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Aspy B. Talati Versus Income Tax Officer

ITA Nos. 4915 & 4916/Bom/1995 - Dated:- 20-6-2000 - D. Manmohan (Judicial Member) And S. V. Mehrotra (Accountant Member) For the Appellant : S. N. Inamdar For the Respondent : B. L. Meena ORDER These two appeals filed by the assessee were heard together and are disposed of by this common order for the sake of convenience. 2. Both the appeals are directed against the separate orders of the CIT(A)-XXXV, Bombay, dt. 28th Feb., 1995, for the asst. yrs. 1990-91 and 1991-92. 3. The ground common in bo .....

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years. During the two relevant assessment years the assessee received ₹ 1 lakh each in appreciation of personal attributes and qualities, which were over and above his legal dues and claimed the amount for the two assessment years as exempt from tax in view of the Supreme Court decision in the case of CIT vs. K.K. Roy (1972) 84 ITR 701(SC) and that of the Calcutta High Court in the case of CIT vs. Ajitkumar Bose (1986) 52 CTR (Cal) 250: (1987) 167 ITR 90(Cal). The assessee had tendered hi .....

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d attributes, management is pleased to approve special ex gratia payments which shall become due and payable on dates specified below : ₹ 1 Lakh on 5th May, 1989 ₹ 1 Lakh on 5th May, 1990 The above sums will be paid by the company to you on above dates in addition to your other dues (PF, gratuity, S/annuation, leave salary, etc.) from the company." It was explained before the AO vide letter dt. 18th Jan., 1991, that the nature of payment made to the assessee was as under : " .....

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eriod." The AO referred to the letter dt. 22nd Feb., 1991, from Shri Harry Patel, managing director of the company, to the assessee in which it was mentioned as under : "You have received lucrative offers during that period, but you continued to work for us on the request of the management recognising fully well that your experience in more than one occasion was absolutely essential to the company's survival." The AO inferred from the wording of this letter that there was a di .....

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ices of the assessee rendered by him to the company through his office. He held that there is no personal attribute or quality pointed out either by the employer or by the assessee which could motivate the employer instantaneously to grant a reward of ₹ 2 lakhs. He held that the loyalty, sincerity and excellent performance during the difficult times of the company displayed by the assessee are attributes recognised only because of his office and those are known commercial attributes and th .....

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tions under ss. 16(i), 80CC, 80CCA, etc. were granted by the company out of the said receipt and the resultant has been subjected to tax deduction at source. He referred particularly to the salary certificate issued by the company for the second instalment of ₹ 1 lakh in which the assessee had received, nothing else but only the second instalment of ₹ 1 lakh and the same was subjected to deduction under s. 16(i) of ₹ 12,000 and the resultant of ₹ 88,000 was further subjec .....

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ent was received on 5th May, 1989, when the assessee was in the service of the company and was a full-fledged director (Finance) of the company and his resignation came into effect on and from 6th May, 1989. He also held that the right to receive ₹ 2 lakhs was granted vide letter dt. 7th April, 1989, of the managing director while the assessee was in service. Accordingly, he held that the assessee acquired the right to receive ₹ 2 lakhs on 7th April, 1989, itself and, likewise, the c .....

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ent and that is why the managing director Shir Harry Patel had to undertake the exercise of writing a letter as late as on 22nd Feb., 1991 to characterise the said payment as voluntary and ex gratia and that too with retrospective effect." The learned CIT(A) referred to the receipts issued by the assessee dt. 5th May, 1989, and 5th May, 1990. In the first receipt dt. 5th May, 1989, the assessee acknowledged the receipt of ₹ 1,91,174 (inclusive of ₹ 1,00,000, the first instalment .....

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received. In the opinion of the learned CIT(A), the assessee had developed and possessed a justiciable right to receive the said instalments, although characterising the same as special ex gratia, which is an act of self-convenience and has no bearing upon the real character of the receipt. He also observed that if the assessee did not have any right to receive, he could not have used the words "except the second instalment". This right was, in his opinion, borne out of the employer-em .....

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suing this receipt, the assessee granted freedom to the company from the bondage of its obligation to pay the assessee the said amount of ₹ 2 lakhs, a bondage which emerged from Shri Harry Patel's letter dt. 7th April, 1989, addressed to the assessee. Taking into account all surrounding circumstances and facts of the case, the learned CIT(A) held that the receipt in question is a direct emolument paid to the assessee-employee in recognition of his past services and, therefore, was noth .....

