S.T. Desai, J.
1. A very short question arises for determination on this reference under section 66(1). The assessee worked as a managing director of the Cement Agencies Ltd., for many years in these circumstances. The Associated Cement Companies Ltd., was incorporated in 1936. Four groups of businessmen were interested in forming that company as also the Cement Agencies Ltd. which was appointed as the managing agents f the Associated Cement Companies Ltd. The four parties have been briefly described in the record as Killicks, Tatas, Khataus and F. E. Dinshaw Ltd. Clauses 4 and 5 of the agreement between the four groups and the Cement Agencies Ltd. are as under :
'Clause 4 : The articles of Cement Agencies Ltd., (hereinafter referred to as 'the articles') shall provide that there shall be not less than four and not more than eight directors of the company and so long as Killicks, Tatas, Khataus and F. E. Dinshaw Limited shall hold not less than 20 shares in the capital of the company they will each respectively be bound to appoint one director (hereinafter called 'a managing director') of Cement Agencies Limited with liberty from time to time to remove the same and appoint another in his place and they shall also be entitled to appoint another director (hereinafter called a 'nominated director'). Managing and nominated directors shall not be liable to retire by rotation. Each managing director shall be a person well conversant with cement manufacturing business and capable of managing efficiently the business and affairs of the Cement Agencies Limited.'
'Clause 5 : Each managing director shall devote the whole of his time and attention to the business of the company and he shall be paid for his services by the party appointing him.'
2. In pursuance of clause 4 of that agreement, the assessee represented F. E. Dinshaw Ltd. on the board of directors of Cement Agencies Ltd. and his status was that of one of the four managing directors and as mentioned in that agreement his remuneration was paid not by the Cement Agencies Ltd. but by F. E. Dinshaw Ltd. The basis of that may be received by F. E. Dinshaw Ltd. and was recorded in a letter addressed by Mr. F. E. Dinshaw to the assessee on 29th October, 1935. It is not necessary to set out the terms of the employment recorded in that letter and it will suffice to observe that the minimum salary payable to the assessee was Rs. 60,000 per annum. In fact his annual emolument for many years was much large than that and exceeded Rs. 1 lac. The assessee continued to be in the employment of F. E. Dinshaw Ltd. and as such continued as one of the managing directors of Cement Agencies Ltd. up to 1st October, 1951, when came into existence certain changes which inter alia affected the assessee. As from 1st October, 1951, the services of the assessee were terminated by F. E. Dinshaw Ltd. and he was thereafter employed by Cement Agencies Ltd. On 27th November, 1951, a resolution was passed by the board of directors of Cement Agencies Ltd. which was as under :
'Resolved that the services of the managing directors appointed by the respective groups, namely, Mr. S. S. Captain, Mr. J. H. Patel and Mr. Haridas Gopaldas be taken over by Cement Agencies Ltd. 1-10-1951 and Col. L. Sawhny on expiration of his leave from 1-12-1951 and their remuneration borne by the company from the said dates.'
3. On 5th December, 1951, a letter was addressed by the chairman of the board of directors of the Cement Agencies Ltd. to the account of Associated Cement Companies Ltd. and in that letter it is stated that it had been decided by the Cement Agencies Ltd. to take over the services of the four representatives of the four groups from 1st October, 1951, and the terms on which their services were taken over are mentioned in that letter. The remuneration that was to be paid to the assessee is mentioned there as Rs. 3,600 per month and in addition to that he was to get certain allowances. On 27th December, 1951, the assessee addressed a letter to Mr. F. E. Dinshaw Ltd. In that letter he put on record certain facts relating to his 30 years of service. He also referred to certain discussions which had taken place between him and Messrs. F. E. Dinshaw Ltd. In the penultimate paragraph of that letter he stated :
'I further pointed out that my remuneration at present amounted to nearly Rs. 11,000 a month and it would probably to on increasing every year in the circumstances of the case. I, therefore, claimed compensation of not less than Rs. 3 lakhs, even allowing for the fact of your having secured me a job with Cement Agencies Ltd.
