TaxTMI 
TaxTMI 
1969 (12) TMI 14
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee so received after cessation of his office as compensation, in respect of which he was assessed for the year 1955-56, part of his income for the year in question as contended for by the revenue or were they of a capital nature as held by the Tribunal. The facts are not for us ; the facts are for the Tribunal which had the case before it. We find that both the parties accepted before the Tribunal that its order contains all the material facts and that they have been correctly set out therein. We, therefore, find it unnecessary to review the facts in detail. Omitting what is contentious, the following facts which are material have been taken by us, practically verbatim, from the statement of the case as furnished by the Tribunal. After his graduation from the Oxford University, the assessee was called to the Bar and on his return to India in the year 1932, he started practice at Indore. But immediately thereafter, His Highness Maharaja Yeshwant Rao Holkar of Indore took him into the services of the then Holkar State. The assessee continued in that service till the year 1947, during which period he held several offices of high responsibility including that of the Deputy Prime ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee was to receive a salary of Rs. 2,500 per mensem, apart from motor allowance of Rs. 350 and garden allowance of Rs. 88 per month. The income-tax and super-tax thereon were to be paid by His Highness. Clause 5 of the said Huzur order provided for the payment of gratuity, while clause 6 guaranteed the period of his employment. There was a note appended to these clauses which is of importance. The relevant clauses, with the note thereto, are set out below : " (5) Gratuity : Capt. Dhanda shall be entitled to receive one month's pay for each completed year of service subject to a minimum of fifteen months' pay as sanctioned under item (1) above. This amount shall become due to him whenever he ceases to be the personal adviser to His Highness Maharaja Yeshwant Rao Holkar, the senior Up-Rajpramukh of Madhya Bharat or his services as such are no longer required for any cause whatever. In the event of Capt. Dhanda's death also, the minimum amount equivalent to his 15 months' pay as sanctioned under item (1) above shall be payable and this shall be paid to his heir and successor. (6) Period of service, etc. : Permanence of service on the above mentioned terms is guaranteed und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ombay, 23rd December, 1951. Immediate Dear Capt. Dhanda, As I have terminated your services with immediate effect, I am to direct you to hand over charge of your office as my adviser to Mr. Masood Quli Khan. You should hand over all the confidential files and papers of the Huzur officer in your possession to Mr. Masood Quli Khan together with a complete list of all such files and papers signed by you. You should also hand over to him copies of correspondence you have been carrying with the States Ministry of the Government of India and State Government of Madhya Bharat on behalf of His Highness the Maharaja of Holkar during your period of office along with the connected files. You are therefore to return to Indore and carry out these instructions at once. You are also to hand over bank pass books and cheque books to Mr. Masood Quli Khan. Yours truly, (Sd.) Yeshwant Rao Holkar (Maharaja of Indore) Capt. H. C. Dhanda, Taj Mahal Hotel, Bombay. " On 24th December, 1951, the assessee wrote to His Highness complaining of the unjust manner in which his services were dispensed with, which was far from fair to him or consistent with the position of the high trust, status and resp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....---------- -------------------- 23,221-10-0 42,604-2-0 65,825-12-0 ------------------ ------------------ -------------------- Paragraph 7 of the said letter reads as hereunder : " 7. Your Highness may kindly note that payment of my dues is due to me immediately under clause 6(b) of my contract in view of the termination of my appointment. I am emphasising this for one very important reason which I may be permitted to repeat, namely, that my sudden retirement has placed me in serious financial difficulties in view of which I shall much appreciate the consideration at Your Highness's hands of the immediate remittance to me of Rs. 2,97,620, as explained in para. 3 of this letter. Immediately thereafter and on receipt of the information solicited by me I shall refund to your Highness such amount as is due to be refunded. I shall also return to your Highness the amount of income-tax or super-tax which may be paid by Your Highness in pursuance of clause (1) of the contract in the event of it being finally held that these taxes are not payable in view of the possible ground referred to under para. (5) of this letter. On the other hand, I have to mention that if the income-tax author....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... thousand six hundred and twenty) on the basis of an alleged contract. His Highness never had any copy of the alleged contract as mentioned by you in the last para. of your letter nor has the office any such copy. His Highness has read with interest the true copy of a so-called Huzur order, dated the 1st March, 1950, sent by you with your letter under reference upon which you seem to rely. The order in question was never discussed with or made known to His Highness during the past 2 years or so and it is strange that there should be no paper or file on the subject in the office. As you know so well, no contract is binding unless it is made with the free consent of the parties and is not vitiated by misrepresentation or fraud. Some of the terms mentioned in the copy of the order sent by you are so unusual and extraordinary that no reasonable person can be expected to give his free consent thereto. The alleged contract is, therefore, void and has no binding effect or legal force whatsoever. Without