A payment made to an employee after the termination of his employment, which is not in the nature of compensation for loss of employment, but is made in recognition of past services, is taxable as a profit in lieu of salary.

Judgment

KAPUR, J. : This is an appeal pursuant to a certificate of the High Court of Bombay against the judgment and order of that Court in Income-tax Reference No. 10 of 1958, answering the question referred to it against the assessee whose legal representatives are the appellants before us, the respondent being the Commissioner of Income-tax.

2. The facts which have given rise to the appeal are that the late Mr. Anantrai P. Pattani, hereinafter called the assessee was, by Hazur Order dated December 10, 1937, appointed the Chief Dewan of Bhavnagar State. On January 15, 1948, the Maharaja of Bhavnagar introduced responsible Government in his State and appointed the assessee as the Chairman of the Bhavnagar Durbar Bank but he received no salary for that post. On the same date by another Hazur Order the Maharaja granted a monthly pension of Rs. 2,000 to the assessee. The order was in the following terms :

"He looked after us well in our childhood and rendered valuable services sincerely and with single-minded loyalty to us and our State during extremely difficult period of the last war and thereafter, which has enhanced the prestige and prosperity of the State and given the State and the people a place of pride in India. In appreciation of this, it is (hereby) decided to grant him a monthly pension of Rs. 2,000 two thousand which is the monthly salary he is drawing at present Date 22-1-1948."

On May 31, 1950, the Maharaja directed Messrs. Premichand Roychand and Sons, Bombay, with whom he had an account "to pay by cheque to Mr. A. P. Pattani Rs. 5 lacs out of the amount lying to the credit of my account with you." This sum was paid to the assessee on June 12, 1950. It is stated that the accountant of the Maharaja asked for instructions as to how that amount of Rs. 5 lacs was to be adjusted in the accounts and on December 27, 1950, the Maharaja made the following order :

"In consideration of Shri Ananatrai P. Pattani the Ex-Dewan of our Bhavnagar State having rendered loyal and meritorious service Rs. 5,00,000 (Rupees Five Lacs) are given to him as gift. Therefore, it is ordered that the said amount should be debited to our Personal Expense Account."

3. On March 1, 1948 Bhavnagar State was merged in the United States of Saurashtra and the Maharaja ceased to be the ruler of the said State as from that date. The assessability of this sum of Rs. 5 lacs was raised in the course of the assessment proceedings for the assessment year 1951-52 and at the request of the assessee which is stated to be oral the Maharaja wrote on March 10, 1953, the following :

"I confirm that in June 1950, I gave you a sum of rupees five lacs (Rs. 5,00,000) which was a gift as a token of my affection and regard for you and your family. This amount was paid to you by Premchand Roychand and Sons according to my letter of 31st may, 1950, from moneys in my account, with them."

On these facts the Income-tax Officer held that Rs. 5,00,000 received on June 12, 1950, was liable to income-tax under S. 7(1) read with explanation (2) of that section as it stood before the amendment by the Finance Act, 1955. The assessee took an appeal to the Appellate Assistant Commissioner which was dismissed. Against that order an appeal was taken to the Income-tax Appellate Tribunal but the Tribunal also dismissed the appeal. The Tribunal held that looking to the circumstances they would attach more importance to the "contemporaneous document, i. e., the order of the 27th December, 1950", which clearly mentioned why the sum of Rs. 5,00,000 was paid to the assessee. The Tribunal was not inclined to "believe in the contents of that letter and would leave the matter at that." The reference is to the letter of the Maharaja dated March 10, 1953. The Tribunal further held that there was no distinction between the Maharaja and the State and

"assuming for a moment that this view of ours is not found to be correct, still it is clear from the Huzur Order No. 13 dated 22-1-1948 (vide para 2 above) th