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 our 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 exhibit A. Under clause (1) of exhibit 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 respondents services before the expiry of the full period of 14 years. In order to settle the question of damages recoverable by the respondent under exhibit A the company and the respondent entered into another agreement on May 20, 1952, marked exhibit B. By this agreement, the respondents services were terminated with effect form May 25, 1952. Under clause (3) of exhibit 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 exhibit 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 companys bungalow at Banjimli, 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, exhibit 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 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 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 sub-section 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 sub-section, 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 taxable under the said section. It is further urged by him that under clause (7) of exhibit 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 any body 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 the 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 assessees 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' 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 exhibit 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 form the following observation of their Lordships of the Supreme Court made in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax :
'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 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 exhibit A and exhibit 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, exhibit 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, exhibit 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 installments 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. 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 Rs. 26,000 received by the assessee was a revenue receipt assessable under the Indian Income-tax Act. It was observed by their Lordships that it was not always easy to decide whether a particular payment received by a per son 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 the 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 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. 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 form 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 service. It is crystal clear that this case is plainly distinguishable from the present one because there is nothing in exhibit B to show that the compensation given to the present assessee was for consideration of his past services. On the contrary, the language of exhibit 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. 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. 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 exactly what he was entitled to receive under his contract of employment and it was on account of that reason that the payment was held to be taxable. This case is clearly distinguishable from the present one, inasmuch as the assessee in the instant case has not received the full amount which he was entitled to get under the original agreement, exhibit A/1, but he has got a much lesser sum for compensation of loss of his office under the second agreement exhibit B.
On the contrary, we point out that in Beak v. Robson the assessee had entered into an agreement with a company whereby he was to be employed for a term of 5 years as director and manager at a certain salary. Under the agreement, the contract was made terminable by either side on 6 months notice in writing. It was also provided in the agreement that if it is determined by a notice or by breach of any provision of the agreement, then until the determination of the period of 5 years, Mr. Robson (assessee) shall not, without the consent in writing of the company, either solely or jointly, be engaged, concerned or interested in the business of coal exporter, coal merchant or shipbroker within fifty miles of Newcastle-upon-Tyne. On the execution of this agreement, he was paid a sum of Pounds 7,000 in consideration of the foregoing restrictive covenant. It was held by the House of Lords affirming the decision of the Court of Appeal that the sum of Pounds 7,000 was not chargeable to income-tax inasmuch as it was not a profit from the office of the director and manager but was a payment made to the assessee under a separate covenant which came into effect only when his services were concluded.
Similarly in In re Khosla the assessee who had considerable insurance experience was appointed as the manager of an insurance company. He was to receive a salary of Rs. 1,500 per month and a certain commission subject to a maximum of Rs. 20,000 in any one year. The agreement for service was for 5 years and it was provided that the period could be extended for another 5 years in certain circumstances. Subsequently, disputes arose between the assessee and the directorate and his services were terminated by an agreement dated October 6, 1938. The company agreed to pay him all his dues up to September 10, 1938, and in addition a lump sum of Rs. 1,10,000 in four installments. The question arose whether the installments received by the assessee were exempt from tax under Explanation 2 to section 7 (1) of the Act. It was held by the learned judges of the Lahore High Court that the lump sum payment made to Mr. Khosla for consideration of the termination of his employment did not include any remuneration for past services and must therefore be held to be solely compensation for loss of employment. It would appear that the above case is almost on all fours with the present one.
In Captain v. Commissioner of Income-tax the assessee was an employee of F. E. Dinshaw Ltd. The minimum salary payable to him was Rs. 60,000 per annum but his annual emoluments for many years exceeded rupees one lakh. From October 1, 1951, his services were terminated by F. E. Dinshaw Ltd., and he was immediately employed by the Cement Agencies Ltd., on a remuneration of Rs. 3,600 per month. As a result of certain discussion which took place between the assessee and F. E. Dinshaw Ltd., the latter agreed to pay him a sum of rupees one lakh as compensation for the termination of his employment. Under the circumstances, the question arose whether the sum of rupees one lakh was taxable in the hands of the assessee under section 7 (1) of the Income-tax Act. It was held that the amount received by the assessee by way of compensation for loss of employment was not taxable even though the loss of employment in fact did not result in immediate rendering of similar service by the assessee. It was further held that 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.
