BANERJEE J. - This is a reference under section 66(1) of the Indian Income-tax Act.
The assessment year involved is the year 1954-55, corresponding to the financial year 1953-54, which is the accounting year.
The assessee, K. K. Roy, is an individual. He is an aeronautical engineer. In December, 1945, he was appointed as the manager of Airways (India) Ltd., to look after the business of the company relating to all matters other than finance and general policy. In 1947, he was appointed as the managing director of the company. While he was acting as the managing director, there was passed the Air Corporations Act (XXVII of 1953) on May 28, 1953. The object of the Act was to nationalise transportation by air and for that purpose 'to provide for the establishment of air corporations, to facilitate the acquisition by the air corporations of undertakings belonging to certain existing air companies and generally to make further and better provisions for the operation of air transport services'. Under the definition of the expression 'existing air companies', in section 2(v) of the Act, was included, amongst others, the Airways (India) Ltd. Further, under section 16 of the Act, it was provided :
'On such date as the Central Government may, by notification in the Official Gazette, appoint (hereinafter referred to as the appointed date), there shall be transferred to and vest in -
(a) Indian Airlines, the undertakings of all the existing air companies (other than Air India International Ltd.), and
(b) Air India International, the undertaking of the Air India International Ltd.'
The appointed date was notified to be August 1, 1953. Since the acquisition was to affect officers and employees of existing air companies, the following provisions, inter alia, were made for them, by section 20 of the Act :
'20. (1) Every officer or other employee of an existing air company (except a director, managing agent, manager or any other person entitled to manage the whole or a substantial part of the business and affairs of the company under a special agreement) employed by that company prior to the first day of July, 1952, and still in its employment immediately before the appointed date shall, in so far as such officer or other employee is employed in connection with the undertaking which has vested in either of the corporations by virtue of this Act, become as from the appointed date an officer or other employee, as the case may be, of the corporation in which the undertaking has vested and shall hold his office or service therein by the same tenure, at the same remuneration and upon the same terms and conditions and with the same rights and privileges as to pension and gratuity and other matters as he would have held the same under the existing air company it its undertaking had not vested in the corporation and shall continue to do so unless and until his employment in the corporation is terminated or until his remuneration, terms or conditions are duly altered by the corporation .....
(4) Notwithstanding anything contained in this Act or in the Indian Companies Act, 1913, or in any other law for the time being in force or in any agreement entered into by an existing air company or in the articles of association of any such company, no director, managing agent, manager or any other person entitled to manage the whole or a substantial part of the business and affairs of the company shall be entitled to any compensation against any existing air company or against either of the corporations for the loss of office or for the premature termination of any contract of management entered into by him with any existin air company and where any existing air company has, after the first day of July, 1952, and before the commencement of this Act, paid to any such person as is referred to in this sub-section any sum by way of compensation to which the person receiving such compensation would nothve been entitled if this sub-section were in force at the time of such payment, the existing air company shall be entitled to claim refund of any sum so paid.'
Anticipating the impact of the Act on the service of the assessee, the board of directors of Airways (India) Ltd. made a recommendation, on January 30, 1953, for payment of Rs. 50,000 to the assessee, in view of the termination of his association with the company, under the impending scheme of nationalisation. The recommendation was adopted by the company, which passed a resolution, on February 28, 1953, couched in the following language :
'Resolved that the recommendation of the board of directors that a payment of Rs. 50,000 (rupees fifty thousand), free of income-tax, as a lump sum payment be made to Mr. K. K. Roy, the managing director of the company in view of the impending termination of his association with the company due to nationalisation of the company as aforesaid, such payment being made only in the event of such nationalisation taking effect, be approved.'
The payment, in terms of the resolution, was made to the assessee on May 7, 1953, prior to the appointed date, namely, August 1, 1953.
After the appointed date, the assessee was appointed by the statutory exporation, known as Indian Airlines, as its resident representative, on the same terms, conditions, rights and privileges, which he was enjoying as the managing director of Airways (India) Ltd.
