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Petitioner: COMMISSIONER OF INCOME-TAX, DELHI AND RAJASTHAN VS Respondent: BRAHAM DUTT BHARGAVAHonorable Justice DAVEKan Singh,Mahesh Dutt Bhargava
1963 P T D 99
1963 P T D 99
[Rajasthan Jodhpur India]
Before D. S. Dave and B. P. Beri, JJ.
COMMISSIONER OF INCOME‑TAX, DELHI AND RAJASTHAN
versus
BRAHAM DUTT BHARGAVA
D. B. Civil Reference No. 8 of 1958, decided on 18th October 1960.
Income‑tax Act (XI of 1922)---
---- S. 7, Expl. 2‑Damages for termination of services‑Payable in monthly instalments‑Restrictive clauses in agreement for termination of services‑Effect‑Payments received by assessee‑Not of revenue nature.
The assessee was appointed as the general manager of an insurance company by an agreement for a period of 14 years from July 6, 1943. Under the agreement the assessee was entitled to a salary of Rs. 1,600 per month with annual increments of Rs. 100, free furnished quarters and other facilities. Clause 10 of the agreement provided that if the assessee were dismissed from service the company shall be liable to pay consolidated damages of the then value of his remuneration for the unexpired portion of the 14 years, after deducting interest at a specified rate. The company desired to terminate the assessee's services before the expiry of the 14 years and in order to settle the question of damages the company entered into another agreement with the assessee. By this agreement his services were terminated with effect from May 25, 1952, and the company agreed to pay the assessee a sum of Rs. 1,625 per month for the unexpired portion of the period of 14 years and gave certain further residential facilities. Under clause 6 of this agreement the assessee agreed not to engage in any insurance business or hold any post in an insurance office during that period, but he was free to engage himself in any other business. Under clause 7 the assessee agreed that he would not divulge the secrets or any facts connected with the business of the company or give any advice to anybody except the company on any insurance matter, and that he would not interfere with or do anything to the prejudice of the company. The question was whether the sums received by the assessee after the termination of his service in accordance with the second agreement were taxable :
Held, on the facts, that the amount paid to the assessee was compensation for loss of future service and it did not cease to be compensation for loss of service merely because it was payable by instalments instead of in a lump sum. further, because restrictive covenants were imposed by clauses 6 and 7 it could not be said that the payment was not made solely as compensation for loss of service. The payments received by the assessee were not of the nature of revenue in whole or in part and were, therefore, not taxable.
The word "solely" is used in Explanation 2 to section 7 of the Income tax Act, 1922, in contradistinction to the clause "and not by way of remuneration for past services", appearing immediately after "compensation for loss of employment", in order to emphasise that the payment should be only for compensation for loss of employment and that if it is given by way of any remuneration for past services, it would fall outside the ambit of the exception.
A payment to an assessee does 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 taxable but if it is given as compensation for the loss of employment, it becomes a capital payment and is not assessable to tax. It is of little consequence whether such a payment is made m a lump sum or in instalments. The mere fact that the compensation is made by half yearly or quarterly or monthly instalments 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 competitive business, or by requiring him to observe forbearance in advising others who are carrying on a rival business.
Commissioner of Income tax v. South India Pictures Ltd. (1956) 29 I T R 910 (S C) ; Datar v. Commissioner of Income tax (1952) 21 I T R 558 (Nag.) and Dale v. De Soissons (1950) 1 A E R 912 distinguished.
In re Khosla (1945) 13 1 T R 436 (Lah.) applied.
Agarwala v Commissioner of Income tax (1960) 38 I T R 67 (Bom.) ; Beak v. Robson (1943) 11 I T R (Suppl.) 23 ; Captain v, Commissioner of Income tax (1939) 36 I T R 84 (Bom.) : Commissioner of Income tax v. Sheppard (1960) 39 I T R 14 (Bom.); Commissioner of Income tax v. South India Pictures Ltd (1956) 29 I T R 910 ; Dale v. De Sissans (1950) 1 All. E R 912 ; .Datar v. Commissioner of Income tax (1952) 21 I T R 558 (Nag.); Divecha v. Commissioner of Income tax (1960) 38 I T R 209 ; In re ; Khosla (1945) 13 I T R 436 (Lah.) and New Jehangir Vakil Mills Ltd. v. Commissioner of Income tax (1959) 37 I T R 11 ref.
Kan Singh for the Commissioner.
Mahesh Dutt Bhargava for the Assessee.
JUDGMENT
DAVE, J. This is a reference by the Income tax Appellate Tribunal (Delhi Bench) under section 66 (1) of the Indian Income tax Act. The question of law which has been set out by the Tribunal for determination of this Court is as follows :
"Whether, on the facts and in the circumstances of this case, the monthly receipts by the assessee from the General Assurance Society Ltd., Ajmer, under the agreement of May 20, 1952 (in supersession of the earlier agreement of July 5, 1943), were not of a revenue nature in whole or in part ?"
