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The Commissioner of Income-tax Vs. D.V. Joshi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T. Ref. No. 93 of 1966
Judge
Reported in(1976)5CTR(Bom)447
ActsCompanies Act, 1913 - Sections 2(9); Income Tax Act, 1961 - Sections 7, 10(5) and 10(5A)
AppellantThe Commissioner of Income-tax
RespondentD.V. Joshi
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.J. Mehta, Adv.
Excerpt:
direct taxation - assessable amount - section 2 (9) of companies act, 1913 and sections 7, 10 (5) and 10 (5 a) of income tax act, 1961 - assessee was paid rs. 20000 as compensation in connection with termination of office - such payment to assessee covered by provisions of section 10 (5 a) - provisions contained in section 7 are general provisions relating to salary - section 10 (5 a) is special provision - where case covered by provisions contained in section 10 (5 a) special provisions to prevail over general provisions contained in section 7 - rs. 20000 received by assessee on termination of service assessable under section 10 (5 a). - .....a manager, the duties assigned to him were such that he would satisfy the definition of the word 'manager' contained in section 2(9) of the indian companies act, 1913. under clauses 1 and 2 of the agreement the assessee was appointed by the company as its manager to manage the whole affairs of the company for a period of fifteen years with effect from november 1, 1949 and as such manager he was to manage the affairs of the company diligently, faithfully and honestly. when such duties are to be discharged by the assessee there can be no controversy that he is a manager. compensation was paid to him in accordance with the letter part of clause 6 of the agreement between the assessee and the company. the first part of clause 6 permits the company to terminate the services of the assessee.....
Judgment:

Kantawala, C.J.

1. This reference relates to the determination of the particular section under which an amount received by the assessee on termination of his services is assessable. By an indenture of agreement dated October 29, 1949 the assessee was appointed as manager of M/s. Noble Steel Products Ltd. (hereinafter referred to as 'the company'). As such manager he was to manage the whole affairs of the company for a period of 15 years with effect from November 1, 1949. Under clause 4 of the agreement he was entitled to monthly salary of Rs. 500/- and in addition thereto the company was to provide him with a motor car and bear all the maintenance and running expenses of the said car. Under clause 6 of the said agreement during the continuance of the agreement the company shall not terminate the services of said Joshi (assessee) as manager except for his inefficiency or incapacity or unfaithfulness or said Joshi accepts any other service. However, if this agreement is terminated by the company for the reasons other than stated above, the company shall pay to said Joshi the remuneration for the unexpired period of his contract as compensation.

2. The services of the assessee with the Company were duly terminated but such termination was not on the ground of inefficiency or incapacity or unfaithfulness or on the assessee accepting any other service. The company paid a sum of Rs. 26,500/- to the assessee by crediting the said amount in his account with the Bank of Maharashtra on July 27, 1959.

3. The question arose before the taxing authorities under what provisions this amount or any part therefor is taxable. Before the Income-tax Officer it was explained that the sum of Rs. 26,500/- which was received by the assessee comprised of two items, namely, Rs. 6,500/- being the salary due to him on account of leave and Rs. 20,000/- being the amount of compensation for loss of services paid to him on the termination of his services. Before the Income-tax Officer it was contended on behalf of the assessee that the sum of Rs. 20,000/- which was received by him as compensation on termination of his services was assessable under section 10(5A) of the Income-tax Act, 1922. That contention of the assessee was rejected by the Income-tax Officer and he held that the amount of Rs. 20,000/- was assessable under Explanation 2(i) to section 7 of the Act.

4. In an appeal by the assessee before the Appellate Assistant Commissioner the very same contention was advanced. It was rejected by him holding that the assessee served the company in the capacity of an employee. In view of this position the Income-tax Officer was justified in assessing the amount of Rs. 20,000/- under the head 'salary'. He accordingly confirmed the order passed by the Income-tax Officer and dismissed the appeal that was preferred by the assessee.

