G. K. MITTER J. - This is a reference under section 66(1) of the Income-tax Act at the instance of the assessee for determination of the question :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,25,000 was assessable in the hands of the assessee under section 7(1) of the Indian Income-tax Act read with Explanation 2 thereof as it stood at the material time ?'
The facts of the case given in the statement of case and the order of the Tribunal are scanty. The Tribunal is, however, not to blame in any respect for the paucity of facts. The fault, if any, lies with the assessee who, in my opinion, might, without difficulty, have put more material before the income-tax authorities. The assessee came out to India as an assistant of a firm of tea brokers by the name of W. S. Cresswell & Co. in the year 1937. The firm had three partners by the name of N. D. Gye, W. N. Batty and N. F. F. Massy, the shareholdings being 8 as. 6 p., 7 as. and 6 p. respectively. The firm was dissolved of June 30, 1947, its business being taken over by a private limited company named W. S. Cresswell & Co. Ltd. The company started carrying on business as from July 1, 1947. In the books of the company a goodwill account was created for a sum of Rs. 5,00,000, Batty being credited with Rs. 3,33,000 and Massy with Rs. 1,66,000. N. D. Gye did not take any share in the goodwill and according to the statement of case, Gye had relinquished his interest in favour of his copartners. There was no explanation given as to the allotment of goodwill of the value of Rs. 1,000. On April 1, 1948, the assessee purchased 300 shares in the company from W. N. Batty for cash. On October 30, 1948, the goodwill account in the companys books was modified and the old account written off. A fresh account was started in which Batty was credited with Rs. 2,00,000, Massy with Rs. 1,75,000 and Carter with Rs. 1,25,000. Subsequently, the amount of Rs. 1,25,000 was transferred to a loan account. The assessee did not show this amount in his original return nor was the fact brought to the notice of the Income-tax Officer at the time of assessment for the corresponding previous year. Subsequently proceedings were started under section 34 and in response to a notice the assessee filed a return showing his income from salaries and dividends. In section D of the return he showed Rs. 1,25,000 as gift as explanation in his letter dated February 11, 1954. The relevant portion of it as quoted by the Income-tax Officer in his assessment order reads :
'I wish to emphasise that I was never a partner in the firm of W. S. Cresswell & Co. I was an assistant in that firm from April 1, 1937, until the date the company was incorporated. People who were just senior to me in the firm were partners of that firm and have been associated with me during my sojourn with the firm. They felt that the fact that I had arrived in India a short while after them and being junior to them had prevented me from enjoying the benefits of being a partner in the firm. The payment to me was only an acknowledgment of their friendship and sympathy.'
The Income-tax Officer proceeded on the basis that this was a monetary recognition of the assessees valuable services and in consideration of his deprivation of a share in the partnership. Treating this as payment in consideration of his services with the firm the Income-tax Officer held that it was assessable under section 7(1) read with Explanation 2 of the Indian Income-tax Act. The appeal to the Appellate Assistant Commissioner by the assessee was dismissed as also that to the Tribunal.
The Tribunal recorded that the reasons for crediting such a large amount in the name of the assessee was not clear. It found that 'the assessee stated that he was in service for a very long time and in due course, he was to be admitted as a partner of the firm. But since the firm was dissolved and the private company was incorporated, the question of his becoming a partner became impossible. Having considered these circumstances, the ex-partners, Mr. Batty and Mr. Massy, thought it fit that a proper adjustment of the goodwill should be made in his favour.' According to the Tribunal, the assessee was rewarded with the sum of Rs. 1,25,000 on account of his service connection and for no other reason : further, the amount was received by the assessee from his former employers, namely, Batty and Massy, and there being no other reason apparent from the facts other than the reward for past services the amount was remuneration within the meaning of section 7 of the Act.
The material provisions of section 7(1) of the Act and of the Explanation as they stood at the relevant time is as follows :
'7. (1) 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.
Explanation 2. - A payment due to or received by an assessee from an employer or former employer... 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.'
On behalf of the assessee two points were urged, namely, (1) the payment was not made by the former employer of the assessee which was the firm of W. S. Cresswell & Co.; and (2) the payment was not made by way of remuneration for past services. It should be noted that at no stage did the assessee make the case that the payment was made solely as compensation for loss of employment and the learned advocate for the assessee was not allowed to press this point before us.