The assessee claimed before the Income-tax Officer that the sum of Rs. 50,000 was received by him as compensation for loss of employment, under the Airways (India) Ltd., and was not liable to be taxed under Explanation 2 to section 7(1) of the Indian Income-tax Act. The Income-tax Officer rejected the claim of the assessee with the following observations :
'The assessee is still a director of Messrs. Airways (India) Ltd. This shows that the resolution by the board of directors was not thoroughly followed by the concern because the assessees association with the company still exists. Being an active director, the assessees remuneration increased upto Rs. 3,000 per month from a very low figure. Such remuneration was being fixed by the resolution of the board of directors from time to time. The assessee was not getting any commission in addition to his remuneration from Messr. Airways (India) Ltd. Again, the assessees income even remains the same by a separate appointment letter by Messrs. Indian Airlines Corporation. The assessee was appointed with the same remuneration and the same terms, conditions and privileges as he would have enjoyed under Messrs. Airways (India) Ltd. Thus there was no loss of office nor employment nor the remuneration of the assessee and his association with the company exists as described above. Therefore, there was no loss either in position or financially. Under the circumstances, the payment cannot be earned as compensation for loss of employment and, therefore, not exempt from taxation.'
Since the sum of Rs. 50,000 was paid to the assessee tax-free, the amount of tax payable by the company had to be included in the assessment of the assessee and the gross amount added back to the income of the assessee, which came up to Rs. 1,00,301. Against the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner referred to the various restictions, passed by Airways (India) Ltd., concerning the terms and conditions of service of the assessee, as originally made and as from time to time altered and amended, and observed :
'Though a director of the company is not a servant or an employee of the company, there may be special terms in the articles of association, or there may be an independent contract, which may bring about a contractual relationship between the company and the director and constitute a director an employee of the company. In the appellants case the resolution dated December 17, 1945, as amended from time to time, brings about the relationship of employee and employer between the appellant and the company. Certain duties have been specified as also the remuneration. Increments have been provided for as also the tenure of employment. Therefore, the appellant must be considered as having been an employee of the company, though he was also the managing director at the time the payment of Rs. 50,000 was made to him.'
The Appellate Assistant Commissioner did not agree with the Income-tax Officer that there was no loss of office or employement for the assessee, because, according to him, the exemption relating to compensation for loss of employment under Explanation 2 to section 7(1) of the Indian Income-tax Act related to an employment quod the same employer and the same employee. As to the nature of payment made to the assessee, he observed :
'It appears from the resolution dated May 28, 1943, that the appellant was allowed a salary of Rs. 1,900 per month plus 1 per cent. of the net profit of the company and a motor car for his personal use. He was also allowed a sum of Rs. 250 per month until adequate profits were available. By the resolution of January 27, 1949, the appellant gave up his share in the profits of the company, but was paid a sum of Rs. 2,250 per month with an annual increment of Rs. 250 per month rising up to a maximum of Rs. 3,000 per month. It will be seen that the appellant had given up a large sum by way of a share in the profits of the company. It is also seen that the appellant by virtue of his unique qualifications was able to put the company on a sound footing. Therefore, it is clear from the aforesaid facts and also from the wording of the resolution dated January 30, 1953, that the company is actually paying him the sum of Rs. 50,000 free of tax in consideration of his past services and also for having generously giving up a share of profit due to him from the company. In this view of the matter, I would hold that the payment was not for compensation for loss of employment but an ex gratia payment in consideration of his past services.'
The Appellate Assistant Commissioner made a further point against the claim by the assessee :
'A further point which strikes my mind is that the company was under no obligation to pay him any sum either in lieu of notice or as compensation for termination of his services. In any event, the companys business having ceased by an Act of the legislature from August 1, 1953, the appellant could have no right to demand anything from the company for his loss of employment. As such, the company was under no liability to pay him anything nor did the appellant have any right. Therefore, any payment made by the company would only be an ex gratia payment and in view of the argument in paragraph 9 the payment can be only in consideration of past services.'
In the view taken, he affirmed the order of the Income-tax Officer including the grossing up with the following further observation :
'The resolution dated January 30, 1953, stated that the payment was free of tax. The appellants representatives contend that the company was advised that payment on loss of employment was a capital receipt and, therefore, exempt from tax, and, consequently, the words tax-free were used in the resolution to imply that the payment itself was exempt from tax in the hands of the appellant. As I have discussed earlier, the resolution does not mention anything about the compensation for loss of employment and, therefore, the argument of the appellants representative has no force. The wording of the resolution dated January 30, 1953, together with the earlier resolutions can only mean that the payment was in consideration of past services and that the company had undertaken to bear the tax. Therefore, the action of the Income-tax Officer in assessing the sum of Rs. 1,00,301 was correct.'
