TMI Blog1962 (12) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... n error in holding otherwise. It would accordingly allow the appeal with costs and my answer to the question referred would be that the sum of Rs. 2,21,000 received by the respondent is taxable to income-tax as "profits in lieu of salary" under subsection (1) of section 7 of the Act. - Appeal No. 527 of 1961 - - - Dated:- 12-12-1962 - DAS, S.K., KAPUR, J.L., SARKAR, A.K. AND DAYAL, RAGHUBAR, JJ. For the Appellant: K. N. Rajagopal Sastri and R. N. Sachthey, For the Respondent: N. A. Palkhivala, J. B. Dadachanji, O. C. Mathur and Ravinder Narian JUDGMENT S. K. Das J. This is an appeal on a certificate of fitness granted by the High Court of Bombay under section 66A(2) of the Indian Income-tax Act, 1922. The relevant facts lie within a narrow compass. The Commissioner of Income-tax, Bombay, is the appellant before us and the assessee, E. D. Sheppard, is the respondent. Killick Nixon Company was a partnership concern carrying on business on a fairly large scale in India. It owned various mills and managing agencies of a number of limited companies. This partnership firm used to employ officer assistants, mostly Europeans, on the basis of a contract for three years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e who were employed with the firm "contract terms". With the exception of one all these sixteen officers were Europeans. The three years contracts expired on different dates depending upon the original date of employment in respect of these sixteen officers. So far as the assessee was concerned, it appears that the new company, styled Killick Industries Ltd., agreed to take over the services of the assessee on new terms under which his salary was increased but the commission was disallowed, but he was left in more or less the same position financially. The assessee entered the employment of Killick Industries Ltd. on these new terms on February 1, 1948. Killick Nixon and Company transferred their assets to the new companies and received shares of the new companies in lieu thereof. A large number of shares of Killick Industries Ltd. were put on the Indian market. The shares were of the face value Rs. 100 only put were quoted in the market at Rs. 130 per share. Some of these shares were kept by the partners of Killick Nixon and Company. All the members of the covenanted staff in the partnership firms (who were officers) were given shares of Killick Industries Ltd. free of payment. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to the true character of the payment received by the assessee. The Accountant Member was of the view that the assessee suffered no loss as a result of the termination of his employment with the partnership firm, because from February 1, 1948, the day after the termination of his employment with the partnership, he was employed by Killick Industries Ltd. which gave him almost the same emoluments; and furthermore, the payment was not made "solely for loss of employment" because the compensation was paid partly for loss of expectations and future prospects which the assessee had in the partnership firm. Lastly, the Accountant Member held that the employment of the assessee was terminable on one months notice and in any event the unexpired portion of his employment would not have amounted to Rs. 2,21,000; therefore, the payment could not be treated as compensation for loss of employment, and at best it was a payment "under the contract" and not for "loss of the contract". The Judicial Member disagreed, and expressed the view that the assessee's services were determined by the firm which was ultimately dissolved and the allotment of shares was made to the assessee "at or in connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt or a capital receipt in the hands of the assessee. With reference to Explanation 2 of sub-section (1) of section 7 an argument was advanced before the High Court to the effect that the payment made to the assessee was not stated to have been made solely or loss of employment but as inclusive of compensation for loss of future prospects. The High Court met this argument by stating that the execution or prospects were rooted in the employment and it would be difficult to distinguish between compensation for loss of employment and compensation for prospects in that employment. The High Court then said : "It is true that by the Explanation a payment which is due to or received by an assessee from an employer or a former employer is to be regarded as profit received in lieu of salary for the purpose of sub-section (1) of section 7; but in our judgment the payment must be made because of the relation between the employee and the employer. If the object of the payment is unrelated to the relation between the employer and the employee, it will not fall within the expression 'profit received in lieu of salary' in Explanation 2 to section 7(1). Assuming, therefore, that a part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontentions before us. His first contention is that word "compensation" in Explanation 2 means what is payable or compellable at law as compensation, the is monetary equivalent of the damage suffered consequent on the injury caused. He has submitted that the assessee in this cause suffered no injury for which the partnership was compellable at law pay any damages. According