As regards the first point it was argued that the former employer of the assessee was the firm of W. S. Cresswell & Co., which, for income-tax purposes, must be considered as an entity separate from the partners of the firm. Further, the firm had ceased to exist on the incorporation of the company and as much no payment howsoever received by the assessee a year and three months afterwards, could be attributed to his former employer. Lastly, it was argued that as N. D. Gye had dropped out of the firm at the time of the incorporation of the company a payment made by Batty and Massy could not be treated as one by the former employer of the assessee.
In my opinion the argument is without any substance in all its branches. No doubt the Income-tax Act treats the firm as distinct from its partners in some of the sections but the Income-tax Act does not permit a firm to be considered as a separate legal entity. Under section 2 of the Income-tax Act 'unless there is anything repugnant in the subject or context firm, partner and partnership have the same meanings respectively as in the Indian Partnership Act of 1932 : Provided that the expression partner includes any person who being a minor has been admitted to the benefits of partnership.'
This definition goes to show that even for the purposes of the Income-tax Act 'firm', 'partner' and 'partnership' have the same attributes as are given to them by the Indian Partnership Act unless there be anything repugnant thereto in any of the sections of the Indian Income-tax Act. Under section 4 of the Indian Partnership Act 'partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
'Persons who have entered into partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called a firm name.'
Reference was made by the learned advocate for the assessee to sections 18, 21, 26A, 48 and 63(2) of the Income-tax Act to show that a firm is for certain purposes treated as distinct from its partners. For instance it was said that when anybody serves a firm and receives a salary which attracts the levy of income-tax it is the firm who is responsible for making deductions out of the salary of the servant under section 18 of the Act and that the same has got to be shown under section 21 of the Act in the annual return. Under section 26A it is the firm which has to apply for registration under the Act. Under section 48 it is the firm which can apply for refund of income-tax and under section 63 a notice can be served on any member of the firm so as to bind it. These various sections of the Act and their implication came up for consideration by the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax. There the question was whether a 'firm' was a person and as such competent to enter into a partnership with another firm or Hindu undivided family or individual. The question was answered in the negative but the court referred to some of the sections mentioned by the learned advocate in the present case and the argument advanced that the definition of the word 'person' in section 3(42) of the General Clauses Act of 1897, read with section 4 of the Partnership Act, showed that a firm was a person. The court held that the definition of the word 'person' occurring in section 3(42) of the General Clause Act could not be imported into section 4 of the Indian Partnership Act. Their Lordships pointed out that although 'commercial men and accountants are apt to look upon a firm in the light in which lawyers look upon a corporation, i.e., as a body distinct from the members composing it.... That is, however, not the English common law conception of a firm... Our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership firm.' Their Lordships adverted to the mercantile usages in showing a firm as a debtor to each partner for what he brings into common stock and showing a partner as a debtor to the firm for all he takes out of that stock as also to the statutory procedure both in England and in India permitting a firm to sue or be sued by another firm having common partners as if the firm was an entity distinct from the partners and stated that although 'the law, English as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or person in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm'. The Supreme Court finally concluded that 'the word persons in section 4 of the Indian Partnership Act... contemplates only natural or artificial, i.e., legal persons and for the reasons stated above, a firm is not a person and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual.'
This authority clearly shows that even under the Indian Income-tax Act a firm is not a legal entity and therefore it cannot be treated as an employer of persons serving the partnership.
Nor, in my opinion, does the case of Commissioner of Income-tax v. A. W. Figgis & Co., help the assessee. In this case it was held that the assessee which carried on business as tea brokers from 1918 to 1947 when the firm was converted into a limited company, could claim relief under section 25(4) of the Income-tax Act not with standing that the constitution of the firm had changed from time to time and the persons who originally constituted it were not members of it at the time when the relief was claimed. There was a provision in the partnership deed of 1939 in that case providing that on the retirement of any partner the partnership would not be determined but would be carried on by the remaining partners. A fresh partnership deed was drawn up in 1945 when a new partner was brought in. The partnership constituted under the last mentioned deed continued to carry on the same business that had been started when the tax was paid under the Act of 1918. In upholding the claim of the assessee that it was entitled to relief under the Act the Supreme Court pointed out that 'under the law of partnership a firm has no legal existence apart from its partners'. This dictum was expressed notwithstanding that a firm could be charged as a distinct assessable entity as distinct from its partners who could also be assessed individually. The court observed : 'The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of a partnership, under English law or Indian law, cannot be taken in applying the law of income-tax.' This brings out clearly that, although for purposes of assessment a firm is treated as a separate and distinct unit under the Income-tax Act, it does not become a legal entity.
