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C. Lakshmi Rajyam Vs. Commissioner of Income-tax, Madras,. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberCase Referred No. 78 of 1955
Reported in[1960]40ITR340(Mad)
AppellantC. Lakshmi Rajyam
RespondentCommissioner of Income-tax, Madras,.
Cases ReferredMoorhouse v. Dooland
Excerpt:
.....even assuming that to be correct, it appears to be fairly well settled that the mere fact that a gift or payment was made by a person other than an employer will not be decisive of the question whether it was intended as a remuneration or present. next, though connected with the assistance he had rendered in connection with the floatation of the company as a member of his firm, was it made to him merely out of admiration for his personal qualities displayed in the course of the carrying out of the engagement or was it intended to confer special benefit on him with respect to the services rendered so as to increase his earnings in the exercise of his profession ?' there is no doubt in the present case that the first of the two tests has been satisfied. on the question whether the second..........even assuming that to be correct, it appears to be fairly well settled that the mere fact that a gift or payment was made by a person other than an employer will not be decisive of the question whether it was intended as a remuneration or present. in bridges v. bearsley danckwerts, j., observed :'nor again can it be assumed that the fact that the money or property is acquired from other persons than the recipients employers prevents the acquisition being treated as a profit of the recipients office.'similar observations were made by jenkins, l.j., after referring to the decision in cowan v. seymour :'a benefit provided for the holder of an office or employment under a company may be a profit of that office or employment although provided by shareholders and not by the company itself,.....
Judgment:

RAMACHANDRA IYER, J. - The assessee, an actress, was engaged to to take the part of heroine in a cinematograph film entitled Samsaram produced by a firm of partners, carrying on business in the name of Sadhana Pictures. There was no dispute that the assessee had been paid all that was due to her under the contract of service. The picture, which was released to the public, in December, 1950, was a great success. On May 5, 1951, Ranganatha Dass, who had half a share in the Sadhana Pictures executed a document in favour of the assessee, agreeing to pay her a fourth of his share of the realisations from the picture; the assessee was to have no liability, if it were to turn out that there was a loss in the picture. The agreement to pay a share in the future realisations from the picture was purely a gratuitous and voluntary act on the part of Ranganatha Dass. Two months later, he married the assessee. That circumstance, however, is mentioned only to be dismissed as having no bearing on the question of the motive or reason which induced the agreement, whereby the assessee obtained a share in the realisations of the film. The preamble to the document, the relevant portion of which is extracted below, contains a statement of the purpose, for which the gift was made to the assessee.

'Whereas the party of the second part (assessee) is featured in the chief heroines role in the picture, and she has acquitted herself in the said role most creditably, and contributed to the unique success of the picture to a very great extent;

And whereas in consideration of the whole-hearted help, co-operation and valuable services rendered by the party of the second part, in respect of the production and completion of the picture the party of the first part (Ranganatha Dass) has undertaken to give her from his share of the realisations of the picture a special remuneration in addition to the fixed remuneration paid by the firm for her services as artist in the picture.'

By virtue of the agreement referred to above, the assessee received two sums of Rs. 63,258 and Rs. 10,362, during the two years of account corresponding to the assessment years 1952-53 and 1953-54 (the assessees year of account being the financial year). The income-tax Officer included those amounts in the assessment of the assessee to tax for the respective years; the assessment was upheld on appeal by the Appellate Assistant Commissioner, and also by the Appellate Tribunal. The following question has been referred under section 66(1) of the Indian Income-tax Act :

'Whether the sum of Rs. 63,258 and Rs. 10,362 received by the assessee during the years ended March 31, 1952, and March 31, 1953, respectively constitute income assessable under the Indian Income-tax Act.'

The principal point for consideration is the nature and character of the receipt of the aforesaid sums by the assessee. If it were held that these sums were received by her as remuneration for the services rendered by her in acting for the picture, they would be income, profits or gains of the assessees profession or vocation, and as such liable to tax.

