Case: Mahesh Anantrai Pattani And Another Vs. The Commissioner Of Income-Tax, Bombay North, Ahmedabad

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 termslooked 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 DateMay 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 orderconsideration 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.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 followingconfirm 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, withthese 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 Statefor 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) that the assessee rendered services not only to the State, if it is distinct from the Maharaja but to the Maharaja as well; for that Huzur Order clearly refers to assessee rendering "valuable services sincerely and conscientiously to us and our State". We would, therefore, hold that the amount of Rs. 5 lacs is a taxable receipt falling under Section 7(1) read with Explanationthe instance of the assessee the following question of law was referred to the High Courtthe sum of Rs. 5 lacs has been properly brought to tax in the hands of the assessee for the assessment year 1951-52."? and a further question as to the applicability of S. 4(3) (vii) of the Income-tax Act was not referred on the ground that it did not arise out of the order of the Tribunal.The High Court, on the findings given by the Tribunal came to the conclusion that S. 7(1) explanation (2) of the Income-tax Act applied. It held that it was not possible to regard the receipt of this sum of money by the assessee as a windfall nor as a personal gift of the nature of a testimonial; that the gift was not made in appreciation of the personality or character of the assessee nor was it symbolical of its appreciation of his personal qualities; that the consideration for the gift was in terms stated to be past services and therefore it could not be treated as a mere gift by an employer to an employee when the Court did not know what motivated the making of that gift. On the facts of the case the High Court reached the conclusion, though with some reluctance, that the case fell within the ambit of S. 7(1) Explanation (2). The High Court also held that this sum could not be exempted from tax on the ground that it was merely a casual or non-recurring receipt because once connection with the employment was established there was no question of considering the recurring or the casual nature of the receipt.5. During the pendency of the proceedings in the High Court the assessee died and his heirs and legal representatives were brought on the record and hence they are the appellants.

Reasoning:
There is no mention in the document of December 1950 of any services rendered to the Maharaja and it does not seem to have been considered by the Tribunal as to why the Maharaja should make out of his personal account the gift of such a large amount for something which was not done for the Maharaja specifically, particularly when services to the State and to the Maharaja and his family had already been well compensated. This lends support to the submission of the appellants that the amount was paid merely as a gift in token of Maharajas affection and regard for the assessee.In our opinion the sum of Rs. 5,00,000/- was not paid to the assessee in token of appreciation for the services rendered as a Dewan of Bhavnagar State but as a personal gift for the personal qualities of the assessee and as a token of personal esteem.17. The appeal is therefore allowed and the order of the High Court set aside and the reference is answered against the Commissioner of Income-tax. The appellants will have their costs throughout.