Reference was made on behalf of the assessee to some of the observations of Chakravartti C.J. in the case of David Mitchell v. Commissioner of Income-tax, relied on by Mr. Meyer for the revenue in connection with the argument on the second point. In this case the promoters of a company employed the firm Lovelock & Lewes, auditors, in connection with the flotation of a company called the Chrestien Mica Industries Ltd. This engagement was attended to by the assessee, Mitchell, a partner of the firm. After the company had been formed and the engagement of Lovelock & Lewes terminated, the promoters who were two persons of the names, Ramkumar Agarwalla and Elbridge Waston, became desirous of retaining the services of Mitchell who was due to retire from India. These two persons entered into an agreement with the assessee whereby it was provided that Mitchell would act as administrative organiser and financial adviser to the promoters for a period of three years without liberty to engage directly or indirectly in any other profession or employment but with liberty to fulfill his obligation as a matter of the firm of Lovelock and Lewes. For his services to the promoters the assessee was to receive no remuneration but he would be entitled to retain any dividend received by him by way of directors fees or otherwise as a result of the agreement. The promoters effected five policies of insurance and it was agreed that all the benefits under the policies would become the property of the assessee for his sole use upon the completion of the agreement. Messrs. Lovelock and Lewes, after completion of the services, billed the promoters for work done by them and their charge was paid in full. Thereafter, as a token of appreciation for the assistance rendered to him by the assessee in connection with the flotation of the company Ramkumar Agarwalla made an unsolicited gift to the assessee of 2,500 ordinary shares of Rs. 10 each in Chrestien Mica Industries Ltd. The revenue authorities sought to assessee the value of the shares as perquisites or profits under section 7(1) of the Income-tax Act. In negativing that contention, Chakravartti C.J. observed at page 714 :
'It appears to me that there can be no question of the shares having been paid to the assessee in lieu of or in addition to any salary or wages. The contract of employment in connection with which he had rendered services to the promoters was a contract between them and Messrs. Lovelock and Lewes. The assessee was not an employee of the promoters under that contract as an individual, nor could he claim any salary or wages as such. The contract of employment could neither be enforced against him personally and individually, nor could he, acting as an individual, enforce it against the promoters. He served the promoters only as a member of the firm with whom only there was a contract of employment. Personally, he was not entitled to claim any salary or wages. It is true that if the engagement resulted in profit, the assessee would share the profit as a member of the firm, but such share would not come to him as salary or wages received from the employers, but only as a share of the profit of the firm received in the altogether different capacity of a partner.'
It was contended that this passage went to show that a firm was a separate entity from its partners and as the assessee, Mitchell, was not regarded there as employed by the promoters, the assessee before us cannot be said to have been in the employment of the partners individually. No doubt, the first sentence of the above passage lends some support to the contention but the effect of the above passage lends some support to the contention but the effect of the whole has got to be taken into account. In that case it was not open to Mitchell to say that he alone would do the work entrusted to the firm by the promoters nor was it open to the promoters to say that they would have the work done by Mitchell alone. The work has entrusted to the whole body of persons constituting the firm and if anything went wrong the entire body would be responsible to the promoters and it would be the entire body which could enforce any rights against the promoters. It was not open to any of the partners to say that he was entitled to an aliquot part of the remuneration for the work paid by the promoters. As a partner of the firm he would only be entitled to share the profits after they had been computed in the usual way, namely, as a result of the working of the whole year.
The correct position of a servant of a partnership is summarised in Halsburys Laws of England, 3rd edition, vol. 25, page 455, 'a partner has implied authority to enter into a contract of hiring service for the benefit of the partnership; and the service of a partnership is the service of each member thereof.' According to Lindley and Halsbury refer to the case of Rex v. Leech, where a servant of a partnership consisting of two partners was charged with a common larceny by one of them and a question was raised that being a servant of two, he could not be prosecuted by one. This objection was overruled and Baylay J. said that 'he was the servant of both; and that it had been decided by the judges, that where a traveler is employed by several houses to receive money, he is the individual servant of each.'
