Bombay High Court
R.B.D.D. Datar vs Commissioner Of Income-Tax on 22 November, 1951
JUDGMENT R. Kaushalendra Rao, J.
1. This matter arises on a statement of the case by the Appellate Tribunal, under Section 66(1) of the Income-tax Act.
2. The assessee joined the "All India Reporter" in 1923, when the journal was the proprietary concern of Shri Chitaley. This concern was turned into a limited company in 1924. The assessee continued as director-in-charge of the All India Reporter. In the year 1942, he was getting a salary of Rs. 1950 per month. There was an agreement on 23rd March, 1943, Between the assessee and the All India Reporter. The agreement is in the following terms:
Agreement entered into this twenty-third day of March 1943, between the All India Reporter Ltd., a company registered under the Indian Companies Act, 1913} through its Managing Director Mr. V.V. Chitaley (hereinafter referred to as the "company") of the one part and Mr. D. D. Datar of Nagpur (hereinafter referred to as " the employee") of the other part. Whereas Mr. D.D. Datar has put in very valuable services in the company since its inception in promoting, building up its business and bringing it in repute which it enjoys, and is still continuing to serve the company. It is in appreciation there-fore hereby agreed that ;
(1) The employee be paid a salary per equal to (six) 6%, of the gross sales received by the company in the year or a sum of Rs. 24,000 whichever is greater, from 1st April 1943.
(2) The period of appointment covered be this agreement is ten years from 1st April 1943 in the first instant to be renewed automatically for such like period at the option of the employee.
(3) It is further agreed, that the employee shall, at the time of termination of the service before or after the period of appointment, for any cause whatsoever, be paid a sum equal to three years' salary calculated at the rate at which he was drawing the salary at the date of the termination of the service, as compensation for cessation of his services. In case of termination of the service by death of the employee such sum as aforesaid shall be paid to his heir or his heirs as the case may be.
(4) The employee is expected to perform the same duties as he is now performing or of the like nature as the Managing Director may from time to time instruct.
(5) The employee shall be free to do any other work or business while in service but shall not engage himself in any business which is of a competing nature, with that carried on by the company.
(6) The employee shall continue to work at Nagpur as at present and will not be called upon to go out of Nagpur against his convenience.
(7) Either party should give six calendar months! notice in case of termination of the service before the period stipulated in the agreement.
3. It would appear that on 2nd November, 1945, the All India Reporter terminated the services of the assessee with his consent, and made him a payment of Rs. 85,000-0-0. The assessee passed the following receipt in favour of the All India Reporter:
In pursuance of Clause No. 3 of the agreement entered into between the All India Reporter Ltd. and myself on the 23rd March, 1943, the All India Reporter Ltd., has terminated my services with my consent and I have received on 2nd November, 1945, from the All India Reporter Ltd., Rs. 85,000 (Rupees eighty-five thousand only) as full payment towards the compensation for cessation of my services, the right of notice having been waived by both parties. The All India Reporter Ltd. has agreed to pay income-tax, super-tax etc., on the total amount of compensation. In case any amount is recovered from me by the Income-tax Department in respect of the total of Rs. 85,000 (Rupees eighty-five thousand only) the All India Reporter Ltd., will indemnify for the same.
4. The Department recovered from the All India Reporter Rs. 39,361 as tax. The contention of the assessee is that the sum of Rs. 85,000 wars exempt from taxation. The Department included in the assessee's income a sum of Rs. 1,24,361. made, up of Rs. 85,000 paid directly to the assessee and Rs. 89,361 paid to the Income-tax Department. The assesses claimed exemption from payment of the tax as according to him it was made as compensation for loss of employment within the meaning of the second explanation to Section 7 (1). The question of law referred by the Tribunal is:
Whether in the circumstances of the case, the sum of Rs. 1,24,36] was liable to be included in the assessable income of the assessee?
5. The answer to the question depends upon the construction of Sub-section (1) of Section 7, and the nature of the payment made by the All India Reporter to the assessee.
6. Section 7 (1), in so far as it is material for the purpose of this case, runs:
The tax shall be payable by an assessee under the head 'Salaries' in respect of any salary... or profits in lieu of, or in-addition to, any salary...which are due to him from, whether paid or not, or are paid by or on behalf of...a company...or any private employer.
Explanation 2.--A payment due to or received by an assessee from an employer or former employer or from a provident or other fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu of salary for the purposes of this sub-section, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services.
