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TMI Blog1961 (3) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... loyees would be paid a salary of 3?% of the gross sales received by the company in the year or a sum of ₹ 12,000 whichever was greater from April 1, 1943. Under clause (2) the appointment of the employee was to be for ten years from April 1, 1943, to be renewed automatically for such like period at the option of the employee. Clause (3), which is the most material clause for our consideration, ran as follows: It is further agreed that the employee shall at the time of the termination of the service before or after the period of appointment for any cause whatsoever be paid a sum equal to 3 years' salary calculated at the rate at which he was drawing the salary at the date of termination of the service, as compensation for cessation of his services. In case of termination of the service by death of the employee such sum as aforesaid shall be paid to his heir or heirs as the case may be. The next relevant clause in this agreement was clause (7), under which it was provided: Either party should give six calendar months' notice in case of termination of the service before the period stipulated in the agreement. After the assessee had served under this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsation for loss of employment and he relied in support of his contention on the case of P.D. Khosla [1945] 13 I.T.R. 436 (Lah.). The contention of the Department, on the other hand, was that the amounts, which were brought to tax, were not by way of compensation but were amounts, which were decreed in favour of the assessee in terms of the agreement of service. The Department contended that clauses identical in terms with clauses (3) and (7) of the agreement in the present case were contained in the agreement of service of the assessee's brother also had that the said clauses had been construed and interpreted by the Nagpur High Court in the case of the assessee's brother and it was held that the amounts, which were payable under the said clauses were not solely as compensation for loss of employment within the meaning of the latter part of Explanation 2 of section 7 of the Income-tax Act. The Tribunal upheld the contentions, which were raised by the Department. It took the view that the amounts of ₹ 36,000 and ₹ 6,000 were decreed by the court in the assessee's suit under paragraphs (3) and (7) of the agreement and there was no claim decreed in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 36,000 and ₹ 6,000 awarded under the decree are by way of salary of profits in lieu of or in addition to any salary within the meaning of section 7(1) or whether they are payments to which the employee was entitled solely as compensation for loss of his employment. Now, in the suit, which the assessee had filed against the company, these amounts had been claimed as per the terms of the agreement. The basis of the claim in so far as these amounts were concerned was not damages for wrongful dismissal but specific performance of the terms of the agreement. The claim in the suit was also awarded on the same basis. It is, however, contended that the terms of the agreement under which this claim was awarded themselves provided for compensation for loss of employment. The argument, therefore, was that the payments which had been obtained as per terms of the agreement were liquidated damages or agreed compensation for loss of employment. In our opinion the soundness of this argument must depend upon the proper construction of the agreement and in particular clauses (3) and (7) thereof. Now, in proceeding to construe the agreement of service in the present case it must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the agreement, if the employee's service was terminated by giving a six months' notice, the employee would have no cause to complain of breach of term (2) of the agreement. We then come to clause (3) of the agreement, which we have already set out earlier in the judgment. What is provided under this clause is that at the termination of the service of the employee at whatever time, whether before or after the date of the appointment, and for whatever cause, the employee would be paid a sum equal to three years' salary calculated at the rate at which he was drawing his salary at the date of the termination of the service. This payment, it is provided in this clause, would be regarded as compensation for cessation of his services and even in case of termination of service by death of the employee, the said sum would be paid over to his heirs. There can be no doubt, in our opinion, that the payment contemplated under this clause was a terminal payment in appreciation of his past services to the company. As we have already pointed out, the agreement itself was in appreciation of the services of the employee and this term of the agreement is all the more so. The agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving rise to the claim for damages on the part of the employee, the payment contemplated under this clause could rightly be regarded as damages or compensation for wrongful deprivation or loss of service. Now, we do not agree with this contention of Mr. Thakkar. Where the term of the agreement has provided, as in the present case, that the parties to the agreement will be at liberty to terminate the service by a six months' notice on either side, a clause like clause (3) providing for payment of three years' salary as a payment of compensation for cessation of service cannot be regarded as fixing the liquidated damages in case of wrongful dismissal. As we have already pointed out although under clause (2) of the agreement the appointment is provided for a period of ten years, it did not provide for certainty of employment for the said term by reason of clause (7) which permitted the termination of the service by a six months' notice. There is, therefore, no good reason for providing three years' remuneration as liquidated damages for loss of employment for the unexpired period of service. It must also be remembered that the amount which is payable under this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Guff v. Commissioner of Income- Tax [1957] 31 I.T.R. 826 (Bom.). We find it difficult to understand how the salary, which is payable to an employee for the notice period can be regarded as compensation for loss of service. If the notice is given for the required period and the employee serves during the said period and receives payment, it is impossible to argue that the salary which he has received for the work put in by him is not his salary for the period. If, on the other hand, the notice is given and the salary for the period for which the notice is required to be given is also given to the employee but no service is taken from him during that period of notice, we cannot see how the payment made to the employee, which the employer was bound to make, can be regarded as compensation paid to the employee. Even though the notice is given terminating the service at the end of the notice period, the relationship of master and servant continues until the end of the period and the circumstance whether the master takes the service or does not take service from the employee does not make any difference to his liability to pay for the employment of the servant. Now, where the ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of termination of service to the date of the suit and ₹ 8,614 after the date of the suit at the court rate of 4% per annum on the decretal claim until realisation. Before the Tribunal the contention raised was that since the principal amount, namely, the amount of ₹ 42,000, was not taxable, the amount of interest thereon was also exempt from the payment of tax. That argument will not be available to the assessee since the principal amount is held to be taxable. A fresh contention, however, was raised by Mr. Thakkar though it was not raised before the Tribunal, that the interest having been awarded by way of damages is not an income received and, therefore, is not taxable. Now, in connection with this argument it must be first pointed out that the amount of ₹ 8,614 which has been awarded after the date of suit on the decretal amount, is not by way of damages but under the power of the court to grant interest at the court rate. The argument of Mr. Thakkar will not, therefor, apply to this item of ₹ 8,614. It is well settled that where a sum is received by way of interest under a contract or award or a decree it is clearly income. Since this amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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