An emolument, or perquisite of an employee may be paid to him under a contract; it is also possible to conceive of cases, where there may be customary presents attached to an employment. An employer may also remunerate the services of an employee by a voluntary gift either because there are no emoluments attached to the employment, or because he wants to give him something over and above his contractual remuneration. In all such cases, the amounts received will be the income of the profession or vocation of the employee. It is also possible that an employee may get gift from his master, without it being intended as additional remuneration to the employee, though it might be that what induced the gift was the loyal services of the latter. It cannot be said that, in such a case, what was given was remuneration for the service.

Where a payment is not gratuitous, but made under a contract for remunerating the services, there would be no doubt about the nature of the receipt. But, where the payment made to an employee was purely voluntary and gratuitous, the question would arise whether it was intended as an addition to his remuneration or whether it was purely a testimonial gift for his past services, that is, a gift of money presented as a mark of esteem or acknowledgment of his services. In the latter case, the amount will not be liable to tax.

The case for the assessee is that the agreement dated 5th May, 1951, under which Ranganatha Dass agreed to give the assessee one-fourth share of his income from the picture, was wholly unconnected with any idea of remunerating her services, but was made on account of the formers admiration for her personal qualities as an outstanding actress. There can be no doubt that a gift made on personal grounds cannot amount to a payment for services, although the services might have provided a motive or reason for making the gift. Such gifts are considered as testimonial gifts. The distinction between the two types of cases set out above, and the question to be decided in cases where a voluntary payment is made to an employee, is pointed out by Rowlatt, J., in Reed v. Seymour :

'.... whether it is earned in his office or is in the nature of a donation to him personally, perhaps not unconnected with the circumstance that he has served in the office-which, as Lord Justice Younger said (in Cowan v. Seymour), is a sine qua non-perhaps arising out of the circumstance that he served in that office and people had acquired an admiration for him in respect of that office. But is it in the nature of a personal gift, or is it remuneration I take it that is the question.'

Viscount Cave, in delivering the judgment on appeal, observed :

'It must now (I think) be taken as settled that they include all payments made to the holder of an office or employment as such-that is to say, by way of remuneration for his services, even though such payments may be voluntary-but that they do not include a mere gift or present (such as a testimonial) which is made to him on personal grounds and not by way of payment for his services.'

The Appellate Tribunal held that the agreement was clear and unambiguous in regard to the nature of the payment, which they held to be remuneration for the services rendered by the assessee. Another reason was given in support of the conclusion. The Appellate Tribunal observed that gifts can only be in the form of a capital asset, and never of 'various sums of money not quantified and ascertained in the first instance and depending on several extraneous factors and contingencies.' The latter reason cannot, however, be supported. We cannot see why a purely personal gift cannot comprise a right to obtain a recurring payment from the collections of a picture.

On behalf of the assessee, it was contended that there was no material from which the Tribunal could say that the agreement was by way of a payment for services, as the services had terminated long before the agreement, and as the assessee had been paid in full her salary. Shortly stated, the learned counsel for the assessee urged three grounds to show why the gift evidenced by the agreement should be treated as a testimonial gift, and not one by way of remuneration for past services. They were : (1) that the gift in the instant case was purely voluntary, there being no obligation on the part of the donor to make any payment, much less a recurring payment, (2) that the services, in recognition of which the gift was made, had long ago ceased and had been paid for, and (3) that the assessee was employed by the partnership : Ranganatha Dass was not by himself the employer or the paymaster, and any payment by him could not partake the character of any remuneration for services.

In Cowan v. Seymour the assessee was employed as a secretary and later, on the liquidation of the company, as the liquidator. The employment in either capacity was without remuneration. On the completion of winding up, a surplus was found after payment to the creditors etc. The shareholders resolved unanimously to pay one half of the surplus to the assessee. It was held that the payment of that sum to the latter was not in respect of his employment, but more in the nature of a testimonial for what he had done in the past, while his office was in existence. In coming to that conclusion, the court of appeal laid emphasis on the fact that the office had terminated at the time of decision to make the payment, that such payment was made not by employer, that is, the company, but by the shareholder, and on the circumstance that the facts existing in the case pointed to only one conclusion, viz., that the receipt was not a remuneration for the services. In Read v. Seymour, a benefit match was organised, and the proceeds therein were paid to a professional cricketer in the employment of a club. The distinguishing feature in that case was that certain subscriptions were collected from the public for the benefit of the cricketer, and the benefit match was associated with it. It was held that the subscriptions being spontaneous gifts of the members of the public, would not become income; likewise the gate collections which might be regarded as contributions of the club to the subscription list. In both the cases, the matter ultimately resolved into a question of fact, viz., whether there was no evidence before the Tribunal of fact, or whether there was evidence on which such Tribunal could come to the conclusion it did.

