TMI Blog1959 (6) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ent dated October 15, 1949, addressed by the mills to Shri Agrawala. A copy of the said letter is marked annexure ' A ' and forms part of the case. Initially, the appointment was for a period of five years with option to renew for a future period of two years )clause 1). Under clause 2(a), the fixed monthly salary was Rs. 2,100 and then there were several perquisites in cash and kind. Clause 2(f) provided : In addition to the above, you will be paid 3% commission on the not profits of the company, profits to be computed on the same basis as the managing agent's commission. Clause 6 set out the duties. powers and responsibilities of Shri R. N. Agrawala as general manager. He was to be responsible for the efficient and economic management of the mills, the accounts, officer, sales and purchase. Clauses 7 and 11 stand as follows : 7. You have undertaken to manage the affairs of the mills efficiently and on a profit earning basis. Should you fails to establish the mills on a sound basis within 12 months from the date of you joining, i.e., 1st April, 1950, the company reserves the right to terminate your services by giving you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the said sum was arrived at. The Tribunal was generally told that it was on account of loss of salary and loss of commission payable under the agreement of October 15, 1949, (annexure ' A ') for the remaining period of five years of initial appointment together with future option of two years, damages for insulting him etc. 4. The last document that was considered by the Tribunal is the memorandum dated. July 17, 1951, signed by the two parties, i.e., the assessee and the mills. A copy of the said memorandum is marked annexure ' C ' and forms part of the case. Clause 1 of it provided : The parties agree that services of Shri R. N. Agrawala as general manager of the company under the agreement dated 15th October, 1949, have been terminated with effect from 2nd July, 1951. Clause 2 runs as follows : The company shall pay to Shri R. N. Agrawala the sum of Rs. 1 lakh in full settlement of all his claims for compensation for termination of the agreement. Under clause 3, Shri R. N. Agrawala became entitle to an immediate payment of Rs, 38, 675 on account of commission on profits for the period October 15, 1949, to June, 1951. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the real nature of it was not compensation for loss of employment but it represented either advance salary or profits in lieu of salary : (ii) there was no loss of employment as the assessee got what he otherwise would have got under the agreement of service for a period of five years ; (iii) the amount was not paid solely as compensation for loss of employment, if there is any loss of employment ; (iv) The mills claimed the said sum of Rs. 1 lakh as a deduction in computing its income and the Income-tax Officer allowed it on proportionate basis agreed over the balance of the period of initial service of five years. Before the Tribunal, Mr. Mulla on behalf of the assessee submitted that the fact of termination of service was established and that on a true construction of the documents already made annexures ' a ', ' B ' and ' C ', it must be held that the said payment was made solely as compensation for loss of employment and not by way of remuneration for past services and as such it was exempt under Explanation 2 to section 7(1) of the Act. 7. For reasons given by the Tribunal in paragraph 6 of its order, a copy of which is marked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the event of any one of the parties terminating the contract except for reasons stated before , the party terminating the contract will be responsible to pay to the other the balance of the monthly remuneration for the unexpired of the contract as provided for in condition 7 of the letter of appointment. This last condition is somewhat obscure, because there could evidently be no monthly remuneration being paid by the assessee to the company in the event of the assessee putting an end to the contract. In the context in which the condition is found, it must mean that in the event of the contract being terminated by the company for reasons other than those set out earlier, the company will pay to the assessee the balance of the monthly remuneration for the unexpired period of the contract. On the 2nd of July, 1951, the company served a notice upon the assessee terminating his appointment as the general manager of the company with immediate effect and three reasons were given in that notice : (1) that for some time past the assessee had been inciting the labour of the mills against the company ; (2) that the assessee had been acting in a manner prejudicial to the interest of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and not for it. They further expressed the opinion that the assessee had received from the employer a certain sum of money which went to fill the hole created in his ' salary' income by reason of premature termination of service contract, such premature termination of contract with consequent damages payable on account of it being provided by the agreement of service itself. On the view taken by the Tribunal, the appear file by the Commissioner was allowed. The Tribunal has referred to this court the following question : 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 ? Evidently, the termination of employment of the assessee was not made on account of inefficiency of the nature that the assessee failed to establish the mills on a sound basis within 12 months from the date of his joining, nor was the employment terminated on account of continued illness or permanent incapacity of the assessee. Under the express agreement, when there was termination of the employment for reasons other than those of inefficiency, illness or incapacity, the company was liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o act as a solatium for the very source which produced the income and in respect of which the employee is liable to tax. The learned Chief Justice then proceeded to consider whether the compensation paid which was equivalent to six months' salary in lieu of notice was within the meaning of Explanation (2) of section 7 salary or remuneration for loss of employment. Mr. Joshi for the Department contends that, in the present case, the compensation paid which to the assessee was not solely for loss of employment and he invites our attention to the covenants contained in the agreement whereby the assessee had undertaken not to accept within a radius of 100 miles from Chardum, employment which was prejudicial to the interest of the company and the assessee had abanded all his rights arising under the terms of the agreement of employment or otherwise. This, Mr. Joshi says, being also the consideration for payment of Rs. 1 lakh by the company, it could not be said that the compensation paid was solely for loss of employment. Explanation 2 to section 7 as it stood before the Act was amended in 1955, in so far as it is material, provided that a payment due to or received by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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