The assessee preferred a second appeal before the Appellate Tribunal, which disagreed with the Appellate Assistant Commissioner and allowed the appeal on the following grounds :
'The said payment came to be received by the assessee by virtue of the resolution dated January 30, 1953, which we have quoted above. Under the said resolution, it is stated that the purpose of the payment was impending termination of his association with the company. It could only mean that the payment was in lieu of the termination of his services. In other words, if the nationalisation had not come by, the assessee would have continued on in the services of the Airways India Ltd., and since, for no fault of the assessee, his services had to be terminated, the said company was paying the aforesaid amount as a compensation for loss of his employment. It is no doubt true that, subsequently, the assessee came to be employed by the nationalised Airlines Corporation but that would not be any material for judging the issue before us because what was in the mind of the board of directors on January 30, 1953, when they passed resolution granting the sum of Rs. 50,000 as compensation to the assessee could not have been affected by a subsequent event. We also find that the assessee had no controlling hand in the direction of the policy of the company, so that he could influence the passing of the aforesaid resolution ...
Keeping all these facts and circumstances of this case in view and the law applicable to the assessment in question, we are of opinion that so far as this payment is concerned it is a payment made to the assessee for loss of his employment and as such is only a capital receipt in his hands, which cannot, therefore, be brought to tax. Since the sum of Rs. 50,000 cannot be brought to tax, its grossing up along with the income-tax payable on it also cannot be sustained.'
Dissatisfied with the order by the Tribunal the Commissioner of Income-tax obtained a reference to this court on the following question of law :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 50,000 grossed up to Rs. 1,00,301 was a capital receipt and not a revenue receipt in the hands of the assessee ?'
Mr. B. L. PAl, learned counsel for the revenue, contended, in the first place, that the assessee was an officer of the Airways (India) Ltd., and he became, as from the appointed date, an officer of the statutory corporation, in which the undertaking of the employer company had vested, under the provisions of sub-section (1) of section 20 of the Air Corporations Act. As such, he submitted, no question of payment of conpensation for loss of eployment arose in the case of the assessee, because the employment continues. This agument may be shortly disposed of. Section 20(1) makes exception in case of directors regarding continuance of service. The assessee was the managing director of Airways (India) Ltd. during the mateiral time. He had no right, under section 20(1) of the Act, to continue in service and this argument of Me. Pal must therefore, fail. Mr. Pal contended, in the laternative, that the assessee got an eployment under the statutory corporation as its resident representative on the same terms, conditions, rights and priviledges which he was enjoying as the office or employment for the assessee. In this contention Mr. Pal is not right. The employment under the statutory corporation was not a continuation of the office of the assessee as the managing director of Airways (India) Ltd. That was a fresh employment under a new statutory body, which took over the business of the former employer of the assessee. The original employment. If not other wise disentitled, he would have been entitled to compensation for loss of his former employment, despite the fact that he got a decisio of the Bombay High Court in H. S. Captain v. Commissioner of Income-tax, in which there is the following observation :
'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 ... The real test, according to us, in a case of this type 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 form the point of view of the employee .... 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 between an employer and an employee.
A somwhat fine distinction was made by learned counsel for the revenue when he said that a distinction must be drawn between termination of employment 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 another employer, in the management of whose affairs the quondum employer had a large say, had employed the assessee makes no difference.'
Mr. Pal next contended that under sub-section (4) of section 20, a director was not entitled to compensation for loss of office and, therefore, the payment of Rs. 50,000 to the assessee should not be treated as compensation for loss of office. This argument again may also be shortly disposed of. Sub-section (4) of section 20 does not prohibit payment of compensation but takes away the right of a director to claim compensation for loss of service even if he was other wise entitled so to do. Thus, if the amount was really paid income in the hands of assessee and be out of the provisions of Explanation 2 section 7(1) of the Indian Income-tax Act and be taxable merely because the assessee was not entitled to claim any such compensation. Although this is so, there is much of force in this argument that in provisions of sub-section (4) of section 10 will be relevant consideration, because if he was not entitled to any compensation, his employer a commercial concern, may not pay him ny such sum.