to learned counsel for the department, compensation for loss of employment means the monetary equivalent for the loss of earning under the existing contract without reckoning the loss of feature prospects, and such loss must also be mitigated in the way known to law. His argument is that judged from that standpoint, the payment of Rs. 2,21,000 to the assessee was not compensation solely for loss of employment within the meaning of Explanation 2. His second contention is that 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 subsection (1) of section 7 unless the payment is made solely as compensation for loss of employment. He has submitted that the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when you look at that question from what is described as the point of view of the receipt, that sends you back again, looking, for that purpose, to the point of view of the payer : not from the point of view of compellability or liability, but from the point of view of a person inquiring 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 of the carrying on of a (1) (1932) 16 Tax Cas. 605, 634. (2) (1924) 9 Tax Cas. 48. 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 business is taxable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression "compensation" used in Explanation 2 because if a proper notice was given to the assesse as found by the Tribunal in that case, he was not entitled to any compensation when his services were terminated after the lapse of six months from the date when the notice was given. The High Court dealt with this argument and repelled it. Chagla, C.J., who delivered the judgment of the court referred to the decisions in Shaw Wallace and Co. v. Commissioner of Income-tax (1932) L.R. 59 I.A. 206 and Chibbett v. Joseph Robinson Sons (1924) 9 Tax Cas. 48 and then said : "We are, therefore, of the opinion that the expression 'compensation for loss of employment' used in Explanation 2 to section 7 refers to any payment made, whether under a legal liability or voluntarily, to compensate or act as a solatium for the loss of employment suffered by the employee." Now, we come to a decision of this court, Commissioner of Income tax v. Vazir Sultan and Sons [1959] 36 I. T. R. 175 ; [1959] Suppl. 2. S. C. R. 375. The assessee there,a registered firm, was appointed the sole selling agent and sole distributor for Hyderabad State for the cigarettes manufactured by the company. The assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for loss of employment was not assessable, while a payment which was made as remuneration for past services was taxable as income. The principle was that compensation for wrongful reputation of a service agreement or for loss of office or employment or cessation of business was a capital receipt, though the payment might be entirely voluntary and the recipient might have no legal right to any compensation at all. In such cases compensation was deemed to be a capital receipt because it was in respect of the source of income. The argument of learned counsel of the department however is that Explanation 2 treated any payment received an assessee from an employer or former employer as a profit in lieu of salary (except where the payment was from a provident or other fund mentioned therein), therefore, the Explanation was an artificial definition which treated any payment received by an assessee from his employer or employer as income and no consideration as to whether the payment related to employment or not or whether it was capital or income need be consider, though learned counsel for the department concedes that a payment made solely as compensation for loss of employment does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployment and compensation for loss of prospects rooted in that employment. The High Court also rightly pointed out that if the object of the payment was unrelated to the relation between the employer and the employee, it would not fall within the expression "profit received lieu of salary" in Explanation 2. We think that the High Court committed no error in answering the question referred to it. For the reasons given above , we have come to the conclusion that there is no subsistence in this appeal. The appeal is accordingly dismissed with costs. RAGHUBAR DAYAL J. I have had the advantage of perusing the majority judgment of my learned brother, S. K. Das J., but regret that I am unable to agree that sum of Rs. 2,21,00 was paid solely as compensation for loss of employment and did not amount to "profit in lieu of salary". Mr. Rajagopala Sastry, for the appellant, concedes that the impugned sum received by the assessee-respondent is not liable to income-tax unless it can be considered to be profits received in lieu of salary, in view of Explanation 2 to section 7(1) of the Income-tax Act, as it stood prior to the amendment in 1955. Section 7 deals with the tax payable by an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the term, just as three had been renewal of the previous contracts and he would not have expected to become, eventually, a partner in the firm as other assistants had become in the past. The firm purported to allot the shares to the assessee as compensation for the loss of employment and the assessee accepted the same as such compensation. What the parties intended the sum to represent is immaterial and has no