1969 Supreme(MP) 45

Madhya Pradesh High Court
A. P. SEN,G. P. SINGH
Commissioner of Income-tax, Nagpur and Bhandara, Nagpur - Appellant
Versus
Captain. H. C. Dhanda, Indore - Respondent
Decided On : 04/12/1969

Headnote:

The payment of Rs. 1,67,345 to the assessee under the agreement dated 27th January 1955 cannot, in truth, be regarded as having been made under Clause 6 (b) of the Huzur Order dated 1st March 1950. Such being the position, it is futile for the Commissioner to contend that the payment in question was a payment of additional remuneration or a deferred payment, in terms of the contract of service.

Fact of the Case:

The assessee was employed as the Personal Adviser to the Senior Up-Rajpramukh of the erstwhile State of Madhya Bharat. On 23rd December 1951, his services were terminated with immediate effect, and he was directed to hand over his office to one Masood Quli Khan. The assessee wrote to His Highness complaining of the unjust manner in which his services were dispensed with, which was far from fair to him or consistent with the position of the high Trust, status and responsibility which he enjoyed with His Highness for many years. On 2nd February 1952, the assessee forwarded to the Holkar a statement of his claim as regards the amounts payable by His Highness on termination of his service, and the total amount payable was Rupees 2,97,620, as per a statement annexed. The statement also indicated the extent of income-tax and super-tax which would be payable on such sum. The Holkar had, in the meanwhile, by Solicitor's letter dated 10th April 1952, demurred his liability, stating that the termination of the assessee's services was by reason of his wilful disregard of the wishes and instructions of his employer. Besides, some instances of gross abuse on his part of the position that he occupied also came to the notice of His Highness. In reply to this, the assessee explained his position to the Holkar, by his letter dated 14th April 1952 and wanted to know whether the solicitor's letter had been written "with the authority and knowledge of His Highness, with a view to prevent the matter being placed in the hands of lawyers." In that letter, the assessee went on to say that "he was unable to understand why His Highness should have been surprised at the figure of his claim", as submitted. According to him, the sum of Rs. 2,97,620 as claimed, was payable "under terms of his appointment" and "in view of its termination." The assessee then complained that the Holkar should adopt an attitude "to find fault with the contract which was not based on truth," was "not straight and was utterly callous to his just rights" after he had rendered to him "services of exceptional value while in service as his Adviser" and not at all "one befitting His Highness' position". The assessee further added that such attitude was "very unwise from the Huzur's point of view", pointing out that the Holkar would get a refund of Rs. 52,564 paid by him as income-tax and super-tax, "according to a first class expert's view" as the payment was to be on account of the termination of contract and such payment would, therefore, "be treated in law, as compensation for loss of employment" and not liable to any income-tax and super-tax which would otherwise be payable. The only response from the Holkar to this was, by his letter dated 21st April 1952, to the following effect :- "No useful purpose will be served by prolonging such unpleasant correspondence". Further correspondence appears to have ensued but with no result. After obtaining requisite permission from the Central Government for the institution of a suit against His Highness Maharaja Yeshwant Rao Holkar of Indore, the assessee brought a suit for recovery of Rupees 2,90,346.62 P. as liquidated damages, being suit No. 1257 of 1954 on the Original side of the Bombay High Court. After narrating the events which culminated in the order of his dismissal, the assessee averred in paras. 17, and 18 of the plaint, as follows :- "17, The plaintiff says that he had rendered very loyal, faithful and exceptionally valuable services to the defendant during the tenure of his office as Personal Adviser to the defendant. The plaintiff further says that the defendant has in breach of the aforesaid agreement, terminated the plaintiff's services. 18. The plaintiff submits that on the termination on 23rd December 1951 of his services by the defendant as aforesaid, the defendant became liable to pay immediately to the plaintiff a sum of Rs. 2,46,228 as and by way of liquidated damages as provided in clause 6(b) of the said Huzur Order dated 1st March 1950, as per particulars hereto annexed and marked Ex. H." In Paragraph 22 of the plaint, he further stated- "22. In the premises, the plaintiff submits that the defendant is bound and liable to pay to the plaintiff the said sum of Rs. 2,46,228 as and by way of liquidated damages as provided in clause 6 (b) of the said Huzur order dated 1st March 1950. The plaintiff further submits that the defendant is also bound and liable to pay to the plaintiff interest on the said sum of Rupees 2,46,228 at the rate of 6 per cent per annum from the 24th December 1951. Under the circumstances there is now due and payable by the defendant to the plaintiff the sum of Rs. 2,90,346/10 as per the said particular hereto annexed and marked Ex. H." An alternative claim was also made by him in para 23 of the plaint, which reads as hereunder :- "23. Without prejudice to the aforesaid submission and in the alternative, the plaintiff submits that by reason of the wrongful termination of the plaintiff's service by the defendant, the plaintiff has suffered damage which the plaintiff assesses at the said sum of Rs. 2,90,346/10. The plaintiff says that he has not been able to obtain any similar or suitable employment." His Highness Maharaja Yeshwant Rao Holkar of Indore did not file any written statement in answer to the claim but, instead, settled the claim out of Court. The parties, by an agreement in writing dated 27th January 1955, came to a settlement for payment of Rs. 1,67,345 to the assessee in full and final satisfaction of the claim. The answer to the reference depends on a construction of that agreement.

Finding of the Court:

The Tribunal, however, on further appeal by the assessee, upheld his contention and was of the view that the receipt of Rs. 1,67,345 by him from His Highness Maharaja Yeshwantrao Holkar of Indore, was "solely as compensation for loss of employment and not by way of remuneration for past services", within the meaning of Explanation II to Section 7(1) of the Income-tax Act, 1922, and being a receipt of capital nature was not taxable in his hands.

Issues: Whether the payment of Rs. 1,67,345 to the assessee under the agreement dated 27th January 1955 was solely as compensation for loss of employment within the meaning of Explanation II to Section 7(1) of the Income-tax Act, 1922, and being a receipt of capital nature was not taxable in his hands.

Ratio Decidendi: The payment of Rs. 1,67,345 to the assessee under the agreement dated 27th January 1955 was solely as compensation for loss of employment within the meaning of Explanation II to Section 7(1) of the Income-tax Act, 1922, and being a receipt of capital nature was not taxable in his hands.

Final Decision: The question referred to us ought to be answered in the affirmative. The assessee shall have the costs of this reference. Hearing fee Rs. 500.