It was argued that the adjustment of the value of the goodwill in the books of W. S. Cresswell & Co. Ltd. showed that Batty had given a portion thereof valued at Rs. 1,25,000 to the assessee and had also transferred goodwill of the value of Rs. 8,000 to Massy and, consequently, the receipt by the assessee, if any, was from Batty alone and not his former employer which must be taken to be the entire body of partners under whom he was working. In my opinion, the discussion above is sufficient to dispose of all the branches of the argument on the first point. Even if it be assumed that it was Batty alone who parted with a portion of the goodwill in favour of the assessee he would still be regarded as a former employer of the assessee within the meaning of section 7(1) of the Indian Income-tax Act. The firm was not a legal entity and as such could not in law be said to be the former employer of the assessee and the fact that it had ceased to exist on the incorporation of the company made no difference.
Under section 7(1) any payment in the nature of salary or wages or annuity or pension or gratuity or fees, commission or perquisites or profits whether in lieu of or in addition to any salary or wages would be taxable but a profit received in lieu of salary which was given solely as compensation for loss of employment and not by way of remuneration for past services could not be taxed. If there was any element of remuneration for past services in the payment which was made to the ex-employee assessability under the section would attach to it. It must necessarily follow that it what is given is not by way of a reward for past services but is by way of a gift the same cannot be taxed. The time lag between the cesser of service and the receipt is also an element to be taken into consideration. When the payment is made long after the termination of service there may arise a presumption that the payment is not by way of remuneration for past services. Again one must take into consideration the treatment meted out to the assessee by his past employer. If the payment made to the servant be ample or generous one would be inclined to suppose that the additional or unsolicited payment was not by way of remuneration for service in the past. Again a question may arise as to whether the termination of service was brought about in the natural course of things or was accidental so as to throw the assessee out of employment unexpectedly. A payment made after an abrupt termination of service may be attributed to the loss of employment, but that may not be the sole cause of it. Indeed, circumstances will vary from case to case, as the life of one man varies from that of another. If the giver indicates his view as to why the payment was made that would go a long way in the solution of the problem although it may not be conclusive. One must, therefore, take all the fats and circumstances relating to the payment into consideration in coming to the conclusion as to whether it was by way of remuneration for past services. Unfortunately, however, the motive which impelled Batty and Massy to agree to the adjustment of the value of the goodwill in the books of the company is not apparent from any statement of theirs or any resolution of the company. It is difficult to believe that before making the alteration in its books the company did not pass any resolution regarding it. A resolution recording the cause of alteration would have thrown a great deal of light on the question before the court and it is strange that no copy thereof is forthcoming. The following are the undisputed facts which relate to the payment made :
(1) The assessee came out to India in 1937 and was working as an assistant of the firm until July, 1947.
(2) At the time of the incorporation of the company the senior partner, Gye, severed his connection with it and Batty and Massy were the two persons who benefited thereby so far as apportionment of the goodwill of the firm was concerned.
(3) Massy who had only 6 pies share in the partnership was allotted half the value of the goodwill which was given to Batty.
(4) The goodwill account was readjusted nearly one year and three months after the incorporation of the company.
According to the assessee :
(a) he was not dealt with fairly at the time of the incorporation of the company. Massy who was just senior to him in the firm became a partner and the assessee who too would have become a partner if the firm had continued was denied the benefit of the partnership because of the incorporation of the company;
(b) the partners, Batty and Massy, had prevented the assessee from realising his expectation by incorporation of the company; and
(c) the readjustment of the goodwill was out of regard which Batty and Massy had for him and in sympathy with him for his unfortunate position.
The assessee did not suffer any diminution in the amount of remuneration he was getting from the company compared to his receipt from the firm. His statement as recorded in the Income-tax Officers order shows beyond any doubt that he had complained to Batty and Massy about the unequal treatment meted out to him. I doubt very much whether he would have any cause for complaint if the ex-partners had not valued the goodwill of the firm Rs. 5,00,000 and apportioned the same between themselves. The assessee could legitimately raise a grievance that as Gye had retired he should have been taken in as a partner in view of his long connection with the firm and if he had been taken in as a partner a portion of the goodwill would have gone to him. A share in the goodwill of the firm would be in recognition of his long connection with the firm. In my view, it was this which motivated Batty and Massy in readjustment their claims to the goodwill of the firm and sharing the same with the assessee. It cannot be treated as a gift by Batty alone as a re-adjustment of this nature was not possible unless all the directors or shareholders were agreed about it. The directors in this case were only two, Batty and Massy, and they were both interested in the transaction and must have agreed to the re-adjustment.
