All India Reporter Ltd., Nagpur vs Ramachandra Dhondo Datar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 327 of 1959

Decision Date: 29 November 1960

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In the matter titled All India Reporter Ltd., Nagpur versus Ramachandra Dhondo Datar, the Supreme Court of India delivered its judgment on 29 November 1960. The opinion was authored by Justice J. C. Shah, and the bench consisted of Justices J. C. Shah, J. L. Kapur, and M. Hidayatullah. The petitioner was All India Reporter Ltd., a company based in Nagpur, and the respondent was Ramachandra Dhondo Datar. The case is reported in the 1961 volume of the All India Reporter at page 943 and also in the 1961 Supreme Court Reports (Second Series) at page 773. The dispute concerned the application of the Indian Income‑Tax Act of 1922, particularly sections 18(2) and 46(5), to a decree that granted the respondent compensation for wrongful termination of service together with arrears of salary, interest, and costs.

The headnote summarizes that after a civil suit the respondent obtained a decree against his former employer, the appellant company, for a sum that included compensation for wrongful termination, salary arrears, interest, and litigation costs, and subsequently applied for execution of the decree. The Income‑Tax Officer issued a notice to the respondent under section 46 of the Income‑Tax Act and petitioned the District Judge that the appellant be permitted to deduct income tax, surcharge, and super‑tax from the awarded sum and remit the deducted amounts to the government treasury. The appellant also moved the executing court seeking a declaration that it was entitled and obligated to make such deductions. The District Judge ordered the appellant to pay the assessed tax and super‑tax to the Income‑Tax Department and to deposit the balance of the decree in court together with a receipt for the tax paid. On appeal, the High Court set aside the District Judge’s order and directed that the decree be executed as claimed by the respondent. The Supreme Court, on further appeal by the appellant, held that because no tax assessment had been made against the respondent, the Income‑Tax Officer could not issue a notice under section 46(5) requiring the appellant to deduct tax from the decretal amount. The Court observed that a substantial portion of the decretal sum did not constitute salary; it consisted of compensation for wrongful termination, salary in lieu of six months’ notice, interest, and costs, and therefore the sum was a judgment‑debt. No provision for payment of income tax was included in the decree, which was thus liable to be executed as prayed by the respondent. Consequently, the appellant was not entitled or bound to deduct income tax under section 18(2) of the Act.

The appeal originated as Civil Appeal No. 327 of 1959 and was taken from the order dated 28 June 1956 of the Bombay High Court at Nagpur in Miscellaneous First Appeal No. 15 of 1954. Counsel for the appellant included A. V. Viswanatha Sastri, Shankar Anand, and A. G. Batnaparkhi, while the respondent was represented by an amicus curiae, K. N. Rajagopal Sastri. The judgment was pronounced on 29 November 1960. In the factual background, the Court noted that Ramachandra Dhondo Datar, hereinafter referred to as the respondent, had been employed by the appellant company in its publications branch.

In 1943 the parties entered into an agreement dated March 23, 1943 whereby the appellant company undertook to pay the respondent, starting April 1, 1943, an annual remuneration equal to three and a half percent of the gross sales or Rs. 12,000, whichever was greater. The agreement was to remain effective for ten years from April 1, 1943 and could be renewed at the option of the respondent for any period he desired. On April 19, 1948 the appellant company served a notice, delivered to the respondent on April 22, 1948, terminating his employment. Consequently the respondent instituted a civil suit before the Fifth Additional District Judge, Nagpur, seeking a decree of Rs. 1,30,000 as compensation for wrongful termination, arrears of salary and interest. On July 17, 1953 the court, after crediting amounts already received by the respondent, rendered a decree for Rs. 42,359, which comprised Rs. 36,000 as compensation for termination, Rs. 6,000 as salary in lieu of six months’ notice, together with interest and costs of the judgment. The respondent thereafter applied for execution of that decree and claimed the amount of Rs. 54,893‑12‑0 less Rs. 18,501‑10‑0 which had been decreed against him in a cross‑suit filed by the appellant company. The Income Tax Officer, Nagpur, issued a notice under section 46 of the Indian Income Tax Act to the respondent and also informed the District Judge, Nagpur, that the appellant company should be permitted to deduct at source and remit to the Government Treasury Rs. 15,956‑13‑0 as income‑tax, surcharge and super‑tax on the sum of Rs. 50,972‑2‑0 awarded to the respondent. The appellant company further applied that the executing Court should declare that it was legally obliged to deduct the tax due on the amount. The learned Judge directed the appellant company to pay Rs. 15,956‑13‑0 to the Income Tax Department as income‑tax and super‑tax on the amount due to the respondent and ordered the company to pay the balance in court after producing a receipt of tax payment from the Income Tax Department. On appeal to the High Court of Judicature at Nagpur, the order of the District Judge was reversed and execution as claimed by the respondent was directed. The appellant company contended that under section 18(2) of the Income Tax Act it was bound to deduct tax computed at the appropriate rate on the salary payable to the respondent because the amount due under the decree represented salary. Section 18(2) of the Income Tax Act, as relevant, provides that any person paying any amount chargeable under the head “salaries” shall, at the time of payment, deduct income‑tax and super‑tax at the rate representing the average of the rates applicable to the estimated total income of the assessee under the head “salary”. Sub‑section (7) declares that a person failing to deduct the taxes required by the section shall

