COMMISSIONER OF INCOME TAX, MADRAS Vs. BJFLETCHER

JUDGEMENT

(1.) question are referred to us by the Income Tax Commissioner, viz., (1) "Whether the sum of Rs. 36,794 paid to Mr. Fletcher in 1932-33 was income liable to tax, or was a capital sum exempted under Clause (v) of sub- Section (3) of Section (4) or otherwise, and (2) "Whether Mr. Fletcher is entitled to relief under section 25 (3) of the Act on the ground alleged by him, viz., that he discontinued his profession in the year of account."

(2.) The sum set out in first question was received by the assessee in the year of account as an employee of the Buckingham and Carnatic Company Limited, Madras, over and above his monthly pay. This sum was received out of the Officer Retiring Fund of the Company. It is a fund created by the company and its constitution and management are governed by certain rules framed by the company and directors of the company for the time being have full discretion to alter, interpret or add to those rules which are before us. The company allots every half year a certain sum to the credit of this Fund and this sum is invested and accumulated at the discretion of the directors of the company. The half yearly allotment is divided a amongst the several officers of the company eligible to the benefits of the Fund in proportion to their salaries and credited half-yearly to accounts maintained in the name of the several officer. Each officer is given a pass book in which are entered the amounts so credited to his account with the Fund. The proportionate interest realised on the investments is also credited to this account. No Officer admitted to the benefits of the Fund has any claim on the company in respect of the amount shown at the credit of his account until he shall have previously served the company continuously and satisfactorily for the prescribed period (six years in the case of the petitioner) (sic) and in no case can the amounts to the credit of an officer become payable to him until he leaves the service of the company. The Directors of the company have full discretion to decide which so the officers of the company shall from time to time be eligible to the benefits of the Fund. They have full power to dispense to with the services of or dismiss any such officer and such persons have no claim against the fund if they have not served for the prescribed period. The amount allotted each half year to the credit of the Fund is not treated as expenditure incurred by the company for the purposes of its assessments; but any amount paid out of the fund to an employee in account with the fund at the time of his retirement is treated as expenditure incurred by the company in the year in the year of payment for the purpose of its assessments. The amount credited each half year to the account of the assessee was not treated by him as his income of that year in any of the returns filed by him nor was it ever assessed to tax as income of any year prior to 1932-33. As before mentioned the total amount to the credit of the assessees account with the Fund on the date of his retirement was Rs. 36,794-3-2. This amount was paid to him by the company on the 29 March, 1933, after deducting Rs. 6,496-7-0 on account of income tax under Section 18 (2) of the Act.

(3.) It was contended on behalf of the assessee that this was not a payment of gratuity coming under the head of Salaries in Section 7 (1) of the Income Tax Act. This payment was variously described by learned counsel for the assessee as a gift, as being akin to commuted pension or a windfall. In my opinion, this is in no sense a gift because provided that the officer has fulfilled the conditions laid down in the rules, on his retirement he has a legal claim to the amount standing to his credit; nor, in my opinion, can it be described as being in the nature of a windfall such as the payment was held to be in Commissioner of Income Tax, Bengal v. Messrs. Shaw Wallace & Co., I. L. R. 59 Cal. 1343, where the company on the termination of an agency received a sum of money to compensate them for its cessation and that sum was held not to be taxable income under Section 6 (iv) (business) nor under Section 6 (vi) (other sources). The case most favour able to the assessee is Rutherford V/s. Commissioner of Income Tax, Bihar and Orissa, I. L. R. 10 Pat. 315. The facts in that case were that it had been the custom of the Bettiah Raj under the management of the court of Wards to grant a lump sum to his managers when they laid down their office. This practice had been sanctioned by the Government in the cases of successive managers and it was one of the inducements offered to candidates for the office. It was recognised that there was no legal obligation upon the Raj or the Government to make the payment but having regard to the established practice it was nevertheless a matter of reasonable expectation and incentive to accept an onerous office at a comparatively small salary and to perform the duties in an efficient manner. In pursuance of this practice, Mr. Rutherford received a sum of Rs. 75,575 which the income tax authorities ought to assess, but it was held that the sum was in the nature of commented pension falling within Section 4 (3) (v) of the Act and was exempt from taxation, the contention for the Crown having been that the sum paid was a gratuity and not a pension. The learned Chief Justice says at p. 318 : The candidate, therefore, enters upon his office under the Court of Wards with a definite salary and the expectation that he will receive at the end of his service the equivalent of a pension but he knows that he will not after his retirement be given a series periodical payments but in lieu thereof he will get a lump sum. In other words he is to get a pension which will certainly be commuted." It was found as a fact that, if it were not for the expectation of this gratuity, the Court of Wards have to pay higher salaries to the officers and further; No doubt the Court of Wards do not pay pensions or guarantee gratuities but allow a gratuity in each case as an act of grace. But it is none the less true the Court of Wards do invariably pay gratuities to their deserving servants on retirement."