1951 (11) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1,24,361 received by the assessee was liable to be included in the assessable income.
2. Nature and characterization of the payment made by the All India Reporter to the assessee.
3. Interpretation and application of Section 7(1) of the Income-tax Act and its Explanation 2.
4. Impact of the employer's tax payment on the assessability of the amount received by the assessee.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 1,24,361 in Assessable Income:
The primary issue was whether the sum of Rs. 1,24,361, comprising Rs. 85,000 paid directly to the assessee and Rs. 39,361 paid by the employer towards tax, was liable to be included in the assessable income of the assessee. The court concluded that the entire amount was taxable as it constituted profits in lieu of salary under Section 7(1) of the Income-tax Act.

2. Nature and Characterization of the Payment:
The court examined the nature of the payment under the third clause of the agreement between the assessee and the All India Reporter. The agreement described the payment as "compensation for cessation of service," a term considered ambiguous and not necessarily indicative of compensation solely for loss of employment. The court determined that the payment was a terminal payment in appreciation of past services rather than compensation for loss of employment.

3. Interpretation and Application of Section 7(1) and Explanation 2:
Section 7(1) stipulates that tax is payable on any salary or profits in lieu of salary. Explanation 2 clarifies that a payment received from an employer is considered a profit in lieu of salary unless it is made solely as compensation for loss of employment and not as remuneration for past services. The court found that the payment in question did not qualify for exemption under Explanation 2, as it was not made solely as compensation for loss of employment but included elements of remuneration for past services.

4. Impact of Employer's Tax Payment:
The court addressed the contention that the sum of Rs. 85,000 should not be taxed again since the employer had already paid tax on it. It was held that the substance of the matter was that the assessee received not just Rs. 85,000 but also immunity from tax on that sum, effectively making the total amount received Rs. 1,24,361. This interpretation aligns with precedents set in North British Railway Company v. Scott and Hartland v. Diggnes, where sums deducted as tax are deemed income received by the assessee.

Separate Judgments:
Kaushalendra Rao, J.:
- Concluded that the payment was a terminal payment in appreciation of past services.
- Held that the payment was taxable under Section 7(1) and did not qualify for exemption under Explanation 2.

Deo, J.:
- Agreed with the conclusion but for different reasons.
- Emphasized that the payment included unpaid salary, sums payable under Clauses 3 and 7 of the agreement, and was not solely compensation for loss of employment.
- Highlighted that under Section 18(4), sums deducted as tax are deemed income received by the assessee.

Order:
The court answered the question in the affirmative, holding that the sum of Rs. 1,24,361 was liable to be included in the assessable income of the assessee. The assessee was ordered to pay the costs of the Department with a counsel's fee of Rs. 100.