9911796707
TMI Blog1969 (12) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... nuary, 1955, by His Highness Maharaja Yeshwant Rao Holkar, the senior Up-Rajpramukh of the erstwhile State of Madhya Bharat, in full and final settlement of his claim for damages for wrongful termination of his services as personal adviser to His Highness. The whole question here is, were the moneys which the assessee so received after cessation of his office as compensation, in respect of which he was assessed for the year 1955-56, part of his income for the year in question as contended for by the revenue or were they of a capital nature as held by the Tribunal. The facts are not for us ; the facts are for the Tribunal which had the case before it. We find that both the parties accepted before the Tribunal that its order contains all the material facts and that they have been correctly set out therein. We, therefore, find it unnecessary to review the facts in detail. Omitting what is contentious, the following facts which are material have been taken by us, practically verbatim, from the statement of the case as furnished by the Tribunal. After his graduation from the Oxford University, the assessee was called to the Bar and on his return to India in the year 1932, he started p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents as he was receiving as Deputy Prime Minister in the Holkar State at the time of his retirement, whichever are higher. " In the Huzur order, dated 1st March, 1950, the terms and conditions for the appointment of the assessee as personal adviser to the senior Up-Rajpramukh were set forth. Amongst other things, the assessee was to receive a salary of Rs. 2,500 per mensem, apart from motor allowance of Rs. 350 and garden allowance of Rs. 88 per month. The income-tax and super-tax thereon were to be paid by His Highness. Clause 5 of the said Huzur order provided for the payment of gratuity, while clause 6 guaranteed the period of his employment. There was a note appended to these clauses which is of importance. The relevant clauses, with the note thereto, are set out below : " (5) Gratuity : Capt. Dhanda shall be entitled to receive one month's pay for each completed year of service subject to a minimum of fifteen months' pay as sanctioned under item (1) above. This amount shall become due to him whenever he ceases to be the personal adviser to His Highness Maharaja Yeshwant Rao Holkar, the senior Up-Rajpramukh of Madhya Bharat or his services as such are no longer required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Highness returned to India, and immediately thereafter, on 23rd December, 1951, by an order of that date, terminated the services of the assessee with immediate effect, and directed him to hand over his office to one Masood Quli Khan. The order of termination of his services, reads as follows : " Windmere New Cuff Parade, Bombay, 23rd December, 1951. Immediate Dear Capt. Dhanda, As I have terminated your services with immediate effect, I am to direct you to hand over charge of your office as my adviser to Mr. Masood Quli Khan. You should hand over all the confidential files and papers of the Huzur officer in your possession to Mr. Masood Quli Khan together with a complete list of all such files and papers signed by you. You should also hand over to him copies of correspondence you have been carrying with the States Ministry of the Government of India and State Government of Madhya Bharat on behalf of His Highness the Maharaja of Holkar during your period of office along with the connected files. You are therefore to return to Indore and carry out these instructions at once. You are also to hand over bank pass books and cheque books to Mr. Masood Quli Khan. Yours tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lieu of leave earned under item (7) 6,250 ---------------------- 2,97,222 Less: Earned income allowance 20% reduced to maximum 4,000 ---------------------- 2,93,222 ---------------------- Income-tax Super-tax Total (1) Tax payable by the employers 19,339-7-0 33,119-7-0 52,458-14-0 (2) Tax payable by the employee 3,882-3-0 9,484-11-0 13,366-14-0 ------------------ ------------------ -------------------- 23,221-10-0 42,604-2-0 65,825-12-0 ------------------ ------------------ -------------------- Paragraph 7 of the said letter reads as hereunder : " 7. Your Highness may kindly note that payment of my dues is due to me immediately under clause 6(b) of my contract in view of the termination of my appointment. I am emphasising this for one very important reason which I may be permitted to repeat, namely, that my sudden retirement has placed me in serious financial difficulties in view of which I shall much appreciate the consideration at Your Highness's hands of the immediate remittance to me of Rs. 2,97,620, as explained in para. 3 of this letter. Immediately thereafter and on receipt of the information solicited by me I shall refund to your Highness suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onveyancing, Company Law, Sales Tax, etc.) 432/52 Shri Capt. H. C. Dhanda, South Tukoganj, Indore. Dear Sir, Under instructions