GUFF W A Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee was employed by Messrs. Thomas Cook and Son Ltd. On the 27th of May, 1946, as an executive in charge of a newly opened department of the company. On the 23rd of March, 1948, he received a communication from London to the effect that it was impossible to continue his activity and that in order to safeguard his personal interest he was being given a chance to explore the sale of business to outside capital. In fact, his services were terminated on the 14th of November, 1948, and on the termination of his services he was paid a sum of Rs. 12,000. The Taxing Department sought to bring this amount to tax and the contention of the assessee was that this sum represented a compensation for loss of office and therefore it was not liable to tad. The Income -tax Officer took the view against the assessee. The Appellate Assistant Commissioner decided in favor of the assessee; but the Tribunal came to a conclusion contrary to the contention of the assessee. The result is, the assessee has now come on these reference before us.

(2.) NOW there was an agreement of service between Messrs. Thos. Cook and Son Ltd. and the assessee, and that contract of service provided that the assessee was entitled to six months' notice if his services were to be terminated. It is also provided that, if six months' notice was not given, he was entitled to salary for six months. On the question of notice the Tribunal has come to the conclusion that the communication to which reference has been made constituted a notice under the contact, and having come to the conclusion, they have taken the view that the assessee was not entitled to anything under the contract and therefore what was paid to him was in the nature of gratuity. They have also state this was a payment received from the employer for past services rendered. Now turning to the section in question, which is section 7, which deals with salaries, that section subjects to tax 'any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profit in lieu of, or in addition to, any salary or wages'. There is an explanation 2 to this section, which provides that any payment due to or received by an assessee from an employer or former employer is, to the extent to which it does not consist of contributions by the assessee or interest on such contributions, a profit received in lieu or salary, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. Therefore, in order that the assessee should succeed, he must establish that this payment which he has received from his employer is a payment made solely as compensation for loss of employment. Now the difficulty is caused by the expression 'compensation for loss of employment.' Two views are possible. one view is that the compensation contemplated by the Legislature is a compensation which the employer was liable in law to pay to the employee : in other words, the loss suffered by the employee must be such as would render the employer liable to make good that loss. On this view, if there is no legal liability to pay the compensation, then any payment made by the employer would not come within this expression used in Explanation 2. If that be the correct view, then undoubtedly the position of the assessee is very difficulty because, if a proper notice was given to him as found by the Tribunal, then he was not entitled to any compensation when his services were terminated after the lapse of six months from the date when the notice was given. Whatever the nature of that payment might be, it was certainly not a payment in respect of a legal liability to compensate which was upon the employer. But the question what we have to consider is whether the expression used in explanation 2 is used in this narrow sense or it is used in the wider sense as meaning as solatium for the deprivation by the employer of his employment. In other words, did the Legislature merely contemplate the factual loss of employment and any amount paid for that loss, whether that payment was under a legal liability or not ? As we shall presently point our, the authorities to which our attention has been drawn have given to the expression 'compensation' a wider connotation. It also seems to us, apart from the authorities, that it is the better view to take of this expression, because if an employee loses his employment which is source of his income any payment made by his employer for that loss should not be looked upon as income liable to tax, as in its very nature the payment is to compensate for or to act as a solatium for the very source which produced the income and in respect of which the employee is liable to tax.

(3.) THERE is nothing in the judgment of the Privy Council which suggests that the compensation that was received by the assessee was a compensation which it was legally entitled to : and the ratio of the judgment is to be found at page 282, where their Lordships say : 'But when once it is admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.'