S.K. Das, J.
1. V.D. Talwar, who was assessee before the taxing authorities and whoselegal representatives on his death are appellants before us, was employed asthe General Manager of Messrs J. K. Iron and Steel Company Ltd., Kanpur. Theterms of his employment as agreed upon by the assessee and the Company wereincorporated in an appointment letter dated February 7, 1946. A formalmemorandum of agreement was also executed between the parties on February 9,1946. The assessee actually joined the service of the company on May 1, 1946.According to the service agreement the pay of the assessee was fixed at Rs.2,000/- per month with an increment of Rs. 100/- p.a. subject to certaindeductions for income-tax, absence of duty etc., which need not be set out indetail for the purpose of this case. According to the agreement the period ofservice was for five years. Clause (5) and (6) of the appointment letter read -
'(5) Period of agreement ofservice to be five years.
(6) Termination of service ifwithin five years to be on notice of twelve months on either side or salary inlieu thereof.'
2. Clause (1) of the memorandum of the agreement dated February 9, 1946 saidthat the employee shall serve the employer faithfully and diligently for a termof five years from the date he joins, and clause 21 read as follows :
'If during the currency of this agreement, theemployee desires to leave the services of the employers for any reasonswhatsoever, he shall be at liberty to terminate the agreement by giving twelvecalendar months' notice in writing only after repaying to the employer joiningmoney and all expenses if they have been allowed to the employee, and theemployers shall have full power to take all necessary steps in order to enforcesuch payment. The employers may terminate the service of the employee by givingtwelve calendar months' notice in writing or (in the case of breach of any ofthe terms or conditions contained herein at any time without any notice) orpaying any salary in lieu thereof.'
3. We have stated earlier that the assessee joined his post as GeneralManager on May 1, 1946. The services of the assessee were however terminatedwith effect from August 31, 1947. It is the admitted case of the parties thatthe services of the assessee were not terminated for any default or misconducton the part of the assessee, but the services were terminated because thecompany did not want to continue the assessee in their employment. It is alsothe admitted case that no notice of twelve months for the termination of theservice was given by the company to the assessee as required by the contract.In lieu of the notice the company paid to the assessee on September 12, 1947 asum of Rs. 18,096/1/0 which was the amount computed as salary for twelve monthsafter deduction of income-tax at the source. The company calculated the salaryfor the twelve months at Rs. 25,200/- and deducted therefrom the sum of Rs.7,103/15/0 as income-tax. The assessee gave a stamped receipt to the companyfor having received Rs. 18,096/1/0 'in full and final settlement of allhis claims and dues against the employer company.'
4. In making the assessment for the year 1948-1949 the Income-tax Officerheld that the sum of Rs. 25,200/- was a revenue receipt of the assessee liableto be taxed under the Indian Income-tax Act, 1922 and rejected the claim of theassessee that the said sum was compensation for loss of employment and the taxamounting to Rs. 7,103/15/0 should be refunded to him. The assessee took anappeal to the Appellate Assistant Commissioner who held that the sum of Rs.25,200/-, though calculated on the basis of twelve times his monthly salary,was nothing but compensation for the loss of service and was therefore nottaxable as income in the shape of salaries. Then there was an appeal to theIncome-tax Appellate Tribunal which reversed the finding of the Appellate AssistantCommissioner and held that the amount of Rs. 25,200/- paid to the assessee wasreally salary in lieu of twelve months' notice and, therefore, the amount wasliable to be taxed under the Indian Income-tax Act, 1922. Under s. 66(1) of theIndian Income-tax Act, the Income-tax Appellate Tribunal referred the followingquestion of law for the opinion of the High Court :
'Whether the sum of Rs. 25,200/- received by theassessee during the previous year was the revenue income of the assessee liableto tax under the Income-tax Act ?'
5. By its judgment and order dated November 22, 1960 the High Court answeredthe question against the assessee. The assessee then obtained special leavefrom this court in pursuance whereof the present appeal has been brought to thiscourt.
