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TMI Blog1965 (2) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... nnexure A to the statement of the case). We would be adverting to this letter later. Suffice it to state at this stage that the assessee was to look after the Bombay office organisation of the company and was to get therefor a fixed amount of ₹ 4,000 per month. The company had also further agreed to pay to the assessee income-tax and super-tax due and payable on the said amount of remuneration per month, according to the rate prescribed in the yearly Finance Acts. The assessee was also further entitled to get from the company conveyance and entertainment allowances as agreed between them from time to time. The period of employment was for a definite period of 25 years commencing from 1st April, 1943, the company reserving its right to depute the assessee to look after the interest of any other of its concerns. It was further provided in the letter that in the event of his services being terminated before the expiry of the period of 25 years, the assessee would be entitled to compensation calculated as equivalent to ₹ 40,000 for each unexpired year of the duration of the assessee's employment. It is principally this clause relating to compensation that has to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solely as compensation for the loss of employment. It therefore did not attract tax. In this view of the matter, the Appellate Assistant Commissioner allowed the appeal on this point and excluded the said sum of ₹ 7 lakhs from assessment. The department appealed to the Tribunal against this order of the Appellate Assistant Commissioner. It appears from the separate orders written by the Accountant Member and the Judicial Member of the Tribunal that two contentions were raised before the Tribunal on behalf of the department. The first contention was that the letter written by the company to the assessee on 11th October, 1943, incorporating the basis of employment was not a genuine letter. This contention was overruled. The other contention raised was that the said amount was paid by the company to the assessee as payment for the past services rendered by the assessee. The Accountant Member of the Tribunal held that on the evidence on record the said amount of ₹ 7 lakhs paid to the assessee was not a payment made to him for the past services rendered by him. The nature of receipt in the hands of the assessee was capital, and, therefore, not assessable. The Judicial Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eu of salary for the purposes of this sub-section, unless the payment is made solely as compensation for loss of employment... The Explanation gives an artificial definition of profits received in lieu of salary by including any payment due to or received by an assessee from an employer or former employer. However, payment which is made solely as compensation for loss of employment is excluded even in the extended definition of the expression from profits in lieu of salary . There can hardly be any doubt that the said amount of ₹ 7 lakhs is a payment received by the assessee from his employer. The real question, therefore, that has to be considered is whether the said payment has been made solely as compensation for loss of employment. Mr. Joshi, learned counsel for the revenue, contends that on a true construction of the aforesaid two documents, the compensation paid is not solely as compensation for the loss of employment. On the other hand, the payment is a profit arising out of employment. He has referred us to the decisions reported in Dale (H.M. Inspector of Taxes) v. De Soissons [1950] 32 Tax Cas. 118, Henry (H.M. Inspector of Taxes) v. Arthur Foster [1932] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and it is signed by the company's director, Mr. Dalmia. In the first paragraph, the company confirms that the assessee will look after its (company's) Bombay office organisation, and for which the assessee will be paid a fixed amount of ₹ 4,000 per month plus income-tax and super-tax due and payable on this amount of remuneration according to the rate prescribed in the yearly Finance Acts. It further provides that conveyance and entertainment allowances will be allowed to the assessee as may be agreed upon from time to time. The second paragraph provides that the term of employment will be for a definite period of 25 years commencing from 1st April, 1943. In the second paragraph, the company reserved its right to depute the assessee to look after the interests of any other concern and arrange for the assessee's remuneration being paid either by that other concern or by itself. The third paragraph reads: You have requested that it should be made clear that should your services be terminated before the expiry of 25 years, then a definite compensation for loss of office and breach of agreement should be provided. In confirming that on the occurrence of any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the expiry of the period. It was provided that he would be paid for the entire period. He was surrendering no rights. The happening of the event envisaged at the time of the formation of the contract took place at the end of November, 1949. On the happening of the event, the payment of ₹ 7 lakhs has been made in terms of the contract of