5. In a second appeal by the assessee before the Appellate Tribunal, the short question that arose for consideration before it was whether on the facts and in the circumstances of the case the sum of Rs. 20,000/- received by the assessee on the termination of his services as manager was to be assessed under section 10(5A) or under section 7, Explanation 2(i) of the Act. If it was assessable under section 10(5A), the assessee was entitled to spread over this amount, if the so elected, for three years immediately preceding the previous year in which the compensation was received by him. The Tribunal took the view that the assessee was manager of an Indian company and that the payment was received by him in connection with the termination of his office as manager of an Indian company. The Tribunal pointed out that the provisions of Explanation 2(i) to section 7 would apply to all employees except those whose cases come under the provisions of section 10(5A). The Provisions contained in section 10(5A) are specific provisions covering the cases of employees of Indian companies who are either a managing agent, a manager or a person by whatever name called who managers the whole or substantially the whole affairs of the company. The Tribunal took notice of the fact that the provisions contained in section 10(5A) were specific and special provisions and if the case was covered by such provisions then it could not be governed by the general provision contained in the Explanation 2(i) to section 7. On a scrutiny of the various provisions contained in the agreement the Tribunal came to the conclusion that the assessee was a Manager. As a result of this finding the assessee was entitled to the benefit of the provisions contained in section 10(5A) and was entitled, if he so elected, to have the tax computed at the average of the rates of income-tax and super-tax applicable to his total income for the three years immediately preceding as therein provided. From this order of the Tribunal at the instance of the Revenue the following question is referred to for our determination :-

'Whether on the facts and in the circumstances of the case the sum of Rs. 20,000/- received by the assessee on the termination of his services by the company is assessable under Explanation 2(i) to section 7 or under section 10(5A) of the Indian Income-tax Act, 1922 ?'

6. Mr. Joshi on behalf of the Revenue contended that the sum of Rs. 20,000/- which was received by the assessee was salary within the head 'Salaries' contained in section 7 of the Act. He submitted that the provisions of that section are wide enough to include under the head 'salaries' profits in lieu of salary paid by the company. He submitted that the expression 'profits in lieu of salary' is defined in Explanation 2 to that section and the case of the assessee was directly covered by clause (i) of that Explanation. He therefore submitted that the sum of Rs. 20,000/- which was received by the assessee was rightly assessed by the taxing authorities, namely, the Income-tax Officer and the Appellate Assistant Commissioner under Explanation 2(i) to section 7. He submitted that the provisions of section 10(5A) could not be applied in this case and the Tribunal was in error in taking the view that the case of the assessee was covered by section 10(5A) and he was entitled to make an election to spread it over for a period of three years as therein provided.

7. The answer to the question referred to will depend upon the fact whether the case of the assessee in respect of assessment of the sum of Rs. 20,000/- is covered by the Explanation 2(i) to section 7 or is covered by the provisions 10(5A) of the Act. If the case is covered by Explanation 2(i) to section 7, then the contention urged by Mr. Joshi on behalf of the Revenue shall have to be accepted, but if it is not so covered and it is covered by the provisions of section 10(5A), then the view taken by the Tribunal in favour of the assessee is justified and legal and the question shall have to be answered against the Revenue. The material part of section 7 for the present purpose is as under :-

'7. Salaries .... (1) The tax shall be payable by an assessee under the head 'Salaries' in respect of any salary or Profits in lieu of ... which are allowed to him by or are due to him, whether paid or not, form, or are paid by or behalf of .... a company ...

x x x Explanation 2 ... For the purpose of this section, 'profit in lieu of salary, includes,

(1) the amount of any compensation due to or received by an assessee from his employer at or connection with, the termination of his employment, whether solely as compensation for loss of employment or for any other consideration.

................................'

8. The material part of section 10 for the present purpose is as under :-

'10. Business .... (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him.

x x x '(5A) Any compensation or other payment due to or received by :-

(a) a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company;

(b) a manager of an Indian company at or in connection with the termination of his office or modification of the terms and condition relating thereto;

(c) any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(d) any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto;

shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax 'accordingly; and the tax on such compensation or other payment shall, if the assessee so elects, be computed at the average of the rates of income-tax and super tax applicable to his total income for the three years immediately preceding the previous year in which the compensation or their payment was due or received.'

9. The word 'manager' is defined in section 2(8A) of the Act as under :-

'2(8A). 'manager' and 'managing agent' have the meanings respectively assigned to them in the Indian Companies Act, 1913 (VII of 1913);'

The word 'manager' was defined in section 2 (9) of the Indian Companies Act as under :-

'2(9) 'manager' means a person who, subject to the control and direction of the directors has the management of the whole affairs of company, and includes a director or any other persons occupying the position of a manager by whatever name called and whether under a contract of service or not.'

