http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: V.D. TALWAR (DEAD) AND AFTER HIM HIS HEIRS

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BIHAR

DATE OF JUDGMENT: 26/03/1963

BENCH: DAS, S.K. BENCH: DAS, S.K. SARKAR, A.K. HIDAYATULLAH, M.

CITATION:  1963 AIR 1583            1964 SCR  (2) 519

ACT: Income-Tax--Assessment-Assessee’s  services  terminated   in terms  of contract-Payment of one year’s salary in lieu   of notice-Amount received by assessee, if compensation for loss of employment-Indian Income-tax Act, 1922 (11 of 1922) s. 7.

HEADNOTE: The  assessee,  Mr. V. D. Talwar, was  employed  as  General Manager by a company, According to the service agreement, he was  to  get  Rs. 2,000/- per month as his  salary  with  an increment of Rs. 100/-- every year.  Deductions for  income- tax,  absence  of duty etc. could be made from  his  salary. The  agreement of service was for five years, but  the  same could  be terminated earlier by the employer after giving  a notice of 12 months or payment of salary in lieu thereof. The  assessee joined as General Manager on May 1,  1946  and his  services  were terminated with effect from  August  31, 1947.   The services were not terminated for any default  or misconduct  on the part of the assessee but were  terminated because the company did not want to continue the assessee in their  employment.  No notice of 12 months was given by  the company as required by the contract.  The comppany  actually paid Rs. 18, 096/1/- which was the amount due as salary  for twelve months after deduction of Income-tax at the sours. The Income-tax Officer held that the sum of Rs. 25,200/was a revenue receipt of the assessee liable to be taxed under the Indian  Income-tax  Act and fie rejected the  claim  of  the asscssec that the said sum was compensation for loss employ- ment  and the tax amounting to Rs. 7,103/15/- should be  re- funded to him.  The appeal of the assessee’ was accepted  by the  Appellate Assistant Commissioner but his  decision  was reversed by the Income-tax Appellate Tribunal.  The question of  law  referred  by the Tribunal to  the  High  Court  was whether  the sum of Rs. 25,200/- was revenue income‘  of  he assessee  or not.  The High Court gave the decision  against the assessec who came to this Court by special leave. 520 Held  that what was paid to the assessee was his  salary  in lieu of notice and not compensation for loss of  employment. The assessee was not given any notice for the termination of his  services.   What  he was given was his  salary  for  12

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

months.   He got exactly what he was entitled to  get  under the  terms  of his employment.  He was not deprived  of  any rights under his service contract.  The payment made to  him could  not be called compensation for loss of office and  he was liable to be taxed under s. 7 of the Act. Henry (H.  M. Inspector of Taxes v. Arthur Foster and  Henry (H.  M. Inspector of Taxes) v. Joseph Foster (1932) 16 T. C. 605, The Commissioner of Income-tax, Bombay City 1,Bombay v. E. D. Sheppard, Bombay. [1964] 1 S.     C. R. 163, Henley v. Murray  (H.   M. Inspector of Taxes) (1950) 31 T. C.  35  1, Date (H.  M. Inspector of Taxes) v. de Soissons, (1950),  32 T.  C. 118, and Duff (H.  M. Inspector of Taxes  v.  Barlow, (1941) 23 T. C. 633, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDIICTION : Civil Appeal  No.  673  of 1962. Appeal  by special leave from the judgment and decree  dated November 22, 1960, of the Patna High Court in Misc. judicial Case No. 740 of 1958. A.   V.  Viswanatha  Sastri and M. S.  Narasimhan,  for  the appellants. Gopal Singh  and R. N. Suchthey, for the respondent. 1963.  March 26.  The judgment of the Court was delivered by S.K. DAB J.-V. D. Talwar, who was assessee before the taxing authorities and whose legal representatives on his death are appellants before us, was employed as the General Manager of Messrs J. K. Iron and Steel Company Ltd., Kanpur.  The terms of  his  employment as agreed upon by the assessee  and  the Company  were  incorporated in an appointment  letter  dated February 7, 1946.  A formal memorandum of agreement was also executed  521 between  the  parties  on February 9,  1946.   The  assessce actually  joined the service of the company on May 1,  1946. According  to the service agreement the pay of the  assessee was  fixed at Rs. 2,000/per month with an increment  of  Rs. 100/-  p.a.  subject to certain deductions  for  income-tax, absence  of duty etc., which need not be set out  in  detail for  the purpose of this case.  According to  the  agreement the  period of service was for five years.  Clauses (5)  and (6) of the appointment -letter read-               "(5) Period of agreement of service to be five               years.               (6)   Termination  of service if  within  five               years  to  be on notice of  twelve  months  on                             either side or salary in lieu thereof. " Clause (1) of the memorandum of the agreement dated February 9,  1946  said that the employee shall  serve  the  employer faithfully and diligently for a term of five years from  the date he joins, and cl. 21 read as follows :               "If during the currency of this agreement, the               employee desires to leave the services of  the               employers for any reasons whatsoever, he shall               be  at liberty to terminate the  agreement  by               giving   twelve  calendar  months’  notice  in               writing  only after repaying to  the  employer               joining  money and all expenses if  they  have               been  allowed to the employee, and the  emplo-               yers  shall have full power to take all  nece-               ssary steps in order to enforce such  payment.               The employers may terminate the service of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