Great reliance was placed by the learned counsel on the decision in Bridges v. Bearsley . That was a case where the assessee had served a limited company for a considerable number of years, and was mainly responsible for building up the company. During the lifetime of the principal shareholder, the assessee expected that a substantial number of shares in the company would be transferred to him by the former to give him a status and position in the company. The principal shareholder did not, however, transfer any shares in his lifetime. It was expected that he would do so at least by his will. Even that did not happen; the principal shareholder had devised his shares in the company in favour of his wife and two sons. The sons, however, felt that they were under a moral obligation to transfer certain shares to the assessee, and in due course they did so. The question arose whether the shares were profits from the assessees office. It was held by the Court of Appeal that the shares transferred were not profits acquired by the assessee by way of remuneration for services in his office, but merely a testimonial for what he had done in such office, and that the value of the shares received could not be taxed. Morris, L.J., observed :

'It may be difficult to describe in precisely accurate language the features of payments or benefits received which must attract tax and the features of those which will not. The general distinction as outlined by Lord Cave (Read v. Seymour) is between payments made by way of remuneration for services and payments made by way of personal gifts. Yet some payments may seem to have a blend of both these elements. The tip given to the taxi driver is in one sense a gift : a particular tip may be somewhat above what would normally be expected by the taxi driver and may reflect a beautiful impulse. Yet all the tips received including the specially generous one, must be regarded as being by way of remuneration for services. But on the other hand it seems to me that payment which has the attributes of being a personal gift does not necessarily lose those attributes merely because the gift is in recognition of services, or because the donor agrees to bind himself so as to be compellable at law to make the payment.'

The transfer of the shares in that case was effected by a document, which recited that the transferor made the transfer to mark his appreciation of the past services of the employee in the employment of the company, and, in consideration of the employee continuing his present engagement for four years from the date of the agreement. It was held that the agreement was not one by way of remuneration for the past services, though the transfer was in appreciation of such services, that it was not also in consideration of his present services, but was merely and implementation of the obligations of the original shareholder, actuated by the personal motive of the transferors of doing what they thought that their father might have done under the will, and that it lacked elements of remuneration. The decision ultimately turned on the construction of the document transferring the shares. Dankwerts, J., in the first instance, held that, although the transaction was not for services performed, or to be performed, the matter had to be decided on the foot of the recitals as to consideration introduced in the document, and that it was not open to the parties to contend that there was no real consideration. As the document specifically stated that the transfer was in consideration of the assessee continuing his services to the company for 4 years, the learned judge held that it was for services to be rendered. This view was not accepted in the Court of Appeal. The Court of Appeal held that the covenants were in effect a mere recital of the appreciation of the assessees services, and that it was not possible to construe the transfer of the shares as anything but a present or testimonial gift in favour of the transferee.

In the instance case, the purpose for which the gift was made is expressly stated in the document to be one as additional remuneration for the services rendered by the assessee. The learned advocate for the assessee contended that, notwithstanding the terms of the document, the other circumstances in the case would show that there could be no intention on the part of the donor to remunerate the assessee for any service, as the dominant object could only be to make a gift out of admiration for her proficiency in acting. We shall consider those circumstances seriatim.

The first of them was that, at the time the agreement was made, the assessee had ceased to do any services as an actress, and that she, having already been paid for such services, the payment was voluntary. A payment voluntarily made could still be one by way of remuneration for services. In Herbert v. Mcquade Collins, M. R., observed :

'Now that, whether the particular facts justified it or not, is certainly an affirmation of a principle in law, that a payment may be liable to income-tax although it is voluntary on the part of the persons who make it, and that the test is whether from the standpoint of the person who receives it, it accrues to him in virtue of his office; if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it. That seems to me to be the test; and if we once get to this-that it has come to him by virtue of his office, accrued to him in virtue of his office-it seems to me that it is not negatived, that is not impossible merely by reason of the fact that there was no legal obligation on the part of the persons who contributed the money to pay it.'