6. The short question before us is, whether the sum of Rs. 25,200/- receivedby the assessee in the circumstances stated above was a revenue income liableto tax under the Indian Income-tax Act or a capital receipt not liable to taxunder the said Act
7. We think that the view taken by the High Court is correct. In Henry (H.M. Inspector of Taxes) v. Arthur Foster and Henry (H. M. Inspector of Taxes) v.Joseph Foster (1932) 16 T.C. 605, Romer, L.J. said ''Compensation forloss of office' is a well-known term and it means a payment to holder of anoffice as compensation for being deprived of profits to which as betweenhimself and his employer he would, but for an act of deprivation by hisemployer or some third party such as the Legislature, have been entitled.'This court accepted the same meaning in The Commissioner of Income-tax BombayCity I, Bombay v. E. D. Sheppard, Bombay : 48ITR237(SC) , and said thatthe emphasis was on the act of deprivation which may or may not give rise toany liability at law. Now, in the present case it is quite clear that the twoterms in cls. (5) and (6) of the appointment letter and cls. 1 and 21 of thememorandum of agreement must be read together and so read the true positionthat emerges is that the contract of services provided that V. D. Talwar couldserve either for five years at a monthly salary mentioned therein or, if thecompany so elected, for a shorter period upon the terms mentioned in clause 21.If the terms of clause 21 were compiled with, then it could not be said that V.D. Talwar had surrendered any rights under the contract or had been deprived ofany such rights. The Court of Appeal dealt with the aforesaid two cases Henry(H. M. Inspector of Taxes) v. Arthur Foster (1932) 16 T. C. 605, and Henry(H. M. Inspector of Taxes) v. Joseph Foster (1932) 16 T.C. 605 along with athird case, Hunter (H. M. Inspector of Taxes) v. Dewhurst (1932) 16 T.C.605. It came to the same conclusion in all the three cases, though the factswere a little different in the third case where the respondent desired toretire from active management of the company but his co-directors wished to beable still to consult him and it was agreed that he should resign the office ofChairman, receive as 'compensation' a lump sum in lieu of theprovision under article 109, waiving any future claim under that article andremain on the Board of the company at a reduced rate of remuneration. Thedecision in this third case was taken to the House of Lords. Lord Dunedinpointed out that assuming that the view of the Court of Appeal in the Fostercasee was right on consideration of how the question stood upon the soleconsideration of the rights arising under article 109, a different questionarose in the case of Dewhurst; because Dewhurst was not paid in terms ofarticle 109 but entered into a new bargain in pursuance of which he was paidpound 10,000 in consideration, not of ceasing to be a director, for he did notcease, but of giving up his potential claims under article 109. His Lordshipsaid that this payment for giving up potential claims under article 109 was notincome. This was a feature which distinguished Hunter (H. M. Inspector ofTaxes) v. Dewhurst (1932) 16 T.C. 605, from the two Foster cases (Supra) andit brought into relief the distinction between the two classes of cases, one inwhich there is deprivation of rights under the agreement and this would fallunder compensation and the other in which there is no such deprivation. PerhapsSir Raymond Evershed, M. R. (as he then was) had this distinction in mind whenin Henley v. Murry (H. M. Inspector of Taxes (1950) 31 T.C. 351), he saidthat there were two kinds of cases which fell for consideration under this head: one in which the right of one party to call upon the other for performance ofthe terms of agreement may be modified or indeed wholly given up, still thecorresponding right to acquire payment either of the whole sum or some lessfigure is preserved and is still payable under the contract and the other iswhere the contract itself goes altogether and some sum becomes payable for theconsideration of the total abandonment of all the contractual rights which theother party had under the contract. In one class of cases the contract persistsand the amount is payable under the contract and in the other class of casesthere is total abandonment of all contractual rights and what is paid is inconsideration of that abandonment. The present case in our opinion comes underthe first of these two classes.
8. Now, the High Court has rightly pointed out that the principle which willapply in a case like this is that laid down in Dale (H. M. Inspector of Taxes)v. De Soissons (1950) 32 T.C. 118.. There the respondent was employed asassistant to the managing director of a company, his remuneration consisting ofa fixed salary of pound 3,000 per annum and a commission calculated on profits.Under the terms of his service agreement, the respondent's appointment was tobe for three years from January 1, 1945 but the company was entitled toterminate the agreement at December 31, 1945 or December 31, 1946 on payment ofpaid pound 10,000 or pound 6,000 respectively, as compensation for loss ofoffice. The company terminated the agreement at December 31, 1945 and paidpound 10,000 to the respondent. It was held that the Payment was notcompensation for loss of office. Roxburgh, J. who dealt with the case in thefirst instance pointed out that the agreement of service must be read as awhole and so read the agreement provided that the respondent's employment wasto be for three more years unless curtailed under clause 4 or clause 5 and thathe was to receive as a profit for his employment the payments provided by theagreement including the payment provided by clause 5; therefore the respondenthad never any right to be employed for three more years and had no legal claimwhich would justify compensation. He then said that the respondent surrenderedno rights under the agreement and got exactly what he was entitled to get underhis contract of employment. Here the position is exactly the same. It is truethat under one of the clauses of the agreement of service V. D. Talwar was toserve for five years; but under another term of the same agreement it wasprovided that the employer might terminate the service of V. D. Talwar bygiving twelve calender months' notice in writing or paying any salary in lieuthereof. The expression 'any salary' must be construed in the contextof the appointment letter which said that if Mr. V. D. Talwar's service was tobe terminated within five years he would be entitled to a notice of twelvemonths or salary in lieu thereof. No notice for the termination of service wasgiven to him in the present case, but he was given twelve months' salary. Hetherefore got exactly what he was entitled to under the terms of his employmentand he was not deprived of any rights under the contract of service. Therebeing no deprivation of his rights under the contract, the payment cannot besaid to be 'compensation for loss of office' within the meaning ofthat expression. Jenkins, L. J. observed in Henley v. Murray (1950) 31 T.C.351..
