Appeal No 327 of 1959
Appeal from the order dated June 28 1956 of the Bombay High Court at Nagpur in Misc
First Appeal No 15 of 1954
98 774 A V Viswanatha Sastri Shankar Anand and A G Batnaparkhi for the appellant
K N Rajagopal Sastri as amicus curiae
November 29
The Judgment of the Court was delivered by SHAH J
Ramachandra Dhondo Datar hereinafter referred to as the respondent was employed by the appellant company in its publications branch
By agreement dated March 23 1943 the appellant company agreed to pay to the respondent as from April 1 1943 remuneration per annum equal to 3 12 of the gross sales or Rs 12000 whichever was greater
The agreement was to remain in operation for ten years from April 1 1943 in the first instance and was renewable at the option of the respondent for such period as he desired
By notice dated April 19 1948 served on the respondent on April 22 1948 the appellant company terminated the employment of the respondent
The respondent then filed a civil suit in the court of the Fifth Additional District Judge Nagpur for a decree for Rs 130000 being the amount of compensation for wrongful termination of employment arrears of salary and interest
On July 17 1953 the court after giving credit for the amount received by the respondent passed a decree for Rs 42359 which was inclusive of Rs 36000 as compensation for termination of employment and Rs 6000 as salary in lieu of six months notice and interest and costs and interest on judgment
The respondent then applied for execution of the decree and claimed Rs 54893 12 0 less Rs 18501 10 0 decreed against him in a cross suit filed by the appellant company
The Income Tax Officer Nagpur served a notice under section 46 of the Indian Income Tax Act upon the respondent and also gave intimation to the District Judge Nagpur that the appellant company be permitted to deduct at source and to pay into the Government Treasury Rs 1595613 0 as income tax surcharge and super tax due on the sum of Rs 50972 2 0 awarded to the respondent
The appellant company also applied that the 775 executing Court do declare that the appellant company was entitled and in law bound to deduct the tax due on the amount
The learned Judge directed the appellant company to pay to the Income Tax Department Rs 15956 13 0 on account of income tax and super tax on the amount due to the respondent and directed it to pay the balance in court after filing a receipt for payment of tax from the Income Tax department
In appeal to the High Court of Judicature at Nagpur the order passed by the District Judge was reversed and execution as claimed by the respondent was directed
The appellant company contends that under section 182 of the Income Tax Act it was bound to deduct the tax computed at the appropriate rate on the salary payable to the respondent as the amount due under the decree represented salary
Section 18 sub section
2 of the Income Tax Act in so far as it is material provides that any person paying any amount chargeable under the head salaries shall at the time of payment deduct income tax and super tax at the rate representing the average of the rates applicable to the estimated total income of the assessee under the head salary
Sub section
7 declares that a person failing to deduct the taxes required by the section shall be deemed to be an assessee in default in respect of such tax
The Legislature has it is manifest imposed upon the employer the duty to deduct tax at the appropriate rate on salary payable to the employee and if he fails to do so the tax not deducted may be recovered from him
But the liability to deduct arises in law if the amount is due and payable as salary
In this case there has been no assessment of tax due by the Income Tax Officer on the amount payable to the respondent
Under section 465 any person paying salary to an assessee may be required by the Income Tax Officer to deduct arrears of tax due from the latter and the employer is bound to comply with such a requisition and to pay the amount deducted to the credit of the Government
But this order can only be passed if income tax has been assessed and has remained unpaid
It is undisputed that at the material 776 time no tax was assessed against the respondent the Income Tax Officer had accordingly no authority to issue a notice under section 465
Nor could the Income Tax Officer claim to recover tax due by a proceeding in the nature of a garnishee proceeding by applying to the civil court to attach the Judgment debt payable by the company
The application submitted by the Income Tax Officer must therefore be ignored
Undoubtedly the employer is by section 18 of the Act liable to deduct from the salary payable by him to his employee the amount of tax at the average rate appli cable to the estimated total income but can it be said that as between the appellant company and the respondent the decretal amount represented salary The respondent had filed a suit for a decree for arrears of salary compensation for wrongful termination of employment and interest
The court having passed a decree on that claim it became a judgment debt
It may have been open to the appellant company in the suit to apply to the court for making a provision in the decree for payment of income tax due by the respondent but no such provision was made
We are not concerned to decide in this appeal whether in the hands of the respondent the amount due to him under the decree when paid will be liable to tax that question does not fall to be determined in this appeal
The question to be determined is whether as between the appellant company and the respondent the amount decreed is due as salary payment of which attracts the statutory liability imposed by section 18
The claim decreed by the civil court was for compen sation for wrongful termination of employment arrears of salary salary due for the period of notice and interest and costs less withdrawals on salary account
The amount for which execution was sought to be levied was the amount decreed against which was set off the claim under the cross decree
A substantial part of the claim decreed represented compensation fir wrongful termination of employment and it would be difficult to predicate of the claim sought to be enforced what part thereof if any represented salary due
Granting that compensation payable to an 777 employee by an employer for wrongful termination of employment be regarded as in the nature of salary when the claim is merged in the decree of the court  the claim assumes the character of a judgment debt and to judgment debts section 18 has not been made applicable
The decree passed by the civil court must be executed subject to the deductions and adjustments permissible under the Code of Civil Procedure
The judgment debtor may if he has a cross decree for money claim to set off the amount due thereunder
If there be any adjustment of the decree the decree may be executed for the amount due as a result of the adjustment
