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1960 (10) TMI 104

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..... incorporated and regis- tered under the Indian Companies Act having its registered office at Ajmer, on July 5, 1943. The said company and the respondent entered into an agreement which is marked as exhibit A. Under clause (1) of exhibit A, it was agreed that the company would employ the respond- ent who will act as the general manager of the company for a term of 14 years computed from July 6, 1943. Under clause (4), it was mentioned that the respondent would be entitled by way of remuneration for his services, to (a) a salary of ₹ 1,600 p.m., (b) free furnished quarters and (c) three servants, electricity and water supply at the cost of the company with an annual increment of ₹ 100 p.m., the first increment falling due on January 1, 1945. Under clause (10) it was further laid down that in case the respondent is dismissed, except as provided in the preceding clauses, the company shall be liable to pay him consolidated damages which will be the then value of the remuneration of the respondent for the unexpired portion of the said 14 years after deducting interest at the then prevailing bank rate plus one per cent. For reasons which are not known, the company considere .....

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..... lge the secrets or any facts connected with the business of insurance matter and will not interfere with or do anything to the prejudice of the society . In the opinion of the Tribu- nal, the company apprehended that with his knowledge and experience, the assessee was likely to set up a flourishing competitive business which will go a long way to injure the interests of the society and in considera- tion of such restrictive covenants agreed to pay a sum of ₹ 1,625 p.m., as a solatium to the assessee. It was therefore held that the said payments did not fall within the ambit of receipt of a revenue nature . The income-tax department was not satisfied with this decision and hence the present reference has been made at its request. Shri Kan Singh appearing for the Commissioner of Income-tax has urged that the payments received by the assessee were taxable under section 7 of the Indian Income-tax Act (which will hereinafter be referred to as the Act). Before proceeding to examine his argument, it would be proper to reproduce here the relevant provision of section 7 of the Act as it stood during the material period of time: The tax shall be payable by an assessee unde .....

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..... 7) is in the following terms: That Mr. Braham Datta will not divulge the secrets or any facts connected with the business of the society, or give any advice to any- body except to the society on any insurance matter and will not interfere with or do anything to the prejudice of the society. In our opinion, a plain reading of the above clause shows that a restriction was put upon the assessee from divulging the secrets or any facts connected with the business of the society (company) and he was further restrained from giving any advice to anybody except to the society on any insurance matter. The words except to the society do not necessarily connote that the assessee was under an obligation to give advice to the society on any insurance matter. It was left to the will of the assessee to give any advice to the society but there was no compulsion on him to give any advice. It is also not mentioned in the clause if he was to give the advice free of any charge or that the compensation which was given to him included the charges for future advice. Clause (7) should be read as a whole in the context of the preceding clauses and, when so read, it only shows, that the entire st .....

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..... that even on the finding of the income-tax Appellate Tribunal, a part of the consideration for the payments made to the assessee was in lieu of the restrictive covenants imposed upon him and thus the payment not being solely as compensation for loss of employment, the assessee could not escape from his liability to be taxed. He has laid great stress on the words solely appearing in Explanation 2 of section 7 of the Act. We have given our earnest consideration to this argument and we find ourselves unable to accept it. From the perusal of exhibit A and exhibit B, it appears that although the assessee had started with a salary of ₹ 1,600 per month on July 5, 1943, he was to receive an annual increment of ₹ 100 and therefore in 1952, he was receiving a very high salary. When the company thought of terminating his services, it was conscious that it would have to pay a heavy amount to him on account of premature termination of his services in terms of the agreement, exhibit A. The total amount of compensation, if it were to be computed at the rate of the salary which the assessee was receiving in 1952 for the unexpired period of the agreement, would have amounted to a hug .....

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..... garded as a capital receipt. It was pointed out that the character of the pay- ment received would vary according to the circumstances and, as an instance, it was pointed out that the amount received as considera- tion for the sale of a plot of land may ordinarily be a capital receipt, but if the business of the recipient is to buy and sell lands, it may well be his income. Thereafter, discussing the facts and circumstances of that particular case, it was held that the amount received by the assessee was received towards commission. It was further held that the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed or sterilized, but in the language of Rowlatt J. in Short Bros.' case [1927] 12 Tax Cas. 955 (C.A.). the amount was simply received by the assessee in the course of its going distributing agency business from that going business. It is obvious that the facts and circumstances of the above case were very different and the observations made by their Lordships cannot be applied to the present case even by any stretch, because the assessee in the instant case has not received the relevant payments during the course o .....