It should be noted that the provisions contained in section 7 of the Act are general provisions applicable to salary, while provisions contained in section 10(5A) are specific or special provisions relating to compensation that may be received by a managing agent or a manager or any other person of the type referred to therein. If a case is of a manager which is covered by section 10(5A) then that section being a specific or special provision will prevail over the general provisions contained in section 7. Mr. Joshi may to a certain extent be right when he says that what is received by the assessee under the terms of the contract from the company amounts to 'profits in lieu of salary' as defined in Explanation 2(i) to section 7 of the Act, because under that Explanation the amount of any compensation due to or received by an assessee from his employer at or in connection with, the termination of his employment, whether solely as compensation for loss of employment or for any other consideration is included in the expression 'profits in lieu of salary'. So far as section 10 is concerned it contains specific provisions relating to business and sub-section (5A) of that section expressly deals with compensation or any other sum received by a manager in connection with termination of his office or by any person by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories at or in connection with the termination of his office.

10. If regard be had to the terms of the agreement entered into by the company with the assessee, there can be no doubt whatsoever that the assessee is a manager as defined in section 2(8A) of the Income-tax act, 1922 read with section 2(9) of the Indian Companies Act, 1913. Under that definition a person who, subject to the control and direction of the directors, has the management of the whole affairs of a company, is a manager. Upon a security of the indenture of agreement dated Oct. 29, 1949 there can be no doubt whatsoever that so far as the company was concerned the assessee was appointed as its manager. Apart from the fact that he was described as a manager, the duties assigned to him were such that he would satisfy the definition of the word 'manager' contained in section 2(9) of the Indian Companies Act, 1913. Under clauses 1 and 2 of the agreement the assessee was appointed by the company as its manager to manage the whole affairs of the company for a period of fifteen years with effect from November 1, 1949 and as such manager he was to manage the affairs of the company diligently, faithfully and honestly. When such duties are to be discharged by the assessee there can be no controversy that he is a manager. Compensation was paid to him in accordance with the letter part of clause 6 of the agreement between the assessee and the company. The first part of clause 6 permits the company to terminate the services of the assessee as manager on the ground of inefficiency or incapacity or unfaithfulness or on the manager accepting any other service, while the latter part of clause 6 provides that if this agreement, that is to say the appointment of Joshi as manager, is terminated by the company for the reasons other than stated above, the company shall pay to said Joshi the remuneration for the unexpired period of his contract as compensation. The sum of Rs. 20,000/- which is referred to in this question is paid to the assessee as compensation for the unexpired period of his contract under the latter part of clause 6, because his services were terminated for reasons other than those specified in the former part of that clause.

11. Though ordinarily a manager may be regarded as an employee who is entitled to salary, the provisions contained in section 7 of the Act are general provisions relating to salary, and if a case is covered by the specific provisions contained in section 10 (5A), which are special provisions, then undoubtedly, the special provisions will prevail over the general provisions contained in section 7. In the present case the entire payment of Rs. 20,000/- to the assessee is covered by the provisions of section 10(5A) as it is compensation paid to the assessee as manager of an Indian company in connection with the termination of his office, or it is compensation paid to a person managing the whole or substantially the whole affairs of any other company in the taxable territories, in connection with the termination of his office. When such was the case, the Tribunal was justified in taking the view that the case being specifically covered by the special provisions contained in section 10(5A) the claim made by the assessee is governed by the special provisions rather than the general provisions contained in section 7, Explanation 2(i).

12. It was urged by Mr. Joshi that the provisions of section 10 will apply only in respect of business and as the assessee as a manager cannot be regarded as carrying on any business, the provisions of section 10(5A) cannot be attracted. Section 10 deals with liability to pay tax of an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profit or gains of any business, profession or vocation carried on by him. There can be no doubt having regard to the definition contained in section 2(9) of the Indian Companies Act, 1913 that a person occupying the position of a manager of an Indian Company is carrying on profession of management of the business of a limited company. Sub-section (5A) of section 10 which has been quoted above contains deeming provision and under that sub-section any compensation received by a manager in connection with the termination of his office shall be deemed to be the profits or gains of a business carried on by the manager. Whenever a deeming provision is contained in a statute the legislature required a particular state of affairs to be assumed which otherwise may not in fact exist. Thus having regard to the language of sub-section (5A) of section 10 whatever compensation is received by the assessee as the manager in connection with the termination of his office is deemed to be the profit or gains of a business. The case is therefore directly covered by section 10(5A) which is a specific provision and will prevail over the general provisions contained in Explanation 2(1) to section 7.

13. In the result, our answer to the question referred to is as under :-

On the facts and in the circumstances of the case the sum of Rs. 20,000/- received by the assessee on the termination of his services by the company is assessable under section 10(5A) of the Indian Income-tax Act, 1922.

The Revenue shall pay the costs of the assessee.


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