The first point that we have to consider, therefore, is what was the nature of the payment made to the assessee. Mr. Pal strongly contended that under Explanation 2 section 7(1) of the Indian Income-tax Act, if the amount was not paid to the assessee as compensation, the same must be treated as remuneration for past services and be taxable as salary. We need refer to the language of the Explanation in order to understand this argument. Explnation 2 section 7(1) of the Indian Income-tax Act, as it stood at the material time, is quoted below :
'7. (1) The tax shall be payable by an assessee under the head Salaries in respect of any salary of wages, any annuity, pension or gratuity, and any fess, commissions, prequisites or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of, the Government, a local authority, a company, of any toehr public body or association, or any private comployer; 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 assesse from an employer or former employer or from a provident or toehr 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 purpose 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.'
This section was construed by the Supreme Court in Commissioner of Income-tax v. E. D. Sheppard in circumstances hereinafter stated. Killick Nixon & Co. was a firm which carried on business on a farily large scale in India. The assessee joined the firm in 1930 as an assistant. He was employed originally for a term of years and his employment was subject to termination by giving one months notice without assigning any reasons. The contract of service was renewed from time to time and the last of such renewal was for the period Novembver 1, 1947 to October 31, 1950. During that period the assessee was entitled to a salary of Rs. 1,200 per month and a commission of 2 1/2 per cent. of the net profits of the firm. On December 29, 1947, the assessee, who was one among sixteen officers, received a notice from the firm stating that, in view of its decision to float two companies to take over its business, his employment would terminate as from January 31, 1948. On January 30, 1948, out of the shares received by the firm in lieu of the assets transferred, 1,700 shares of the market value of Rs. 2,21,000 were caused to be alloted to the assessee, in the company which took over the firms business. The assessee entered the employment of that company of February 1, 1948, on new terms under which his salary was increased but no commission was allowed. In his assessment proceedings the assessee produced a letter purporting to be written on behalf of the firm, to the effect that the shares were allotted to compensate the officers for loss of employment ad not by way of reward for past services. The majority of the members of the Appellate Tribunal held that the allotment of the shares was made solely to compensate the assessee for loss of employment and not made as a reward for past services. Thereafter, the Commissioner of Income-tax moved the Tribunal for a reference of the following question :
'Whether, on the facts and circumstances of the case, the sum of Rs. 2,21,000 being the value of the shares received by the assessee free of payment, is income of the assessee and assessable under section 7 of the Income-tax Act ?'
The High Court answered the question in the negative and in favour of the assessee. On appeal before the Supreme Court, atr the instance of the Commissioner of Income-tax, it was contended : (1) that the word 'compensation' in Explanation 2 means what is payable or compellable at law as compensation, that is, monetary equivalent of the damage suffered consequent on the injury caused; (2) under the Explanation any payment received by an assessee from his employer or former employer (save payment from a provident or toher fund mentioned therein) is profit received in lieu of salary for the purpose of sub-section (1) of section 7 unless the payment was made solely as compensation for loss of employment. It was submitted that the Explanation created as it were an artificial definition of 'profits in lieu salary' and if the payment was not compensation in the sense of payment compellable at law, no further question arose as to whether it was capital or revenue in the hands of the assessee. S. K. Das J., who delivered the majority judgment of the court, negativated both the contentions. In respect of the first contention advanced on behalf of the revenue, his Lordship observed :
'As Tomer L.J. said in Henry v. Arthue Foster, compensation for loss of office or employment is a well-known term; it emans a payment to the holder of an offcie as compensation for being deprived of profits to which as between himseld and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled. It should be obvious that when the deprivation is by the legislature, there can be no question of liability or compellability to pay damages at law. The emphasis is on the act of deprivation - which may or may not give tise to any liability at law. In Chibbett v. Joseph Robinson & Sons the assessees were employed by a certain steamship company as ship managers profits. The company went into liquidation and the general meeting of the company authorised the liquidators to transfer to the assessee a sum of Pounds 50,000 which was in certain bonds as compensation for loss of office. The question that arose before Rowlatt J. was whether the sum of Pounds 50,000 received by the assessees was capital or income. At page 60 of the judgment, the learned judge said :
As Sir Richard Henn Collins said, you must not look at the point of view of the person who pays and see whether he is compellable to pay or not; you have to look at the point of view of the person who receives, to see whether he receives it in respect of his services, if it is a question of an office, and in respect of his trade, it it is a question of trade, and so on. You have to look at his point of view to see whether he receives it in respect of those considerations. That is perfectly true. Butr when you look at that question from what is described as the point of view of the recipient, that sends you back again, lookig for that purpose, to the point of view of the payer : not from the point of veiw of compellability or liability, but from the point of view of a person inquiring what is this payment for ...