In Wright v. Boyce voluntary gifts were made to a huntsman at Christmas time, in accordance with a widespread custom. It was held that the payment received by the huntsman should prima facie be taken as made in pursuance of the custom, of which the huntsman as such by virtue of his office of employment was the object, and to have been received by him in that capacity and, therefore, liable to tax.

Nor will it be correct to say that a payment made after the services had terminated could not be one intended as remuneration, but could only be by way of testimonial.

That was also the view adopted by this court in Sadasivam v. Commissioner of Income-tax , where certain payment for past services were held to be of revenue nature.

It was then contended that the gift made by Ranganatha Dass who was not an employer, the employer being the partnership firm, would be more analogous to the case of an admirer making a present under an impulse of the moment by way of appreciation. The assumption that the donor was not the employer is not wholly correct; he was a partner in the Sadhana Pictures, and he would be as much an employer as the other partner. But it is not necessary to reject the contention on that ground; even assuming that to be correct, it appears to be fairly well settled that the mere fact that a gift or payment was made by a person other than an employer will not be decisive of the question whether it was intended as a remuneration or present. In Bridges v. Bearsley Danckwerts, J., observed :

'Nor again can it be assumed that the fact that the money or property is acquired from other persons than the recipients employers prevents the acquisition being treated as a profit of the recipients office.'

Similar observations were made by Jenkins, L.J., after referring to the decision in Cowan v. Seymour :

'A benefit provided for the holder of an office or employment under a company may be a profit of that office or employment although provided by shareholders and not by the company itself, the natural paymaster.'

In David Mitchell v. Commissioner of Income-tax the assessee was an accountant, who was also a partner in a firm of chartered accountants. On behalf of the latter, he assisted in the floatation of the company. In recognition of his services, the company made an unsolicited gift of a number of shares in the company to the assessee. It was held that the shares were received by the assessee in appreciation of the professional services rendered by him, and in order to give him an extra profit over and above the share of the profit he might get from the firm, of which he was a member, and that, therefore, they were liable to tax. The learned judges, following the decision in Cooper v. Blakiston held that where a sum of money was given to an employee substantially in respect of his services as employee, it shall be held to accrue to him by reason of his office. The learned judges observed :

'The test, therefore, confining ourselves to the present case, would be this : first, was the payment altogether unconnected with the service rendered by the assessee to the promoters in connection with the floatation of their company The answer to that primary question has been furnished by the assessee himself. It was not unconnected. Next, though connected with the assistance he had rendered in connection with the floatation of the company as a member of his firm, was it made to him merely out of admiration for his personal qualities displayed in the course of the carrying out of the engagement or was it intended to confer special benefit on him with respect to the services rendered so as to increase his earnings in the exercise of his profession ?'

There is no doubt in the present case that the first of the two tests has been satisfied. On the question whether the second has also been satisfied, the learned counsel for the assessee relied on the decision in Reed v. Seymour , and contended that the payment in the present case was the outcome of a spontaneous admiration rather than of a calculated act to pay for the services of an artist who had already been paid in full her remuneration by the Sadhana Pictures. In Reed v. Seymour a cricket club organised a benefit match to a cricketer in their service. The proceeds of the match were ultimately received by the cricketer. It was held that the receipt could not be held to be a profit accruing to him in respect of the cricketers office of employment, but was in the nature of a personal gift, not assessable to tax. The House of Lords held that the quality of payment was that of a spontaneous gift made by the members of the club on the eve of his retirement, and was not a perquisite to his office. In Moorhouse v. Doolang , a similar payment was made to a cricketer, by the cricket club organising a cricket match. The cricketer, who was assessed on the amount received, was a professional cricketer employed by the club. The terms of his employment which was in writing contained a clause which stated 'collections shall be made for any meritorious performance by the professional.' It was held that the collections were part of the earnings of the respondents employment, and not mere personal presents distinct from his earnings. The principles which are deducible from the earlier cases have been succinctly stated by Jenkins, L.J., in Moorhouse v. Dooland thus :