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further submitted that the payment was made not as a recompense for services rendered but in appreciation of the assessee's loyalty, sincerity and trustworthiness. The payment was not connected with the period of service or any such factor and was given purely as a gift after the assessee ceased to be an employee. He referred to p. 10 of the paper book which is letter dt. 7th April, 1989, of the managing director to the assessee in which it was clearly mentioned that the payment is in appre .....

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ent was absolute loyalty of the assessee which prompted them to make the payment. He submitted that though the assessee was offered lucrative jobs during the period of lock-out, he preferred to remain with the company and helped the management in its most difficult times. He observed as under : "I understand that you had received lucrative offers during that period, but you continued to work for us on the request of the management recognising fully well that your experience on more than one .....

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lay of total loyalty and sincerity. I had the same experience after I took over as managing director." The learned counsel for the assessee relied on the decision of the High Court of Justice (Chancery Division) in the case of Bridges (H.M. Inspector of Taxes) vs. Bearsley 37 Tax Cases 289, in which the headnote reads as under : "Income-tax. Schedule E'Shares in company transferred to director' Whether profits of office. The respondents were at the material times respectively m .....

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the company. They had been under the impression that the former principal shareholder would bequeath them shares by his will, but he had not done so. In due course they approached the sons about the matter and in 1945 the sons entered into covenants under which the respondents, in consideration of their continuing their engagements with the company for four years, were each to receive 8,000 of the shares within three months of the death of the widow. These shares were transferred to the respond .....

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to sue on the documents effectively. Alternatively it was contended that if the value of the shares transferred was income assessable under Sch. E, such income either arose on the execution of the deeds or should be spread over the four years 1945-46 to 1948-49. The Special Commissioners found that the transfers and covenants were not remuneration for the respondents' services in their current office and held that neither the value of the shares nor the value of the covenants represented inc .....

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he assessee received the amount not as remuneration for services but as ex gratia for what he had done earlier. The employer was not legally obliged to make the payment. The learned counsel for the assessee referred to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Ajit Kumar Bose (supra) in which it was held that the employer was under no obligation to pay anything to the assessee in connection with termination of his employment otherwise than salary for notice perio .....

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hat the amount paid cannot be called as payment for deprivation of any right. He also referred to the decision of the Tribunal, Mumbai Bench 'A', in the case of ITO vs. Shri Anilkumar Rudra in ITA No. 8975/Bom/1990, dt. 12th Oct., 1998 in which it was held that amounts received after superannuation had nothing to do with the employment and so they are not in the nature of compensation received by the assessee or in connection with the termination of employment or the modifications of the .....

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s of the assessee. 6. The learned Departmental Representative submitted that the right to receive the amount had accrued by virtue of letter dt. 7th April, 1989, of the managing director. The amount is borne out of employer-employee relationship and the payment was committed by the company when the employer-employee relationship subsisted. The assessee had acquired a vested right in the payment, as though the resignation was accepted on 7th April, 1989, the assessee continued to serve the compan .....

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n whether the amounts constituted compensation. The learned counsel for the assessee also submitted that salary certificate does not determine the character of income. The employer deducted the tax as a precautionary measure in order to avoid any default under the various provisions of the Act. 8. We have considered the rival submissions of the learned parties and have perused the record of the case. The terms of the agreement are at pp. 4 to 9 of the paper book, in para 3 of which the remunerat .....

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that the payment is being made in appreciation of personal qualities and attributes, as special ex gratia payment, which has been approved by the management also. It was not only the managing director's decision but had the approval of the management. So it cannot be said that the managing director termed the payment as special ex gratia payment. It was basically the personal loyalty of the assessee towards the management which in English proverb is termed as "A friend in need is a frie .....

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case of Benyon vs. Thorpe (1928) 14 Tax Cases 1 it was held that a payment made as a gift in appreciation of personality and character of the employee is not taxable as salary. The letter dt. 7th April, 1989, addressed to the assessee by the managing director was written on the next day of the resignation of the assessee clearly spells out the intention of the management for making the payment, which was in appreciation of the personal qualities and attributes of the assessee and made as specia .....

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ind no evidence on record for the learned CIT(A) to come to the conclusion that the real motive behind the said payment was to reward the assessee for his past long meritorious service and the basic character of the receipt was not ex gratia but profit in lieu of salary. The only reason for coming to this conclusion by the learned CIT(A) was the treatment accorded to the payment in the books of account of the company. The first receipt dt. 5th May, 1989, issued by the assessee in acknowledgement .....

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