TMI Blog1944 (4) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the year of account is exempt from income-tax under the provisions of Explanation 2 to Section 7 (1) of the Income-tax Act? Reference No. 31 of 1943 relates to the assessment for the year 1940-41 and the question referred is :- Whether, on the facts of the case, the sum of ₹ 25,000 received by the assessee in the year of account is exempt from income-tax under the provisions of Explanation 2 to Section 7 (1) of the Income-tax Act?' The material facts are the same in each reference and the decision on Reference No. 32 of 1943 relating to the assessment year 1939-40 will govern the assessment for 1940-41. The question referred arises out of the termination of Mr. Khosla's services as manager of the Bh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to receive a salary of ₹ 1,500 per mensem plus commission on the first year's premia at 5 per cent, and on all renewals at 1 per cent. He was also to receive 1 per cent on all policies which had lapsed but were revived during his term of office. A proviso was added limiting the aggregate commission thus received by Mr. Khosla in any one year to a maximum of ₹ 20,000. The agreement was for five years provided that his employment as manager could be extended for another five years if the business of the company during his term of office amounted to at least three crores. It is not disputed that during the period of Mr. Khosla's employment as manager of the Bharat Insurance Company he, in fact, earned the maximum commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in the subsequent accounting period with which we are not concerned. In submitting his returns to the Income-tax authorities, Mr. Khosla claimed exemption in respect of these payments under Explanation 2 no sub-section (1) of Section 7 and it is for this reason that in Reference No. 32 of 1943 the amount on which exemption is claimed is ₹ 60,000 and in Reference No. 31 of 1943 the amount on which exemption is claimed is ₹ 25,000. The question for determination is whether these payments were made solely as compensation for loss of employment and not by way of remuneration for past services. The claim had been rejected by the Income-tax department whose decision is supported by the Tribunal in appeal on two grounds:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that there is no question here of any voluntary relinquishment of the post by Mr. Khosla. The use of the word resigned in the agreement of the 6th October, 1938, is clearly a euphemism for termination of employment under pressure and means that Mr. Khosla accepted the annulment of his employment agreement, dated the 4th July, 1936, in consideration of what is stated in the agreement, viz., the payment of full dues up to the 30th September, 1938, and in addition, a lump sum payment of ₹ 1,10,000 in four installments. It is true that this lump sum payment is not described as compensation for loss of employment nor however, is it described as remuneration for past services. Indeed, it could not be remuneration for past services, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of ₹ 1,10,000 only involving a loss of prospects valued at approximately ₹ 1,84,000. In the order of the Income-tax Officer making the assessment for 1939-40, the following sentence occurs :- The right of renewal of the first agreement had obviously become inoperative in view of the proposed legislative enactment . This is in fact a reference to Section 32 of the Insurance Act, IV of 1938, which came into operation from 1st July, 1939. This section abolished the appointment of a managing agent with effect from 30th June, 1942, and for the interim period up to the date of abolition limited the remuneration inclusive of commission and salary to ₹ 2,000 a month. Now, it is doubtful whether Mr. Khosla' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument that this sum could have included anything except compensation for the loss of future prospects. We are satisfied that with effect from 1st October, 1938, the dispute between Mr. Khosla and the board of directors was settled by the termination of Mr. Khosla's services according to the terms incorporated in the agreement of the 6th October, 1938, and that there is no question of any voluntary relinquishment by Mr. Khosla such as would disentitle him to compensation for loss of employment. We are further satisfied that the lump sum payment in four installments made to Mr. Khosla in consideration of the termination of his employment did not include any remuneration for past services and must, therefore, be held to be solely co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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