'As the many cases on the topic show, it is oftenvery difficult to determine the character of a payment made to the holder of anoffice when his tenure of the office is determined or the terms on which heholds it are altered, and the question in each case is, whether, on the factsof the case, the lump sum paid is in the nature of remuneration or profits inrespect of the office or is in the nature of a sum paid in consideration of thesurrender by the recipient of his rights in respect of the office.'
9. In the present case, if V. D. Talwar had been served with a notice forthe termination of his service he would have worked for twelve months and gothis salary and thereafter his service would have come to an end. Instead ofgiving him a notice the company paid him twelve months' salary in lieu thereof.The true position is that he received twelve months' salary in respect of hisoffice though he did not do any work for that period. By no stretch ofimagination can it be said that the sum paid to him was in consideration of thesurrender by the recipient of his rights in respect of the office. It is worthyof note here that in Henley v. Murray (1950) 31 T.C. 351., their Lordshipscame to the conclusion that what was paid to the appellant in that case waspaid in consideration of his surrendering his right to serve on and beremunerated down to the end of his contractual engagement, for in that case theappellant had the right to continue in service till March 31, 1944 and hisservice was terminable by three months' notice only after that date. He howeverresigned at the request of the Board of Directors on an earlier date, namely,September 2, 1943. Therefore, the principle laid down is Henley v. Murray(1950) 31 T.c. 351., is not the principle which is applicable in the presentcase.
10. Learned counsel for the appellant has then relied on Duff (H. M.Inspector of Taxes) v. Barlow (1941) 23 T.C. 633.). That was also a case wherethe parties agreed that the arrangement arrived at between them should subsistup to 1945 though no exact percentage of the remuneration payable was fixed.The arrangement however was brought to an end prematurely in November 1937 andin consideration of his premature termination some remuneration was paid forservices up to November, 1937 and a sum of pounds 4,000 was paid ascompensation for the loss of the employee's right to future remuneration underthe earlier agreement of 1935. In these circumstances it was held that the sumof pounds 4,000 was received by the respondent of that case not under contractof employment nor as remuneration for services rendered or to be rendered butas compensation for giving up a right to remuneration. We are unable to see howthat decision is of any help to the appellant in the present case. It seemsclear to us that in the present case the appellant has surrendered no rightsunder the contract; what has been paid to him has been paid under the terms ofcontract and as salary which he would have earned if twelve months' notice hadbeen given to him. As no notice was given he was treated as though he was inservice and entitled to salary for twelve months and that was what was paid tohim. It is difficult to see how such payment can be treated as compensation forloss of office.
11. The present case is similar to the two cases of Henry v. Arthur Fosterand Henry v. Joseph Foster (1932) 16 T.C. 605. and different from the case ofHunter v. Dewhurst (1932) 16 T.C. 605. In the first two cases therespondents were directors of a limited company. They had no written contractsof services with the company but Article 109 of the company's articles providedthat in event of any director who held office for not less than five years,dying or resigning as ceasing to hold office for any cause other thanmisconduct, bankruptcy, lunacy or incompetence, the company should pay to himor his representatives by way of compensation for loss of office a sum equal tothe total remuneration received by him in the preceding five years. The respondentsresigned office as director in these two cases and received from the company as'compensation' a payment calculated in accordance with Article 109.It was held by the Court of Appeal that the payment constituted a profit of theoffice of Director and was properly assessable to income-tax. Lord Hanworth, M.R. said at page 629 :
'Now it is argued that those sums which becamepayable under the terms recorded in article 109 were compensation for the lossof office. Is that the substance of the matter When a man has died he is notcompensated for the loss of his life : if he resigns voluntarily, why should hebe paid compensation for the loss of his office It would seem as if thosewords were put in in view of the possibility thereunder of escaping the chargeto tax; but, as I have said, we have got to look at the substance of thematter, and the substance of this payment is this : It is contemplated as apart of the remuneration of the Director payable to him, and estimatedaccording to his service during a certain time, and in addition to the amountpaid to him under clause 104, there shall be estimated a sum which is to fallto be paid to him under clause 109.'
12. Lawrence L.J. said at page 632 :
'In my judgment, the determining factor in thepresent case is that the payment to the Respondent whatever the parties mayhave chosen to call it was a payment which the company had contracted dot maketo him as a part of his remuneration for his services as a director. It is truethat payment of this part of his remuneration was deferred until his death orretirement or cesser of office, and that in the articles it is called'compensation for loss of office.' It is, however, a sum agreed to bepaid in consideration of the Respondent accepting and serving in the office ofDirector, and consequently is a sum paid by way of remuneration for hisservices as Director.'
13. It seems to us that the same principle should apply in the present case.What has been paid to the appellant is his salary in lieu of notice. If that isthe true position then the amount paid is taxable under s. 7 of the IndianIncome-tax Act, 1922. It is not compensation for loss of employment within themeaning of Explanation 2 thereto.
14. For the reasons given above we think that the High Court correctlyanswered the question. The appeal fails and is dismissed with costs.
15. Appeal dismissed.