NAIMUDDIN, J.-By this reference under section 66(1) of the Income-tax Act, 1922 (hereinafter called the Act), the Income-tax Appellate Tribunal has referred the following question .Of law to this Court for answer: "Whether in the facts and circumstances of the case the Tribunal was justified in holding that the separation allowance was received by the assessee as compensation for loss of employment and being a capital receipt is not liable to be taxed."
2. The facts giving rise to the question are that during the charge year 1963-64, the assessee/respondent vas an employee of Messrs General Motors Overseas Corporation, Karachi Branch (hereinafter called the Corporation). Besides the usual salary tae respondent received a further sum in the year as his share of what has teen termed as "Separation Allowance". Under this head, a total sum of about Rs. 9,00,000 was distributed by the Corporation on the eve of its cessation of business in Pakistan with effect from 1-4-1963, when its entire business was taken over by Gandhara Industries Limited (hereinafter called the Company). The respondent did trot declare this allowance in his return of income for the tear on the ground that the amount was exempt from tax under Explanation (2) to subsection (1) of section 7 of the Act, as it then stood however, the income-tax officer included the amount in the total income of the respondent for the year treating the same as his remuneration for past services on the ground that the terms of employment of the respondent with the Corporation did not include any payment of benefit on the termination of his service except a salary for one month in lieu of notice. He further held that since the respondent was given employment by the Company on terms identical with those of the Corporation, there was no actual loss of employment to the respondent.
3. In appeal, the Appellate Assistant Commissioner, by the order, dated 6-1-1969, held that the separation allowance received by the respon--dent being the compensation for loss of employment was a capital receipt and was, therefore, not taxable.
4. An appeal was filed with the Income-tax Appellate Tribunal, Karachi Bench, Karachi. The Tribunal relying on their earlier decision in I. T. A. No. 2190 of 1968-69, and for the reasons given therein, rejected the appeal.
5. Before the Tribunal; on behalf of the applicant, reference was made to the terms of Explanation
(2) to subsection (1) of section 7 of the Act, according to which any payment due to or received by an assessee from an employer or former employer as a profit and in lieu of salary for the purposes of subsection unless, however, the payment is made solely as compensation for loss of employment. It was urged before the Tribunal that, unles3 it could be established that payment in question was made solely as compensation for the loss of employment it must beheld to be an income-tax under the head "salary" as provided in section 7 of the Act.
6. We have heard Mr. Nasarullah Awan learned counsel for the applicant. The respondent has remained absent.
7. Mr. Awan has submitted that there was no occasion for the loss of employment, for firstly, the service of the respondent was liable to be terminated on one month's notice; secondly, the respondent was re-employed by the Company on the same terms and conditions on which he was employed with the Corporation.
8. In support of the first leg of the argument, he pointed out that in the absence of any letter or contract of employment reference must be made to clause (b) of rule 25(1) of the Rules of Employment for monthly salaried employees of the Corporation, which provided as follows:- "If the services of an employee having more than three months--- continuous service with the Company, are to be terminated by the Company, through Do fault of his own the Company shall give him one month's notice in writing of their intention to terminate his services or one month's salary in lieu of notice, including dearness allowance, if any, currently in force."
9. Accordingly, the learned counsel argued that the respondent had no right to continue in service beyond a month in which circumstances there could be no question of surrender of any right nor could there be any question for payment of any compensation for any loss, if one month's salary in lieu of notice was paid.
9-A. In support of the second kg of the argument that the respondent was employed on the same terms and conditions the learned counsel relied on the letter, dated 5-8-1964, mentioned in the Statement of Facts addressed by the Secretary of the Company to the Income-tax Officer, Salary Circle, Karachi which reads as follows: "We hereby confirm that our Company came into existence on 1st April, 1963.
That General Motors Overseas Corporation, Karachi branch, closed their operations in Pakistan on 31st March, 1463 and terminated employment of all their employees from the same date and paid them off in full and final settlement of their accounts.
That we offered fresh employment to all ex-General Motors employees and those who applied to us were given the same-starting pay which they were drawing with General Motors Overseas Corporation at the time of their termination of employment on 31st March, 1963.
These employees were taken on by us as fresh employees on three months' probation on our own terms and conditions of employment and length of service or any other condition they had with General Motors.
