1940 (3) TMI 10 - HC - Income Tax

Summary

Issues Involved:

1. Whether the appellant is liable to income-tax in respect of the sum of lb45,000 as a profit arising from the office of director under Schedule E of the Income-tax Act.
2. Whether the payment of lb45,000 was a profit from the appellant's directorship or merely a consideration for not serving a notice of resignation.
3. Whether the payment can be considered a capital payment rather than income.

Issue-wise Detailed Analysis:

1. Liability to Income-Tax under Schedule E:

The primary issue in this appeal is whether the appellant is liable to income-tax on the sum of lb45,000 received from his company. The Special Commissioners initially held that the sum was not subject to income-tax under Schedule E, as it was a consideration for not resigning. However, Lawrence, J. reversed this decision, asserting that the payment arose from the appellant's office as director. The Court of Appeal, by majority, upheld Lawrence, J.'s decision. The income-tax under Schedule E is charged "in respect of every public office or employment of profit" and includes "all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment." It was admitted that the appellant held a directorship, an office of profit, and received the sums in question during the year of assessment while holding that office. The crux of the matter was whether these payments arose from the office held by the appellant.

2. Nature of the Payment:

The appellant contended that the payment was merely for agreeing not to serve a notice of resignation, not a profit from his directorship. The Court, however, found that the substance and form of the documents indicated that the payment was to induce the appellant to continue as a director. The continuance of his office was deemed the essence of the bargain, not just a by-product of the agreement not to resign. The Court reasoned that an agreement not to resign is effectively an agreement to continue serving as a director. The payment was thus seen as a profit arising from the office of director, making it taxable under Schedule E.

3. Capital vs. Income:

The appellant argued that the payment could be viewed as a capital payment rather than income. However, the Court found no basis for this assertion. The payment was made to secure the appellant's continued service as a director, and the size of the sum alone did not justify categorizing it as capital. The Court concluded that the payment was an extraordinary profit from the appellant's directorship, falling within the wide terms of "salaries, fees, wages, perquisites or profits whatsoever" under Schedule E.

Conclusion:

The Court concluded that the payment of lb45,000 was indeed a profit from the appellant's directorship and thus subject to income-tax under Schedule E. The appeal was dismissed with costs, affirming the order of the Court of Appeal. The decision in Dewhurst's Case was distinguished as it involved different facts and did not govern the present case. The Court emphasized that the payment was made in the interest of the company to retain the appellant's services, making it a profit from his office as a director.