1960 (11) TMI 21 - SC - Income Tax

Whether as between the appellant company and the respondent the amount decreed is due as salary payment which attracts the statutory liability imposed by section ? Held that - In the present case there is a decree passed in favour of the respondent ; under the scheme of the Civil Procedure Code, that decree has to be executed as it stands, subject to such deductions or adjustments as are permissible under the Code. There was no tax liability which the respondent was assessed to pay in respect of this amount till the date on which the appellant company sought to satisfy the alleged tax liability of the respondent. As between the appellant company and the respondent, the amount did not represent salary ; it represented a judgment debt and for payment of income-tax thereon, no provision was made in the decree. The Civil Procedure Code bars an action of the nature which was filed in Westminster Bank s case. The defence to the execution, if any, must be raised in the execution proceeding and not by a separate action. The amount payable by the appellant company to the respondent was not salary but a judgment debt, and before paying that debt the appellant company could not claim to deduct at source tax payable by the respondent. Nor could the appellant company seek to justify its plea on the ground that the judgment creditor was indebted to a third person. Appeal dismissed.

Summary

Issues:
1. Whether the appellant company was obligated to deduct income tax from the amount payable to the respondent under a civil court decree.
2. Whether the amount decreed to the respondent represented salary payment attracting statutory liability under section 18 of the Income-tax Act.
3. Whether the appellant company could claim to deduct income tax from the judgment debt payable to the respondent.
4. Applicability of the House of Lords decision in Westminster Bank Ltd. v. Riches to the present case.
5. Relevance of the case in Manickam Chettiar v. Income-tax Officer to the current scenario.

Analysis:

1. The appellant company argued that it was bound to deduct income tax from the amount payable to the respondent under a civil court decree as per section 18(2) of the Income-tax Act. However, the court held that the liability to deduct tax arises only if the amount is due and payable as salary. Since there was no assessment of tax due by the Income-tax Officer on the amount payable to the respondent, the appellant company was not obligated to deduct tax without proper assessment.

2. The court examined whether the amount decreed to the respondent represented salary payment attracting statutory liability under section 18 of the Income-tax Act. The decree included compensation for wrongful termination of employment, arrears of salary, salary due for the notice period, interest, and costs. The court concluded that a substantial part of the claim decreed was for compensation, making it difficult to determine if any part represented salary due. As the claim merged into a judgment debt, the court ruled that section 18 did not apply to judgment debts.

3. The appellant company's plea to deduct income tax from the judgment debt payable to the respondent was rejected. The court emphasized that the amount decreed was a judgment debt, not salary, and no provision for income tax deduction was made in the decree. The appellant company could not claim to deduct tax payable by the respondent before paying the judgment debt, nor could it justify the plea based on the respondent's indebtedness to a third party.

4. The House of Lords decision in Westminster Bank Ltd. v. Riches, where income tax was held deductible from interest awarded under a judgment, was distinguished from the present case. The court noted that the circumstances and nature of the amounts differed, emphasizing that the respondent's decree was to be executed as it stood without tax deductions.

5. The court discussed the case of Manickam Chettiar v. Income-tax Officer, where tax was prioritized for payment out of sale proceeds received by the court. However, the court found this case inapplicable to the current scenario as tax had been assessed and recovery proceedings were initiated, unlike the situation in the present case.

In conclusion, the court dismissed the appeal, stating that the appellant company was not entitled to deduct income tax from the judgment debt payable to the respondent.