1959 (6) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 1 lakh received by the assessee from the employer mills is income liable to tax under the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Nature of the Payment:
The primary issue was whether the sum of Rs. 1 lakh received by the assessee from the employer mills constituted taxable income. The assessee argued that the amount was a capital receipt, while the Department contended it was taxable income.

2. Terms of Employment and Termination:
The assessee was appointed as the general manager of Orissa Textile Mills Ltd. under an agreement dated October 15, 1949, with specific terms regarding salary, commission, and other perquisites. The agreement included clauses on the conditions under which the employment could be terminated and the compensation payable in such events.

3. Termination Notice and Subsequent Settlement:
On July 2, 1951, the mills terminated the assessee's employment citing inefficiency and other reasons. The assessee demanded a sum of Rs. 2,70,750 for the termination. Eventually, a settlement was reached on July 17, 1951, where it was agreed that the assessee would receive Rs. 1 lakh in full settlement of all claims.

4. Tax Treatment of the Settlement Amount:
The assessee contended that the Rs. 1 lakh was exempt under Explanation 2 to section 7(1) of the Indian Income-tax Act, 1922, as it was compensation for loss of employment. The Income-tax Officer rejected this, but the Appellate Assistant Commissioner accepted the assessee's contention. The Department appealed, arguing that the amount was either advance salary or "profits in lieu" of salary and thus taxable.

5. Tribunal's Findings:
The Tribunal concluded that the payment was made under the service agreement and not solely as compensation for loss of employment. They noted that the payment filled the gap created in the assessee's salary income due to the premature termination of the service contract.

6. High Court's Judgment:
The High Court examined whether the payment was made solely as compensation for loss of employment. The court noted that the payment was made under an agreement which stipulated compensation for termination of employment. The court referred to previous judgments, including Guff v. Commissioner of Income-tax, which held that payments made solely as compensation for loss of employment are capital receipts and not taxable.

7. Consideration of Additional Covenants:
The Department argued that the payment was also for the assessee's agreement not to engage in competing business within a specified area and for abandoning all claims against the company. However, the court held that these additional considerations did not change the nature of the payment as compensation for loss of employment.

Conclusion:
The High Court concluded that the payment of Rs. 1 lakh was compensation for loss of employment and not taxable income. The court answered the referred question in the negative, meaning the amount was not liable to tax under the Indian Income-tax Act, 1922. The Commissioner was directed to pay the costs of the reference.