Section 18(7) of the Income‑Tax Act declared that a person who fails to deduct the tax required by the provision would be treated as an assessee in default with respect to that tax. The legislature clearly imposed on an employer the duty to deduct tax at the appropriate rate from salary that is payable to an employee, and it provided that any tax not deducted could be recovered from the employer. However, the obligation to deduct arose only when the amount in question was legally due and payable as salary. In the present case, the Income‑Tax Officer had not made any assessment of tax on the amount that was payable to the respondent. Under section 46(5), an Income‑Tax Officer may require a person who pays salary to an assessee to deduct arrears of tax that are due, and the employer must comply with such a requisition and remit the deducted amount to the Government. Such a requisition could be issued only after the tax liability had been assessed and remained unpaid. It was undisputed that at the material time no tax had been assessed against the respondent; consequently, the Income‑Tax Officer possessed no authority to issue a notice under section 46(5). Moreover, the officer could not seek to recover tax by initiating a garnishee‑type proceeding, that is, by applying to the civil court for attachment of the judgment‑debt owed by the company. Accordingly, the application filed by the Income‑Tax Officer had to be disregarded. While it was undeniable that, pursuant to section 18, the employer was liable to deduct from the salary he paid to his employee tax at the average rate applicable to the employee’s estimated total income, the Court had to examine whether, between the appellant company and the respondent, the amount decreed by the civil court actually represented salary. The respondent’s suit sought a decree for arrears of salary, compensation for wrongful termination of employment, and interest. Once the civil court granted the decree, the sum became a judgment‑debt. The appellant company could, in theory, have applied to the court to insert a provision in the decree directing that income‑tax due by the respondent be deducted, but it made no such application. The present appeal was not concerned with determining whether, once paid, the amount due to the respondent would be taxable in his hands; that question lay outside the scope of the appeal. The issue before the Court was solely whether, as between the appellant company and the respondent, the decreed amount was due as salary and therefore attracted the statutory liability imposed by section 18. The civil court’s decree comprised compensation for wrongful termination, arrears of salary, salary due for the notice period, interest, and costs, less any withdrawals from the salary account, and execution was sought on the amount after setting off the cross‑decree claim.

In this case, the Court observed that a large portion of the decree represented compensation for wrongful termination of employment and that it would be difficult to determine, within the claim that is to be enforced, which part, if any, corresponded to salary that was actually due. Even if compensation paid by an employer for wrongful termination could be treated as salary, once the claim is incorporated into the court’s decree it becomes a judgment‑debt, and Section 18 of the Income Tax Act does not apply to judgment‑debts. Accordingly, the decree issued by the civil court must be executed subject only to the deductions and adjustments permitted under the Code of Civil Procedure. The Court explained that a judgment‑debtor who also holds a cross‑decree for money may set off the amount due under that cross‑decree against the judgment debt. If any adjustment to the decree is necessary, execution may proceed for the adjusted amount. The Court further stated that a third person who has obtained a decree against the judgment‑creditor may seek attachment of that decree, and execution may be carried out subject to the third person’s claim; however, the judgment‑debtor cannot, lacking an explicit direction in the decree, satisfy a third‑person claim and pay only the remaining balance. While a statutory provision can modify the rule that a decree must be executed according to its tenor, the Court found no provision in the Income Tax Act that permits the debtor to deduct income‑tax which may become payable by the judgment‑creditor on the ground that the underlying cause of action was an employment contract and that part of the decree represented salary or damages in lieu of salary. Counsel for the appellant relied heavily on the House of Lords decision in Westminster Bank Ltd. v. Riches. In that case, a decree was awarded for £36,255 as principal and £10,028 as interest. The Bank later sought a declaration that it had satisfied the judgment by paying the plaintiff the amount due less £5,014, which represented income‑tax on the interest. The House of Lords held that the £10,028 constituted “interest of money” within Schedule D and General Rule 21 of the Income Tax Act, 1918, making the tax deductible. The sole argument presented by the Bank, as recorded in the speech of Viscount Simon, L. C., at page 187, was that the additional sum of pound