prejudice to the above contention, we are further instructed to add that the termination of your services was by reason of your wilful disregard of the wishes and instructions of your emp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax and super-tax which would otherwise be payable. The only response from the Holkar to this was, by letter dated 21st April, 1952, to the following effect : " No useful purpose will be served by prolonging such unpleasant correspondence. " Further correspondence appears to have ensued but with no result. After obtaining requisite permission from the Central Government for the institution of a suit against His Highness Maharaja Yeshwant Rao Holkar of Indore, the assessee brought a suit for recovery of Rs. 2,90,346.62 as liquidated damages, being Suit No. 1257 of 1954, in the Original side of the Bombay High Court. After narrating the events which culminated in the order of his dismissal, the assessee averred in paras. 17 and 18 of the plaint, as follows : " 17. The plaintiff says that he had rendered very loyal, faithful and exceptionally valuble services to the defendant during the tenure of his office as personal adviser to the defendant. The plaintiff further says that the defendant has in breach of the aforesaid agreement, terminated the plaintiff's services. 18. The plaintiff submits that on the termination on 23rd December, 1951, of his services by the defendant as afor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompensation for loss of employment amounting to Rs. 2,92,920-3-0 (rupees two lakhs ninetytwo thousand nine hundred twenty and annas three only) plus interest and WHEREAS it is settled between the parties that the ex-employee should withdraw all his claims against the employer and get his suit dismissed : NOW THEREFORE it is hereby agreed between the parties as under :-- 1. That the ex-employee shall forthwith take steps to have his abovementioned suit in the Bombay High Court dismissed and give a complete and effectual discharge in respect of all his claims against the employer. 2. That the employer agrees to pay to the ex-employee on this signing of this agreement a sum of Rs. 1,45,000 (rupees one lakh and forty-five thousand only) in cash and remit Rs. 22,345 (rupees twenty-two thousand three hundred forty-five only) outstanding against the ex-employee in connection with his trip to England in 1950, both these amounts as compensation for the loss of his employment in full and final settlement of all the exemployee's claims. IN WITNESS WHEREOF the parties hereto have signed this agreement at Indore on the 27th day of January, 1955, in the presence of (Witnesses) 1. Sd. (Dina....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... amendment in 1955." On the facts as stated, the Tribunal, however, on further appeal by the assessee, upheld his contention and was of the view that the receipt of Rs. 1,67,345 by him from His Highness Maharaja Yeshwant Rao Holkar of Indore was " solely as compensation for loss of employment and not by way of remuneration for past services ", within the meaning of Explanation 2 to section 7(1) of the Income-tax Act, 1922, and being a receipt of capital nature was not taxable in his hands. The Tribunal, in considering the question, observed as follows : " 8. Therefore the question is whether the payment of Rs. 1,67,345 received by the assessee is compensation solely as such for termination of service. In this case the assessee had already been adequately remunerated for the past services. The Maharaja of Holkar repudiated the agreement on the 23rd December, 1951, and once that agreement was repudiated, we fail to see how it could form the basis for this payment. The assessee has claimed damages for wrongful termination of his services and claimed damages both liquidated and alternatively as damages to be fixed by the court. The Maharaja of Holkar terminated the services because ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as only in and by way of damages for wrongful dismissal. " We are inclined to think that the Tribunal was right in its view for reasons we shall presently state. It is common ground that the provision which would be applicable was the old Second Explanation to section 7(1) of the Income-tax Act, 1922, as it stood before its amendment by section 5 of the Finance Act, 1955. That provision reads as follows : " Explanation 2.--A payment due to or received by an assessee from an employer or former employer or from a provident or other fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions 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. " Relying on the dictum of Lord Greene M. R. in Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioners, Shri M. Adhikari, learned counsel for the Commissioner urges that the exchange of letters between the parties culminating in the institution of Suit No. 1257 of 1954 and the compromise thereof under the agreement dated 27th January,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of all rights to damages for repudiation of the contract of service, as described in the agreement dated 27th January, 1955. As a result of the agreement, there was a complete release of the employer from all his liabilities. It was, therefore, a payment made solely as " compensation for loss of employment " At no stage had the department ever suggested that the transaction did not represent the real bargain between the parties. It was not now open to the Commissioner to urge that the parties had camouflaged the payment in the guise of compensation for loss of employment with a view to avoid their income-tax liability. The correspondence which ensued between them upon the sudden dismissal of the assessee from service, clearly showed that the payment was not in consideration of his past services but in reality was one towards settlement of his claim for damages for wrongful breach of the contract. He had an enduring prospect under the contract of service, the tenure of his office being guaranteed till the attainment of 55 years