In Agarwala v. Commissioner of Income-tax the assessee was a general manager of a textile mills. He was appointed for a period of 5 years, at a specified monthly salary, with certain perquisites, and a commission on the net profits, by an agreement dated October 15, 1949. On July 2, 1951, the company served upon him a notice terminating his appointment. The assessee in his turn served a notice on the company demanding payment of Rs. 2,70,050 for termination of his employment. As a result of negotiations, it was agreed that the services of the assessee will be deemed to have been terminated with effect from July 2, 1951, and that the company shall pay to the assessee a sum of rupees one lakh in settlement of all his claims for compensation for termination of the agreement. The assessee also gave up all claims against the company and undertook for a period of one year not to engage himself on his own account or on behalf of others, within a specified area, in any profession or business which might be detrimental to the interest of the company. The question arose whether the sum of rupees one lakh received by the assessee was taxable. It was held that as the assessees employment was terminated, the payment made to him was not under the terms of the agreement of employment but was made as compensation for termination of employment and that the payment was therefore in the nature of a capital payment and was not assessable in the hands of the assessee. In that case it was urged on behalf of the department that the compensation made to the assessee was not solely for loss of employment. This argument was based on the ground that the assessee had made covenants in the agreement whereby he had undertaken not to accept within a radius of 100 miles from Chardum, employment which was prejudicial to the interest of the company and the assessee had abandoned all his rights arising under the terms of the agreement of employment or otherwise. Reference was also made to Explanation 2 to section 7 as it stood before the Act was amended in 1955. Repelling this argument, it was observed by the learned judges as follows :
'But, evidently on the Explanation, it cannot be said that a payment which is made as compensation but not solely for loss of employment must always be regarded as revenue receipt. The legislature regards a payment made solely for loss of employment, which is not made by way of remuneration for past services, as a capital payment. It is implicit in the Explanation that a payment made as remuneration for past services is to be regarded as a revenue payment. But in the absence of any express provision about payments which are neither of the nature of compensation paid solely for loss of employment, nor as remuneration for past service, it would be difficult to rely upon the Explanation to support the view that the payment is capital payment or revenue payment.'
Again, in Commissioner of Income-tax v. Sheppard the assessee was in the employ of Killick Nixon & Co., which was a partnership concern carrying on business on a large scale in India. This firm decided to recognise its business by converting itself into a company. The public company styled as Killick Industries Ltd., were promoted with a view to take over the business previously carried on by the said partnership. This necessitated the termination of the service of the assessee amongst other employees. The now public company - Killick Industries Ltd., took the assessee into its employment on fresh terms. The firm Killick Nixon & Co. transferred its assets to the new company and in lieu thereof received shares of the new company. Out of these shares, it gave to the assessee 1,700 shares whose market value at the material time amounted to Rs. 2,21,000. The income-tax department sought to tax the assessee on the footing that the shares were allotted to him for consideration of past service. It was however held by the learned judges of the Bombay High Court that the payment was made for compensation on account of loss of employment and was therefore not taxable. It was observed by the learned judges that 'It is true that by the Explanation a payment which is due to or received by an assessee form an employer or a former employer is to be regarded as profit received in lieu of salary for the purpose of sub-section (1) of section 7; but in our judgment the payment must be made because of the relation between the employee and the employer. If the object of the payment is unrelated to the relation between the employer and the employee, it will not fall within the expression profit received in lieu of salary in Explanation 2 to section 7 (1). Assuming, therefore, that a part of the compensation paid to the assessee was not solely for loss of employment but was attributable to the loss of future prospects which the assessee had of becoming a partner in future in the firm, that will not, in our judgment, be regarded as profit received in lieu of salary...' The learned judges held the payment as a capital receipt and not as a revenue receipt in the hands of the assessee.
A review of the above decisions would clearly show that 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 certainly taxable but if it is given as compensation for the loss of employment, then, it becomes a capital payment and is not assessable. It is of little consequence whether such a payment is made in a lump sum or in installments. The mere fact that the compensation is made by half-yearly or quarterly or monthly installments 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. In the present case, the assessee has received compensation for the loss of his employment. He had no doubt entered into restrictive covenants also but for observing these covenants, he was not required to render any kind of active service to his former employer. His relations with the employer as an employee were completely severed and the restrictive covenants only required him to forbear to do certain things for the unexpired period of the first agreement. Therefore, under the facts and circumstances of the present case, the payments received by him were not of a revenue nature in whole or in part. The reference is answered accordingly.
Reference answered accordingly.