We also confirm that so far we have not introduced any Provident Fund Scheme for our employees though the same existed in General Motors.
This letter is issued on the request of ex-General Motors overseas Corporation staff, who are employed by as, in connection with their Income-tax."
The learned counsel also relied on a copy of the notice, dated 28-3-l%3, issued by the Managing Director of the Company, which reads as follows:-- "We are pleased to announce brat the monthly paid and hourly paid employees of General Motors Overseas Corporation Karachi Branch (which organisation will cease to exist with affect from 31st March, 1963), whose services with General Motors will terminate effective 31st March, 1963, will be offered fresh employment by us effect 1st April, 1963.
The starting salaries of the monthly paid employees will be the same which they were drawing with General Motors as on 31st March. 1963. The take-home pay of the hourly rated employees will be the same as they were drawing on 31st March 1963, but this will be spread over a 44 hours week, to determine the hourly wage rate.
All the employees reporting to work on 1st April, 1963 will be given application forms for employment which shall be duly filled in and submitted to the concerned Departmental Head, on receipt of which individual appointment letters for a probationary period of three months will be issued."
10. Now, so far as first leg of argument is concerned, the Tribunal relying on rule 3 (1) of the Rules of Employees of the Corporation held that the respondent was a permanent employee of the Corporation, as rule 3(I) actually classified the employees of the Corporation into three categories, as permanent employees, probationers and temporary employees. According to sub-rule (2) (a) to rule 3, a permanent employee means an employee who has completed a probation of 3 months' continuous service with the Company, whereas sub-rule 2(2) defines temporary employee as an employee who has been appointed for a limited period for work which is of an essentially temporary nature, or who .Is employed temporarily as an additional employee in connection with temporary increase in work of a permanent nature. The Tribunal, in terms of the definition of a permanent employee, found the respondent to be a permanent employee. Reference has also been made by the Tribunal, in the Statement of Facts, to rule 5. Whereunder the Corporation reserved the tight to retire any employee at any time after the age of 55 years or earlier in case of ill-health or physical or mental incapacity. From this rule, the Tribunal concluded that a permanent employee could normally serve the Corporation upto the age of 55 years. Accordingly, the Tribunal repelled the argument of Mr. Davar, the Departmental Representative, that the assessee had no right to service, beyond a mere monthly period.
11. In this regard it was observed by the Tribunal that they were unable to accept mere Departmental Representative's proposition that the respondent was a mere month to month employee and had secured no right of service with the Corporation. They further observed that in their view it would be preposterous to say that the respondent who had served the Corporation well for about a decade would still be a mere temporary hand with no more security of service than a monthly wage-earner: We think that the conclusion arrived at by the Tribunal that the respondent was a permanent employee is not unreasonable and the same has not been questioned before us in any manner.
12. As regards the second submission of Mr. Awan that the respondent was re-employed by the Company and consequently there was no loss of employment, it may be mentioned that the finding of the Tribunal is that the Company were under no obligation to re-employ the respondent as there was no contract between the Corporation and the Company to employ of re-employ any of the members of the staff of the Corporation. In this regard reliance was placed on the contract of sale between the Corporation and the Company which did not contain such term.
13. A perusal of the two letters extensively quoted by us herein before would show that the Corporation terminated the employment of their employees with effect from 31-3-1963, and paid them off in full and final settlement of their accounts, and they were offered fresh employment by the Company provided they applied for the same and returned to work on 1-4-1963, when they were to be given application forms for employment which were required to be filled in and submitted to the concerned department, on the receipt whereof the individual appointment letter for probationary period of three months were issued. It is, therefore, clear that they were to be, in the first instance, employed for a probationary period of three months and they might or might not have been found suitable for the job in the Company. Accordingly, we find that there was loss of employment in the circumstances of this case.
14. The expression "Compensation for loss of employment" used, in Explanation 2 to section 7 of the Act, as has been held, in a number of cases, refers to any payment made, whether under a legal liability ors voluntarily, to compensate or act as a solatium for the loss of employment suffered by the employee. We may, however, refer to W. A. Guff v. Commissioner of Income-tax, Bombay City (1957) 31 I T R 826, wherein Chagla, C. J., who wrote the opinion of the Court, following the decision of the Privy Council in Show Wallace do Co. v. Commissioner of Income-tax (2) (1932) 2 Comp. Cas.