7. It is necessary to examine the nature of the payment under the third clause of the agreement. The way the parties choose to describe a payment is not conclusive as to its character, It may however be mentioned that neither the agreement between the parties nor the receipt executed by the assessee describes the payment as compensation for loss of service. Both the documents describe the payment as compensation for cessation of service. "Cessation of service" is a colourless expression. Cessation of service may be brought about in a variety of ways. Under the agreement payment was to be made to the asseasee whether the termination of the services was before or after the period of employment stipulated in the second clause. The assessee was entitled to receive the payment on termination of service "for any cause whatsoever". Therefore even termination of service brought about by his own misconduct or inefficiency is not excluded Lastly the sum was payable on termination of the service as a result of the death of the employee. The payment in that contingency would be to the heirs of the employee. The one thing certain about the payment; was that the assessee was entitled to it at the termination of his service irrespective of the circumstances bringing about the termination. What could be the reason for such a payment'?
8. The agreement itself recites that it was entered into in appreciation of the fact that the assessee was continuing to serve the company after putting in very valuable services in the company since its inception in promoting, building up its business and bringing it in repute. A payment receded under such an agreement on termination of service "for any cause whatsoever" can only be regarded as a terminal payment in appreciation of past services. In short, the contract entitled the assessee to a terminal payment in addition to the salary paid to him.
9. As the assessee's services were terminated with his consent and as he did not insist upon notice it cannot be said that there was any deprivation of his right to serve which entitled him to compensation for any loss arising from such deprivation. It is incongruous to regard anything which the assessee was himself willing to forego as a loss entitling him to compensation. Considering all the circumstances it must be held that the payment in question was a profit paid to the assessee at the end of his service in addition to the salary already received by him. In no case can it be regarded as a payment made solely as compensation for loss of employment and not remuneration by way of his past services. The case is covered by Sub-section (1) and is outside the concluding portion of the second explanation.
10. It is necessary to consider the decisions cited at the bar : Hunter (H. M. Inspector of Taxes) v. Dewhurst (1932) 16 Tax Cas 637 H.L. Du Cros v. Ryall (1935) 19 Tax Cas. 444; Henley v. Murray (H.M. Inspector of Taxes (1950) 31 Tax Cas 351); P.D. Khosla, In re and Income-tax Commissioner v. Shaw Wallace & Co. (1932) 59 I.A. 206. But none of these cases can help the assessee. Each one of them is distinguishable on its own facts.
11. In Dewhurst's case (1932) 16 Tax Cas 637 H.L. the payment was not made by way of remuneration for past services or future services. It was paid to the assessee to obtain a release from a contingent liability under a contract of employment, under which in case of termination of service, he would have been entitled to a payment of compensation for loss of service. The payment in the present case was expressly received under the agreement, not apart from it.
12. In Du Cros v. Ryall (H.M. Inspector of Taxes) (1935) 19 Tax Cas. 444 the payment was made on a compromise in an action brought by the assesses against the employer for repudiation in 1923 of an agreement between the parties which entitled the assessee to act as a general manager of the company till 1932. The sum paid on compromise as agreed damages was regarded not as income but as a capital payment as damages for cancellation of service agreement.
13. In Henley v. Murray (H.M. Inspector of Taxes) (1950) 31 Tax Cas. 351 the payment was made to the assessee because the contract of employment was terminated before the period agreed upon between the parties. The payment was therefore not regarded as remuneration paid under the contract but consideration paid for the total abrogation imposed upon the assessee of his contract of employment.
14. In Shaw Wallace's case (1932) 59 I.A. 206 the claim of the Department was that a sum received from a principal by an agent "as full compensation for cessation of the agency", or as "compensation for the loss of office", was taxable under the head "business'' under Section 6(iv). Their Lordships observed that, though the words defining "business" in Section 2(4) were no doubt wide, under Section 10 the tax was to be payable by an assessee under the head "business" ; "in respect of the profits or gains of any business carried on by him". The fundamental idea therefore being the continuous exercise of an 5 activity a sum received as solatium for the compulsory cessation of the business could not be regarded as profits arising out of the business of the assessee. The decision can have no application to the instant case which is governed by the words in Section 7 which are quite different. The profits received in addition to the salary which are taxable under Sub-section (1) may well be paid at the termination of employment.
16. The question must be answered in the affirmative. Some point was raised before the Tribunal as to whether the communication dated 11th February, 1948, received from the All India Reporter should have been taken into consideration for deciding the case. The assessee took exception to the statement being used against him. The point is immaterial as even without any reference to that document, the assessee cannot be given the benefit of the concluding portion of explanation 2.