After discussion at several meetings it has been agreed between you and me that you should pay me the sum of Rs. 1 lakh as compensation for the termination of my employment.'
4. It is to be noticed that in this letter the assessee placed on record the fact that Messrs. F. E. Dinshaw Ltd. has agreed to pay him a sum of Rs. 1 lakh as 'compensation for the termination of my employment'. On 28th December, 1951, the managing director of Messrs. F. E. Dinshaw Ltd. wrote to the assessee acknowledging receipt of the letter of 27th December, 1951, and by that letter the agreement to pay the assessee Rs. 1 lakh 'as compensation for termination of your employment with us' was confirmed. Along with the letter a cheque for Rs. 1 lakh was sent to the assessee. Now, by 1st October, 1951, the Cement Agencies Ltd. had not declared any dividend for that year but that dividend was declared about six months later. The assessee was paid full year's remuneration as he had been paid in the past and he received as remuneration up to the date of termination of his services a sum of Rs. 1,34,300. Over and above that, he received the sum of Rs. 1 lakh of which we have already made mention. This sum of Rs. 1 lakh was claimed by Messrs. F. E. Dinshaw Ltd. as a revenue deduction but we are not concerned in this reference with what question. That question, we are informed, arises in the next reference before us. The assessee claimed before the Income-tax Officer that the sum of Rs. 1 lakh received by him from Messrs. F. E. Dinshaw Ltd. was a capital receipt. The Income-tax Officer took the view that it was not compensation for the loss of employment but a payment made to an employee for past services.
5. It will be convenient here to refer to section 7(1) of the Income-tax Act as it stood before its amendment by the Finance Act of 1955. That sub-section as also Explanation 2 to that sub-section were amended in 1955. Here we are concerned with the enactment as it stood prior to 1955. The words 'compensation for loss of employment' occur in Explanation 2 to sub-section (1) of section 7. The material parts of the sub-section and the Explanation are as under :
'Salaries-(1) The tax shall be payable by an assessee under the head 'Salaries' in respect of any salary or wages,..... in lieu of, or in addition to, any salary or wages, which are due to him from..... any private employer.'
'Explanation 2 :- A payment due to or received by an assessee from an employer or former 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.'
6. The Appellate Assistant Commissioner allowed the assessee's appeal. He took the view that the payment was made not on account of past services but was as compensation for termination of employment. The Department carried the matter in appeal to the Tribunal and the Tribunal held that the Appellate Assistant Commissioner had misjudged the whole position. It took note of the fact that there was no unexpired period of the contract of service between F. E. Dinshaw Ltd. and the assessee. It also took note of the fact that the assessee was a fairly old man and observed that 'his services normally could be terminated by F. E. Dinshaw Ltd. by giving a reasonable notice. F. E. Dinshaw Ltd. had already been very liberal inasmuch as they had given him salary for the whole year. Over and above what was paid as remuneration he also got a lakh of rupees. We do not think that the Appellate Assistant Commissioner is right when he says that the nature of the payment is not of the nature of gratuity for past services. F. E. Dinshaw Ltd. were not bound in law to continue with the services of the assessee. If after giving reasonable notice the assessee's services were terminated, he could not have filed a suit for the recovery of damages or for specific performance.......... A horse does not become a dog if the parties agree to call it such.' What weighted with the Tribunal was the circumstance that the assessee was never out of job and his services were immediately taken up by the Cement Agencies Ltd. It also took note of the fact that the assessee continued to do the same job sitting in the same office and the only difference was that F. E. Dinshaw Ltd. and the Cement Agencies Ltd. agreed that the assessee's salary should be borne by the Cement Agencies Ltd. and not by F. E. Dinshaw Ltd. Then the Tribunal observed that in order to style a payment as compensation for termination of employment, it is essential that the assessee should have a legal right to demand the payment. That legal position has not been challenged before us on behalf of the assessee. The Tribunal reached the conclusion that this was not a case of compensation for termination of employment but of a voluntary payment made by an employer of the nature of gratuity.