276, 6 I T C 178, AIR 1932 Born. 138 and Chibbet v. Joseph Robinson 4 Sons (3) (1924) 9 Tax Cas. 48 opined that the expression "compensation for loss of employment" used in Explanation 2 to section 7 of that Act refers to any payment made, whether under a legal liability or voluntarily, to compensate or act as a solatiurn for the loss of employment suffered by the employee.
In this case, the facts were the assessee joined service of a Company on the 27th May, 1946, as an executive incharge of a new department of the Company under an agreement which provided that his services could be terminated by giving six months' notice. On the 23rd of March 1948, he received a communication from the Company that 'the department could not function any more, but he 'continued to serve until the 10th November, 1948, for winding up the department. On the 13th November, 1948, the Company paid him a sum of Rs. 12,000 "as compensation equivalent to six months' salary for the termination of his employment owing to the closure of the department". The question being: whether the amount of Rs. 12,000 received by the assessee was a capital receipt or a revenue receipt taxable as salary under section 7 of the Income-tax Act. It was held that the communication of the 23rd March, 1948 constituted a notice terminating the services of the assessee as required by the contract of service: on the facts and circumstances of the case it was held that the payment was made not for past services but as compensation or solatium for termination of his office arid the amount of Rs. 12,000 received as compensation was a capital receipt and exempt from tax.
15. In the Privy Council's case, it was held by their Lordships that a sum of money received as compensation for loss or cessation or oil distributing agencies was not income, profits or gains within the meaning of the Income-tax Act. It yeas further observed by their Lordships as follows: "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 plan."
16. In the other case of Chibbet v. Joseph Robinson & Sons the facts were that the assessee were employed by a certain steamship company as ship managers aid their remuneration was fixed a percentage of the Company's annual profits. The Company went into liquidation and the general meeting of the Company authorised the liquidators to transfer to the assessee a sum of 250,000 which was in certain bonds as compensation for loss of office. The question that arose before Mr. Justice Rowlatt was whether this sum was a voluntary payment made to them as compensa--tion for loss of profits and, therefore, capital or it was a revenue, and Mr. Justice Rowlatt held in favour of the assessee. In this judgment, at page 60, the learned Judge points out that you must look at the question, not from the point of view compellability or liability, but from the point of view of a person enquiring what is this payment for, and you have to see whether the maker of the payment makes it for the services and the receiver received it for the service. It was; therefore, concluded that if the payment was not made for past services and was made for past services and was made as a solatium for loss of office, then the question of compellability or liability is irrelevant. In other words, whether the employer was compellability or liability to make the compensation, or not, if in fact he made the payment as a solatium, they payment would be a capital receipt not liable to tax.
17. The opinion expressed by Chagl, C. J. In Guff v. Commissioner of Income-tax, Bumboy City (supra) and the case of Chibbet v. Joseph Robinson Sons which reliance was placedChagla, C. J.
Were referred to with approval by the Supreme Court of India in the case of Commissioner of Income-tax, Bombay City v. E. D . Sheppard (1963) 7 Tax 383=(1963) 48 I T R 237.