In order to appreciate the point which is involved in the present case, it would be proper to state here briefly the facts out of which the question has arisen.
The respondent was engaged as a General Manager of the General Assurance Society Ltd., which was a company incorporated and registered 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 Exh. A. Under clause (1) of Exh. A, it was agreed that the company would employ the respondent 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 Rs. 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 Rs. 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 considered it proper to terminate the respondent's services before the expiry of the full period of 14 years. In order to settle the question of damages recoverable by the respondent under Exh. A the company and the respondent entered into another agreement on May 20, 1952, marked Exh. B. By this agreement, the respondent's services were terminated with effect from May 25, 1952. Under clause (3) of Exh. B, the company agreed to pay to the respondent a sum of Rs. 1,625 only per month with effect from May 25, 1952, up to the date of the expiry of the term in Exh. A, i.e., up to July 5, 1957. Under clause (4) the respondent was to continue to occupy the residence in which he was living at that time at Ajmer for 6 months and thereafter he was given the right to occupy the company's bungalow at Banjimali, Ajmer, up to July 5, 1957. Under clause (6) it was agreed that the respondent shall not engage in any insurance business or hold any post in an insurance office up to July 5, 1957, but he was left free to engage himself in any other business. Under clause (7) he was required not to divulge the secrets or any facts connected with the business of the society, or give any advice to anybody except to the society, on any insurance matter and it was further enjoined upon him not to interfere with or do anything to the prejudice of the society (i.e., the company).
Thereafter during the financial years 1952 53 and 1953 54. i.e., the corresponding assessment years 1953 54 and 1954 55, the respondent, who will be referred to hereafter as the assessee, received Rs. 14,938 and Rs. 3,000 in the first year and Rs. 19,500 and Rs. 2,700 in the second year in terms of the agreement, Exh. B. The Appellate Assistant Commissioner held that the above payments received by the assessee were not taxable. On appeal by the Income tax Officer, Ajmer, the Income-tax Appellate Tribunal (Delhi Bench) affirmed the said order and dismissed the appeal on August 13, 1957. The finding of the Tribunal was "that the payment made to the assessee was on account of his losing the office of the General Manager and on account of observing the restrictive covenants contained in clauses (6) and (7) of the agreement, i.e., that he will not engage himself in any business of insurance or hold any post in an insurance office up to July 5, 1957, and will not divulge the secrets or any facts connected with the business of the society or give any advice to anybody except to the society on any insurance matter and will not interfere with or do anything to the prejudice of the society". In the opinion of the Tribunal, "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 consideration of such restrictive covenants and on account of the loss of the office of the assessee, the company agreed to pay a sum of Rs. 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 under the head `Salaries' 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, whether paid or not, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer ; and for the purposes of this subsection advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received. . .
"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 subsection, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services."
It is contended by Shri Kan Singh that the payments received by the assessee were made by his former employer and that since they were not made solely as compensation for loss of employment, they were taxable under the said section. It is further urged by him that under clause (7) of Exh. B, the assessee was not only restrained from giving any advice to a third person but he was under an obligation to give advice to the company on any insurance matter, that the monthly payment which was given to the assessee was thus paid to him in the capacity of a retainer and that he thus indirectly continued in the employ of the company. In reply, it is contended by the learned counsel for the assessee, that a new question of fact cannot be raised at the time of the hearing of the reference in this Court, that it was never suggested before the income tax Tribunal or `at any earlier stage, if his client continued in the employ of the company or that he was paid as a retainer and therefore this argument should not be allowed to be raised. It is conceded by Shri Kan Singh that it was not stated in express terms before the Income tax 'Tribunal or at any earlier stage that the payments made to the assessee also included some remuneration of a retainer but according to him this is apparent from the language of clause (7) of the agreement itself. Clause (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 anybody 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 tile 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 stress was upon restraining the assessee from giving out the secrets or any other facts connected with the business of the company or to give advice to anybody else so that the interests of the company may not be prejudiced in any manner. The Appellate Tribunal also took it as a restrictive covenant. Clause (2) of the same agreement expressly laid down that the assessee's appointment was terminated from May 25, 1952, and clause (6) further made it clear that thereafter he was free to engage in any other business except that of insurance. There was no restriction upon the petitioner to live at Ajmer. Under the circumstances, it cannot be inferred by the mere use of the words "except to the society" appearing in clause (7) that part of the payment made to the assessee was for his fees as a retainer. It is rightly urged on behalf of the assessee that the Income tax Appellate Tribunal had given a clear finding that the payments received by the assessee were on account of his loss of the office of General Manager and on account of observing the restrictive covenants contained in clauses (6) and (7) of Exh. B. At no earlier stage of the case, it was even suggested on behalf of the income tax department if the amount received by the assessee included his fees as a retainer. This objection cannot be allowed to be raised for the first time in this Court. This view finds support from the following observation of their Lordships of the Supreme Court made in New Jehangir Vakil Mills Ltd. v. Commissioner of Income tax ((1959) 37 I T R 11, 19 (S C)) :
"It is the facts admitted and/or found by it (the Tribunal) that would form the basis on, which the statement of case would be drawn and references of the question of law made by the Tribunal to the High Court. If such facts were not there whether in the order of the Tribunal or in the record before it there would certainly not be any foundation for the raising of any question of law either in the abstract or otherwise and it is only a question of law which would arise out of such facts which are admitted and/or found by the Tribunal that would be the substratum of the reference to the High Court."