It is worthy of note that on the question of whether a receipt is capital or income in the hands of the assessee, the learned judge made no distinction between office or trade. The income arising form an employment is taxable as Salaries under section 7; the profits of a business are taxable under section 10; while the income arising from an office which does not involve employment would be taxable under section 10 as business profits, e.g., in the ordinary case of managing agents or selling agents, where the activities amount to the carrying on of a business, and in other cases, e.g., an ordinary director of a company, it would be taxable under wction 12 as 'Income from other sources. The uqestion whether compensation received for loss of employment or offcie or for cessation of business is taxable under any of the three section will fall to be considered, prior to the amendments of 1955, with reference to the general principle of income-tax law which is to tax income. In other words, the question would be whether it is income or capital in the hands of the assessee.'
His Lordship then considered the judgment of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co., the judgment of the Bombay High Court in Guff v. Commissioner of Income-tax and a judgment of the Supreme Court in Commissioner of Income-tax v. Vazir Sultan and Sons and observed :
' ... That in all such cases one has really to look to the nature of the receipt in the hands of the assessee irrespective of any consideration as to what was actuating the mind of the other party. This court referred with approval to the observations made by Rowlatt J. in Chibbett v. Joseph Robinson and Sons which we have earlier quoted. This court also referred with approval to the decision of W. A. Guff v. Commissioner of Income-tax and said that it was immaterial whether the amount paid was compensation for which the employer was liable at law or was a payment made ex gratia.'
With regard to the second contention advanced on bahalf of the revenue, his Lordship observed :
'Explanation 2 to section 7(1) made it clear that a payment which was made solely as compensation for loss of employment was no assessable, while a payment which was amde as remuneration for past services was taxable as income. The principle was that compensation for wrongful repudiation of a service agreement or for loss of office or employment or cessation of business was a capital receipt, though the payment might be entirely volutary and the recipient might habe no legal right to any compensation at all. In such cases compensation was deemed to be a capital receipt bvecause it was in respect of the source of income. The argument of learned counsel for the department, however, is that Explanation 2 treated any payment received by an assessee from an employer or former em ployer as a profit in lieu of salary (except where the payment was from a provident or toehr fund mentioned therein ); therefore, the Explanation was an artificial definition which treated any payment received by an assessee from his employer or former employer as income and no consideration as to whether the payment related to employment or not or whether it was department concedes that a payment made solely as compensation for loss of employment does not come within the artificial definition of the Explanation. We do not think that the proposition put in very wide form, in which the learned counsel for the department has put it , can be accepted as correct. In Mahesh Anantrai Pattani v. Commissioner of Income-tax this court had to consider section 7(1) of the Act and Explanation 2 thereto, as they stood prior to the amendments in 1955. The facts of that case were these : M. A. Pattani, who was the Dewan of the State of Bhavnagar, was granted a monthly pension of Rs. 2,000 by the Maharajah of te State by an order dated January 15, 1948. On March 1, 1948, the Maharaja ceased to be the Ruler of the State. Subsequently, on May 31, 1950, the Maharajah directed his banker in Bombay to pay Pattani a sum of loyal and meritorious services which Pattani had rendered to the State. The question which arose for decision was whether the aforesaid payment of Rs. 5,00,000 and said that the payment was made in consideration of the question which arose for decision was whether the aforesaid payment of Rs. 5 lakhs was liable to tax under section 7(1) read with Explanation 2. This court held that the sum of Rs. 5 lakhs was given to Pattani not as as payment in consideration of the services already rencered by Pattani as the Dewan of the State but merely as a gif in token of the Maharajahs affection and regard for the assessee. Therefore, it was held that the payment was not liable to be assessed to tax under secton 7(1), Explanation 2. The ratio of the decision was that the payment was a capital receipt, and not income assessable to income-tax, in the hands of the assessee. Apparently, this court did not accept the proposition that every payment to an assessee by his employer or former employer was income and no question of treating such payment as capital in the hands of the assessee need be considered.'