The reported decisions are many and of diverse character. It is difficult to reconcile some of them with others and they can be examined only to find out what are the tests which have been applied by courts in solving the problem from time to time. In M. A. Pattani v. Commissioner of Income-tax, the facts were as follows : Pattani, the assessee, was the Chief Dewan of Bhavnagar State from 1937 to 1948 when he was appointed the Chairman of the Bhavnagar Durbar Bank, for which post he received no salary. The Maharaja, however, granted him a monthly pension of Rs. 2,000 which was the same as the monthly salary he has drawing as Chief Dewan. The order of the Maharaja awarding the pension showed that it was given to the assessee for his valuable services and single-minded loyalty to the ruler and his State during the difficult period of the war. More than two years thereafter the Maharaja directed his bankers to pay the assessee the sum of Rs. 5,00,000 out of monies lying to his credit. Nearly six months afterwards, being asked for instructions as to how the amount should be adjusted in the accounts by his accountant, the Maharaja made an order that the money should be debited to his personal expense account and treated as gift to the assessee in consideration of his having rendered loyal and meritorious services. During the assessment proceedings for the year 1951-52, of the assessee, the Maharaja wrote to him on March 10, 1953, that he had given the sum of Rs. 5,00,000 'by way of gift as a token for his affection and regard for the assessee and his family.' The revenue authorities attached great importance to the instructions given to the accountant by the Maharaja in December, 1950, as being contemporaneous with the payment. Taking into consideration the two orders of the Maharaja, the fact that in the document of December 1950, there was no mention of any service rendered to the Maharaja as also the fact that the Dewan had been amply compensated for his service to the State by the award of the pension the Supreme Court held that the gift should be treated as one in token of the Maharajas affection and regard for the assessee and so out of the mischief of section 7.
In Commissioner of Income-tax v. Sheppard, the Bombay High Court accepted the view of the majority of the members of the Income-tax Appellate Tribunal that the payment made to the assessee was intended in fact to be compensation for termination of his employment together with his future prospects and held that the same could not be regarded as salary or other remuneration or profits in lieu of salary within the meaning of section 7(1) and the Explanation thereto. In this case the assessee, Sheppard, was an assistant who had joined the firm of Killick Nixon & Co. in the year 1930. The partnership carried on an extensive business owning various textiles factories and acting as managing agents of limited companies. The assistants of the firm could expect in due course to become partners thereof. The assessee received between the years 1930-35, salary ranging from Rs. 500 to Rs. 700 per month which gradually rose to Rs. 1,200 per month in 1947, besides 2% of the profits of the firm. In the last mentioned year, the firm decided to reorganise its business by converting itself into a limited company. Two companies were floated, one a public limited company and the other a private limited company which was to manage the business of the first-mentioned company. In December, 1947, a notice was served upon the assessee that in view of the changes in the firm his employment would be put an end to from January 31, 1948. On January 30, 1948, the assessee was allotted 1,700 shares in the public limited company and on February 1, 1948, he entered the employment of this company. By the allotment of these shares the assessee received assets of the value of Rs. 2,21,000. The Income-tax Officer sought to bring the shares to tax on the footing that these were allotted in consideration of past services. The assessee produced before the Income-tax Officer a letter purporting to be written to him on behalf of the firm informing him that 1,700 shares had been allotted as compensation for loss of employment. Before the Appellate Tribunal, the assessee produced an affidavit affirmed by five out of six partners who constituted the firm in the month of January, 1948 (the sixth partner having died in the meanwhile), that in December, 1947, the firm had determined to terminate the employment of the assistants and to cause an allotment of shares to them to compensate them for the loss of employment. According to this affidavit this payment was in no sense a reward for past services and, further, it was felt right that the assistants concerned, most of whom were serving under agreements the periods for which had still to expire, were entitled to compensation for the loss of their employment including future prospects. On behalf of the revenue it was contended that even this affidavit went to show that the payment was not made solely for the loss of employment but was inclusive of compensation for loss of future prospects. The learned judges of the Bombay High Court observed :
'But if, under the terms of the employment, an expectation could reasonably be entertained by the assessee that in the course of his employment he will earn promotion, that expectation cannot be divorced from his employment. The expectations or prospects are rooted in the employment : and it will be difficult to distinguish between compensation made for loss of employment and for loss of prospects in that employment. In any event, even assuming that the future prospects are not to be regarded as incidental to the employment of the assessee as at the date of the termination of his employment with the firm, compensation paid for extinction of those future prospects may still not be regarded as salary or other remuneration or as profits in lieu of salary due within the meaning of section 7(1) and the Explanation thereto........ If the object of the payment made 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).'
