1960 (11) TMI 22 - SC - Income Tax

Whether the sum of 5 lakhs has been properly brought to tax in the hands of the assessee for the assessment year 1951-52 ? Held that - The sum of 5, 00, 000 was not paid to the assessee in token of appreciation for the services rendered as a Dewan of Bhavnagar State but as a personal gift for the personal qualities of the assessee and as a token of personal esteem. The appeal is therefore allowed and the order of the High Court set aside and the reference is answered against the Commissioner of Income-tax.

Issues Involved:
1. Assessability of Rs. 5 lakhs under Section 7(1) of the Income-tax Act.
2. Nature of the payment: whether it was a gift or remuneration for past services.
3. Applicability of Explanation 2 to Section 7(1) of the Income-tax Act.
4. Evaluation of contemporaneous documents and their evidentiary value.

Issue-wise Detailed Analysis:

1. Assessability of Rs. 5 lakhs under Section 7(1) of the Income-tax Act:
The Income-tax Officer held that Rs. 5 lakhs received on June 12, 1950, was liable to income-tax under Section 7(1) read with Explanation 2 of that section as it stood before the amendment by the Finance Act, 1955. The Tribunal and the High Court upheld this view, concluding that the amount was taxable. The High Court stated that the payment could not be regarded as a windfall or a personal gift of the nature of a testimonial but was in appreciation of past services, thus falling within the ambit of Section 7(1), Explanation 2.

2. Nature of the payment: whether it was a gift or remuneration for past services:
The appellants argued that the Rs. 5 lakhs was a personal gift from the Maharaja, given out of affection and regard for the assessee and his family, and not as remuneration for past services. They contended that the Maharaja had already compensated the assessee for his services by granting a monthly pension of Rs. 2,000. The Tribunal, however, placed more importance on the Maharaja's order dated December 27, 1950, which stated that the amount was given in consideration of the assessee's loyal and meritorious services, thus treating it as remuneration for past services.

3. Applicability of Explanation 2 to Section 7(1) of the Income-tax Act:
Explanation 2 to Section 7(1) states that a payment received from an employer or former employer is considered a profit received in lieu of salary unless it is made solely as compensation for loss of employment and not by way of remuneration for past services. The High Court concluded that the payment was connected to the employment and could not be exempted from tax on the ground that it was a casual or non-recurring receipt. The Tribunal's view was that the payment was a taxable receipt falling under Section 7(1) read with Explanation 2.

4. Evaluation of contemporaneous documents and their evidentiary value:
The Tribunal considered the Maharaja's order of December 27, 1950, as a contemporaneous document and attached more importance to it than to the Maharaja's letter dated March 10, 1953. The Tribunal did not believe the contents of the latter letter, which stated that the payment was a gift out of affection and regard. The Supreme Court, however, found that the Tribunal erred in treating the December 27, 1950, document as contemporaneous, noting that it was written six months after the payment and was merely an instruction to an accountant. The Supreme Court emphasized that the Maharaja had already granted a generous pension for the services rendered, supporting the appellants' claim that the Rs. 5 lakhs was a personal gift.

Separate Judgments:

Majority Judgment:
The majority judgment, delivered by Kapur, J., concluded that the Rs. 5 lakhs was not paid in appreciation of services rendered as Dewan of Bhavnagar State but as a personal gift for the personal qualities of the assessee and as a token of personal esteem. The appeal was allowed, the High Court's order was set aside, and the reference was answered against the Commissioner of Income-tax. The appellants were awarded costs throughout.

Dissenting Judgment:
Hidayatullah, J., in his dissenting judgment, disagreed with the majority view, stating that the High Court had correctly answered the question referred to it. He emphasized that the Tribunal was within its rights to accept one piece of evidence over another and that the payment was indeed in consideration of past services. He would have dismissed the appeal with costs.

Order:
In view of the majority judgment, the appeal was allowed with costs throughout.

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