1958 (10) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1 lakh received by the assessee from F.E. Dinshaw Ltd. is income and liable to be assessed under the Income-tax Act.
2. Whether the assessee is entitled to the benefit of the F.D. Notification No. 878-F, dated 21-3-1922, as amended by Notification No. 8, dated 24-3-1928.

Issue-Wise Detailed Analysis:

1. Nature of the Rs. 1 Lakh Payment:
The primary issue was whether the Rs. 1 lakh received by the assessee from F.E. Dinshaw Ltd. was a capital receipt as compensation for loss of employment or income liable to be taxed. The assessee argued that the payment was compensation for the termination of his employment, while the Income-tax Officer contended it was remuneration for past services.

The court examined the terms of the agreement between F.E. Dinshaw Ltd. and the assessee, noting that the assessee's services were terminated on 1st October 1951, and he was subsequently employed by Cement Agencies Ltd. A resolution by Cement Agencies Ltd. on 27th November 1951 indicated the takeover of the services of the managing directors from the four groups, including the assessee.

The court referred to Section 7(1) of the Income-tax Act and Explanation 2, which states that a payment is considered a profit in lieu of salary unless it is solely compensation for loss of employment. The Appellate Assistant Commissioner had allowed the assessee's appeal, viewing the payment as compensation for termination of employment. However, the Tribunal reversed this decision, considering the payment as gratuity for past services, emphasizing that the assessee was never out of a job and continued to work in the same capacity for Cement Agencies Ltd.

The court disagreed with the Tribunal's reasoning, emphasizing the legal relationship between the employer and employee. It concluded that the termination of employment by F.E. Dinshaw Ltd. resulted in a loss of employment for the assessee, irrespective of his immediate re-employment by Cement Agencies Ltd. The court stated, "the crucial matter is: In whose employment was the assessee and whether that employment was terminated resulting in a loss of employment of the employee?"

The court concluded that the payment was indeed compensation for the loss of employment, as the jural relationship between F.E. Dinshaw Ltd. and the assessee had ended. Therefore, the Rs. 1 lakh received was a capital receipt and not taxable as income.

2. Applicability of F.D. Notification:
The second issue was whether the assessee was entitled to the benefit of F.D. Notification No. 878-F, dated 21-3-1922, as amended by Notification No. 8, dated 24-3-1928. The court noted that this question would only arise if the first question was answered in favor of the Revenue.

Since the court's answer to the first question was in favor of the assessee, concluding that the Rs. 1 lakh was a capital receipt and not taxable, it was unnecessary to address the second issue regarding the applicability of the F.D. Notification.

Conclusion:
The court answered the first question in the negative, determining that the Rs. 1 lakh received by the assessee was not income liable to be assessed under the Income-tax Act. Consequently, it did not address the second question. The Commissioner was directed to pay the costs, and the reference was answered accordingly.