1960 (10) TMI 104 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of monthly receipts under the agreement of May 20, 1952.
2. Interpretation of Section 7 of the Indian Income-tax Act.
3. Nature of payments received-whether they are of a revenue nature or compensation for loss of employment.
4. Applicability of restrictive covenants and their impact on taxability.

Detailed Analysis:

1. Taxability of Monthly Receipts:
The primary issue is whether the monthly receipts by the assessee from the General Assurance Society Ltd., Ajmer, under the agreement of May 20, 1952, were of a revenue nature in whole or in part. The assessee was employed as a general manager under an agreement dated July 5, 1943, which was terminated prematurely by a subsequent agreement on May 20, 1952. The new agreement provided for monthly payments to the assessee until July 5, 1957, along with certain restrictive covenants.

2. Interpretation of Section 7 of the Indian Income-tax Act:
Section 7 of the Indian Income-tax Act, as it stood during the material period, provided that tax shall be payable under the head "salaries" for any salary, wages, annuity, pension, gratuity, and any fees, commissions, perquisites, or profits in lieu of salary. Explanation 2 to Section 7 specified that payments made solely as compensation for loss of employment and not as remuneration for past services would not be considered as "profits in lieu of salary."

3. Nature of Payments Received:
The Income-tax Appellate Tribunal held that the payments received by the assessee were on account of losing the office of the general manager and for observing restrictive covenants, thus not falling within the ambit of "receipt of a revenue nature." The Tribunal found that the payments were made to prevent the assessee from engaging in competitive business and divulging business secrets, thereby protecting the interests of the company.

4. Applicability of Restrictive Covenants:
The restrictive covenants required the assessee not to engage in any insurance business, hold any post in an insurance office, or divulge business secrets until July 5, 1957. The Tribunal and the court found that these covenants did not imply that the assessee continued in the employ of the company as a retainer. The court emphasized that the payments were made solely as compensation for the loss of employment, even though they were paid in monthly installments.

Conclusion:
The court concluded that the payments were not of a revenue nature in whole or in part. The restrictive covenants did not change the nature of the payments, which were solely for the loss of employment and not as remuneration for past services. The reference was answered accordingly, affirming that the payments received by the assessee were not taxable.