7. The questions we are called upon to answer on this reference are :-
'(1) Whether on the facts and in the circumstances of the case, the sum of Rs. 1 lakh received by the assessee from F.E. Dinshaw Ltd. is income of the assessee see and liable to be assessed under the Income-tax Act
(2) Whether on the facts and in the circumstances of the case, the assessee is entitled to the benefit of the F. D. Notification No. 878-F. dated 21-3-1922 as amended by Notification No. 8 dated 24-3-1928 ?'
8. Now, we have already mentioned that the question of assessment of F. E. Dinshaw Ltd. was also before the Department. About a yea before this order made by the Tribunal, that matter had been before the Tribunal and one of the points which arose for consideration before the Tribunal in that case was about the nature of this payment. The president accepted what was recorded in the two letters of 27th December, 1951, and 28th December, 1951, mentioned by us as recording a genuine arrangement. The accountant member expressed the view that the letter dated 27th December, 1951, written by the assessee to F. E. Dinshaw Ltd. was a made up affair. Now, it is not for us in this reference to express any opinion about the bona fields of the transaction recorded in the two letters because in the statement of the case before us the Tribunal has treated the two letters as recording a genuine arrangement and no doubt is cast on the existence of the agreement recorded in the two letters. We have to proceed, therefore, on the footing that the two letters recorded an arrangement which was bona fide arrived at between the parties, and if the arrangement was bona fide arrived at between the parties, we are not aware of any principle of law on which it can be said that the reason for the payment recorded in that letter is not to accepted by the Department. The order of the Tribunal if examined clearly shows that it proceeds on the footing that the substance of the arrangement was different from its form. The doctrine of substance went by the board many years ago and the Privy Council in the well-known case of Chettinad Bank accepted the principle which was laid down by the House of Lords in England. The court cannot ignore the form of the transaction and say that it will only have regard to the substance of the matter. What is meant is that the legal position cannot be ignored in these matters. It is not meant that a colourable transactions not to be probed into but that is a different matter which would raise different considerations. Here, as we had already mentioned, there is no suggestion and there could be no suggestion that the transactions a colourable one. This is one of those cases in which the court has to notice and have regard to the forma specific of the two letters. But even apart from this legal aspect of the matter, on merits it is difficult for us t see how it can be said that this payment was not one for compensation for loss of employment once it is accepted that the genuineness of the transaction cannot be challenged.
9. It has been argued by Mr. Joshi, learned counsel for the Revenue, that if the facts of the case are properly appreciated, it would appear that there was in this case no loss of employment and that if there was no loss of employment, there could be no question of any compensation for the same and no question of the payment being claimed as having been received as a capital receipt. We agree with Mr. Joshi that if on the facts of this case we come to the conclusion that there was no loss of employment, the assessee must fail in his contention.