'(i) The test of liability to tax on a voluntary payment made to the holder of an office or employment is whether, from the standpoint of the person who receives it, it accrues to him by virtue of his office or employment, or in other words by way of remuneration for his services. (ii) If the recipients contract of employment entitled him to receive the voluntary payment, whatever it may amount to, that is a ground, and I should say a strong ground, for holding that, from the standpoint of the recipient, it does accrue to him by virtue of his employment, or in words, by way of remuneration for his services. (iii) The fact that the voluntary payment is of a periodic or recurrent character affords a further, but I should say a less cogent, ground for the same conclusion. (iv) On the other hand, a voluntary payment may be made in circumstances which show that it is given by way of present or testimonial on grounds personal to the recipient, as, for example, a collection made for the particular individual who is at the time vicar of a given parish because he is in straitened circumstances, or a benefit held for a professional cricketer in recognition of his long and successful career in first-class cricket. In such cases the proper conclusion is likely to be that the voluntary payment is not a profit accruing to the recipient by virtue of his office or employment but a gift to him as an individual, paid and received by reason of his personal needs in the former example and by reason of his personal qualities or attainments in the latter example.'

In Mahesh Anantrai Pattani v. Commissioner of Income-tax the assessee served a Maharajah as a Diwan. Rs. 5,00,000 were paid over to the assessee, through the Maharajas bank, the Maharaja indicating in his letter that the money was paid to the assessee as a gift in consideration of the assessee having rendered loyal and meritorious service. About three years later, the Maharaja confirmed that he had given the assessee the sum of Rs. 5,00,000 as a token of his affection. The Bombay High Court held that the payment was liable to tax. It was held that the dominant intention of the Maharajah was to remunerate the assessee for his services.

It has, therefore, to be seen whether, from the point of view of the assessee, the amount received accrued to him by virtue of his employment. That is a matter of evidence. The circumstances relied on by the assessee will, no doubt, be evidence for deciding the character of the receipt, but such evidence will be of very little value, when the reasons for the payment are contained in a document between the parties-a document which has not been shown to be sham or one brought about with any ulterior purpose in view. The terms of the document then would be evidence on the question. In Bridges v. Bearsley it was held that the terms of the document would be decisive on the question, and that the meaning of the terms thereof could not be affected or altered by any evidence as to how the wording of the deeds of covenant came about, and that the evidence to contradict the plain terms of the deeds by attempting to show that the intention of the parties were to give a meaning to the provisions of the deeds contrary to the words which the deeds plainly contain, was inadmissible. In the present case, the terms of the arrangement are specific that the payment thereunder was made to the assessee in her character as an employee by was of additional remuneration in respect of her employment, and there could be no doubt that the income thereunder accrued to her by virtue of her having acted in the film. That would preclude the idea of any testimonial gift, as in the words of the Master of the Rolls in Moorhouse v. Dooland , as to the alternatives between a case of remuneration and personal gift.'I observe only that alternatives were intended to be mutually exclusive-if the sum in question was a mere personal gift, then, ex necessitate rei, it was not received by way of earnings of the office or employment; and vice versa.' The learned counsel for the assessee contended that, in the assessment to income-tax, Ranganatha Dass claimed deduction of the amounts paid, under the agreement, to the assessee. But the Department declined to allow the deduction claimed. From that, it was sought to be argued that it was not a remuneration paid to the assessee. We cannot see how that can follow. The fact that the amount paid to the assessee was not allowed as a permissible deduction in the assessment proceedings of Ranganatha Dass cannot determine the character of the receipt in the hands of the assessee.

The circumstances relied on by the assessee to support a case of personal gift are not conclusive while the alternative case is made out by the terms of the document. The Appellate Tribunal had, therefore, sufficient material to come to the conclusion it did, namely, that the receipts were assessable. We answer the question referred to us in the affirmative and against the assessee. The assessee will pay the costs of the Department. Advocates fee Rs. 250.

Question answered in the affirmative.


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