This being the legal position, we cannot again accept the extreme contention of Mr. Pal that if the payment had not been made as compensation for loss of employment of the assessee, it must be treated as remuneration for past services and as such must be taxed as income.
Before we consider the real nature of the payment made to the assessee, we need consider another judgment of the Supreme Court in P. H. Divecha v. Commissioner of Income-tax in which the facts involved were as hereinafter stated in brief. A firm which was conducting business in electrical goods including electric lamps entered into an agreement with Phillips Electrical Co. under which the firm was given exclusive rights to purchase and sell electrical plamps manufactured by Phillips in certain areas. By a letter, whcih formed part of the agreement, the firm because entitled to a commission of 12 1/2 per cent. on the gross invoice amount and a further discount of 2 per cent on the net incvoice pricess to cover breakage of fault in manufacture. If the company sold away any goods directly to buyers in those areas, the firm was entitled to compensation of 5 per cent. of the net amount of invoice covering such sales. The firm on its part undertook to sell only Phillips lamps in those areas and to prevent re-exportation of the lamps by third parties. The agreement was to continue unless determined by either party by giving three months notice. There was no provision in the agreement for the payment of compensation to the firm on the termination of the agreement nor was compensation payable for temporary suspension of supplies. This agreement continued for a period of 16 years. Phillips Electrical Co. decided to take over the distribution of lamps in those areas and served a notice upon the firm terminating the agreement with effect from June 30, 1954. The firm was, however, free to deal in their lamps as regular lamp dealers. As a result of discussion between the firm and Philips Electrical Co., certain minutes were recorded covering, inter alia, the furnishing by the firm of names of dealers over the past six months, the execution of local orders, certain outstanding contracts and the payment of commission on such contracts, and the disposal of stocks of the firm. As a gesture of goodwill Philips Electrical Co. agreed to pay in instalments Rs. 40,000 per annum for a period of three years to each of the partners of the firm. The minuted further recorded that 'the three years remuneration' would be in addition to the profit the firm would realise as regular lamp dealers. The question was whether the sum of Rs. 20,000 received in the accounting year ended December 31, 1954, by each of the assessees, who were partners of the firm, was assesssable to income-tax. The Supreme Court held, (1) that the agreement between the firm and Philips Electrical Co. created a monopoly right of purchase for a monopoly right of sale in certain areas. Itsecured to the firm an advantage of an enduring nature and was not an ordinary trading agreement; (2) that in the absence of any proof that the amount payable to the partners reperesented to likely profits of the firm that would have arisen if the agreement had not been terminated, it could not be said that it replaced those profits. Although the amount was large, there was nothing to show that it replaced those profits. Although the amount was large, there was nothing to show during the three years in which the amount was paid; (3) that the payment could not be regarded as payment for nay services rendered, even though it was described as remuneration in addition to the ordinary profits of trading. The payment was made out of regard for the qualities of the three partners who had built up a vast network of sales organisation of which the company would obtain the benefit when it entered on the business of selling for itself; (4) that as it was not related to any business done or to loss of profits and it was not recompense for services, past or future, the payment did not bear the character of income taxable under the Income-tax Act, 1922; (5) that the payment not being income, profits or gains, section 4(3)(vii) of the Act had no application; and (6) that the payment did not fall within section 10(5A)(d) of the Act ans was not liable to tax under that section. There the Supreme Court observed :
'In determining whether this payment amounts to a return for loss of a capital asset or is income. profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss of profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particulae receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. Moew relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as pay, remuneration, etc., but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because perodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain period. These general principles have been settled firmly by this court in a large number of cases.'