employment provided in the third paragraph of the letter of 11th October, 1943. The termination of the employment of the assessee on 30th November, 1949, did not put an end to the contract. A part of the contract subsisted, namely, paragraph 3 of the letter of 11th October, 1943. Payment being in accordance with the terms of the contract of employment is profits in lieu of salary received by the assessee for the unexpired period . It is not compensation for loss of employment. Mr. Joshi laying emphasis on the bracketed portion in the first paragraph of the letter of 14th February, 1950, further argued that this letter shows that the payment has been made in accordance with the terms of the contract of employment. We find it difficult to accept the construction which Mr. Joshi wants to put on the said two letters. It is true that the mere u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther show that if his services were terminated prior to the expiration of 25 years, it would be a breach of the agreement. He requested that a provision be made for the measure of compensation if such an event in breach of the agreement occurs. The first part of paragraph 3 says that the assessee had requested that it should be made clear that should his services be terminated before the expiry of 25 years, then, a definite compensation for loss of office and breach of agreement should be provided. The assessee, therefore, has characterised the termination of his services prior to expiration of the period of 25 years as breach of the agreement and loss of his office. The aforesaid claim of the assessee has been accepted in the latter part of the letter of the company. In the latter part, the company says that on the happening of any such contingency, the assessee would be entitled to claim compensation at the rate stated in the said letter. Now, the termination of the services prior to the expiry of 25 years has been characterised by the parties as breach of the agreement and loss of office, and in the latter part of the letter, a definite measure of compensation calculated as eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dying or resigning or ceasing to hold office for any cause other than misconduct, bankruptcy, lunacy or incompetence, the company should pay to him or his representative by way of compensation for loss of office a sum equal to the total remuneration received by him in the preceding five years. All the three directors had held office for not less than five years. Arthur Foster and Joseph resigned the office as directors and received from the company as compensation a payment calculated in accordance with article 109. It is not necessary to state the facts in Dewhurst's case [1932] 16 Tax Cas. 605, as no reliance is placed on Dewhurst's case [1932] 16 Tax Cas. 605. The Court of Appeal held that the said payment under article 109 constituted profit of office of the director and was properly assessable to income-tax under Schedule E for the last year of office. Lord Hanworth M.R., after examining article 104, which related to the remuneration paid to the contractor, and the provisions of article 109, at page 629 of the report, observed: Now it is argued that those sums which became payable under the terms recorded in article 109 were compensation for the loss of office. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At page 633 of the report, he observes: Now, supposing that a director is employed upon the terms that he is to be paid in each year of his service a sum of ? 1,000, and in the last year of his service a sum of ? 5,000 in addition to the ? 1,000, no one I think could doubt in such a case that the ? 5,000 was a profit of his office, paid to him in respect of his office, that it was liable to income tax, and was to be treated for the purposes of tax as forming part of his salary for the last year of his office. The case before us is precisely that case, with two exceptions: Firstly, that the sum is not fixed, but has to be ascertained by reference to events which will not be determined until the last year of office--that can make no difference at all--and, secondly, that article 109 expresses that the sum to be paid in the last year of office is to be compensation for loss of office. Now, do those words make any difference? In my opinion they do not. It would be seen that the view taken by all the learned judges on the construction of article 109 was that it was a deferred payment in respect of the services already rendered. Such, however, is not the case here. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Income Tax Act. Mr. Joshi laid great emphasis on the concluding observations of Sir Raymond Evershed in his judgment. They are: I am satisfied to accept the last few words of Roxburgh J.'s judgment as giving expression entirely to my own conclusion, 'In the present case the Colonel surrendered no rights. He got exactly what he was entitled to get under his contract of employment. Accordingly the payment, in my judgment, falls within the taxable class'. Laying emphasis on these observations he argues that this exactly is the case here. Payment as contemplated in the agreement contained in the letter of 11th October, 1943, has been made to the assessee for each unexpired year of the duration of his employment. He has surrendered nothing. He got everything that he