             employee  by  giving twelve  calendar  months’               notice in writing or (in the case of breach of               any  of  the  terms  or  conditions  contained               herein  at  any time without  any  notice)  or               paying any salary in lieu thereof." 522 We have stated earlier that the assessee joined his post  as General  Manager  on  May  1, 1946.   The  services  of  the assessee were however terminated with effect from August 31, 1947.   It  is  the admitted case of the  parties  that  the services of the assessee were not terminated for any default or misconduct on the part of the assessee, but the  services were terminated because the company did not want to continue the  assessee in their employment.  It is also the  admitted case that no notice of twelve Months for the termination of’ the  service  was given by the company to  the  assessce  as required by the contract, In lieu of the notice the  company paid  to  the assessee on September 12, 1947 a  sum  of  Rs. 18,096/1/0-  which  was the amount computed  as  salary  for twelve  months after deduction of incometax at  the  source. The  company calculated the salary for the twelve months  at Rs.  25,200,/-  and  deducted  therefrom  the  sum  of   Rs. 7,103/15/0  as  income-tax.   The assessee  gave  a  stamped receipt  to the company for having recieved  Rs.  18,096/1/0 "in  full  and final settlement of all his claims  and  dues against the employer company." In making the assessment for the year 1948-1949 the  Income- tax Officer held that the sum of Rs. 25,200/- was a  revenue receipt of the assessee liable to be taxed under the  Indian Income-tax Act, 1922 and rejected the claim of the  assessee that  the said sum was compensation for loss  of  employment and the tax amounting to Rs. 7,1031/15/0 should be  refunded to  him.  rhe  asscssee  took an  appeal  to  the  Appellate Assistant Commissioner who held that the sum of Rs. 25,200/, though  calculated on the basis of twelve times his  monthly salary, was nothing but compensation for the loss of service and  was  therefore not taxable as income in the  shape  of’ salaries.   Then  there  was  an  appeal  to  the  Incometax Appellate  Tribunal  which  reversed  the  finding  of   the Appellate Assistant Commissioner and held  523 that  the  amount of Rs. 25,200/- paid to the  assessee  was really  salary  in  lieu  of  twelve  months’  notice   and, therefore,  the  amount  was liable to be  taxed  under  the Indian Income Tax Act,  1992.  Under s. 66(1) of the  Indian Income-Tax  Act, the Incometax Appellate  Tribunal  referred the  following question of law for the opinion of  the  High Court :               "Whether  the sum of Rs. 25,200/- received  by               the assessee during the Previous year was  the               revenue  income of the assessee liable to  tax               under the Income-tax Act?" By  its judgment and order dated November 22,1960  the  High Court   answered  the  question  against  the   assessee.The assessee then obtained special leave -from   this  court  in pursuance  whereof  the present appeal has been  brought  to this court. The  short  question before us is, whether the  sum  of  Rs. 25,200/-.   I received by the assessee in the  circumstances stated  above was a revenue income liable to tax  under  the Indian Income-tax Act or a capital receipt not liable to tax under the said Act ? We  think that the view taken bv the High Court is  correct. In  Henry (H.  M. Inspector of Taxes) v. Arthur  Foster  and Henry  (H.   M. Inspector of Taxes) v.  Joseph  Foster  (1),