of age. He was deprived of profits to which he would, but for the unilateral act of deprivation by the employer, have been entitled. The payment could be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... payment of Rs. 1,67,345 as compensation for loss of employment in pursuance thereof was a cloak in disguise to shield a wholly different arrangement or that the words " compensation for loss of employment " in that agreement were used to give to it a semblance of reality. In that context the Tribunal, in its order, while dealing with the appeal before it, observed : " 7. The bona fides of parties for entering into the agreement dated 27th January, 1955, has never been in dispute. There is no allegation of any collusion between the parties in this case...... " The parties had agreed before the Tribunal that all the material facts in its order were correctly stated (para. 2). The statement of the case was drawn by the Tribunal with the consent of the parties (para. 13) and it again recites the same thing (para. 8) : " 8. The bona fides of parties for entering into the agreement dated 27th January, 1955, had never been in dispute. There was no allegation of any collusion between parties in this case........ In view of this, the contention by the Commissioner that the whole thing was a mere camouflage for avoiding tax cannot possibly be accepted. We would, however, make it clear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct which would justify the view in law that the money was received by the assessee in settlement of his claim otherwise than as compensation by way of solatium for the loss of office. The decision of the Tribunal, in the present case, regarded as a matter of law, appears to be correct. The Second Explanation to section 7(1) of the Act, prior to its amendment, applies to two classes of receipts, namely, (a) sums which would be totally exempt from tax, being receipts of a capital nature, and (b) sums which would be otherwise assessable in full. Included in the first class is " compensation for loss of office " as defined by Romer L. J. in Henyy v. A. Foster : Henry v. J. Foster. Included in the second class is a sum paid in terms of a service agreement on termination of employment as in Dale v. de Soissons. What is attributable to capital and what to revenue has led to a long controversy and Hidayatullah J. (as he then was), speaking for the court, stated this problem in Abdul Kayoom v. Commissioner of Income-tax in these words : " Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the assessee's other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field. " [See also Commissioner of Income-tax v. Vazir Sultan and Sons.] These observations have been followed by the different High Courts in India and by their Lordships of the Supreme Court in dealing with payments given to an employee on cessation of employment. In such cases the compensation was taken to be a capital receipt because it was in respect of the source of income. The expression " compensation for loss of office " is a well-known term, and, as we understand it, 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 a legislature, have been entitled, per Romer L.J. in Henry v. A. Foster. This definition of the expression by Romer L.J. has been accepted by their Lordships of the Supreme Court in Commissioner of Income-tax v. E. D. She....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed : " ...the payment to the respondent whatever the parties may have chosen to call it was a payment which the company had contracted to make to him as part of his remuneration for his services as a director. " The decision in that case, however, turned on the meaning of a particular agreement. In Prendergast v. Cameron, a taxpayer wished to retire from his directorship but the company wishing to retain his services, paid him the sum of pound 45,000 upon his agreeing not to resign but to continue devoting less time to the company's affairs and receiving a smaller salary. The majority of the Court of Appeal (Greene M.R. dissenting) and a unanimous House of Lords held that the payment arose from the director's office and was, therefore, taxable. In the Court of Appeal, Finlay L.J. said : " His fellow directors highly valued his services, and were willing to pay him a large sum to retain them....He was a director when the payment was arranged for, he was a director when the payment was received...I cannot resist the view that in these circumstances the sum paid to him was paid to him in respect of his continued services as a director. " In his opinion in the House of Lords, Vis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dingly, payments received for the surrender of rights acquired under the service agreement and found to be in the nature of capital would be excluded from taxation as income [see 20 Halsbury's Laws of England, Simond's edition, pages 14, 150-1 and 324-5, Simom's Income Tax, Replacement 1964-65, volume III, pages 109-13, Income Tax Law and Practice, Plunket and Newport, 29th edition, pages 152-3, Principles of Income Taxation by Hannan, page 271 el seq., and The Meaning of Income in the Law of Income-Tax, by F. E. La Brie, 1953 edition, pages 205-15]. There are two decisions of the Supreme Court which deal with the question. In Mahesh Anantrai Pattlani v. Commissioner of Income-tax, their Lordships were concerned with the assessability to income-tax of an amount of rupees five lakhs paid by the Maharaja of Bhavnagar to the assessee who was the Chief Dewan of the native State upon its merger in the United State of Saurashtra, on his ceasing to be the ruler of that State. At the request of the assessee, the Maharaja subsequently wrote a letter to him stating that the payment was a gift in token of his affection and regard for his loyal and meritorious services. The income-tax authori....