17. There is no force in the contention of the assessee that the All India Reporter having already paid the tax on Rs. 85,000 the same sum could not be subject to taxation twice by being taken into account in the income of the assessee. The substance of the matter is what the assessee received is not merely the sum of Rs. 85,000 but also the immunity to tax on that sum. That being so, the actual sum received was rightly treated as Rs. l,24,361 see North British Railway Company v. Scott (1922) 8 Tax Cas. 332 at p. 341 and Hartland v. Diggnes (1926) 10 Tax Cas. 247 at p. 256, allowing credit for the sum already paid towards the tax under Sub-section (5) of Section 1.8
18. The assessee will pay the cost of the Department. Counsel's fee Rs. 100.
P.P. Deo, J.
1. I agree with my learned brother in the answer proposed by him though for different reasons.
2. The Tribunal has found as a fact that the services of the assessee were terminated on 2nd November, 1945. What led to the termination of services by the employer is not clear from the record The assessee no doubt agreed to such termination but apparently had no alternative. Under Clause 7 of the agreement he was entitled to a notice for six months and under Clause 3 to a sum equal to three years salary, calculated at the rate at which he was drawing the salary on 2nd November, 1945. If he had insisted on the notice, he would have been entitled to six months' salary in addition. For the year ending 31st March, 1945, the assessee received by way of salary Rs. 52,727, calculated in accordance with Clause 1 of the agreement From 1st April, 1945, to the date of termination the assessee had provisionally received Rs. 16,000 as the minimum salary payable under the Agreement. On 2nd November, 1945, therefore, his entire salary for the period he served was not paid. It would have been paid after the end of the year on taking accounts of the gross sales. He received a net sum of Rs. 85,000, i.e., after deduction of tax at source because the employer undertook the liability to pay the tax in respect of this payment and that amount was Rs. 39,361. The Department treated Rs. 1,24,361 as the income of the assessee.
3. The contention of the assessee that a sum of Rs. 1,24,361 cannot be treated as income is without any substance. Under Section 18 (2) of the Act the employer is bound to deduct income-tax and super-tax from the amount payable which is chargeable under the head "salaries "and to pay the amount as tax on behalf of the employee If the employer fails without reasonable cause or excuse to deduct and pay any tax payable under Section 18, he shall under Section 51 on conviction before a Magistrate, be punishable with fine which may extend to ten rupees for every day during which the default continues By Section 18, Sub-section (4), all sums deducted in accordance with the provisions of the section shall, for the purpose of computing the income of an assessee, be deemed to be income received. The employer was thus entitled to deduct the income-tax before making payment of Rs. 85,000 and that deduction is deemed under law to be the income of the assessee. An express provision has therefore been made in the receipt passed by the assessee that the employer shall take the responsibility for payment, of tax under Section 18 and indemnify the assessee against such payment he may have to make.
4. The question therefore is whether this sum of Rs. 1,24,361 is taxable under the head salary. The amount no doubt includes the unpaid salary upto 2nd November, 1945, and the sum payable under" Clause 3 and the sum payable in lieu of notice under Clause 7, The argument of the assessee that no salary remained unpaid on 2nd November, 1945, is unsupportable on the facts found. If Rs. 2,000 per month was the salary to which the assessee was entitled on 2nd November, 1945, he would have obtained a gross sum of Rs. 85,000 under Clauses 3 and 7 of the agreement even if he had insisted on six months' salary in lieu of notice. The payment of Rs. 1,24,361 cannot be explained unless the assessor's salary is taken at a figure higher than Rs. 2,000 per month. That was a salary he was drawing in the previous year and there is no material on record to show that he would have drawn a lesser salary in the year in question. The payment of Rs. 1,24,361 was evidently made in settlement of the three claims referred to above and cannot therefore be solely as compensation for loss of employment even if we assume that the assessee was entitled to such compensation on 2nd November, 1945.
5. Under Section 7 (1) of the Income-tax Act tax is payable in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages which are due to him from....Under Explanation 2 a payment due to or received by the assessee from an employer...is a profit "received in lieu of salary for the purposes of this sub-section unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. Unless the assessee can therefore prove that the net payment of Rs. 85,000 was made solely as compensation for loss of employment and that there was no other element of receipt, he is not entitled to any relief. In view of the above circumstances, the net payment of Rs. 85,000 cannot be held "to be a payment solely as compensation for loss of employment. In this view I am taking, it is not necessary to consider the several English and Indian decisions noticed by my learned brother. There are a number of other decisions bearing on the question, but the propositions laid down in all those decisions are not quite reconcilable.
ORDER We, answer the question in the affirmative. The assessee will pay the costs of the Department, Counsel's fee Rs. 100.