Case: V.D. Talwar (Dead) And After Him His Heirs Vs. The Commissioner Of Income-Tax, Bihar

V. D. Talwar, who was the assessee before the taxing authorities and whose legal representatives on his death are the appellants before us, was employed as the general manager of Messrs. J. K. Iron and Steel Company Ltd., Kanpur. The terms of his employment as agreed upon by the assessee and the company were incorporated in an appointment letter dated February 7, 1946. A formal memorandum of agreement was also executed between the parties on February 9, 1946. The assessee actually joined the service of the company on May 1, 1946. According to the service agreement the pay of the assessee was fixed at Rs. 2, 000 per month with an increment of Rs. 100 p. a. subject to certain deductions for income-tax, absence of duty, etc., which need not be set out in detail for the purpose of this case. According to the agreement the period of service was for five years. Clauses (5) and (6) of the appointment letter readPeriod of agreement of service to be five years(6) Termination of service if within five years to be on notice of twelve months on either side or salary in lieu thereof.(1) of the memorandum of the agreement dated February 9, 1946, said that the employee shall serve the employer faithfully and diligently for a term of five years from the date he joins, and clause 21 read asIf during the currency of this agreement, the employee desires to leave the services of the employers for any reasons whatsoever, he shall be at liberty to terminate the agreement by giving twelve calendar months notice in writing only after repaying to the employer joining money and all expenses if they have been allowed to the employee, and the employers shall have full power to take all necessary steps in order to enforce such payment. The employers may terminate the service of the employee by giving twelve calendar months notice in writing or (in the case of breach of any of the terms or conditions contained herein at any time without any notice) or paying any salary in lieu thereof. "We have stated earlier that the assessee joined his post as General Manager on May 1, 1946. The services of the assessee were, however terminated with effect from August 31, 1947. It is the admitted case of the parties that the services of the assessee were not terminated for any default or misconduct on the part of the assessee but the services were terminated because the company did not want to continue the assessee in their employment. It is also the admitted case that no notice of twelve months for the termination of the service was given by the company to the assessee as required by the contract. In lieu of the notice the company paid to the assessee on September 12, 1947, a sum of Rs. 18, 096-1-0 which was the amount computed as salary for twelve months after deduction of income-tax at the source. The company calculated the salary for the twelve months at Rs. 25, 200 and deducted therefrom the sum of Rs. 7, 103-15-0 as income-tax. The assessee gave a stamped receipt to the company for having received Rs. 18, 096-1-0 "in full and final settlement of all his claims and dues against the employermaking the assessment for the year 1948-49 the Income-tax Officer held that the sum of Rs. 25, 200 was a revenue receipt of the assessee liable to be taxed under the Indian Income-tax Act, 1922, and rejected the claim of the assessee that the said sum was compensation for loss of employment and the tax amounting to Rs. 7, 103-15-0 should be refunded to him. The assessee took an appeal to the Appellate Assistant Commissioner who held that the sum of Rs. 25, 200 though calculated on the basis of twelve times his monthly salary was nothing but compensation for the loss of service and was, therefore, not taxable as income in the shape of salaries. Then, there was an appeal to the Income-tax Appellate Tribunal which reversed the finding of the Appellate Assistant Commissioner and held that the amount of Rs. 25, 200 paid to the assessee was really salary in lieu of twelve months notice and, therefore, the amount was liable to be taxed under the Indian Income-tax Act, 1922. Under section 66(1) of the Income-tax Act, the Income-tax Appellate Tribunal referred the following question of law for the opinion of the High Court" Whether the sum of Rs. 25, 200 received by the assessee during the previous year was the revenue income of the assessee liable to tax under the Income-tax Actits judgment and order dated November 22, 1960, the High Court answered the question against the assessee. The assessee then obtained special leave from this court in pursuance whereof the present appeal has been brought to this court

Reasoning: We think that the view taken by the High Court isin the present case it is quite clear that the two terms in clauses (5) and (6) of the appointment letter and clauses 1 and 21 of the memorandum of agreement must be read together and so read the true position that emerges is that the contract of service provided that V. D. Talwar could serve either for five years at a monthly salary mentioned therein or, if the company so elected, for a shorter period upon the terms mentioned in clause 21. If the terms of clause 21 were complied with, then it could not be said that V. D. Talwar had surrendered any rights under the contract or had been deprived of any suchone class of cases the contract persists and the amount is payable under the contract and in the other class of cases there is total abandonment of all contractual rights and what is paid is in consideration of that abandonment. The present case in our opinion comes under the first of these two classesNow, the High Court has rightly pointed out that the principle which will apply in a case like this is that laid down in Dale (H.M.Inspector of Taxes) v.e the position is exactly the same. It is true that under one of the clauses of the agreement of service V. D. Talwar was to serve for five years; but under another term of the same agreement it was provided that the employer might terminate the service of V. D. Talwar by giving twelve calendar months notice in writing or paying any salary in lieu thereof. The expression "any salary" must be construed in the context of the appointment letter which said that if Mr. V.D. Talwars service was to be terminated within five years he would be entitled to a notice of twelve months or salary in lieu thereof. No notice for the termination of service was given to him in the present case, but he was given twelve months salary. He, therefore, got exactly what he was entitled to under the terms of his employment and he was not deprived of any rights under the contract of service. There being no deprivation of his rights under the contract the payment cannot be said to be "compensation for loss of office" within the meaning of thatthe present case, if V. D. Talwar had been served with a notice for the termination of his service, he would have worked for twelve months and got his salary and thereafter his service would have come to an end. Instead of giving him a notice the company paid him twelve months salary in lieu thereof. The true position is that he received twelve months salary in respect of his office though he did not do any work for that period. By no stretch of imagination can it be said that the sum paid to him was in consideration of the surrender by the recipient of his rights in respect of the office. It is worthy of note here that iny, their Lordships came to the conclusion that what was paid to the appellant in that case was paid in consideration of his surrendering his right to serve on and be remunerated down to the end of his contractual engagement, for, in that case, the appellant had the right to continue in service till March 31, 1944, and his service was terminable by three months notice only after that date. He, however, resigned at the request of the board of directors on an earlier date, namely, September 2, 1943. Therefore, the principle laid down inMurray is not the principle which is applicable in the presentseems clear to us that in the present case the appellant has surrendered no rights under the contract; what has been paid to him has been paid under the terms of the contract and as salary which he would have earned if twelve months notice had been given to him. As no notice was given he was treated as though he was in service and entitled to salary for twelve months and that was what was paid to him. It is difficult to see how such payment can be treated as compensation for loss ofpresent case is similar to the two cases of Henry v. Arthur Foster and Henry v. Joseph Foster and different from the case of Hunter v.seems to us that the same principle should apply in the present case. What has been paid to the appellant is his salary in lieu of notice. If that is the true position then the amount paid is taxable under section 7 of the Indian Income-tax Act, 1922. It is not compensation for loss of employment within the meaning of Explanation 2r the reasons given above we think that the High Court correctly answered the question.