from our client, His Highness Maharaj Yeshwant Rao Holkar, senior Up-Rajpramukh, Madhya Bharat, we write to you as under :-- Our client was simply shocked and surprised to read your letter, dated 2nd February, 1952, claiming Rs. 2,97,620 (rupees two lakhs ninety-seven thousand six hundred and twenty) on the basis of an alleged contract. His Highness never had any copy of the alleged contract as mentioned by you in the last para. of your letter nor has the office any such copy. His Highness has read with interest the true copy of a so-called Huzur order, dated the 1st March, 1950, sent by you with your letter under reference upon which you seem to rely. The order in question was never discussed with or made known to His Highness during the past 2 years or so and it is strange that there should be no paper or file on the subject in the office. As you know so well, no contract is binding unless it is made with the free consent of the parties and is not vitiated by misrepresentation or fraud. Some of the terms mentioned in the copy of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther added that such attitude was " very unwise from the Huzur's point of view ", pointing out that the Holkar would get a refund of Rs. 52,564 paid by him as income-tax and super-tax, " according to a first class expert's view " as the payment was to be on account of the termination of contract and such payment would, therefore," be treated in law, as compensation for loss of employment " and not liable to any income-tax and super-tax which would otherwise be payable. The only response from the Holkar to this was, by letter dated 21st April, 1952, to the following effect : " No useful purpose will be served by prolonging such unpleasant correspondence. " Further correspondence appears to have ensued but with no result. After obtaining requisite permission from the Central Government for the institution of a suit against His Highness Maharaja Yeshwant Rao Holkar of Indore, the assessee brought a suit for recovery of Rs. 2,90,346.62 as liquidated damages, being Suit No. 1257 of 1954, in the Original side of the Bombay High Court. After narrating the events which culminated in the order of his dismissal, the assessee averred in paras. 17 and 18 of the plaint, as follows : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lkar, Maharaja of Indore and senior Up-Rajpramukh of Madhya Bharat State (hereinafter called the " employer ") of the one part and Capt. H. C. Dhanda of South Tukoganj, Indore, ex-personal adviser to His Highness the Maharaja of Holkar (hereinafter called the " ex-employee "), of the other part witnesseth : WHEREAS the ex-employee has filed a suit against the employer in the High Court at Bombay (Suit No. 1257 of 1954) claiming compensation for loss of employment amounting to Rs. 2,92,920-3-0 (rupees two lakhs ninetytwo thousand nine hundred twenty and annas three only) plus interest and WHEREAS it is settled between the parties that the ex-employee should withdraw all his claims against the employer and get his suit dismissed : NOW THEREFORE it is hereby agreed between the parties as under :-- 1. That the ex-employee shall forthwith take steps to have his abovementioned suit in the Bombay High Court dismissed and give a complete and effectual discharge in respect of all his claims against the employer. 2. That the employer agrees to pay to the ex-employee on this signing of this agreement a sum of Rs. 1,45,000 (rupees one lakh and forty-five thousand only) in cash and remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot, therefore, be regarded solely as compensation for loss of employment. It was a payment which was contemplated under the agreement of 1950. The terms 5 and 6 of that agreement were not only meant for services in future but also to reward him for past services. I, therefore, consider that the Income-tax Officer was justified in treating the amount of Rs. 1,67,345 as income under Explanation 2 of section 7(1) of the Income-tax Act, before its amendment in 1955." On the facts as stated, the Tribunal, however, on further appeal by the assessee, upheld his contention and was of the view that the receipt of Rs. 1,67,345 by him from His Highness Maharaja Yeshwant Rao Holkar of Indore was " solely as compensation for loss of employment and not by way of remuneration for past services ", within the meaning of Explanation 2 to section 7(1) of the Income-tax Act, 1922, and being a receipt of capital nature was not taxable in his hands. The Tribunal, in considering the question, observed as follows : " 8. Therefore the question is whether the payment of Rs. 1,67,345 received by the assessee is compensation solely as such for termination of service. In this case the assessee had already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, would not indicate that the provision of compensation for termination of services was under clause 6(b) of the Huzur order. Again we may repeat that the assessee has already been remunerated for his earlier services. The assessee served the State up to his retirement in January, 1948. The services under the Holkar personally had nothing to do with the earlier services of the assessee under a different employer. What the assessee received was only in and by way of damages for wrongful dismissal. " We are inclined to think that the Tribunal was right in its view for reasons we shall presently state. It is common ground that the provision which would be applicable was the old Second Explanation to section 7(1) of the Income-tax Act, 1922, as it stood before its amendment by section 5 of the Finance Act, 1955. That provision reads as follows : " Explanation 2.