1. The question referred to us under sub-section (1) of section 66 of the Income-tax Act is :
'Whether on the facts and in the circumstances of the case the sum of Rs. 52,000 is income liable to be taxed in the hands of the assessee ?'
2. The assessee jointed the service of the Bombay Mutual Life Assurance Society Limited as a manager, on April 1, 1944, and the terms of service were reduced to the form of a document of date April 6, 1944. The terms, inter alia, were :
(a) Salary of Rs. 2,500 per month rising to Rs. 4,000 per month by annual increment of Rs. 200 per month, the last increase being Rs. 100 per month.
(b) The appointment will be liable to be terminated on 12 months' notice on either side.
(c) The assessee will be entitled to the benefit of the society's provident fund and leave rules in force from time to time.
3. During 1952, serious differences of opinion arose between the assessee and the board of directors of the employer company. The differences ultimately culminated in the assessee giving 12 months' notice to the employer company. Part, material to the case, of that letter is in following terms :
'........ To avoid that, I hereby give twelve months' notice as provided in my letter of appointment to resign my job. Please note that and oblige.'
4. This letter of the assessee was acknowledged by the chairman of the employer company under his letter of 6th June, 1952, noting the assessee's resignation therein. In its meeting held on the 18th June, 1952, the board of directors passed the following resolution :
'In continuation of resolution No. 19 dated 4th June, 1952, noting the termination of his employment by the manager, resolved that :
(a) Manager be given leave from 19th June, 1952, to 30th June, 1952, and from 1st July, 1952, he be relieved from service;
(b) his salary up to 30th June, 1952, and his own contribution to the provident fund and the society's contribution up to 30th June, 1952, along with interest due thereon be paid to him;
(c) the bonus for the services rendered in the year 1951 be paid to him after it is sanctioned by the board for the staff and he will be paid at the same rate as may be sanctioned for other employees;
(d) a sum of Rs. 52,000 be paid to him a compensation for termination of his services prematurely; and
(e) excepting (c) the amounts due under (a), (b) and (d) be paid to him immediately and that the bonus be paid to him when declared.'
5. In pursuance of the said resolution, the amount of Rs. 52,000 was paid to the assessee on 1st July, 1952. The income-tax authorities sought to bring the said sum to tax on the ground that that was salary paid to the assessee by the employer company. On the other hand, it was the contention of the assessee that the payment of Rs. 52,000 was made to him solely as compensation for loss of employment and was, therefore, not liable to be taxed under Explanation 2 to sub-section (1) of section 7 of the Act as it then stood. The aforesaid claim made by the assessee was rejected by the Income-tax Officer, the Appellate Assistant Commissioner and also by the Tribunal. On an application under sub-section (1) of section 66, the Tribunal has drawn up the statement of the case and referred the aforesaid question of law to us.
6. Mr. Mehta, learned counsel for the assessee, contends that the Tribunal was in error in holding that the said amount of Rs. 52,000 was not a payment made solely as compensation for loss of employment. According to him, the assessee was entitled to serve for a period of full 12 months from 1st June, 1952, though he had sent in a letter of resignation by giving 12 months' notice. Instead, the employer company has brought about termination of the service of the assessee prematurely under the resolution passed by it on 18th June, 1952, and for this premature termination of the service of the assessee, the employer company has paid Rs. 52,000 by way of compensation. Payment of Rs. 52,000, therefore, is a payment made to the assessee solely as compensation for loss of employment within the meaning of the second explanation to sub-section (1) of section 7 of the Act. The said payment, therefore, is a capital payment and is not no liable to tax. Mr. Mehta referred us to two decisions reported in H.S. Captain v. Commissioner of Income-tax and R.N. Agrawala v. Commissioner of Income-tax.
7. It is not possible for us to accept the contention of Mr. Mehta. We fail to see how any question of payment of any compensation as such arises in this case. A question of payment of compensation may arise when the employer has terminated the services of his employee. In the instant case, the assessee, who is an employee, has chosen to put an end to his service at the expiry of the period of 12 months by exercising the option conferred on him in the agreement of service. Before the resolution of 18th June, 1952, was passed, the assessee had sent in a letter of resignation on 26th May, 1952, informing the employer company that he had exercised the option to put an end to his service by giving 12 months 'notice. That letter of resignation was accepted and noted by the company on 4th June, 1952, and acknowledged by the chairman in his letter of 6th June, 1952. Thereafter, instead of allowing the assessee to come to the office and work, the employer company had paid twelve month's salary and the provident fund to the assessee. These being the facts of the case, it is indeed very difficult to hold that the payment of Rs. 52,000 was made a compensation for loss of employment. It has been found that the payment of Rs. 52,000 consist of twelve months' salary, at Rs. 4,000 per month (which the assessee was getting then) and Rs. 4,000 as contribution of the employer company to the provident fund for that period of twelve months to which the assessee was entitled under the terms of the contract. The two decisions to which reference was made, in our opinion, have no application to the facts of the present case. In both these cases, it was the employer who had put an end to the service of the employee. Further, payment which was made to the assessee was not payment in lieu of notice period. The decision which is apposite to this case in reported in Ramachandra Dhonde Datar v. Commissioner of Income-tax. In that case, the assessee was an employee. Under the terms contract, either party could put an end to the service by giving six months' notice. In spite of that, the employer had terminated the services of the assessee without giving six months' notice. The assessee then filed a suit against his employer and one of the items of his claim was salary of six months of the notice period which he was entitled to under terms of the contract. The amount was decreed in his favour. It was contended by the assessee, that he was not liable to pay tax on the six months' salary decreed in his favour. According to him, it was the compensation paid to him for termination of his service. This contention of the assessee in that case was not accepted by this court. This court held that 'where the terms of service provided for a notice to be given, but on the service being terminated in breach of that term the employee was entitled to claim salary for the notice period, his claim for salary for the period would be based on the terms of service and would proceed on the basis that although the service was purported to be terminated with immediate effect in view of the condition requiring a notice to be given for termination of service, the liability of the employer to pay the employee up to the end of the notice period still continued and was enforceable under the agreement of service. What was paid to the employee, therefore, even in such a case was a payment to which he was entitled under the terms of his service and not compensation or damages or even solatium for loss of service or for wrongful termination of service.' This exactly is the case here. The assessee was entitled to get salary for twelve months and also entitled to the contribution of the employer to the provident fund for this period. That amounted to Rs. 52,000 and that has been paid to the assessee by the employer company. This being the position, in our opinion, the Tribunal was not in error in rejecting the contention of the assessee.
8. The question referred to us will therefore have to be answered in the affirmative. We answer it accordingly. The assessee shall pay the costs of the Commissioner.
9. Question answered in the affirmative.