A third person who has obtained a decree against the judgment creditor may apply for attachment of the decree and such decree may be executed subject to the claim of the third person but the judgment debtor cannot claim to satisfy in the absence of a direction in the decree to that effect the claim of a third person against the judgment creditor and pay only the balance
The rule that the decree must be executed according to its tenor may be modified by a statutory provision
But there is nothing in the Income Tax Act which supports the plea that in respect of the amount payable under a judgment debt of the nature sought to be enforced the debtor is entitled to deduct income tax which may become due and payable by the judgment creditor on the plea that the cause of action on which the decree was passed was the contract of employment and a part of the claim decreed represented amount due to the employee as salary or damages in lieu of salary
Counsel for the appellant company strongly relied upon the decision of the House of Lords in Westminster Bank Ltd vs Riches 1
That was a case in which in an action brought by one R against the Westminster Bank trustee of the estate of one X R was awarded a decree for pound 36255 principal and pound 10028 as interest
The Bank thereafter brought an action for a declaration that it had satisfied the judg ment in the action by R by paying him the amount 1 18 Tax Cases 159
778 due less pound 5014 the latter sum representing income tax on the interest awarded by the judgment
It was held by the House of Lords that pound 10028 was interest of money within Schedule D and General Rule 21 of the Income Tax Act 1918 and that income tax was deductible therefrom
In that case the only argument advanced on behalf of the Bank is set out in the speech of Viscount Simon L C at p 187 The appellant contends that the additional sum of pound 10028 though awarded under a power to add interest to the amount of the debt and though called interest in the judgment is not really interest such as attracts Income Tax but is damages
The short answer to this is that there is no essential incompatibility between the two conceptions
The real question for the purposes of deciding whether the Income Tax Acts apply is whether the added sum is capital or income not whether the sum is damages or interest The House of Lords in that case by a majority held that pound 10028 awarded under the judgment represented not capital but interest and was liable to tax
In our view  this case has no application to the facts of the present case
In the case before us there is a decree passed in favour of the respondent under the scheme of the Civil Procedure Code that decree has to be executed as it stands subject to such deductions or adjustments as are permissible under the Code
There was no tax liability which the respondent was assessed to pay in respect of this amount till the date on which the appellant company sought to satisfy the alleged tax liability of the respondent
As between the appellant company and the respondent the amount did not represent salary it represented a judgment debt and for payment of income tax thereon no provision was made in the decree
The Civil Procedure Code bars an action of the nature which was filed in Westminster Bank s case supra
The defence to the execution if any must be raised in the execution proceeding and not by a separate action
The amount payable by the appellant company to the respondent was not salary but a judgment debt and before paying that debt the appellant company could not claim 779 to deduct at source tax payable by the respondent
Nor could the appellant company seek to justify its plea on the ground that the judgment creditor was indebted to a third person
The principle of the case in Manickam Chettiar vs Income Tax Officer Madura 1 on which reliance was also sought to be placed by the appellant company has no application to this case
In Manickam Chettiar s case 1 in execution of a money decree certain properties belonging to a judgment debtor were attached and sold and the sale proceeds were received by the court
The Income Tax Officer who had assessed the decree holder to tax payable by him on his other income applied to the court for an order directing payment to him out of the sale proceeds the amount of income tax due by the decree holder
It was held that the claim for income tax was entitled to priority in payment and the court had inherent power to make an order on the application for payment of money due as income tax
Tax had admittedly been assessed and proceedings substantially for recovery of the tax so assessed were adopted by the Income Tax Officer
It was held in the circumstances that the court had jurisdiction to direct recovery of tax out of the amount standing to the credit of the decree holder
The principle of that case can have no application to the facts of the present case
The respondent had not appeared before us but we have been assisted by Mr Rajagopala Sastri and we are indebted to him for placing the evidence and the various aspects of the case on a true appreciation of which the question in issue fell to be determined
The appeal fails and is dismissed
As there was no appearance for the respondent there will be no order for costs
Appeal dismissed
1 VI IT R 180


Summary:
In a civil suit the respondent obtained a decree against his employer the appellant company for a sum which included com pensation for wrongful termination of his service arrears of salary interest and costs of the suit and then applied for execution of the decree
The Income tax Officer served a notice upon the respondent under section 46 of the Indian Income tax Act and applied to the District Judge that the appellant be permitted to deduct at source the income tax surcharge and super tax on the sum awarded to the respondent and pay the same in the Government Treasury
The appellant company also moved the executing court for a declaration that they were entitled and bound to deduct the tax due on the amount
The District judge directed the appellant company to pay the income tax and super tax to the Income Tax Department and pay the balance in Court together with a receipt for the income tax paid
In appeal the High Court reversed the order of the District judge and directed the execution of the decree as claimed by the respondent
On appeal by the appellant company Held that as no tax was assessed against the respondent the Income Tax Officer could not issue a notice under section 465 requiring the appellant company to deduct tax from the decretal amount
A substantial part of the decretal amount did not represent salary of the respondent it consisted of compensation for wrongful termination of the respondent s service salary in lieu of six months  notice interest and costs of the suit
It was a judgment debt and no provision for payment of income tax was made in the decree which was liable to be executed as prayed by the respondent
The appellant company was not therefore entitled or bound to deduct income tax under section 18 sub section
2 of the Act