In the case before us, as I have already said, there is no indication of the intention of the persons who made the payment and the statement of the assessee goes to show that he was not complaining about any loss of employment but his grievance was that this past service had not got full recognition which would not have been the case if he had been taken in as a partner of the firm.
The case of W. A. Guff v. Commissioner of Income-tax illustrates the proposition that in order to be within section 7(1) of the Income-tax Act, a payment need not be made under a legal liability and that a voluntary payment would also be within the section. In this case the assessee joined the service of Thomas Cook & Son Ltd., in May, 1946, as an executive in charge of a newly opened department. His appointment was under a contract of service which was terminable on six months notice. In March, 1948, he was informed that the department of which he was in charge could not function any longer. He, however, continued to be employed by the company until November, 1948, when he received a sum of Rs. 12,000. The company, the employer, described this payment as compensation equivalent to six months salary for the termination of his employment owing to the closure of the department. The Income-tax Officer held that the amount was payment in lieu of six months notice and as such taxable. The Appellate Assistant Commissioner reversed the finding but in appeal the Tribunal held that the assessee had left the service of the company after the expiry of the period of six months notice for which he had drawn full pay. The payment was not, therefore, compensation for loss of employment but at the sweet will of the employer and in lieu of the service rendered being in the nature of a gratuity. Chagla C.J. pointed out that 'the salary paid to him was quite a generous salary; and there was nothing to indicate that there was any reason why the employer should want to appreciate the services of his employee by paying him anything more than what was due to him under the contract. Therefore, on the facts and circumstances of this case, a payment was made by the employer to the employee which was a voluntary payment and which was paid to him, not for past services rendered, but as a compensation or solatium for terminating his employment...... The employer mentioned that the employment was being terminated owing to the closure of the department. Thus, the employer indicated that, but for the accidental closure of the department, the services of the employee would have been continued, and that the employee was without his job through no fault of his.' In the result it was held that the receipt was of a capital nature.
Counsel for the revenue drew my attention to some of the English cases noted by the Supreme Court in Pattanis case. The case of Beynon v. Thorpe turned on the interpretation of the English Income Tax Act, 1918, as amended by section 18 of the Act of 1922. Under the Act of 1918, 'Tax under Schedule E shall be charged in respect of every public office or employment of profit, and in respect of every annuity, pension, or stipend payable by the Crown, etc.' Section 18 of the Act of 1922 transferred from Schedule D 'such profits or gains arising or accruing to any person from an office, employment or pension as are, under the Income Tax Act, 1918, chargeable to income-tax under Schedule D.' Under Schedule D the tax is on 'the annual profits or gains arising or accruing....... (ii) to any person...... from any trade, profession, employment or vocation.....' and 'all interest of money, annuities, and other annual profits or gains not charged under Schedule A, B, C or E, and not specially exempted from tax.' Case II covers 'tax in respect of any profession, employment or vocation not contained in any other Schedule' and the rule applicable to Case II provides 'the tax shall extend to every employment..... and to all profits and earnings of whatever value arising from employments.' Thorpe who was the managing director of a limited company had to resign his position on account of ill-health in 1922, but retained his seat on the board as an ordinary director until 1925. Between 1922 and 1925 he did no work for the company, attended no board meeting and received no remuneration as a director. It was the companys custom to give the retired employees pension or allowances. In 1923, the directors passed a resolution awarding him during his retirement a pension of pounds 5,000 a year but this was rescinded in 1925, and a final payment of pounds 5,000 was voted to him 'not as or because he is a director, but as a personal gift.' Thorpe was assessed under Schedule E in respect of both the pension and the final payment and the assessment was discharged on appeal by the Special Commissioners who decided that the allowances were gifts of personal nature only. Rowlatt J. observed :
'The Commissioners must have found that these sums were paid to him not as remuneration for being de praesenti an ordinary director but as an allowance in the nature of a pension in respect of the past services which were over and done with. They must have held that. I do not see that they could have held that this large sum of money was a mere charitable gift to him. I think they must have held (the facts all point to it, there is no doubt about it) that it was a gift to him in respect of his past services as managing director, by way of pension. But it seems to me upon the facts - and this is I think most important -that these payments cannot be regarded as supplementary salary for the services as they were rendered but are payments in respect of the termination of the services in respect of the period which he will live after the services have been rendered.' According to the learned judge there were a series of gifts to the respondent and the question was whether the gifts ceased to be mere gifts because what had led to it was past employment. His Lordship felt himself bound by the decision in Duncans case and added, 'it is nothing but a gift moved by the remembrance of past services already efficiently remunerated as services in themselves; it is merely a gift moved by that sort of gratitude or that sort of moral obligation if you please : ....... it is only a matter of history that the feeling between the parties which has generated the gift arises out of an employment.'