Keeping in view the law laid down by the Supreme Court in the judgments referred to above, we have to see what was the nature of the payment made to the assessee. The resolution allowing the payment speaks of nothing more than that the payment was made 'in view of the impending termination of his association with the company' . Nevertheless, it is undisputed that his association with the company was fruitful. The Appellate Assistant Commissioner found that by virtue of his nuique qualification, the assessee put the company on a sound footing. The termination of his association with the company came to be caused by legislation, namely, by the effect of the Air Corporations Act which would not accept directors or managing directors of an existing air company in the service of the corporation (vide section 20(1) of the Air Corporations Act). But for this, the employer of the assessee might have continued the valuable service by the assessee under them. But the nationalisation of the concern made it impossible. The assessee was not entitled to any compensation, firstly, because sub-section (4) of section 20 disentitled him to compensation and, secondly, because the termination being by legislation, the question of payment of compensation for loss of employment did not arise. Therefore, there was no question of paying to the assessee any remuneration for past service rendered by him, because such service had laready been amply remunerated. The resolution providing for payment to the assessee did not speal of payment of compensation for loss of employment or of remineration for past services rendered. The resolution providing for payment to the assessee did not speak of payment of compensation for loss of employment or of remuneration for past services rendered. The resolution did not also show that any service in that future was expected from the assessee. The payment was thus not related to any service either in the past or in the future. It was, in no sense, a remuneration. It was in fact payment made out of regard to a person who was long associated with the employer company and redered valuable service to the company. Called by whatever name, a testimonial, solatium, a presentation of a purse, the payment appears to have been made in appreciation of the assessee. It was not related to business done or to loss of profits, and was not recompense for services, past or future. It ws a payment by an employer to a valued employee out of gratitude or appreciation. The payment, in the hands of the assesse, should not thus be treated as income, profits or gains, which alone are taxable inder the Indian Income-tax Act.
In the view that we take, which is the view also of the Supreme Court, we need not further consider the other casescited before us from the Bar, namely, (1) Cowan v. Seymour, in which a sum voted by the shareholders to a person, who was at one time the secretary of the company, without remuneration and thereafter the liquidator of the company, was not treated as income accruing to him in respect of an office or employment of profit; (2) Beynon v. Thrope, in which a payment to a non-attending director was treated kas his income; (3) Henry v. Arthus Foster, in which a sum paid to a chairman of the board of directors as compensation for forgoing certain rights under the articles of association and for agreeing to remain in the board of directos at a reduced rate of remuneration was treated as not assessable to income-tax; (4) Henley v. Murray, in which a sum apid to a resigned director of a company as remuneration, to which he would have been entitled if his employment had continued, was treated as not assessable to income-tax; (5) Commissioner of Income-tax v. Pran Jiban Jaitha, in which a payment made to a shipping company for loss of freight, and brokerage due to suspension of business on account of war was not treated as a revenue receipt; and (6) Commissioner of Income-tax v. S. P. Jain, in which the damages paid for premature termination of the contract of employment were treated as profits in lieu of salary as such cases because two very dissimilar cases lead to different principles. We have already quoted from the judgment of the Supreme Court in Divechas case and Sheppards case, the leagal principles applicable to the instant case. Applying those oprinciples we hold that the payment received by the assessee was not impressed with the character of income, profits or gains in the hands of the assessee, being payment made to him by way of personal appreciation on the eve of his departure from his employer company.
Mr. Pal made a last desperate attempt to rope in the some paid to the assessee from taxation purposes. He relied upon a decision of this court Airways (India) Ltd. v. Commissioner of Income-tax. That was a case in which the employer of the assessee claimed deduction under section 10(2) (xv) of the Indian Income-tax Act, of the some of Rs. 50,000 paid to the assessee from the computation of its own income. This court negatived that claim with the observation :
'The case of the managing director was worse as the sole motive behind the payment to him was one of giving a gratuity for services render in the past. There was no evidence that the company was in the habit of giving gratuities to its servants on superannuation or for other cause. The managing director did not even have a contract of service for a particular period. It was not a case where the employee had an expectation of reasonable gratuity. The payment to the managing director was also not deductible under section 10(2) (xv). The test laid down by the Supreme Court in Gordon Woodroffe Leather Mfg. Co. v. Commissioner of Income-tax would preclude an expenditure like this being considered as the deductible item under section 10(2) (xv).'
We do not see how that decision helps Mr. Pal. The sum paid to the assessee may not be an amount spent wholly and exclusively for business purposes of the employer of the assessee and may not be deductible under section 10(2) (xv) of the Act but that alone would not make the sum an item of income in the hands of the assessee. We, therefore, make little of this submission of Mr. Pal.
In our opinion, the answer to the question should be in the affirmative and in favor of the assessee. The Commissioner of Income-tax shall pay the cost of this reference to the assessee.
K. L. Roy J. - I agree.
Question answered in the affirmative.