1967 (6) TMI 1 - HC - Income Tax

Termination of service - sum paid to the assessee may not be an amount spent wholly and exclusively for business purposes of the employer of the assessee and may not be deductible under s. 10(2)(xv) of the Act but that along would not make the sum an item of income in the hands of the assessee

Summary

Issues Involved:
1. Nature of the payment of Rs. 50,000 to the assessee.
2. Whether the payment was compensation for loss of employment or remuneration for past services.
3. Taxability of the payment under the Indian Income-tax Act.

Detailed Analysis:

1. Nature of the Payment of Rs. 50,000 to the Assessee:

The primary issue was to determine the nature of the payment made to the assessee. The resolution by the board of directors of Airways (India) Ltd. stated that the payment was made "in view of the impending termination of his association with the company." The Appellate Tribunal found that the payment was made as compensation for the loss of employment due to the nationalization of the company. The Tribunal noted that the assessee had no controlling hand in the direction of the policy of the company and that the payment was not influenced by any subsequent employment under the nationalized Airlines Corporation. The Tribunal concluded that the payment was a capital receipt and not taxable.

2. Whether the Payment was Compensation for Loss of Employment or Remuneration for Past Services:

The Income-tax Officer initially rejected the assessee's claim, stating that there was no loss of office or employment since the assessee continued to be associated with the company and later got employment under the nationalized corporation. The Appellate Assistant Commissioner also held that the payment was an ex gratia payment in consideration of past services and not compensation for loss of employment. However, the Tribunal disagreed, stating that the payment was made due to the termination of his services because of nationalization and was thus compensation for the loss of employment. The Tribunal emphasized that the subsequent employment by the nationalized corporation was irrelevant to the issue at hand.

3. Taxability of the Payment under the Indian Income-tax Act:

The Tribunal held that the payment was a capital receipt and not taxable under the Indian Income-tax Act. The Commissioner of Income-tax contended that the payment should be treated as remuneration for past services and thus taxable. However, the court referred to several judgments, including the Supreme Court's decision in Commissioner of Income-tax v. E. D. Sheppard, which clarified that compensation for loss of employment is a capital receipt and not taxable. The court also cited P.H. Divecha v. Commissioner of Income-tax, which emphasized that the nature of the receipt in the hands of the assessee is crucial in determining its taxability.

The court concluded that the payment was made out of regard for the assessee's valuable service to the company and was not related to any past or future services. It was a capital receipt and not taxable as income, profits, or gains. The court also noted that the payment was not deductible under section 10(2)(xv) of the Indian Income-tax Act for the employer, but this did not affect its nature as a capital receipt in the hands of the assessee.

Conclusion:

The court answered the question in the affirmative, holding that the sum of Rs. 50,000 grossed up to Rs. 1,00,301 was a capital receipt and not a revenue receipt in the hands of the assessee. The Commissioner of Income-tax was directed to pay the cost of the reference to the assessee.