TaxTMI 
TaxTMI 
1959 (6) TMI 13
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....after referred to as " the mills" or " the employer"). The terms and conditions of his appointment are contained in the letter of appointment dated October 15, 1949, addressed by the mills to Shri Agrawala. A copy of the said letter is marked annexure ' A ' and forms part of the case. Initially, the appointment was for a period of five years " with option to renew for a future period of two years " )clause 1). Under clause 2(a), the fixed monthly salary was Rs. 2,100 and then there were several perquisites in cash and kind. Clause 2(f) provided : " In addition to the above, you will be paid 3% commission on the not profits of the company, profits to be computed on the same basis as the managing agent's commission. " Clause 6 set out the duties. powers and responsibilities of Shri R. N. Agrawala as general manager. He was to be responsible " for the efficient and economic management of the mills, the accounts, officer, sales and purchase. " Clauses 7 and 11 stand as follows : " 7. You have undertaken to manage the affairs of....
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.... to bring a copy of the said notice on record, Mr. Mulla, who then appeared for the assessee, informed the Bench that it could not be produced as it could not be traced. Mr. Mulla stated that the Department might secure it as it was the Department's appeal. He, however, accepted the fact that by the said notice. The assessee demanded payment of a sum of Rs. 2,70,750. Mr. Mulla could not throw any light as to how the said sum was arrived at. The Tribunal was generally told that it was on account of loss of salary and loss of commission payable under the agreement of October 15, 1949, (annexure ' A ') for the remaining period of five years of initial appointment together with future option of two years, damages for insulting him etc. 4. The last document that was considered by the Tribunal is the memorandum dated. July 17, 1951, signed by the two parties, i.e., the assessee and the mills. A copy of the said memorandum is marked annexure ' C ' and forms part of the case. Clause 1 of it provided : " The parties agree that services of Shri R. N. Agrawala as general manager of t....
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....nbsp; . . . a profit received in lieu of salary for the purpose 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. " The assessee contended that the said payment of Rs. 1 lakh "is made solely as compensation for loss of employment. " The Income-tax Officer rejected this contention but the Appellate Assistant Commissioner accepted it. A copy of the order passed by the Appellate Assistant Commissioner is marked annexure ' D ' and forms part of the case. 6. The Department filed an appeal from the Appellate Assistant Commissioner's order to the Tribunal and contended that the sum of Rs. 1 lakh was a taxable receipt for several reasons, viz. : (i) the real nature of it was not compensation for loss of employment but it represented either advance salary or " profits in lieu " of salary : (ii) there was no loss of employment as the assessee got what he otherwise would have got under the agreement of service for a period of five years ; (iii) the amount was not paid solely as compensation for loss of employment, if there is any loss of employment ; (iv) The mills ....
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.... a monthly allowance of Rs. 900 for entertainments, maintenance of car etc. Besides this remuneration he was to be paid commission at 3% on the net profit of the company and was to be provided with a furnished bungalow, four servants, free use of the company's transport and separate allowance for entertainment on behalf of the company and free medical aid. The assessee undertook to manage the affairs of the mills efficiently and on a profit earning basis and if he " failed to establish the mills on a sound basis within 12 months from the date " of his joining, i.e., 1st April, 1950, the company reserved its rights to terminate his services by giving him six months ' notice in writing on the 1st of April, 1951, stating the various grounds of inefficiency. it was further provided that neither party could terminate the contract except on account of continued illness or permanent incapacity ( of the assessee). It was also provided that in the event of any one of the parties terminating the contract except for reasons " stated before ", the party terminating the contract will be responsible to pay to the other the balance of the monthly remuneration for the unexpired of th....
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....out of the same or otherwise however on any profession o business either in his own account or in the services of others within 100 miles of Chowdwar which may be detrimental to the interest of the company. It was finally agreed that the company withdrew all the allegations against the assessee and the assessee withdrew all the allegations against the company, its managing agents and directors. The Income-tax Officer brought the amount of Rs. 1 lakh to tax on the view that its was not receive solely as compensation for loss of employment. In appeal to the Appellate Assistant Commissioner, the order made by the Income-tax Officer was reversed. In appeal to the Income-tax Tribunal, it was held that the termination of employment of the assessee was made in exercise of the powers vested in the company under clause 11 of the agreement dated the 15th of October, 1949, and that the amount of Rs. 1 lakh paid to the assessee was " under ' this agreement and not " for " it. They further expressed the opinion that the assessee had received from the employer a certain sum of money which " went to fill the hole created in his ' salary' income by reason of premat....
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....ment was to be made as compensation for termination of the employment. In Guff v. Commissioner of Income-tax ([1957] 31 I. T. R. 826), Chagla, C. J., in delivering the judgment of the court referred to the scheme of section 7 and Explanation (2) before its amendment in the year 1955 and observed : " In other words, id the Legislature merely contemplate the factual loss of employment and any amount paid for that loss, whether that payment was under a legal liability or not ? As we shall presently point out, the authorities to which our attention has been drawn have given to the expression ' compensation ' a wider connotation. It also seems to us, apart from the authorities, that it is the better view to taken of this expression, because if an employee loses his employment which is the source of his income, any payment made by his employer for that loss should not be looked upon as income liable to tax, as in its very nature the payment is to compensate for or to act as a solatium for the very source which produced the income and in respect of which the employee is liable to tax. " The learned Chief Justice....