Commissioner Of Income-Tax, Bombay vs S.P. Jain

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

Court: supreme-court

Case Number: Civil Appeal No. 457 of 1960, Civil Appeal No. 458 of 1960

Decision Date: 4 May 1961

Coram: J.C. Shah, M. Hidayatullah

In this matter the Supreme Court heard two separate appeals arising from orders issued in income‑tax proceedings. The first appeal, identified as Civil Appeal No 457 of 1960, challenged an order dated 26 March 1958 issued by the High Court of Judicature at Bombay. That order had refused to direct the Income‑tax Appellate Tribunal to state a case under section 66(2) of the Indian Income‑tax Act. The second appeal, recorded as Civil Appeal No 458 of 1960, contested an order dated 13 August 1956 rendered by the Income‑tax Appellate Tribunal. The tribunal’s order had decided an appeal that was made under section 33(4) and was filed against the income‑tax department.

The respondent in these proceedings had been employed by Dalmia Cement and Paper Marketing Co. Ltd. An agreement dated 11 October 1943 appointed him to manage the Bombay Officer Organisation of the company and provided him a monthly salary of Rs 4,000. Under the terms of that agreement the company undertook to remit the income‑tax and super‑tax due on the salary at the rates specified in the annual Finance Acts, and it also agreed to pay conveyance and entertainment allowances as may be mutually agreed from time to time. The employment was expressly for a fixed period of twenty‑five years commencing on 1 April 1943. The agreement reserved to the company the right to deploy the respondent to look after the interests of any other concern and to arrange that the remuneration be paid either by that other concern or by the company itself. Furthermore, the agreement stipulated that if the respondent’s services were terminated before the expiry of the twenty‑five‑year term because the company “severed connection with” him or for any other reason, he would be entitled to compensation calculated at the rate of Rs 40,000 for each unexpired year remaining on his contract.

The respondent remained in the employ of the company until some time in 1949. By a letter dated 14 February 1950 the company effected termination of his employment with effect from 30 November 1949. In that letter, the company explained that the termination was unilateral and that, as a result, the respondent was being awarded a sum of Rs 7 lakhs, described as “compensation for the cessation of employment.” The letter further stated that the amount of compensation had been considered and mutually agreed between the parties as the appropriate quantum payable in consequence of the termination. The income‑tax authorities subsequently attempted to levy tax on the Rs 7 lakhs under section 7 of the Indian Income‑tax Act. The assessing officer forwarded the matter for appellate review, and the Appellate Assistant Commissioner reserved a decision. That reservation was later confirmed by the Income‑tax Appellate Tribunal. The Commissioner of Income‑tax then sought to have the Tribunal state a case under section 66(1); however, the Tribunal declined to do so.

The Commissioner of Income‑tax, invoking section 66(2) of the Income‑tax Act, filed an application before the High Court seeking a direction to the Income‑tax Appellate Tribunal to state a case. The High Court rejected that application. The Commissioner then obtained special leave to appeal before this Court, challenging both the Tribunal’s order made under section 33(4), which disposed of the appeal, and the High Court’s refusal to call upon the Tribunal to state a case. The respondent argued that, before the tax authorities, the only issue raised by the department was that the payment of Rs 7 lakhs to him constituted compensation for past services and was therefore taxable. The department had not advanced any other ground. Both the Appellate Assistant Commissioner and the Tribunal had concluded that the payment was not in lieu of past services, thereby creating a factual finding that, in the respondent’s view, the High Court could have asked the Tribunal to state a case on. The Court observed, however, that the essential question was to determine the true nature of the payment by examining the legal effect of the employment agreement, the termination letter, and the agreement under which the Rs 7 lakhs were paid. This determination, the Court held, was a question of law rather than a question of fact. Consequently, the High Court was in error in declining to require the Tribunal to state a case on that legal issue.

The Court therefore declared that a specific question of law arose and directed the Tribunal to state a case on the following point: “Whether, on the facts and circumstances of the case, the sum of Rs 7 lakhs is liable to tax under section 7 of the Indian Income‑tax Act?” The Court noted that Civil Appeal No 458 of 1960, which sought review of the Tribunal’s order, had not been pressed before it and consequently dismissed that appeal without any order as to costs. Civil Appeal No 457 of 1960 was allowed, and the order of the High Court was replaced with an order directing the Tribunal to state a case before the High Court. The costs of this appeal were to be borne as costs in the reference to the High Court. Accordingly, Appeal No 457 of 1960 was allowed, and Appeal No 458 of 1960 was dismissed.