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..... hat the compensation was given to the assessee for the loss of his services. Learned counsel has further referred to Divecha v. Commissioner of Income-tax [1960] 38 I.T.R. 209 (Bom.). It would suffice to say that the facts of that case were very different and the observations made therein are of little help to the present case. Lastly, learned counsel has referred to Dale v. De Soissons [1956] 1 All E.R. 912. In that case, one Mr. Pierre de Soissons who was employed by a company, was entitled to a fixed salary and commission and it was further provided in their agreement that the company would be entitled to terminate his appointment at the end of the first or second year out of the three years for which he was to remain in service. The company terminated the agreement at the end of the first year and paid the agreed sum of compensation to him. It was no doubt held in that case that the compensation received by him was a profit from his employ- ment and that it was assessable to income-tax; but it may be pointed out that the said view was held since it was found that he had not surrendered any right. In other words, it was not a compensation given to him for loss of office bu .....

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..... ump sum of ₹ 1,10,000 in four installments. The question arose whether the installments received by the assessee were exempt from tax under Explanation 2 to section 7(1) of the Act. It was held by the learned judges of the Lahore High Court that the lump sum payment made to Mr. Khosla for consideration of the termina- tion of his employment did not include any remuneration for past services and must therefore be held to be solely compensation for loss of employment. It would appear that the above case is almost on all fours with the present one. In Captain v. Commissioner of Income-tax [1959] 36 I.T.R. 84 (Bom.) the assessee was an employee of F.E. Dinshaw Ltd. The minimum salary payable to him was ₹ 60,000 per but his annual emoluments for many years exceeded rupees one lakh. From October 1, 1951, his services were terminated by F.E. Dinshaw Ltd., and he was immediately employed by the Cement Agencies Ltd., on a remuneration of ₹ 3,600 per month. As a result of certain discussion which took place between the assessee and F.E. Dinshaw Ltd., the latter agreed to pay him a sum of rupees one lakh as compensation for the termination of his employment. Under the cir .....

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..... employment which was prejudicial to the interest of the company and the assessee had abandoned all his rights arising under the terms of the agreement of employment or otherwise. Reference was also made to Explanation 2 to section 7 as it stood before the Act was amended in 1955. Repelling this argument, it was observed by the learned judges as follows [1960] 38 I.T.R. 67, 75 (Bom.): But, evidently on the Explanation, it cannot be said that a pay- ment which is made as compensation but not solely for loss of employ- ment must always be regarded as revenue receipt. The legislature regards a payment made solely for loss of employment, which is not made by way of remuneration for past services, as a capital payment. It is implicit in the Explanation that a payment made as remuneration for past services is to be regarded as a revenue payment. But in the absence of any express provision about payments which are neither of the nature of compensation paid for loss of employment, nor as remuneration for past service, it would be difficult to rely upon the Explanation to support the view that the payment is capital payment or revenue payment. Again, in Commissioner of Income-tax v. .....

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..... oes not become taxable simply because it comes from a former employer irrespective of the circumstances in which it is made. If the payment is made in consideration of the past services, it is certainly taxable but if it is given as compensation for the loss of employment, then, it becomes a capital payment and is not assessable. It is of little consequence whether such a payment is made in a lump sum or in installments. The mere fact that the compensation is made by half-yearly or quarterly or monthly installments does not change the nature of the compensation. Similarly, the compensation does not change its complexion merely because a few restrictive covenants are also imposed upon the assessee in order to safeguard the interests of the former employer by restraining the assessee from entering into a com- petitive business, or by requiring him to observe forbearance in advising others who are carrying on a rival business. In the present case, the assessee has received compensation for the loss of his employment. He had no doubt entered into restrictive covenants also but for observing these covenants, he was not required to render any kind of active service to his former emplo .....

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