10. Now, let us see how Mr. Joshi builds up this submission of his. It is said that the assessee was a managing director of the Cement Agencies Ltd., and according to the arrangement between him and F. E. Dinshaw Ltd. he had to device his whole time to the affairs of the Cement Agencies Ltd. It was added that there was not even a day's break between the termination of the original agreement and the operation of the revised agreement. Mr. Joshi relied on the words 'services to be taken over' in the context of the services of the assessee and others and said that the same services which were being rendered continued to be rendered after they were taken over. It was urged that the position of the assessee as a managing director was not in the least disturbed be the new arrangement. It was a tripartite arrangement, so the argument ran, and the only change was that the financial burden of paying the emoluments of the assessee was transferred from F. E. Dinshaw Ltd. to the Cement Agencies Ltd. Then Mr. Joshi said that every one concerned understood that the employment of the assessee continued as before with some slight variation. It was emphasised that all along the assessee served Cement Agencies Ltd. and continued to serve Cement Agencies Ltd. after the variation in the arrangement. Now, the whole argument is founded on a fallacy and ignores the plain language of Explanation 2 itself and section 7(1). A prime question on the point of compensation for loss of employment of the nature before us is; Who was the employer and who was the employee There is a loss of employment if the employer terminates the services of the employee. The mere fact that the employee immediately gets another service with a third party or with a party with which the employer himself is connected makes little difference. The exemption relation to compensation for loss of employment relates to an employment queued the same employer and the same employee. The crucial matter is : In whose employment was the assessee and whether that employment was terminated resulting in a loss of employment of the employee In considering whether there was or was not any loss of employment, the question that the court would have to consider would be : Who is it that was paying the salary to the employee who appointed him and who could have terminated his services - A different way of putting the same thing, though not in an elegant manner, would be : Who paid the piper - It is not possible in this context to consider the question of element of the personality of the employer. But says Mr. Joshi, all this makes no difference and does not matter. If the employee continued to do the same work, there could be no loss of employment. We are unable to accept this argument. The facts before us are very simple and very clear and the only reasonable inference that can be drawn from those facts is that there was loss of employment though in fact it did not result in immediate discontinuance of the rendering of similar service by the assessee. It is also to be noted that the assessee was entitled to be remunerated on the quantum of dividends declared by the Cement Agencies Ltd. and in 1951, he was getting on an average Rs. 11,000 a month. The salary he was to be paid by the Cement Agencies Ltd., as we have already mentioned, was Rs. 3,600 per month with some additional allowances. In this set of facts, it is not possible for us to accede to the argument that there was no loss of employment. The real test, according to us, in a case of this type should be : Did the jural relationship between the employer and the employee come to an end If the jural relationship which created the legal status of master and servant between the parties was put an end to by a unilateral act of the employer it must result in a loss of employment from the point of view of the employee, and as we have already said when we started, the argument runs counter to the language of Explanation 2 itself. The question of compensation for loss of employment is to be considered in the matrix of Explanation 2 which is an explanation to sub-section (1) of section 7. Section 7 speaks of no relationship other than that between an employer and an employee.
11. A somewhat fine distinction was made by learned counsel for the Revenue when he said that a distinction must be drawn between termination of employment and loss of employment. We agree that there is some difference between the two concepts. A loss of employment is a result of the termination of employment But what we have to consider here is : Did the termination of employment result in loss of employment The distinction in the present context is rather fine and here we do not see how it can be said that there was no loss of employment. The fact that another employer, in the management of whose affairs the quondam employer had a large say, had employed the assessee makes no difference. The identity of the quondam employer and the Cement Agencies Ltd. was totally different.
12. Then, it was urged that there was a further aspect of the matter. It was said that no period was fixed for the duration of the employment in this case and reliance was placed on the contents of the letter addressed by Mr. F. E. Dinshaw to the assessee in 1935 at the time of his employment. It is true that the letter does not in terms say that the employment was of the nature of an annual service. At the same time, there is an important factor which cannot be overlooked and that is that the salary of the assessee was payable to him annually, and the minimum was assured as Rs. 60,000 per annum. That was in 1935 and the termination of the employment was in 1951. It is not necessary for us to express any opinion as to what precise amount of compensation the assessee would have got in a court of law if he had made a claim for damages or compensation for wrongful termination of his employment. That he would have been entitled to a reasonable notice has not been questioned by learned counsel for the Revenue. In such a case, the period of reasonable notice would certainly have been of more than six months. Of that we have no doubt. Therefore, the suggestion in this case that an inordinately large sum was paid to the assessee by F. E. Dinshaw Ltd. cannot be accepted. Moreover there is not much of a sequitor to this. Ultimately the suggestion of counsel came to be that the arrangement was not what it seemed to be on the face of it. But as we have already observed, it is not for us in this case to questioner doubt the genuineness of the arrangement recorded between the parties.
13. There are two questions referred to us and the second question, as Mr. Joshi has rightly pointed out, does not arise if our opinion on the first question is in favour of the assessee.
14. Our answer to the first question will be in the negative.
15. In view of what we have decided, it is not necessary to answer the second question.
16. Commissioner to pay the costs.
17. Reference answered accordingly.