1958 (10) TMI 60 - HC - Income Tax

Summary

Issues Involved:
1. Ambit and scope of Section 7(1) and Explanation 2 of the Income-tax Act prior to the amendment by the Finance Act, 1955.
2. Determination of whether the sum of Rs. 5 lakhs received by the assessee was a taxable receipt.
3. Applicability of Explanation 2 to Section 7(1) to a person who has ceased to be an employee.
4. Nature of the payment: whether it was a personal gift or remuneration for past services.
5. Consideration of whether the payment was a casual and non-recurring receipt.

Detailed Analysis:

1. Ambit and Scope of Section 7(1) and Explanation 2:
The principal question pertains to the ambit and scope of Section 7(1) and Explanation 2 before the amendment by the Finance Act, 1955. The court noted that the section is couched in the broadest possible terms, encompassing even purely voluntary payments like gifts or rewards if the payment was made to remunerate or recompensate past services. The section covers all employees, regardless of their designation.

2. Determination of Taxable Receipt:
The sum of Rs. 5 lakhs was paid by the Maharaja of Bhavnagar to the assessee, who had been his Chief Dewan, "in consideration of having rendered loyal and meritorious services." The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all concluded that the amount was a taxable receipt under Section 7(1) read with Explanation 2. The Tribunal emphasized the contemporaneous document dated 27th December 1950, which explicitly mentioned the reason for the payment.

3. Applicability of Explanation 2 to Former Employees:
The argument that Explanation 2 does not apply to a person who has ceased to be an employee was rejected. The court held that the section and Explanation 2 cover any payment received by the employee in addition to his stipulated salary, including voluntary payments aimed at remunerating past services. The court clarified that compensation for loss of employment stands on different footing and is expressly excluded from the purview of the Explanation.

4. Nature of the Payment:
The assessee argued that the payment was a personal gift and not remuneration for past services. However, the court examined the order of 27th December 1950, which explicitly stated that the payment was made "in consideration of having rendered loyal and meritorious services." The court referred to various cases, including Moorhouse v. Dooland, David Mitchell v. Commissioner of Income-tax, Reed v. Seymour, and Beynon v. Thorpe, to illustrate the principles applicable to voluntary payments. The court concluded that the payment was not a personal gift but was connected with and related to the past services rendered by the assessee.

5. Casual and Non-Recurring Receipt:
The assessee contended that the payment was a casual and non-recurring receipt and thus not liable to tax. The court dismissed this contention, stating that once the connection with employment is established, the nature of the receipt, whether casual or recurring, is irrelevant. The payment falls within the ambit of Section 7(1) and is thus taxable.

Conclusion:
The court answered the question in the affirmative, holding that the sum of Rs. 5 lakhs was properly brought to tax in the hands of the assessee for the assessment year 1951-52. The payment was considered remuneration for past services and not a personal gift. The court also emphasized that the relationship of employer and employee subsisted between the Maharaja and the assessee, and the payment was made in that context. The assessee was ordered to pay the costs.