Case: The Commissioner Of Income-Taxbombay Vs. E.D.Sheppard

was no enforceable agreement as between the assessee and the company which could be made the subject matter of a legal claim for damages for compensation at his instance in the event of its termination or cancellation by the company. The agency agreement in that case was terminable at the will of the company and if the company chose to do so, the assessee had no remedy at law in regard to the same. The argument was that therefore there was no enforceable agreement between the assessee and the company which could be made the subject matter of a legal claim for compensation. This argument was repelled and this Court said 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 ((1924) 9 Tax Cas. 48), which we have earlier quoted. This Court also referred with approval to the decision of W. A. Guff v. Commissioner of Income-tax ([1957] 31 I.T.R. 826.), 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.In view of these decisions we must over-rule the first contention urged on behalf of the appellant that compensation in Explanation 2 to s. 7 (1) means compensation which is payable or compellable at law.2a. We now turn to the second contention. Prior to the amendments introduced by the Finance Act, 1955, Explanation 2 to s. 7 (1) made it clear that a payment which was made solely as compensation for loss of employment was not assessable, while a payment which was made 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 voluntary and the recipient might have no legal right to any compensation at all. In such cases the compensation was ( deemed to be a capital receipt because 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 employer as a profit in lieu of salary (except where the payment was from a provident or other 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 capital or income need be considered, though learned counsel for the 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 the very wide form in which learned counsel for the department has put it, can be accepted as correct. In Mahesh Anantrai Pattani v. The Commissioner of Income-tax, Bombay North, Ahmedabad this Court had to consider s. 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 Dewan of the State of Bhavnagar was granted a monthly pension of Rs. 2, 000/- by the Maharajah of the State by an order dated January 15, 1948. On March 1, 1948, the State of Bhavnagar merged in the United States of Saurashtra and the Maharajah 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 Rs. 5, 00, 000/- and said that the payment was made in consideration of the 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/- was liable to tax under s. 7 (1) read with Explanation 2. This Court held that the sum ( of Rs. 5, 00, 000/- was given to Pattani not as a payment in consideration of the services already rendered by Pattani as the Dewan of the State but merely as a gift in token of the Maharajahs affection and regard for the assessee.Therefore, it was held the payment was not liable to be assessed to tax under s. 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 bands 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 bands of the assessee need be considered.3. Once it is held that the payment in the present case was a payment made solely as compensation for loss of employment, there is an end of the appeal; because Explanation 2 in clear terms excepts such payment from being treated as a profit received in lieu of salary. The Tribunal held on the evidence before it that the payment was made solely as com- pensation for loss of employment. The High Court rightly took the view that no distinction could be made between compensation for loss of employment and compensation for loss of prospects rooted in that employment. The High Court also rightly pointed out that if the object of the payment was unrelated to the relation between the employer and the employee, it would not fall within the expression "profit received in lieu of salary" in Explanation 2. We think that the High Court committed no error in answering the question referred to it.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]We consider that both the points urged on behalf of the department are without substance and are not supported by decisions including decisions of thisview of these decisions we mustthe first contention urged on behalf of the appellant that compensation in Explanation 2 to s. 7 (1) means compensation which is payable or compellable atdo not think that the proposition put in the very wide form in which learned counsel for the department has put it, can be accepted as correct.Once it is held that the payment in the present case was a payment made solely as compensation for loss of employment, there is an end of the appeal; because Explanation 2 in clear terms excepts such payment from being treated as a profit received in lieu of salary. The Tribunal held on the evidence before it that the payment was made solely as compensation for loss of employment. The High Court rightly took the view that no distinction could be made between compensation for loss of employment and compensation for loss of prospects rooted in that employment. The High Court also rightly pointed out that if the object of the payment was unrelated to the relation between the employer and the employee, it would not fall within the expression "profit received in lieu of salary" in Explanation 2. We think that the High Court committed no error in answering the question referred to it.