The Court examined the argument that the sum of ten thousand twenty‑eight pounds, although awarded under a statutory power to add interest to the principal debt and described in the judgment as interest, was in substance not interest for tax purposes but rather damages. The Court observed that this contention did not reveal any fundamental conflict between the concepts of interest and damages. Rather, the pivotal issue for determining the applicability of the Income Tax statutes was whether the additional amount should be characterised as capital or as income, and not whether it was labelled damages or interest. The House of Lords, by a majority, had held in the earlier case that the ten thousand twenty‑eight pounds awarded under the judgment was to be treated as interest, not as capital, and therefore attracted tax. The Court held that the precedent set by that decision did not apply to the present facts. In the present matter, a decree had been passed in favour of the respondent. Under the provisions of the Civil Procedure Code, that decree must be executed exactly as it stands, subject only to deductions or adjustments that the Code expressly permits. No tax liability had been assessed against the respondent in respect of the decree amount up to the point when the appellant company attempted to satisfy an alleged tax liability of the respondent. The sum in dispute between the appellant company and the respondent was not salary; it was a judgment debt, and the decree made no provision for the payment of income tax on that debt. The Civil Procedure Code therefore precludes an action of the type that was instituted in the Westminster Bank case. Any defence to the execution, if it existed, had to be raised within the execution proceedings themselves and could not be pursued by a separate suit. Consequently, the amount payable by the appellant company to the respondent could not be treated as salary, and the appellant company could not deduct tax at source on behalf of the respondent before satisfying the judgment debt. The appellant company also could not justify its position by alleging that the judgment creditor owed money to a third party. The Court further noted that the principle invoked from Manickam Chettiar v. Income Tax Officer, Madura (1), which the appellant company had relied upon, was inapplicable to the present case. In Manickam Chettiar’s case, during the execution of a money decree, certain properties belonging to the judgment debtor were attached, sold, and the proceeds were received by the court. The Income Tax Officer, who had assessed tax on the decree‑holder’s other income, applied to the court for an order directing that the tax due be paid out of those sale proceeds. The Court in that case held that the tax claim was entitled to priority and that the court possessed inherent power to issue an order for payment of money due as income tax. Tax had been duly assessed and the Income Tax Officer had commenced recovery proceedings. The Court concluded that, given those circumstances, the principle from that earlier decision could not be extended to the facts before it.

In this case the Court held that it possessed jurisdiction to order that the tax liability be recovered from the amount that remained as credit to the decree‑holder. The Court reasoned that its inherent power to direct payment of taxes from sums awarded by the court supported such jurisdiction. It further observed that the legal principle set out in the earlier decision could not be applied to the facts of the present matter. The respondent did not appear before the Court; nevertheless the Court was assisted by counsel Mr. Rajagopala Sastri, whose help in presenting the evidentiary material and in explaining the various facets of the dispute was gratefully acknowledged, as it enabled a true appreciation of the issue that required determination. The acknowledgement of counsel’s assistance emphasized the importance of an accurate presentation of facts for the Court’s proper resolution of the question. Upon consideration of the material and the arguments, the Court concluded that the appeal was without merit and therefore dismissed it. Because the respondent failed to appear, the Court made no order for costs against that party, noting that without the respondent’s participation costs could not be awarded. Consequently the appeal was dismissed, and the citation to the earlier case is recorded as (1) VI I.T. R. 180.