bearing on the determination of the true of the payment. Of course, it can be a factor which can be taken into consideration in arriving at the proper conclusion. The question, however, is whether in its real nature the sum received by the assessee does come within the expression "compensation for loss of employment". If it comes within that expression, it would not be taxable under section 7, as, in that case, it would not be deemed to be "profit in lieu of salary". If it does not come under that expression. it would be taken to be "profit in lieu of salary". If it comes within the scope of the first part of Explanation 2 to sub-section (1) of section 7 it would then be assessable to tax under the provisions of section 7 and other relevant sections of the Act. We have, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the employer, as "depriving" is a coercive measure (Law Lexicon of British India by P. Ramanatha Aiyar). The word "entitled" connotes that the employee should have a legal claim to the profits of which he is deprived and for which deprivation he gets the compensation. Neither of these two words would be properly applicable to the case of the person whose tenure of office is cut short by the employer in exercise of his right under the contract in such circumstances which do not give the employee right to any relief on account of such termination of his service. What Romer L. J. said further in Henry v. Arthur Foster, etc. (1932) 16 Tax Cas. 605 explains what he meant by the aforesaid meaning of the expression "compensation" and that is consistent with the view I have expressed. He said at page 634 : "In the Present case, the payments are to be made on the death or resignation or cesser of office on ground other than those specially excepted in the article, events, be it observed, on which in the very terms of the man's employment, his office, and therefore his emolument, would come to an end. It is impossible, therefore, in such a case, to say that when he dies or resigns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived did amount to "compensation" as there was no dispute about it. The cases dealing with payments in connection with cessation of agencies are, therefore not of any help in determining the question before us. I, however, refer to them as much reliance has been placed on them for the respondent. Anglo-French Exploration Co. Ltd. v. Clayson (1955) 36 Tax Cas. 545 ; [1956] 30 I. T. R. 309, 316 was a case with respect to assessment of income-tax under Schedule D of the English Income tax Act and the question was whether the sum sought to be assessed, amounted to annual profits arising or accruing from any trade exercised within the United Kingdom. The sum to be assessed was paid to the assessee for its resigning as agents of another company. It was remarked at page 557, by Lord Evershed, M.R. : "But the question remains, not whether that sum in some senses or in some contexts mights sensibly be called a "capital" payment, but whether within the terms of Schedule D it is a profit or gain arising from the trade of the recipient." Similarly, it can be said, in the present case, that the question is not whether the sum of Rs. 2,21,000 can be called, in any sense, a capital receipt, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this court do not go against what I have said about the meaning of the word "compensation". There are, however, certain other cases which deal with payments made to employees at the termination of their services. The English cases are not much in point for the simple reason that there such payment were sought to be taxed under Schedule E of the Income Tax Act which related to assessment of income-tax on persons having or exercising an office or employment of profit mentioned in that schedule. It was held that such payments did not accrue to a person by reason of his office which had really come to an end and were in the nature of testimonials, solatium or gift and so were not taxable. Explanation 2 to sub-section (1) of section 7 of the Indian Income-tax Act provides for assessment of the income-tax on different basis and, therefore, what has been held not assessable to tax under Schedule E of the English Act is no guide for our determining whether a certain sum does or does not amount to compensation for loss of employment. In Cowan v. Seymour 1919) 7 Tax Cas. 372 payments made to one who had been secretary of the company by the shareholders out of the profit payable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 653 : "I am disposed to regard them as too widely expressed, for remuneration for services may take, in part, the form of a payment at the end of the employment, and a payment does not necessarily cease to be remuneration for services because it is payable when the services come to an end." Further, in Chibbett's case (1924) 9 Tax Cas. 48 Rowlatt J. himself observed at page 61 : "The company as then constituted certainly came to an end, and when it came to an end they gave this solatium to this firm out of their abundant prosperity, once for all, not because of anything they were doing, but really every much, I think, as the Master of the Rolls puts it, as a testimonial for what they had done in the past in their office which had now terminated. Of course it is true that it is a trade receipt in this sense, that if these people had no been