--A payment due to or received by an assessee from an employer or former employer or from a provident or other fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu of salary for the purpose of this sub-section, unless the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrears of salary for 23 days in the suit filed by him. In view of this he urges that the payment of Rs. 1,67,345 cannot be treated to be a payment solely as compensation for loss of employment, but the amount paid was inclusive of arrears of salary. On the other hand, the assessee, Shri H. C. Dhanda, who argued his own case, urges in reply. The terms of the bargain, under which the payment of Rs. 1,67,345 was made to him, were on his relinquishment of all rights to damages for repudiation of the contract of service, as described in the agreement dated 27th January, 1955. As a result of the agreement, there was a complete release of the employer from all his liabilities. It was, therefore, a payment made solely as " compensation for loss of employment " At no stage had the department ever suggested that the transaction did not represent the real bargain between the parties. It was not now open to the Commissioner to urge that the parties had camouflaged the payment in the guise of compensation for loss of employment with a view to avoid their income-tax liability. The correspondence which ensued between them upon the sudden dismissal of the assessee from service, clearly showed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal that the payment was received by him solely as compensation for loss of employment is a finding of fact which cannot be assailed on a reference under section 66(1) of the Income-tax Act. So far as the genuineness of the transaction embodied in the agreement dated 27th January, 1955, is concerned, we agree with the assessee that in view of the admission made by the department before the Tribunal the revenue cannot at this stage urge that the payment of Rs. 1,67,345 as compensation for loss of employment in pursuance thereof was a cloak in disguise to shield a wholly different arrangement or that the words " compensation for loss of employment " in that agreement were used to give to it a semblance of reality. In that context the Tribunal, in its order, while dealing with the appeal before it, observed : " 7. The bona fides of parties for entering into the agreement dated 27th January, 1955, has never been in dispute. There is no allegation of any collusion between the parties in this case...... " The parties had agreed before the Tribunal that all the material facts in its order were correctly stated (para. 2). The statement of the case was drawn by the Tribunal with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded for income-tax purposes as capital or income may involve questions both of law or fact. The terms of a bargain under which the sum was paid in respect of the relinquishment of an office are a question of fact, but the effect of the bargain, once its terms have been found on the character of the sum paid, is a question of law (Henley v. Murray). But, in the present case, the Tribunal's determination does not appear to us to disclose any conclusion of fact which would justify the view in law that the money was received by the assessee in settlement of his claim otherwise than as compensation by way of solatium for the loss of office. The decision of the Tribunal, in the present case, regarded as a matter of law, appears to be correct. The Second Explanation to section 7(1) of the Act, prior to its amendment, applies to two classes of receipts, namely, (a) sums which would be totally exempt from tax, being receipts of a capital nature, and (b) sums which would be otherwise assessable in full. Included in the first class is " compensation for loss of office " as defined by Romer L. J. in Henyy v. A. Foster : Henry v. J. Foster. Included in the second class is a sum paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. In rejecting the contention of the department that the sum though called compensation for the cessation of the agency was clearly profits earned during the year, their Lordships stated : " It is contended for the appellant that the ' business ' of the assessee did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the assessee's other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field. " [See also Commissioner of Income-tax v. Vazir Sultan and Sons.] These observations have been followed by the different High Courts in India and by their Lordships of the Supreme Court in dealing with payments