In the result his Lordship held that the gift was not taxable.
In my view, it cannot be said that the transfer of a portion of the goodwill which Batty and Massy had appropriated to themselves to the assessee was gift of the kind given to Thorpe. Rather it would appear that the assessee had prevailed upon Batty and Massy to agree to the transfer, because his past services to the firm called for better treatment than was accorded to him.
The decision in Reed v. Seymour, although finally heard by the House of Lords seems to have come in for criticism afterwards. Seymour, a professional cricketer in the service of the Kent County Cricket Club was granted a benefit the proceeds from which together with subscription after being held by the trustees of the club on certain securities were eventually handed to him and applied in the purchase of a farm. Under the rules of the club a professional cricketer might be granted a benefit but on the express understanding that proceeds should be allowed to be invested in the name of the trustees of the club during the pleasure of the committee. There was a uniform practice, however, that the sum invested was always handed over to the cricketer on his retirement or when he found an investment approved of by the trustees. The special Commissioners were of opinion that the sum of pounds 939 16s. od. being the net proceeds derived from the match played in the year 1920 for the benefit of the appellant was donation or gift and was not an emolument of profit arising from the appellants employment and as such not taxable to income-tax. This was affirmed by Rowlatt J., reversed by the Court of Appeal and reaffirmed by the House of Lords by a majority. The question was whether the above-mentioned sum fell within the description contained in rule 1 of Schedule E of 'salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment so as to be liable to income-tax under that Schedule.' Viscount Cave held that 'it must now... 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 question to be answered is, as Mr. Justice Rowlatt put it, 'is it in the end a 'personal gift or is it remuneration ?' If the latter it is subject to the tax; if the former, it is not.' According to his Lordship the net proceeds of the benefit match should be regarded as a personal gift and not as income from the appellants employment, because the terms of his employment did not entitle him to a benefit. His Lordships reasoning was as follows :
'A benefit is not usually given early in cricketers career, but rather towards its close, and in order to provide an endowment for him on retirement; and, except in a very special case, it is not granted more than once. Its purpose is not to encourage the cricketer to further exertions, but to express the gratitude of this employers and of the cricket-loving public for what he has already done and their appreciation of his personal qualities. It is usually associated, as in this case, with a public subscription; and, just as those subscriptions, which are the spontaneous gift of members of the public, are plainly not income or taxable as such so the gate moneys taken at the benefit match, which may be regarded as the contribution of the club to the subscription list, are (I think) in the same category. If the benefit had taken place after Seymours retirement, no one would have sought to tax the proceeds as income; and the circumstance that it was given before, but in contemplation of retirement does not alter its quality. The whole sum - gate money and subscription alike - is a testimonial and not a perquisite.'
Lord Atkinson who delivered the dissenting judgment said that 'he could not find anything in the case suggesting that the club, or its committee, had any motive, object or aim in giving the benefit of this match to Seymour, their officer, other than to reward him for the efficient discharge of the duties of his post.' According to his Lordship the fact of the giving of the permission of the committee of the club to the holding of benefit matches was purely voluntary and discretionary was entirely immaterial.