18. In this case, the facts, briefly stated, weft that Messrs Killick Nixon & Co. Was a partnership firm carrying on business on a fairly large scale in India. The assessee E. D. Sheppard was employed originally in 1930 as an assistant, for a term of 5 years. His services were subjects to termination by giving one month's notice without assigning any reasons. During the period of employment, the assessee was entitled to a salary of Rs. 1,200 per month and commission of two and half per cent of the net profits of the firm. The firm's decision to float two companies to take over its business led to the termination of the employment of the assessee who was allotted 1,700 shares of the market value of Rs. 2,21,000 in the Company, which took over the firm's business. The assessee entered into employment of that company on increased salary but no commission was allowed. In his assessm ent proceedings the assessee claimed that the shares were allotted to compensate him for loss of employment and not by way of reward for past services. The Income-tax Officer, however, brought to tax the shares of the value of Rs. 2,21,000 on the ground that the shares were allotted to, the assessee in consideration of past services. Having failed before the Appellate Assistant Commissioner, he went upto the Tribunal. The majority of the members of the Tribunal held that the allotment of the shares was made solely to compensate the assessee for loss of employment and that it was not made as a reward for past services, concurring with the view of the Tribunal, the High Court held that the amount of Rs. 2,21,000 was not income of the assessee assessable under section 7 of the Act. On further appeal by the Department, the Supreme Court following, Privy Council's decision C. I. T. v. Shaw Wallace and affirmining the judgment of the High Court by majority judgment (Das, Kapur & Sarkar and Raghbar Dayal, dissenting) held as follows:
(i) "compensation" explanation 2 to section 7(1) of the Income-tax Act does not mean compensation which is payable or compellable by law. Compensation for loss of employment is a well-known term: it means a payment to the holder of an office of compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled. When deprivation is by the Legislature, there can be no question of liability or compellability to pay damages at law. The emphasis is on the act of deprivation, which may or may not give rise to any liability at law:
(ii) the explanation 2 to section 7(1) did not treat every payment received by an assessee from his employer as income and did not exclude the consideration as to whether the payment related to employment or not and whether it was capital or income ; Reliance was placed on Mohesh Anantrai Pattani v. Commissioner of Income-tax (1951) 41 I T R 481-
(iii) the payment in this case was payment .Mace solely as compensation for loss of employment and it therefore could not be treated under explanation 2 to section 7(1) as profit received in lieu of salary ;
(iv) there was no distinction between compensation for loss of employment and compensation for loss of prospects rooted in that employment ; and
(v) if the object of the payment was not related to the relation between the employer and the employee it would not fall within the expression `profit received in lieu of salary' in explanation 2 to section 7(1)."
18. We may also refer here to an English decision of King Bench Division in Duff (H. H. Inspector of Taxes) v. Barlow (1942) 10 I T R 157, wherein the facts were that the assessee was the managing director of a company manufactur--ing metal goods. In 1935, the Company purchased a tin plate works and it formed a subsidiary company to take over the works and the manufacture of tin plates. As the starting up and the management of the subsidiary Company involved additional work by the assessee and by another director, the assessee suggested and the Company agreed that they, should be specially remunerated upto 1945 by a percentage share of the notional profits made by the subsidiary. The exact percentage, however, was not fixed. In 1937, it was felt that the 1935 agreement was not in the best interests of the company and it was, therefore, agreed that it should be terminated.The assessee who continued to be the managing director of the present Company, agreed so accept -- 500 as additional remuneration for his services upto 1937, and -- 4,000 as compensation for the loss of his right to future remuneration under the earlier agreement.
The Special Commis--sioner held that the payment of -- 4,000 was made by the Company in order to obtain a release from liability under a contract of employment entered into in 1935 ; and was received by the assessee, notunder the contract of employment or as remuneration for services rendered or to be rendered, but as compensation for giving up a right to remuneration. In this case it was held by Lawrence, J., as follows: "Whether, or not the assessee was performing any of the services in connection with the subsidiary Company which he had performed, he was not under any obligation to do so, and that, therefore, in the circumstances of the case, the payment of -- 4,000 was properly treated as compensation for loss of his office as manager of the subsidiary Company. The sum was, therefore, a capital asset in the assessee's hands and was not assessable to income-tax."
19. Now, so far as the question that the amount paid was remuneration for past service, it may be observed that the term 'remunera--tion' for past service implies an appreciation of the satisfactory service of the employee by his employer, in recognition of which the remuneration is going to be given and in the present case, it has been found by the Tribunal that there is no evidence, whatever, that this payment of the allowance was madeout of any appreciation of the employee's good work with the Corporation. On the contrary, it is stated by the Tribunal that what was given asseparation allowance was by way of bargain or settlement of certain outstanding disputes under section 5(3) of the Industrial Disputes Ordinance, 1959, read with rule 57 of the Rules made thereunder, as recited in the Memorandum of settlement between the Corporation and General Motor Employees Union, Karachi, dated 15-3-1963, signed by the representatives of both the employees and the employer. The short recital of the case quoted below, will clearly speak for itself and we show that the settlement was arrived at after certain negotiations between the representatives of the employees and the Corporation: SHORT RECITAL OP THE CASE "The General Motors Employees Union submitted a list of demands on 21st January, 1963, pertaining to three previous old pending cases, bonus payment for the year 1962, payment of amounts o Provident Fund, increase in the rate of Separation Allowance, retrenchment and loss of career benefits, purchase of one-third of business of the new company and continuity of existing terms and conditions of the service with the new employer.
