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TMI Blog1967 (6) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... or that purpose "to provide for the establishment of air corporations, to facilitate the acquisition by the air corporations of undertakings belonging to certain existing air companies and generally to make further and better provisions for the operation of air transport services ". Under the definition of the expression "existing air companies ", in section 2(v) of the Act, was included, amongst others, the Airways (India) Ltd. Further, under section 16 of the Act, it was provided: " On such date as the Central Government may, by notification in the Official Gazette, appoint (hereinafter referred to as 'the appointed date'), there shall be transferred to and vest in (a) Indian Airlines, the undertakings of all the existing air companies (other than Air India International Ltd.), and (b) Air India International, the undertaking of the Air India International Ltd." The appointed date was notified to be August 1, 1953. Since the acquisition was to affect officers and employees of existing air companies, the following provisions, inter alia, were made for them, by section 20 of the Act : "20. (1) Every officer or other employee of an existing air company (except a director, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the termination of his association with the company, under the impending scheme of nationalisation. The recommendation was adopted by the company, which passed a resolution, on February 28, 1953, couched in the following language: " Resolved that the recommendation of the board of directors that a payment of Rs. 50,000 (rupees fifty thousand), free of income-tax, as a lump sum payment be made to Mr. K. K. Roy, the managing director of the company in view of the impending termination of his association with the company due to nationalisation of the company as aforesaid, such payment being made only in the event of such nationalisation taking effect, be approved." The payment, in terms of the resolution, was made to the assessee on May 7, 1953, prior to the appointed date, namely, August 1, 1953. After the appointed date, the assessee was appointed by the statutory corporation, known as Indian Airlines, as its resident representative, on the same terms, conditions, rights and privileges, which he was enjoying as the managing director of Airways (India) Ltd. The assessee claimed before the Income-tax Officer that the sum of Rs. 50,000 was received by him as compensation for l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the resolution dated December 17, 1945, as amended from time to time, brings about the relationship of employee and employer between the appellant and the company. Certain duties have been specified as also the remuneration. Increments have been provided for as also the tenure of employment. Therefore, the appellant must be considered as having been an employee of the company, though he was also the managing director at the time the payment of Rs. 50,000 was made to him." The Appellate Assistant Commissioner did not agree with the Income-tax Officer that there was no loss of office or employment for the assessee, because, according to him, the exemption relating to compensation for loss of employment under Explanation 2 to section 7(1) of the Indian Income-tax Act related to an employment quod the same employer and the same employee. As to the nature of payment made to the assessee, he observed : " It appears from the resolution dated May 28, 1943, that the appellant was allowed a salary of Rs. 1,900 per month plus 1 per cent. of the net profit of the company and a motor car for his personal use. He was also allowed a sum of Rs. 250 per month until adequate profits were avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant's representative has no force. The wording of the resolution dated January 30, 1953, together with the earlier resolutions can only mean that the payment was in consideration of past services and that the company had undertaken to bear the tax. Therefore, the action of the Income-tax Officer in assessing the sum of Rs. 1,00,301 was correct." The assessee preferred a second appeal before the Appellate Tribunal, which disagreed with the Appellate Assistant Commissioner and allowed the appeal on the following grounds " The said payment came to be received by the assessee by virtue of the resolution dated January 30, 1953, which we have quoted above. Under the said resolution, it is stated that the purpose of the payment was 'impending termination of his association with the company'. It could only mean that the payment was in lieu of the termination of his services. In other words, if the nationalisation had not come by, the assessee would have continued on in the services of the Airways India Ltd., and since, for no fault of the assessee, his services had to be terminated, the said company was paying the aforesaid amount as a compensation for loss of his employment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as its resident representative on the same terms, conditions, rights and privileges which he was enjoying as the managing director of Airways (India) Ltd., and that there was no loss of office or employment for the assessee. In this contention Mr. Pal is not right. The employment under the statutory corporation was not a continuation of the office of the assessee as the managing director of Airways (India) Ltd. That was a fresh employment under a new statutory body, which took over the business of the former employer of the assessee. The original employment under the former employer ceased and the assessee lost that employment. If not otherwise disentitled, be would have been entitled to compensation for loss of his former employment, despite the fact that he got another employment under a new employer. This view finds support from a decision of the Bombay High Court in H. S. Captain v. Commissioner of Income-tax, in which there is the following observation: " The crucial matter is: In whose employment was the assessee and whether that employment was terminated resulting in a loss of employment of the employee ? . . . The real test, according to us, in a case of this type sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial concern, may not pay him any such sum. The first point that we have to consider, therefore, is what was the nature of the payment made to the assessee. Mr. Pal strongly contended that under Explanation 2 to section 7(1) of the Indian Income-tax Act, if the amount was not paid to the assessee as compensation, the same must be treated as remuneration for past services and be taxable as salary. We, need refer to the language of the Explanation in order to understand this argument. Explanation 2 to section 7(1) of the Indian Income-tax Act, as it stood at the material time, is quoted below: "7.