given to an employee on cessation of employment. In such cases the compensation was taken to be a capital receipt because it was in respect of the source of income. The expression " compensation for loss of office " is a well-k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing out of his contract and payable by virtue of his office or employment. Examples of such bargains are these : In Henry v. Foster, a company's articles of association provided for the payment of compensation for loss of office in the event of a person ceasing to be a director (after 5 or more years' service) by reason of death or any other cause other than misconduct, bankruptcy or incompetence. The director retired and Lawrence L.J., in giving judgment for the revenue, stated : " ...the payment to the respondent whatever the parties may have chosen to call it was a payment which the company had contracted to make to him as part of his remuneration for his services as a director. " The decision in that case, however, turned on the meaning of a particular agreement. In Prendergast v. Cameron, a taxpayer wished to retire from his directorship but the company wishing to retain his services, paid him the sum of pound 45,000 upon his agreeing not to resign but to continue devoting less time to the company's affairs and receiving a smaller salary. The majority of the Court of Appeal (Greene M.R. dissenting) and a unanimous House of Lords held that the payment arose from the direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia with our Second Explanation to section 7(1) prior to its amendment), are founded on judicial recognition of a certain capital amount arising out of contract of service in circumstances where the rights acquired or surrendered by the employee thereunder are sufficiently enduring and defined. The rule that income-tax does not tax the value of the source of income or the amount of a capital gain therefrom ought, on principle, to apply equally to all and every form of transaction. Accordingly, payments received for the surrender of rights acquired under the service agreement and found to be in the nature of capital would be excluded from taxation as income [see 20 Halsbury's Laws of England, Simond's edition, pages 14, 150-1 and 324-5, Simom's Income Tax, Replacement 1964-65, volume III, pages 109-13, Income Tax Law and Practice, Plunket and Newport, 29th edition, pages 152-3, Principles of Income Taxation by Hannan, page 271 el seq., and The Meaning of Income in the Law of Income-Tax, by F. E. La Brie, 1953 edition, pages 205-15]. There are two decisions of the Supreme Court which deal with the question. In Mahesh Anantrai Pattlani v. Commissioner of Income-tax, their Lordships w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1947, the assessee along with 15 other officers received a notice from the company stating that, in view of its decision to float two subsidiary companies to take over its business, his employment would terminate as from 31st of January, 1948. On 30th January, 1948, out of the shares received by Messrs. Killick Nixon and Company in lieu of the assets transferred to the subsidiary companies, 1,700 shares of the market value of Rs. 2,21,000 were caused to be allotted to the assessee in the company which took over its business. The assessee entered the employment of that company on 1st February, 1948, on new terms under which his salary was increased but no commission was allowed. During the assessment proceedings, the assessee produced a letter written on behalf of Messrs. Killick Nixon and Company and an affidavit by 5 out of the 6 partners who constituted that firm, to the effect that the shares were allotted to compensate the officers for loss of employment and not by way of reward for past services. The majority of the members of the Appellate Tribunal held that the allotment of the shares were made solely to compensate the assessee for loss of employment and that it was not mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expression " compensation for loss of employment ", although the payment of Rs. 12,000 to the assessee equivalent to 6 months' salary for termination of his employment, owing to the closure of the department of which he was an executive in charge, was a gratuitous payment and under the contract of service, nevertheless, the payment was treated as a compensation for loss of employment. The other cases on the point are : R. N. Agarwala v. Commissioner of Income-tax, Commissioner of Income-tax v. S. P. Jain, Commissioner of Income-tax v. K. K. Roy and Indian Overseas Bank Ltd. v. Commissioner of Income-tax. The second class of case is where the contract itself ceases altogether and the sum becomes payable in consideration of the total abandonment or abrogation of all contractual rights which the recipient had under the contract. The sum received would not be assessable except to the extent provided. In Henley v. Murray, although the sum paid by way of compensation for loss of office was equal to the balance of the salary to the end of the employee's period of service, nevertheless the sum was paid in consideration