1969 (12) TMI 14 - HC - Income Tax

Sum of Rs. 1,67,345 represents the payment to the assessee in full and final settlement of his claim for damages for wrongful termination of his services - it could not be regarded partly as derived from employment - therefore, held that sum is covered by the 2nd Explanation to section 7(1) of the Act as it stood prior to its amendment by s. 5 of the Finance Act, 1955.

Issues Involved:
1. Whether the sum of Rs. 1,67,345 received by the assessee is covered by the 2nd Explanation to section 7(1) of the Income-tax Act, 1922, as it stood prior to its amendment by section 5 of the Finance Act, 1955.

Issue-wise Detailed Analysis:

Issue 1: Nature of the Payment Received by the Assessee
The primary question was whether the sum of Rs. 1,67,345 received by the assessee was income or a capital receipt. The amount was paid by His Highness Maharaja Yeshwant Rao Holkar in full and final settlement of the assessee's claim for damages due to wrongful termination of his services as personal adviser. The Tribunal had to determine if the payment was part of the assessee's income for the year in question or if it was of a capital nature.

Tribunal's Findings:
- The Tribunal found that the payment was made solely as compensation for loss of employment and not by way of remuneration for past services.
- The Tribunal noted that the assessee had already been adequately remunerated for his past services and that the Maharaja of Holkar had repudiated the agreement on 23rd December 1951.
- The Tribunal emphasized that the payment was made as a result of the wrongful termination of the assessee's services and was not connected to past services.
- The agreement dated 27th January 1955 explicitly described the payment as "compensation for the loss of his employment."

Legal Precedents and Interpretations:
- The court referred to the old Second Explanation to section 7(1) of the Income-tax Act, 1922, which states that a payment received by an assessee from an employer is considered a profit in lieu of salary unless it is made solely as compensation for loss of employment and not as remuneration for past services.
- The court cited various cases, including Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioners and Henry v. A. Foster, to assert that the substance of the transaction must be considered over its form.
- The court noted that the Tribunal's finding that the payment was solely for compensation for loss of employment was a finding of fact, which should not be disturbed unless there was a misdirection in law.

Court's Conclusion:
- The court agreed with the Tribunal's view that the payment of Rs. 1,67,345 was solely as compensation for loss of employment.
- The court rejected the Commissioner's argument that the payment was a terminal payment or additional remuneration for past services.
- The court emphasized that the payment was made under a fresh agreement dated 27th January 1955, which was a settlement for the wrongful termination of the contract of service.
- The court concluded that the payment was a capital sum for the total abandonment of all contractual rights under the service agreement.

Final Decision:
- The court answered the question in the affirmative, stating that the sum of Rs. 1,67,345 received by the assessee was indeed covered by the 2nd Explanation to section 7(1) of the Income-tax Act, 1922, as it stood prior to its amendment.
- The court awarded the costs of the reference to the assessee, with a hearing fee of Rs. 500.

Summary:
The High Court concluded that the sum of Rs. 1,67,345 received by the assessee was a capital receipt, being compensation for loss of employment, and not taxable as income under section 7(1) of the Income-tax Act, 1922, prior to its amendment. The court upheld the Tribunal's finding that the payment was made solely as compensation for the wrongful termination of the assessee's services and not as remuneration for past services.

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