(1) The tax shall be payable by an assessee under the head 'Salaries' in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer; and for the purposes of this sub-section advances by way of loan or otherwise of income chargeable under this head shall be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax moved the Tribunal for a reference of the following question : "Whether, on the facts and circumstances of the case, the sum of Rs. 2,21,000 being the value of the shares received by the assessee free of payment, is income of the assessee and assessable under section 7 of the Income-tax Act ?" The High Court answered the question in the negative and in favour of the assessee. On appeal before the Supreme Court, at the instance of the Commissioner of Income-tax, it was contended : (1) that the word " compensation " in Explanation 2 means what is payable or compellable at law as compensation, that is, monetary equivalent of the damage suffered consequent on the injury caused; (2) under the Explanation any payment received by an assessee from his employer or former employer (save payment from a provident or other fund mentioned therein) is profit received in lieu of salary for the purpose of sub-section (1) of section 7 unless the payment was made solely as compensation for loss of employment. It was submitted that the Explanation created as it were an artificial definition of " profits in lieu of salary " and if the payment was not compensation in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is this payment for . . . ' It is worthy of note that on the question of whether a receipt is capital or income in the hands of the assessee, the learned judge made no distinction between office or trade. The income arising from an employment is taxable as ' Salaries ' under section 7 ; the profits of a business are taxable under section 10; while the income arising from an office which does not involve employment would be taxable under section 10 as business profits, e.g., in the ordinary case of managing agents or selling agents, where the activities amount to the carrying on of a business, and in other cases, e.g., an ordinary director of a company, it would be taxable under section 12 as ' Income from other sources'. The question whether compensation received for loss of employment or office or for cessation of business is taxable under any of the three sections will fall to be considered, prior to the amendments of 1955, with reference to the general principle of income-tax law which is to tax income. In other words, the question would be whether it is income or capital in the hands of the assessee. " His Lordship then considered the judgment of the Privy Council in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtment has put it, can be accepted as correct. In Mahesh Anantrai Pattani v. Commissioner of Income-tax this court had to consider section 7(1) of the Act and Explanation 2 thereto, as they stood prior to the amendments in 1955. The facts of that case were these: M. A. Pattani, who was the Dewan of the State of Bhavnagar, was granted a monthly pension of Rs. 2,000 by the Maharajah of the State by an order dated January 15, 1948. On March 1, 1948, the State of Bhavnagar merged in the United State of Saurashtra and the Maharajah ceased to be the Ruler of the State. Subsequently, on May 31, 1950, the Maharajah directed his banker in Bombay to pay Pattani a sum of Rs. 5,00,000 and said that the payment was made in consideration of the loyal and meritorious services which Pattani had rendered to the State. The question which arose for decision was whether the aforesaid payment of Rs. 5 lakhs was liable to tax under section 7(1) read with Explanation 2. This court held that the sum of Rs. 5 lakhs was given to Pattani not as a payment in consideration of the services already rendered by Pattani as the Dewan of the State but merely as a gift in token of the Maharajah's affection and regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as regular lamp dealers. As a result of discussion between the firm and Philips Electrical Co., certain minutes were recorded covering, inter alia, the furnishing by the firm of names of dealers over the past six months, the execution of local orders, certain outstanding contracts and the payment of commission on such contracts, and the disposal of stocks of the firm. As a gesture of goodwill Philips Electrical Co. agreed to pay in instalments Rs. 40,000 per annum for a period of three years to each of the partners of the firm. The minutes further recorded that " the three years' remuneration " would be in addition to the profit the firm would realise as regular lamp dealers. The question was whether the sum of Rs. 20,000 received in the accounting year ended December 31, 1954, by each of the assessees, who were partners of the firm, was assessable to income-tax. The Supreme Court held, (1) that the agreement between the firm and Philips Electrical Co. created a monopoly right of purchase for and a monopoly right of sale in certain areas. It secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement; (2) that in the absence of any proof that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter. A payment may even be described as 'pay', 'remuneration', etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. These general principles have been settled firmly by this court in a large number of cases." Keeping in view the law laid down by the Supreme Court in the judgments referred to above, we have to see what was the real nature of the payment made to the assessee. The resolution allowing the payment speaks of nothing more than that the payment was made " in view of the impending termination of his association with the company ". Nevertheless, it is undisputed that his association with the company was fruitful. The Appellate Assistant Commissioner found that by virtue of his unique qualification, the assessee put the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of profit; (2) Beynon v. Thorpe, in which a payment to a non-attending director was treated as personal gift and was not treated as his income; (3) Henry v. Arthur Foster, in which a sum paid to a chairman of the board of directors as compensation for forgoing certain rights under the articles of association and for agreeing to remain in the board of directors at a reduced rate of remuneration was treated as not assessable to income-tax ; (4) Henley v. Murray, in which a sum paid to a resigned director of a company as remuneration, to which he would have been entitled if his employment had continued, was treated as not assessable to income-tax ; (5) Commissioner of Income-tax v. Pran Jiban Jaitha, in which a payment made to a shipping company for loss of freight, and brokerage due to suspension of business on account of war was not treated as a revenue receipt; and (6) Commissioner of Income-tax v. S. P. Jain, in which the damages paid for premature termination of the contract of employment were not treated as profits in lieu of salary and as such not assessable to tax. No useful purpose will be achieved by going over such cases because two very dissimilar cases lead to different ..... X X X X Extracts X X X X X X X X Extracts X X X X
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