Moreover, as pointed out above, the language of clause (7) does not justify such an inference. There is thus no force in this contention and it is fit to be dismissed.
Another argument raised by Shri Kan Singh is 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 Exh. A and Exh. B, it appears that although the assessee had started with a salary of Rs. 1,600 per month on July 5, 1943, he was to receive an annual increment of Rs. 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, Exh. 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 huge sum but the company was able to obtain the consent of the assessee for a smaller sum and thereafter both of them arrived at the agreement, Exh. B. The payment, which was made to the assessee under this agreement, was to our mind simply for the loss of his future service. Again, the amount paid to him did not cease to be compensation for loss of service simply because he agreed to accept the money by monthly instalments instead of receiving the entire compensation in one lot. It is true that while giving compensation to the assessee for loss of his service, certain restrictive covenants were also imposed upon him in order to safeguard the future interests of the company, but on that account alone, it cannot be said that the payment was not made solely as compensation for loss of service. In our opinion, the word "solely" was used in Explanation 2 in contradistinction to the clause "and not by way of remuneration for past services", appearing immediately after "compensation for loss of employment". In other words, this word was used to emphasise that the payment should be only for compensation for loss of employment and that if it is given by way of any remuneration for past services, it would fall outside the ambit of the exception.
It is urged by Shri Kan Singh that the contention raised by him is supported by the view expressed by their Lordships of the Supreme Court in Commissioner of Income tax v. South India Pictures Ltd. ((1956) 29 I T R 910 (SC)). In that case, the assessee was a private limited company carrying on the business of production and distribution of films. In the course of such business, it had advanced moneys to Jupiter Pictures Ltd. of Madras for the production of three films and acquired the right of distribution of those films under three agreements. On October 31, 1945, the assessee and Jupiter Pictures entered into a fresh agreement cancelling the three agreements and, in consideration of such cancellation, Jupiter Pictures agreed to pay to the assessee Rs. 26,000 and they were actually paid to it. In those circumstances, the question arose whether the sum of Rs. 26,000 received by the assessee was a revenue receipt assessable under the Indian Income tax Apt. It was observed by their Lordships that it was not always easy to decide whether a particular payment received by a person is his income or whether it is to be regarded as a capital receipt. It was pointed out that the character of the payment received would vary according to the circumstances and, as an instance, it was pointed out that the amount received as consideration for till, 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 T C 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 of his employment or a going business.
Learned counsel has next referred to Datar v. Commissioner of Income tax ((1952) 21 I T R 558 (Nag.)). In that case, the assessee was a director of a limited company. When his services were terminated on November 2, 1945, he was given a payment of Rs. 85,000 and the company agreed to pay income tax and super tax on the total amount of the compensation. The income tax department recovered Rs. 39,361 as tax from the company. It was then included in the total income of the assessee which was assessed at Rs.1,24,361. The assessee claimed that the amount of Rs. 85,000 was paid to him as compensation for loss of employment and therefore it was exempt from income tax. Learned Judges of the Nagpur High Court held that the payment made to the assessee was not solely as compensation for loss of employment and that what he had received was not merely a sum of Rs. 85,000 but also the immunity to tax on that sum. It was, therefore, held that the sum of Rs. 1,24,361 was rightly included in the assessable income of the assessee. In this case, it was observed by the learned Judges that "neither the agreement, between the parties nor the receipt executed by the assessee describes the payment as compensation for loss of service". On the contrary, both the documents described the payment as "compensation for cessation of service" which in the view of the learned Judges was a colourless expression. It was also found that under clause (3) of the agreement between the parties, a sum equal to 3 years' salary was to be paid to the assessee as compensation for "cessation of his service," "for any cause whatsoever". The agreement itself recited 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 since its inception. It was in those circumstances that the learned Judges held that a payment received under such an agreement on termination of services for any cause whatsoever can only be regarded as a terminal payment in appreciation of past services. It is crystal clear that this case is plainly distinguishable from the present one because there is nothing in Exh. B to show that cot the compensation given to the present assessee was for consideration of his past services. On the contrary, the language of Bra Exh. B clearly shows that 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 employment 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 but he had got…
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