COMMISSIONER OF INCOME TAX Vs. SHEPPARD E D

JUDGEMENT

(1.) THIS reference relates to the asst. year 1948 -49. Killick Nixon & Co. were a partnership concern carrying on trading operations on an extensive scale in India. They owned various textile factories and managing agencies of limited companies. The firm used to employ assistants initially for five years, and if their service were found satisfactory, extensions were given after the initial period at enhanced salary. The assistants could expect in due course to become partners in the firm. The assessee, E. D. Sheppard, was one of such assistants who joined the firm in 1930. The original contract of Sheppard's employment is not on the record : but it is undisputed that the terms of employment were the same as those on which one W. J. Heygate was employed on 7th Jan., 1937. A copy of Heygate's contract of employment was produced before the ITO. The assessee was in the first instance employed for a period of five years and he undertook to "diligently and faithfully serve the firm." By cl. 10 it was provided that notwithstanding anything contained in the agreement the firm may terminate the agreement without assigning any reasons after giving the assessee one calendar month's previous notice of its intention so to do. This initial agreement was extended from time to time on the expiration of the original period of employment. Even the agreements by which the period of the assessee's employment was extended are not on the record, but it is admitted that the terms were the same as the terms of extension of the employment of one J. G. Milne -a copy of whose contract was produced on the record. By this agreement the assessee was to be paid the salary set out therein and a percentage of profits as commission. The assessee received between the years 1930 and 1935 salary rising from Rs. 500 to Rs. 700 per mensem ; between the years 1935 and 1938 he received salary rising from Rs. 750 to Rs. 875 per mensem ; between 1938 and 1941 he received a salary of Rs. 950 per mensem and 1 per cent. of the net profits as commission ; between 1941 and 1944 he received a salary of Rs. 1,050 per mensem and 1= per cent. of the net profits ; and between 1944 and 1947 he received a salary of Rs. 1,200 per mensem and 2 per cent. of the profits. The last extension given to the assessee was from 1st Nov., 1947, to 31st Oct., 1950, and under that agreement he was to receive a salary of Rs. 1,200 per mensem and 2= per cent. of the net profits as commission. There is no dispute that the total emoluments of the assessee under this agreement would have been approximately Rs. 50,000 per annum.

(2.) SOME time about the last quarter of the year 1947 the firm decided to reorganize its business, and with that end in view decided to convert itself into a public limited company. For that purpose two limited companies were floated : one was the Killick Industries Ltd. -a public limited company -and the other was Killick Nixon & Co. Ltd., a private limited company which was to manage the business of the former company. This arrangement to convert the firm into a public limited company necessitated termination of the services of the firm's employees. On 29th Dec., 1947, a notice was served upon the assessee informing him that it was "desirable to place on record" that in view of the changes in the firm which, it was anticipated, will be effected "in the near future", the firm will be unable to continue him in its employment as from 31st Jan., 1948. On 30th Jan., 1948, an allotment of 1,700 shares of the Killick Industries Ltd., was made to the assessee. On 1st Feb., 1948, the assessee entered the employment of the Killick Industries Ltd. For transferring its assets the firm received certain shares of the Killick Industries Ltd., and of Killick Nixon & Co. Ltd.

(3.) THE ITO sought to bring the shares of the value of Rs. 2,21,000 to tax on the footing that these shares were allotted to the assessee in consideration of past services. The assessee produced before the ITO a letter purporting to be written by one D. R. C. Hartley on 1st Oct., 1952, on behalf of the firm, in which the assessee was informed that the firm had caused 1,700 shares in Killick Industries Ltd. to be allotted as "compensation for loss of employment." In appeal to the AAC, the order passed by the ITO bringing to tax the amount of Rs. 2,21,000 was confirmed. Before the Tribunal the assessee produced an affidavit, dated 22nd Feb., 1954, sworn by five out of the six partners who constituted the firm in the month of January, 1948, (the sixth partner having died in the meanwhile), which affirmed the terms of a memorandum submitted to the ITO by M/s Crawford Bayley & Co. on behalf of the assessee. It was recited in paragraph 8 of the affidavit that the partners had decided to discontinue the firm and prior to such discontinuance and on 27th Dec., 1947, they wrote to each assistant who was then employed by the firm terminating his services from 31st Jan., 1948, and stating that a further communication will be addressed to him regarding "the question of compensation for loss of employment." It was further recited in paragraph 8 that the intention of the partners on the discontinuance of the firm in causing allotments of certain shares to be made to the assistants was to compensate them for loss of employment and it was "in no sense a reward for past services." It was then recited that all the assistants had accepted the allotment as "compensation for the loss of employment in terms of the letter of the 27th Dec., 1947, and in veiw of such allotment no claim was made by any assistant against the firm" and that a confirmatory letter from the partners to the assistants was some time thereafter written "for purposes of the record". It was stated in paragraph 8 of the memorandum which was submitted by M/s Crawford Bayley & Co. that "the long continued employment (of the assistants) with the firm with the expectations attached thereto came to an end and it was but right that the assistants concerned, most of whom had unexpired agreements, were entitled to claim and did receive compensation for the loss of their employment including future prospects."