After exchange of a series of correspondence and mutual discussion with the Union, the offer made by Management was not acceptable to the Union and the Union staged a strike both in the office and factory from Monday, 11th March, 1963. At a conciliation meeting held in the office of the Conciliation Officer on Monday, 11th March, Management made a further offer which was again not accepted by the Union. Again on Friday, 15th March, a meeting was convened in the office of the Branch Manager in the presence of the Conciliation Officer, Mr. Rafiq Ahmed and after holding discussions with the Representatives of the Union, the following agreement was arrived at between the parties."
We find nothing on our record to support the claim that the payment made was for past services.
20. We have already referred to cases wherein the expression com--pensation for loss of employment' came up for consideration. We may however, here refer to one more case namely, In re: P. D. Khosla (1945) 13 I T R 436, which is a case decided by a Division Bench of Lahore High Court consisting of Din Muhammad and Sale, JJ. In this case, the facts were that the assessee, who had acquired considerable insurance experience, was appointed as the manager of an insurance Company under an agreement, dated 4th July, 1936, by which he was to receive a salary of Rs.
1,500 per mensem and a certain commission which was subject to a maximum of Rs. 20,000 in any one year. The agreement was for five years, but his employment could be extended for another five years, if the business of the Company during his term of office amounted to at least three crores.
Subsequently, there was a change in the directorate of the Company. Disputes arose between assessee and the new directorate and the assessee's services were terminated by an agreement, dated 6th October, 1938. Under the terms of his agreement the assessee resigned his post as manager of the Company on the 30th September, 1938 and in consideration of his resignation, the Company agreed to pay all hip, dues upto 10th September, 1938, and in addition to a lump sum of Rs. 1,10,000 in four instalments. During the period of the assessee's employment, he was earning, the maximum commission of Rs. 20.000 At the termination of his employ--ment, the business of the company secured during his term of office amounted to three crores. The question was whether the installment payments received by the assessee in the years 1938-39 and 1939-40 under the terms of the agreement were exempt from tax under Explanation 2 to section 7(1) of the Income- tax Act. On these facts it was held: "We are further satisfied that the lump sum payment in four instal--ments made to Mr. Khosla in consideration of the termination of his employment did not include any remuneration for past services and must, therefore, he held to be solely compensation for loss of employment. The payments of these instalments are, therefore, exempt from income-tax under the provisions of explanation 2 to subsection (1) of section 7 of the Income-tax Act, and we answer the question accordingly in favour of the assessee."
21. However, Mr. Nasarullah Awan, learned counsel for the applicant, relied on Henry (H. M. Inspector of Taxes) v. Arthur Foster (1931) 16 Tax Cas. 605, V. D. Talwar v. Commissioner of Income-tax, Bihar(1963) 49 I T R 122, Commissioner of Income-Ox v. S. B. Jain 1965 PTD 767, to contend that the payment in the instant case could not be for loss of employment but was for past services. We have already found that the payment was not for past services. None--theless, we would still discuss the cases referred to by Mr. Nasarullah Awan.
22. Now, taking up the first base cited by Mr. Awan namely, Henry (H. M. Inspector of Taxes) v. Athur Foster, it may be stated that in this case, while considering the expression "Compensation for loss of office" Romer L. J., defined it as a payment to the holder of an office as com--pensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third party such as the Legislature, have been entitled.
While considering the nature of payment made with reference to Articles 104 and 109 of the Articles of Association of the Company and further considering the hypothetical question, Romer L. J., observed as follows:- "Now, supposing that a director is employed upon the terms that he is to be paid in each year of his service a sum of -- 1,000 and in the last year of his service a sum of -- 5,000 in addition to the -- 1,000 no one I think could doubt in such a case that the -- 5,000 was a profit of his office, paid to him in respect of his office, that it was liable to Income-tax and was to be treated for the purposes of tax as forming part of his salary for the last year of his office.