had bargained for, and which he was entitled to get under the agreement. The amount, therefore, cannot be compensation for loss of employment. We have already stated that what has been provided in paragraph 3 is the measure of damages in the event of cessation of employment and is not payment arising from or on account of employment. It is, therefore, not a payment which could be said to be one which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment will be for a definite period of 25 years, commencing from 1st April, 1943. Facts in V.D. Talwar v. Commissioner of Income-tax [1963] 49 I.T.R. (S.C.) 122 were: Mr. Talwar was employed as the general manager of a company under the service agreement which provided, inter alia, that the period of service was 5 years, and that the company might terminate the services by giving 12 months' notice, or paying any salary in lieu thereof, or in the case of any breach of the terms or conditions of service without any notice. Mr. Talwar had joined the service on 1st May, 1946. His services were terminated with effect from August 31, 1947, without notice, not for any default or misconduct on his part, but because the company did not want to continue the assessee in their employment. In lieu of the notice, the company paid 12 months' salary, and paid ₹ 18,096, which was the amount arrived at after deducting from 12 months' salary of ₹ 25,200, income-tax of ₹ 7,104. The question which fell for consideration was whether the said sum of ₹ 25,200 was taxable in the hands of the assessee. It was held that the service agreement provided that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing observations of Sir Raymond Evershed M. R. at page 362 of the report It is quite clear I think that bargains of this kind may take at any rate one of two forms. A man who has a contract in respect of which he is entitled to periodic remuneration may say, ' well, I will take now a lump sum instead of the periodic remuneration in the future, and though I will continue to serve under my contract, I shall not be expected to do quite as much work ', or he may even say, ' I shall not be expected to do any work at all. ' If that were the form of the arrangement in this case, I think it would be true to say that the lump sum which was paid was profits which became payable under his contract, and that it was paid to him by virtue of his office or employment of profit within the meaning of the Schedule. Referring to these observations, he contends that such is the arrange-ment here. In paragraph 3 of the letter of 11th October, 1943, the assessee, who had a contract in respect of which he was entitled to a periodic remuneration of ₹ 4,000 per month free of tax, has said that he will take a lump sum payment in respect of the periodic remuneration in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1963] 49 I.T.R. (S.C.) 122, the service agreements provided for the amount to be paid at the termination of the services. In the latter three cases payment has been held to be liable to tax. In the former case, i.e., of Henley's case [1950] 31 Tax Cas. 351, the amount is held not taxable. According to Mr. Joshi, the principle that follows is that where the initial agreement itself provides for making certain payments in the event of the termination of the services, the payment is under the contract of service and, therefore, taxable; but if such a provision is not made in the service agreement, the payment made under the subsequent agreement on termination of the services is not taxable, it being compensation for the loss of service. In our opinion, such a ratio does not follow from these decisions. The decisions in these cases have not turned on the presence or absence of a term in the service agreement relating to payment of compensation on termination of the services of an employee prior to the expiry of the period stipulated in the agreement, but, on the other hand, it would be seen from the discussion of these decisions that the decisions have turned on the construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot terminate the contract except on account of continued illness, etc. No doubt there is difference in the language used in the letter of 11th October, 1943, and the agreement in Agrawala's case [1960] 38 I.T.R. 67. The language used here is: The term of employment will be for a definite period of 25 years commencing from 1st April, 1943 ; but the difference in language, in our opinion, does not make any material difference. What is stipulated in both these agreements is that the term of the employment is for a definite period. The letter of 14th February, 1950, states that the employment of the assessee has ceased from 30th November, 1949. The second paragraph of this letter says that the services were terminated unilaterally by the company. The assessee has not consented to the termination of his services. The second paragraph further says that he claimed compensation for the termination of his office, and as a result of negotiations an amount of ₹ 7 lakhs was agreed to be paid by the company to the assessee. The order of the Income-tax Officer shows that though ₹ 7 lakhs are calculated according to the measure of damages in paragraph 3, the salary would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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