managers they never would have got it. It was not a gift to them as individuals or anything of that sort; it was because they were people of this kind .... after all, the old arrangement has come to an end and he gets this lump sum given him as compensation for loss of office, if you like to put it that way, or if you like to put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00. later on, after the State had merged in the United State of Saurashtra on March 1, 1950, and the Maharajah ceased to be the ruler of the State, he ordered, on May 31, 1950, the payment of Rs. 5,00,000 to the assessee. In his letter dated March 10, 1953, the Maharaja stated that this amount was paid as a gift in token of his affection and regard for the assessee and his family, though earlier, in his letter dated December 27, 1950, the Maharajah had that this amount was given as a gift in consideration of the assessee, the ex-Dewan of the State, having rendered meritorious and loyal services. This court, by majority, held that the Income-tax Appellate Tribunal should have relied on the letter dated March 10, 1953, and held that the payment was as a personal gift for the personal qualities of the assessee and as to token of personal esteem and was not in token of appreciation for the services rendered as Dewan of the Bhavnagar State. This court accepted the contention for the assessee that the payment did not fall within Explanation 2 to sub-section (1) of section 7 because it was neither made by the Maharajah for services rendered to him nor was relatable to the office of the De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. In several cases the High Court had to consider whether a certain sum was taxable or not under Explanation 2 to sub-section (1) of section 7 of the Act. In most of the cases, in which the sum was held to be paid as compensation for loss of employment, the recipient was entitled to compensation under the law. These cases are P. D. Khosla, In re [1945] 13 I. T. R. 436. : H. S. Captain v. Commissioner of Income-tax; 1950] 36 I. T. R. 84, R. N. Agarwala v. Commissioner of Income-tax [1960] 38 I. T. R. 67. Only in one case, he was not so entitled and it was held that a wider meaning be given to the expression "compensation for loss of employment". I do not consider this to be the correct view. In W. A. Guff v. Commissioner of Income-tax [1957] 31 I. T. R. 826, strongly relied on by the respondent, the assessee had joined the services of the company as an executive in charge of the new department under an agreement which provided that his services could be terminated by giving him six months notice. On March 23, 1948, he received communication from the company that the department could not function any more. He however, continued to serve until November 10, 1948, for winding up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is not considered to be "profits in lieu of salary" in Explanation 2 to sub-section (1) of section 7 and not "solatium" in the sense of a "gift" or any payment distinguished from compensation. In support of his view, Chagla C.J. placed reliance on Commissioner of Income-tax v. Shaw Wallace Co. [1932] 2 Comp. Cas. 276, (1932) L.R. 59 I.A. 206 I have already considered that case and have stated that it has no bearing on construing Explanation 2 to sub-section (1) of section 7 of the Act. The definite opinion of the Privy Council was that the sums received in that case were not for carrying on business and therefore not assessable to tax. It was of course stated that they were received as some sort of solatium for the compulsory cessation of the agencies. It was neither necessary to state, nor was it stated, that the actual nature of that solatium was. I am of opinion that the compulsory cessation of employment is not equivalent to the compulsory cessation of an agency for the purpose of considering whether any voluntary amount paid at the cessation of the employment or the cessation of an agency is assessable to tax or not as the two amounts are assessable under different prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the assessee as capital receipt or revenue receipt. In fact, it will be deemed to be revenue receipt as "profit in lieu of salary" must be deemed to be "income" for the purpose of the Act. It has, however, been argued for the respondent that the language of the first part of the Explanation should not be given a wide meaning and should be given a restricted meaning so that it be taken to refer to such payment as is made because of the relation between the employer and his employee; and that the object of the payment of the sum of Rs. 2,21,000 being unrelated to the relation between the firm and the assessee, it cannot deemed to be "profit in lieu of salary". Even if such a restricted construction be put on the language of the aforesaid Explanation, that will not take the sum of Rs. 2,21,000 out of its scope. This sum was paid to the assessee because of the relation between the employer and him. It was related to the services of the assessee with the firm. It was made because he was an employee whose service was to cease in accordance with the terms of the contract. It was not paid for any extraneous consideration. It was long not paid for any personal relations betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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