the question whether the amount of Rs. 2,21,000 is a capital receipt or a revenue in the hands of the respondent. In view of Explanation 2, it would be a revenue receipt in the sense that it would be deemed to be "profits in lieu of salary" it being a payment by the employer to the employee in case it be not a payment as compensation forloss of employment. In connection with the question whether the sum sought to be taxed was capital receipt or revenue receipt in Vazir Sultan's case [1959] Supp. 2 S. C. R. 375 ; [1959] I. T. R. 175, 185. it was canvassed that "there was no enforceable agreement as between the assessee and the company which could be made subject-matter of a legal claim for damaged or compensation at his in....
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....aid at page 378 : "It is now well settled, whatever might have been considered before, that a voluntary payment, if it accrues by reason of an office or employment, is a profit under this section, it has been quite clearly decided that a voluntary payment or a gift, call it which you like, can be a profit and is a profit if it accrues by reason of the office" It was held that the amount was paid to him as a testimonial for what he had done in the past while in office, which had then terminated, and not as payment for those services. The factors leading to such a view were that the payment was made after the office had terminated and was not made by the employer, but by others. In Chibbett v. Joseph Robinson & Sons (1924) 9 Tax Cas. 48 the assessee was taxed under Schedule D of the English Income Tax Act. The assessee were a firm of ship-managers and were employed in that capacity by a certain steamship company. The company went into liquidation and the liquidator transferred Pounds 50,000 of 5% National War Bonds to the assessee as compensation for loss of office. Subsequently, in pursuance of the arrangements already made, the undertaking of the company including two ships and ....
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....unt in dispute amounted to profits within the meaning of Schedule D. What its true nature was, it was not necessary to determine, so long as it was not held to be profits. It was therefore that alternative opinion was expressed by Rowlatt J. about its nature which could be either compensation for loss of office or a testimonial on account of the past work rendered by the assessee. I do not think that this case really helps the respondent in his contention that the sum of Rs. 2,21,000 amounts to compensation for loss of employment. In Duff v. Barlow (1941) 23 Tax Cas. 633 the assessee, the managing director of a company, was paid Pounds 4,000 for the loss of his right to further remuneration which he was entitled to get under the terms of an earlier agreement. He continued to be the meaning director. It was held that the sum of Pounds 4,000 received by the assessee was not under the contract of employment nor as remuneration for services rendered or to be rendered, but was compensation for giving up a right to remuneration. There is nothing in this case which can be of any guidance in determining the question before us. In Hose v. Warwick (1946) 27 Tax Cas. 459 a certain sum paid ....
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....mention in the document of December, 1950 of any services rendered to the Maharajah and it does not seem to have been considered by the Tribunal as to why the Maharajah should make out of his personal account the gift of such a large amount for something which was not done for the Maharajah specifically, particularly when the services to the State and to the Maharajah and his family had already been well compensated. This lends support to the submission of the appellants that the amount was paid merely as gift in token of the Maharajah's affection and regard for the assessee." And again, at page 752 : "....that the gift was voluntary is clear but it is not quite clear how the amount can be said to be relatable to the office held by the recipient. Even according to the case of the respondent the amount was paid about two years after the assessee had ceased to be an employee of the Maharajah of the State and immediately on his ceasing to be the Dewan of Bhavnagar State, the Maharajah had granted him a pension from out of the public funds for his services to the State as Dewan and for services rendered to the Maharajah and his family a handsome and a generous monthly pension of Rs. ....
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....o the closure of the department. It was held that the communication of March 23, 1948, constituted a notice terminating the services of the assessee as required by the contract of service and that the payment of Rs. 12,000 was made not for past service,but as compensation or solatium for termination of his office and as compensation, was capital receipt and exempt from tax. Chagla C.J. rightly said at page 831 : "Therefore, in order that the assessee should succeed, he must establish that this payment which he has received from his employer is a payment made solely as compensation for loss of employment. Now the difficulty is caused by the expression 'compensation for loss of employment. Two views are possible. One view is that the compensation contemplated by the Legislature is a compensation which the employer was liable in law to pay to the employee : in other words, the loss suffered by the employee must be such as would render the employer liable to make good that loss. On this view, if there is no legal liability to pay the compensation, then any payment made by the employer would not come within this expression used in Explanation 2. He, however, further posed a question i....
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.... view of section 10 in the other. In Guff's case Chagla C.J. also relied on Chibbett's (1924) 9 Tax Cas. 48 case and on the observation of Romer L. J. in Henry v. Arthur Foster (1931) 16 Tax Cas. 605. 634 etc. I have already considered that observation along with what Romer L. J. said in that very case about the nature of the payment in dispute and have also dealt with Chibbett's (1924) 9 Tax Cas. 48 case and need say nothing more them. I am, therefore, of opinion that any sum by an employer or former employer to an employee at the termination of his services will be a "payment made solely as compensation for loss of employment" only when it is made in consideration of what the employee can claim as such compensation under law or the terms of the contract of service. If he cannot claim such compensation, the sum paid to the employee will not be by way of compensation for loss of employment. It is immaterial that the employer pays it or the employee receives it as compensation for loss of employment. The true nature of the sum received to be determined in accordance with what has been stated above. In the present case, the assessee's services were terminated by giving one month's ....