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company which took over its business. The assessee entered the employment of that company on 1st February, 1948, on new terms under which his salary was increased but no commission was allowed. During the assessment proceedings, the assessee produced a letter written on behalf of Messrs. Killick Nixon and Company and an affidavit by 5 out of the 6 partners who constituted that firm, to the effect that the shares were allotted to compensate the officers for loss of employment and not by way of reward for past services. The majority of the members of the Appellate Tribunal held that the allotment of the shares were made solely to compensate the assessee for loss of employment and that it was not made as a reward for past services. Das, Kapur and Sarkar JJ. (Raghubar Dayal J : dissenting), speaking for the Supreme Court, stated that the question whether compensation received or loss of employment or office or for cessation of business was taxable under section 7 fell to be considered prior to the amendment of the Act in 1955, with reference to the general principle of income-tax law which was to tax income. In other words, according to their Lordships, the question would be whether ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x v. S. P. Jain, Commissioner of Income-tax v. K. K. Roy and Indian Overseas Bank Ltd. v. Commissioner of Income-tax. The second class of case is where the contract itself ceases altogether and the sum becomes payable in consideration of the total abandonment or abrogation of all contractual rights which the recipient had under the contract. The sum received would not be assessable except to the extent provided. In Henley v. Murray, although the sum paid by way of compensation for loss of office was equal to the balance of the salary to the end of the employee's period of service, nevertheless the sum was paid in consideration of his resigning his office at the request of the board. It was described as compensation for loss of office by the assessee, in a letter to the company. The Court of Appeal held that the payment, being payable in consideration of the abrogation of the contract, and not under the contract, was not taxable. Evershed M. R. described the payment as follows : " ...........there is another class of case, were the bargain is......of an essentially different character, (viz., where), the contract itself goes altogether and some sum becomes payable for the conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, 'You must go'. I think it is perhaps clear from the position that he held that he need not have gone, but he, as he said, was forced into it ; he did it at the request of the employers. The sum which he stipulated for according to his letter, it seems to me, must legally be in precisely the same position as would have been a sum for damages for wrongful dismissal. " The direct authority which furnishes a complete answer to the question before us is in Du Cros v. Ryall. That was a case in which the general manager of a company working on a fixed salary and a commission on profits had a contract for a fixed term. It was repudiated by the employing company. He brought an action which was compromised and the question was whether the large sum paid as agreed damages under the compromise was assessable under Schedule E. The contract of service was at an end. The source of income had disappeared, and the sum paid by way of damages could not be regarded as a sum derived from the employment. It was something which arose outside the employment. It was something to which the assessee became entitled by reason of the disappearance of the employment. In those circumstances, Finlay J. held t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... at after deducting from 12 months' salary of Rs 25,200, income-tax of Rs. 7,104) and he gave a receipt for Rs. 18,096, in full and final settlement of all his claims against the company. The question was whether the sum of Rs. 25,200 was taxable in the hands of the assessee. The High Court held that the amount was not compensation for loss of employment within the meaning of Explanation 2 to section 7(1) of the Income-tax Act (before amendment in 1955) as it was part of the remuneration to which the assessee was entitled under the contract of service and was received by him in accordance with the terms thereof and the assessee had not surrendered any rights under the contract and therefore, it was assessable to tax. On appeal, their Lordships held that as, under the contract of service, the assessee could serve for a period of 5 years or for a shorter period if the company decided to terminate it, it could not be said that the assessee surrendered any right or was deprived of any benefits. He received exactly what he was entitled to under the contract and the amount received by him was not compensation for loss of office. It was an amount paid in respect of his office though he di....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... So also in Ramachandra Dhonde Datar's case, the service agreement was identically in similar terms and it provided for a terminal payment if his services were terminated for any cause whatsoever and also in the event of his death, in addition to payment of 6 months' salary in lieu of notice. Under these circumstances, the payment of a lump sum to him, on the termination of his services, was treated as and by way of salary or profits in lieu of or in addition to salary within the meaning of section 7(1), because the amount was payable to him under a contract of service, irrespective of the cause of termination. The payment to the Datars were as cleary income as their salary was. We are of the view that the assessee's case is entirly different. Though the words " for any cause whatsoever " appear in clause 6(b) of the Huzur order, dated 1st March, 1950, the payment of Rs. 1,67,345 was not in terms thereof. The payment was received by him " solely " " as compensation for loss of employment ", under the terms of the agreement dated 27th January, 1955. The payment was as damages for the repudiation of his service agreement due to the abrupt and unilateral act of the employer. The sum....