TMI Blog1967 (3) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... , he would be entitled on his retirement to pensionary benefits. The petitioner, which is the Indian Overseas Bank Ltd., Madras, requisitioned his services as its general manager but his acceptance of service under the petitioner would involve sacrifice of the benefits which he would otherwise have been entitled to from the Imperial Bank of India. An agreement was entered into on April 11, 1945, between the petitioner and Subbiah which provided that, in consideration of Subbiah agreeing to accept service with the petitioner, the latter undertook to pay him a sum of Rs. 1,00,000 on his joining service on specified terms and conditions. Subbiah was to serve the petitioner for a period of seven years from the date of his assuming office as general-manager and was to be paid a salary of Rs. 1,100 per month during the period of his service. But if at any time during that period Subbiah should die or voluntarily tender his resignation from service of the petitioner, in that case a sum as calculated therein should be payable by Subbiah or from his estate to the petitioner. A schedule was drawn up for this purpose according to which the sum so payable at any particular time would be the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was an outright payment on the taking up of service by Subbiah, he being only placed under an obligation to pay to the petitioner certain sums on his failure to fulfil his part of the contract and that on that view it was obvious that there was no expenditure at all incurred during any of these years to the extent claimed. The learned judges considered that the expenditure in the sum of rupees one lakh had already been incurred in 1945 when the payment was made to Subbiah and the writing off of any sum during any of the years by the bank had no legal effect. Before the reference was made to this court, the Income-tax Officer had written to the petitioner on August 6, 1958, inviting its attention to the fact that its claim in respect of the sum of rupees one lakh as expenditure year after year had been allowed and asking it to show cause against action being taken as provided in the Act for non-compliance with the provisions of section 18(2) of the Act. The petitioner in reply took up the stand that, having regard to the terms of the agreement, the payment of rupees one lakh was in the nature of an advance and there was, therefore, no question of deduction of tax at source at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the receipt in the hands of Subbiah was compensation for loss of employment. For a payment to have that character, the presence of three elements is essential. There should be an employment which necessarily implies relationship of employer and employee. Secondly, there must exist a loss of such employment which means a cessation or termination of service, putting an end to the relationship of employer and employee. Thirdly, the amount paid must be connected with or related to such loss and should be with a view to compensate for the loss. Unless there is a nexus between each of the three requirements, it cannot, in our opinion, be said that a given payment has the character of compensation for loss of employment. In each case, the question has to be tested in the light of particular facts. The test will not merely be as to what the payment represented as a receipt in the hands of the employee. It has to be ascertained as to what for the payment was made by the employer. It is in the light of answers to both the tests, can the question as to the character of a given receipt be satisfactorily decided. In Chibbett v. Joseph Robinson Sons, Rowlatt J. observed : " As Sir Richar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a sense from the point of view of the recipient it may be a quid pro quo for loss of his service with the third party, it is nevertheless not a payment by " X " for loss of service with or under him. The payment in such a case is made by " X " not for loss of service but for other consideration. The instant case before us is a typical illustration of such a case. It may be that by joining the petitioner's service, Subbiah had necessarily to leave the Imperial Bank of India with the consequence that he would no more be entitled to pensionary benefits. from his former employer. In a loose sense, Subbiah may regard the sum of rupees one lakh received by him as wholly or in part compensation for loss of his benefits from the Imperial Bank of India. But what was the payment made for by the petitioner ? There was no relationship of employer or employee prior to the agreement between the petitioner and Subbiah and there could, therefore, be no question of cessation or termination of such a service. It follows that, so far as the petitioner was concerned, it was not a payment for loss of employment in the statutory sense we earlier indicated. Looking at both the aspects, therefore, fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t did relate to the service of Subbiah under the petitioner for a period of seven years. Though the payment was a lump sum, that fact by itself is not determinative of the character of the payment. The terms of the contract make it quite clear that if Subbiah failed to serve the petitioner for the full period of seven years, a proportionate sum would be recoverable from him out of the sum of rupees one lakh. That shows that the payment of rupees one lakh was not merely for the purpose of procuring the services of Subbiah but also for retaining him in service for the entire period. In that sense, part of the payment related to the future service of Subbiah and could only be regarded, as we consider, as an addition to the salary. In fixing Subbiah's monthly salary, this part payment included in the lump sum of rupees one lakh was presumably taken into account. That part of the payment which we hold to relate to future service flowed from the service agreement and related to the employment under the petitioner and the emoluments attached thereto. A problem would then arise, how to apportion the payment which is partly of a capital character and partly in the nature of salary within ..... X X X X Extracts X X X X X X X X Extracts X X X X
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