The case before us is precisely that case with two exceptions. Firstly, that the sum is not fixed, but has to be ascertained by reference to events which will not be determine until the last year of office that can make no difference at all and secondly, that Article 109 expresses that the sum to be paid in the last year of office is to be compensation for loss of office. Now, do those words make any difference? In my opinion they do not. In the first place, it cannot matter what the parties call the money which is to be paid in the last year of office if one finds, as here, that the only considera-- tion for the payment by the company of that sum is the service by the director and that it is a sum for which the director must be deemed to have stipulated when offering his services to the Company and that it is paid to him by reason of his having performed those services. In the second place, it does appear to me that the words on the face of them are wholly in applicable to describe the payments to which they are by the article made to refer.
In the present case, the payments are to be made on the death or resignation or cesser of office on any ground other than those specially excepts in the article, events, be it observed, on which in the very terms of the man's employment, his office and, therefore, his emolument, would come to an end. It is impossible, therefore, in such a. Case, to say that when he dies or resigns or his office otherwise comes to an end he has lost any salary or any points at all. The words `compensation for loss of office' in such a case seem to me to be wholly misleading."
In this case the facts were that the Company of G & R. Dewhurst (1920) Ltd., hereinafter called the Company, was incorporated on 16th March, 1920, to take over, as a going concern, a long established cotton business belonging to Geo & R. Dewhurst (1920) Ltd. Arthur Foster, who had been long employed by the previous Company, took up shares in the new Company and became one of the first directors of the Company. He had written contract of service with the company, apart from the articles and resolutions hereinafter mentioned. At all material times he held the necessary number of qualifying shares as required by the articles. By Articles 104 and 109 of the Company it was provided as follows:- "104. The directors shall be paid out of the funds of the Company by way of remuneration for their services such sums as the Company in general meeting shall from time to time determine. Such remunerations shall be divided among them in such proportions and manner as the directors may determine and, its default of such determination within the year, equally. Such remuneration may be either by way of fees or commission or participation in profits, or by any or all of those modes or otherwise as the Company in general meeting shall determine. The directors shall also be paid all hotel, travelling and other expenses incurred by them in connec--tion with the business of the Company, including their travelling expenses of attending and returning from board and committee meetings."
"109. In the event of any director dying or resigning his office, or in the event of any director ceasing to hold office for any cause other than misconduct, bankruptcy, lunacy or incompetence, the Company shall pay to him or his representative (as the case may require) by way of compensation for the loss of office a sum equal to the total amount of the remuneration which in his five years of office last preceding the commencement of the financial year in which his death, resignation or cesser of office shall occur, shall have been received by him under clause 104 hereof, but so that in computing the amount of the remuneration so received, there shall be excluded from account all sums received by him by way of commission, or participation in profits or otherwise than by way of director's fees. No such compensation shall be paid in the case of a director who, at the commencement of the financial year in which his death, resignation or cesser of office occurs, shall have held the office of director (whether continuously or discontinuously) for less than five years; but in the case of any person who shall have been a director of this company for less than five years, any period during which he held office as a director of the old Company shall be added to and commuted with, the period for which he was a director of this Company, and in that case the remuneration received by him in his character as a director of the old Company and by way of fees :nail be deemed to have been remuneration received by him as director of this Company. In computing for the purposes of this clause the amount of the fees received by any director, any sums deducted therefrom for Income-tax shall be reckoned as part of such fees. It shall rest solely with the directors to determine for what cause any director ceased to hold office, and their decision shall be final and conclusive."
Now firstly, this case is distinguishable on facts. Secondly, this case is precisely one among others on which the dissenting Judge R. Dayal relied for his decision in the case of Commissioner of Income-tax, Bombay City I. v. E. D. Sheppard. The learned dissenting Judge quoting with approval the view of Romer L. J., has stated as follows: "It is obvious from these observations that when under a contract the employer has no further claim to salary or profits on the termination of his service in terms of the contract, any payment made to him cannot be payment as compensation for loss of office and that therefore what Romer L. J. Meant by the meaning given to the expression "compensation for loss of office" was that the expression meant such payment which the holder of the office was entitled in law to get on account of his being, against his will, deprived of the profits to which as between himself and his employer he was entitled. If he was not entitled to any such profits on the cessation of office, any payment to him could not be compensation for loss of office."