of his resigning his office at the request of the board. It was des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I am wrongfully dismissed ' and sues for damages he is admittedly outside Schedule E and untaxable, it seems to me to follow from that, if one goes by stages, that if you take a case where equally the employer dismisses his employee and the damages are agreed without litigation, the fact that they are agreed instead of being awarded by a judge or jury cannot affect their legal petition in regard to the Income Tax Code. It seems to me on the evidence that that is what happened here. The employer said, 'You must go'. I think it is perhaps clear from the position that he held that he need not have gone, but he, as he said, was forced into it ; he did it at the request of the employers. The sum which he stipulated for according to his letter, it seems to me, must legally be in precisely the same position as would have been a sum for damages for wrongful dismissal. " The direct authority which furnishes a complete answer to the question before us is in Du Cros v. Ryall. That was a case in which the general manager of a company working on a fixed salary and a commission on profits had a contract for a fixed term. It was repudiated by the employing company. He brought an action which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of any breach of any of the terms thereof or conditions of the service without any notice. The assessee joined his post on 1st May, 1946, but his services were terminated with effect from 31st August, 1947, without giving 12 months' notice. The services were terminated because the company did not want to continue the assessee in their employment and not for any default or misconduct on his part. In lieu of the notice, the company paid the assessee a sum of Rs. 18,096. (which was the amount arrived at after deducting from 12 months' salary of Rs 25,200, income-tax of Rs. 7,104) and he gave a receipt for Rs. 18,096, in full and final settlement of all his claims against the company. The question was whether the sum of Rs. 25,200 was taxable in the hands of the assessee. The High Court held that the amount was not compensation for loss of employment within the meaning of Explanation 2 to section 7(1) of the Income-tax Act (before amendment in 1955) as it was part of the remuneration to which the assessee was entitled under the contract of service and was received by him in accordance with the terms thereof and the assessee had not surrendered any rights under the contract and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of Rs. 85,000, in full satisfaction of his claim on account of arrears of salary, under clause 1 of the service agreement for the period he had served, a sum equal to 3 years' salary payable under clause 3 in the event of termination, and 6 months, salary in lieu of notice under clause 7. The court, accordingly, held that the net amount of Rs. 85,000 received by the assessee could not be regarded to be payment solely for compensation for loss of employment because it included other elements of income. So also in Ramachandra Dhonde Datar's case, the service agreement was identically in similar terms and it provided for a terminal payment if his services were terminated for any cause whatsoever and also in the event of his death, in addition to payment of 6 months' salary in lieu of notice. Under these circumstances, the payment of a lump sum to him, on the termination of his services, was treated as and by way of salary or profits in lieu of or in addition to salary within the meaning of section 7(1), because the amount was payable to him under a contract of service, irrespective of the cause of termination. The payment to the Datars were as cleary income as their salary was. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee relinquished all the rights that he had under his contract of service. The only other question for us to consider is whether the inclusion by the assessee of a claim for 23 days' salary in his suit filed in the High Court of Bombay must lead to the irresistible inference that the payment of Rs. 1,67,345 was not " solely " as compensation for loss of employment within the meaning of Explanation 2 to section 7(1) of the Act, as it then stood prior to its amendment. The Tribunal has not stated this part of the case, because the contention was apparently never raised before it. Even assuming that this arises on the question referred by the Tribunal, we are unable to hold that the amount of Rs. 1,67,345 was not received solely as compensation for loss of employment. From the fact that the whole of the sum received by the assessee was in the nature of a capital receipt, it may be assumed that no ascertainable part of it represented arrears of salary. The assessee's claim on this account in the suit had become merged or extinguished as a result of the compromise arrived at between the parties. The entire sum was paid to him by way of damages, and it could not be regarded partly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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