Wright v. Boyce was the case of a professional huntsman who had been a hunt servant all his life. In 1946, he was appointed huntsman to the Bathurst Hunt where he worked up to 1952. He then joined woodland Pytchley Hunt. In his capacity as huntsman he was the senior member of the hunts staff and occupied a responsible position. In each of the hunts he was engaged by the master. In each year he received presents of cash at or about Christmas time. Some of these came to him from persons with whom he had come into contact in his capacity as hunts servant earlier in his career, but who had no connection with the hunt to which he was huntsman at the time the presents were given. Most of the presents, however which included both cash as well as those in kind came to him from persons with whom he was at the time in contact in his capacity as huntsman. It was a widespread custom in hunts in most parts of the country (including the Bathurst and Woodland Pytchley Hunts) for followers of the hunt to give the huntsman presents of cash at Christmas time. The question was whether this voluntary and payment made at Christmas to the huntsman by followers, supporters and persons interested in the hunt were profits of his employment within the meaning of Schedule E. Strong reliance was placed by counsel for the huntsman on the case of Reed v. Seymour. Jenkins J., who delivered the leading judgment of the court of Appeal distinguished Seymours case on the ground that the benefit match there was held and the gate money collected on the eve of the retirement of the cricketer after a long and brilliant career and once for all and that these were factors tending to show that the payment were in the nature of testimonial. His Lordship observed that 'generally speaking, where there is no definitely determining factor, like a reference in the contract of employment of the person concerned, it is hardly possible to assess the quality of the payment without considering the position both of the player and of the payee and it may well be that, where it is sought to tax a man on receipts of this general character, he can repel the claim to tax by proving that the persons who gave him the sums alleged to be taxable gave them to him on some entirely different account. But then I think the first test would still hold good : what was the quality of the payment from the point of view of the recipient ?' His Lordship referred to the custom of payment to huntsman and said that it went to show that, prima facie, the payment were not made to the taxpayer as an individual but in accordance with custom which produced 'a regular annual subvention, every Christmas from the date of the taxpayers engagement.' In this case there is nothing to show that the employers of the assessee were giving a testimonial to him and the quality of the payment from his point of view is recognition of his long service with the firm.
Reference was also made to the case of Susil Sen, In re, a well-known solicitor of this court, who was assessed to tax in respect of a payment made to him not by a client but by a third party who had received the benefit of Mr. Sens exertions on behalf of his client. In 1937 when the Indian Iron & Steel Company Limited were about to issue new shares of the company, Mr. Sen was engaged by a shareholder of the company in connection with certain proposals which were being put forward by Messrs. Martin & Co., managing agents of India Iron & Steel Company Limited. Mr. Sen attended a meeting of the shareholders of the company on a proxy given by his client and held discussions with the chairman of the meeting and other directors of the company. Due largely to the exertion of Mr. Sen, there was a very substantial issue of shares to the public in which the public dealt with very heavily leading to a rise in the process of the shares. A partner of the firm of Messrs. Mugniram Bangur & Co., stock and share-brokers, gave Mr. Sen a sum of Rs. 10,000 as inam or gift. The question was whether this was taxable. Derbyshire C.J. observed :
'No letter accompanying the cheque for Rs. 10,000 has been exhibited to show that it was a testimonial to Mr. Sen, or a contribution for any specific purpose, or that it was subject to any condition. It is clear to me that it was paid to Mr. Sen because of the help he, as a lawyer and advocate, had rendered in April, 1937, in respect of the new issue of shares in the Indian Iron and Steel Co. Limited through which help the players had derived great benefit. I have, therefore, come to the conclusion that this sum of Rs. 10,000 was a receipt by Mr. Sen arising from the exercise by him of his profession as a lawyer and advocate and is part of Mr. Sens income which is not exempt from tax under section 4(3).'
Incidentally his lordship remarked that 'commercial men rarely pay money without good reason and generally do so in return for property, goods, services or help.' Quite a number of English cases were referred to including Seymours case and Panckridge J. observed that 'I very much doubt if the case of Seymour v. Reed would be applicable to a professional cricketer who had received a sum of money made up of contributions collected from the spectators at the close of an exceptionally meritorious innings'. According to his lordship 'It is as plain as anything could be instruction of Mr. Khandelwala at the shareholders meeting.'
I do not think it will serve any useful purpose to refer to any more authorities on this point. In considering the question as to how a payment of this nature should be treated, all the surrounding circumstances have got to be taken into consideration, and in my view the motive of the persons paying, though not conclusive on the point, would go a very long way in establishing whether the payment was by of testimonial or not. On the facts as found by the Tribunal it cannot be said that it went wrong in holding that the readjustment of the value of the goodwill was not in the nature of a testimonial and that the cause of it was the long service of the assessee to the firm and the deprivation of the benefit which might have accrued to him if the firm had continued in existence.
The answer to the question must, therefore, be in the affirmative and against the assessee. The revenue will have the costs of this reference.
LAIK J. - I agree.
Question answered in the affirmative.