But this view did not find -favour with the majority of the fudges who delivered the majority judgment of the Supreme Court of India.
It may be mentioned that in the same case of Henry (H. M. Inspector of Taxes) v. Arthur Foster, Rowlatt, J. At page 625 of the report enunciated a different view as: "In those circumstances it does not seem to me that this is a case where a sum is being added to the annual earnings of these directors by way of supplementing the annual profits of their offices.
That is what it ought to be, I think, to make it taxable. I think that is what it is not. I think this is a special sum which it was provided that these gentlemen were to have when this employment came to an end a lump sum to be given to them then. I may have been wrong in that case, but it is certainly covered by what I said in Chibbet's case (Chibbet v. Joseph Robinson & Sons 9 Tax. Cas.
48) and I still hold that opinion. It is a very important point. What I" said was: "If it was a payment in respect of the termination of their employment I do not think that is taxable. I do not think that is taxable as a profit. It seems to me that a payment to make tip for the cessation for the future of annual taxable profits is not itself an annual profit at all."
22. Low, while considering the second cited case namely, V. D. Talwar v. Commissioner of Income- tax Bihar, relevant facts may firstly be stated. They are: The assessee was employed as the General Manager of a Company under a service agreement which provided, inter alia, that the period of service was five years, and that the Company might terminate his services by giving 12 months notice or paying salary in lieu thereof, or in the case of any breach of any of the terms or conditions of service without any notice. The assessee joined his post on May 1, 1946. His services were terminated with effect from August 31, 1947 without notice, not for any default or misconduct on his part, but because the Company did not want to continue the assessee in their employment. In lieu of notice, the Company paid the assessee a sum of Rs. 18,096 (which was the amount arrived at after deducting from 12 months salary of Rs. 25,200 income-tax of Rs. 7,104 and he gave a receipt for Rs. 18,096 in full and final settlement of his claims against the Company. The question was whether the sum of Rs. 25,200 was taxable in the hands of the assessee. It was held by the Supreme Court of India as follows: "That the service agreement provided that the assessee could serve either for five years at a monthly salary mentioned therein or, if the Company so elected, for a shorter period upon the terms mentioned in the agreement. As the assessee's service was terminated in compliance with the terms of the agreement and salary in' lieu of notice was paid to him, it could not be said that the assessee had surrendered any rights under the agreement or had been deprived of any such rights. He received exactly what he was entitled to under the contract and the amount received by him was not compensation for of- office within the meaning of Explanation 2 to section 7 of the Indian Income-tax Act, 1922 (before amendment in 1955). It was an amount paid in respect of his office though he did not do any work and the amount was, therefore, taxable under section 7."
It will be seen from above-mentioned facts that on facts of that case it was found that the assessee had received exactly what he was entitled to under the contract. Therefore, this case is also distinguishable on fact.
23. As regards Commissioner of Income-tax v. S. P. Jain, the facts of this case, briefly stated, were "In a contract of employment an employee was to serve for a period of'25 years and, in the event of his services being terminated before the expiry of the term, he was to receive compensation calculated at Rs. 40,000 for each unexpired year of the term. The employee receiv--ed Rs. 7 lakhs on the termination of his employment."
24. On these facts it was held by Bombay High Court that, on the facts, there was no option reserved in favour of the Company under the contract of employment. What was provided in the contract was a measure of damages in the event of termination of the services of the assessee by the Company in breach of service agreement. The sum of Rs. 7 lakhs was not, therefore, assessable as profits in lieu of salary. It was further held that the mere description of a payment as compensation for loss of office or loss of employment by the parties concerned is not determinative of the real nature of the payment.
This case is distinguishable on facts and the ratio of this case has no application to the present case. So, this case also does not help Mr. Nasrullah Awan, for a Court has to ascertain, on the evidence before it, as to what in substance is the real bargain between the parties. The Court has to look to the substance and not to the form to find out the real nature of the transaction in question.
25. We, therefore, answer the question referred to us in the affirmative. Since the respondent has remained absent, no costs are awarded.