RAMACHANDRA DHONDE DATAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is an IT Ref. under S. 66(1) of the IT Act and raises a question under S. 7(1), r/w Expln. 2, of the Act as it stood before its amendment by the Finance Act of 1955. The assessee had been a manager of the All India Reporter Ltd., for a long time. On 23rd March, 1943, an agreement was entered into between him and the All India Reporter Ltd., specifying the terms of service of the assessee. The preamble of this agreement stated that as the assessee had put in very valuable services in the company since its inception in promoting, building up its business and bringing it in repute which it was enjoying and was still continuing to serve the company, the agreement was being entered into in appreciation thereof. Clause (1) of the agreement provided that the employee would be paid a salary of 3 1/2 per cent of the gross sales received by the company in the year or a sum of Rs. 12,000 whichever was greater from 1st April, 1943. Under cl. (2) the appointment of the employee was to be for ten years from 1st April, 1943, to be renewed automatically for such like period at the option of the employee. Clause (3), which is the most material clause for our consideration, ran as follows :

(2.) AFTER the assessee had served under this agreement for some years, disputes arose between him and the company and on 22nd April, 1948, a notice was served by the company on the assessee dismissing him from service peremptorily on charges of misconduct, neglect of duty, disobedience and bad faith. In this notice the company also made a claim of Rs. 51,657 from the assessee. This notice was replied to by the assessee on 28th May, 1948. Subsequently, on 19th April, 1951, the assessee filed Civil Suit No. 21/B/1952 against the company seeking to recover a sum of Rs. 1,30,000 from the company on various grounds. This suit was decided and decreed in favour of the assessee in respect of a part of the claim which he had set up. In the decree which was so made in favour of the assessee on 17th July, 1953, he was awarded a sum of Rs. 36,000 as compensation for three years as per cl. (3) of the agreement of service. A sum of Rs. 6,000 was also awarded to the assessee as for salary for six months in lieu of notice as per cl. (7) of the agreement of service, an amount of Rs. 625 by way of interest at 6 per cent up to the date of the institution of the suit and a further sum of Rs. 8,614 by way of interest from the date of suit till the date of realisation. The decree also awarded Rs. 3,921 by way of costs. Out of the amounts, which were awarded by the decree, the ITO brought to tax a total amount of Rs. 51,239 consisting of the items of Rs. 36,000 paid under cl. (3) of the agreement and Rs. 6,000 paid under cl. (7) of the agreement, and the amount of interest awarded by the decree, namely, Rs. 625 for interest up to the date of institution of the suit and Rs. 8,614 for interest from the date of the suit onwards. The assessment year during which this amount was brought to tax was 1954 -55, the corresponding accounting year for the period being the year ending 31st March, 1954.

(3.) THE Tribunal upheld the contentions, which were raised by the Department. It took the view that the amounts of Rs. 36,000 and Rs. 6,000 were decreed by the Court in the assessee's suit under paras. (3) and (7) of the agreement and there was no claim decreed in favour of the assessee on the basis of compensation for wrongful dismissal. It further took the view that the amounts, which were claimed and decreed under cls. (3) and (7) of the agreement, were not solely as compensation for loss of employment. In the view of the Tribunal, the case of P.D. Khosla (supra) was distinguishable from the case of the assessee and the ratio of that case did not apply to the assessee's case. As to the interest awarded by the decree the argument advanced before the Tribunal was that since the principal amount was not taxable, the amount of Rs. 9,239 which was awarded towards interest by the decree was also not taxable. The Tribunal held that the contention was utterly untenable because interest was taxable unless specifically exempted under the specific provisions of the Act. The Tribunal accordingly dismissed the assessee's appeal. On an application made by the assessee under S. 66(1) of the IT Act, the Tribunal drew up a statement of the case and referred the following two questions of law as arising out of its order :