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

Romer,  L.  J. said "Compensation for loss of office’  is  a well-known  term  and  it means a payment to  holder  of  an office  as  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."  This  court accepted the same meaning in The Commissioner of  Income-tax Bombay  City  1, Bombay v. E. D. Sheppard, Bombay  (2),  and said  that the emphasis was on the act of deprivation  which may  or may not give rise to any liability at law.  Now,  in the present case it is quite clear that the (1) (1932) 16 T.C. 605, (2) [1964] 1 S.C.R. 163. 524 two terms in cls. (5) and (6) of the appointment letter  and cls.   1 and 21 of the memorandum of agreement must be  read together and so read the true position that emerges is  that the  contract  of service provided that V. D.  Talwar  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 cl. 21.  If the terms of cl.  21 were  complied  with, then it could not be said that  V.  D. Talwar had surrendered any rights under the contract or  had been deprived of any such rights.  The Court of Appeal dealt with  the  aforesaid two cases Henry (H.   M.  Inspector  of Taxes) v. Arthur Foster (1), and Henry (H.  M. Inspector  of Taxes) v. Joseph Foster (1) along with a third case,  Hunter (H.  M. Inspector of Taxes) v. Dewhurst (1).  It came to the same  conclusion  in all the three cases, though  the  facts were  a  little  different  in  the  third  case  where  the respondent  desired to retire from active management of  the company  but  his  codirectors wished to be  able  still  to consult  him  and it was agreed that he  should  resign  the office  of Chairman receive as "compensation" a lump sum  in lieu of the provision under article 109, waiving any  future claim  under  that article and remain on the  Board  of  the company at a reduced rate of remuneration.  The decision  in this  third  case  was taken to the House  of  Lords.   Lord Dunedin pointed out that assuming that the view of the Court of Appeal in the Foster casee was right on consideration  of how  the question stood upon the sole consideration  of  the rights arising under article 109, a different question arose in  the case of Dewhurst; because Dewhurst was not  paid  in terms  of  article  109 but entered into a  new  bargain  in pursuance   of   which   he  was  paid   pound   10,000   in consideration,  not of ceasing to be a director, for he  did not  cease,  but  of giving up his  potential  claims  under article 109.  His Lordship said that this payment for giving up potential claims under article 109 was not income.   This was a feature (1)  (1932) 16 T.C. 605,  525 which  distinguished  Hunter (H.M. Inspector  of  Taxes)  v. Dewhurst  (1),  from  the two Foster cases  (Supra)  and  it brought into relief the distinction between the two  classes of cases, one in which there is deprivation of rights  under the agreement and this would fall under compensation and the other  in which there is no such deprivation.   Perhaps  Sir Raymond   Evershed,  M.  R.  (as  he  then  was)  had   this distinction  in  mind  when  in  Henley  v.  Murry  (H.   M. Inspector  of Taxes (2), lie said that there were two  kinds of cases which fell for consideration under this head :  one in  which the right of one party to call upon the other  for performance  of  the terms of agreement may be  modified  or indeed  wholly  given up, still the corresponding  right  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

acquire payment either of the whole sum or some less  figure is preserved and is still payable under the contract and the other is where the contract itself goes altogether and  some sum  becomes  payable  for the consideration  of  the  total abandonment  of all the contractual rights which  the  other party  had  under the contract.  In one class of  cases  the contract  persists  and  the amount  is  payable  under  the contract  and  in the other class of cases  there  is  total abandonment  of all the contractual rights and what is  paid is  in consideration of that abandonment.  The present  case in our opinion comes under the first of these two classes. Now,  the  High  Court  has rightly  pointed  out  that  the principle which will apply in a case like this is that  laid down  in  Dale (H.  M. Inspector of Taxes) v.  de  Soissions (3).  There the respondent was employed as assistant to  the managing director of a company, his remuneration  consisting of a fixed salary of pounf 3,000 per annum and a  commission calculated  on  profits.   Under the terms  of  his  service agreement, the respondent’s appointment was to be for  three years  from January 1, 1945 but the company was entitled  to terminate the agreement at December 31, 1945 or December 31, 1946 on payment (1) (1932) 16 T.C. 605.      (2) (1950) 31 T.C. 35 1. (3) (1950) 32 T.C. 118. 526 of  pound  10,000  or  pound  6,000/-  ‘  respectively,   as compensation  for , loss of office.  The company  terminated the agreement at December 31, 1945 and paid A; 10,000 to the respondent.    It  was  held  that  the  Payment  was   riot compensation  for  loss of office.  Roxburgh, J.  who  dealt with  the  case in the first instance pointed out  that  the agreement of service must be read as a whole and so read the agreement provided that the, respondent’s employment was  to be  for three more years unless curtailed under clause 4  or clause  5  and that he was to receive as a  profit  for  his employment the payments provided by the agreement  including the  payment provided by clause 5; therefore the  respondent had never any right to be emploved for three more years  and had  no  Iegal claim which would justify  compensation.   He then  said that the respondent surrendered no  rights  under the  agreement and got excatly what lie was entitled to  get under his contract of employment.under one of the clauses of the agreement of service V. D. Talwar was to serve for  five years;  but under another term of the same agreement it  was provided that the employer might terminate the service of V. D.  Talwar  by  giving twelve  calendar  months’  notice  in writing  or  paving  any  salary  in  -lieu  thereof.    The expression "any salary" must be construed in the context  of the appointment letter which said that if Mr. V. D. Talwar’s service  was to be terminated within five years he would  be entitled  to  a notice of twelve months or  salary  in  lieu thereof.  No notice for the termination of service was given to him in the present case,, but he was given twelve  months salary.   He therefore got exactly what he was  entitled  to Under the terms of his employment and he was not deprived of any  rights Under the contract of service.  There  being  no deprivation  of his rights under the contract,  the  payment cannot be said to be "compensation for  527 loss  of  office"  within the meaning  of  that  expression. Jenkins, L.J. observed in Henley v. Murray(1)               "As  the many cases on the topic show,  it  is               often   very   difficult  to   determine   the               character  of a payment made to the holder  of               an  office when his tenure of’ the  office  is

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

             determined or the terms on which lie holds  it               are altered, and the question in each case is,               whether,  on the facts of the case,  the  lump               sum  paid is in the nature of remuneration  or               profits in respect, of the office or is in the               nature  of a sum paid in consideration of  the               surrender  by the recipient of his  rights  in               respect of the office." In the present case, if V. D. Talwar had been served with  a notice  for  the termination of his service  he  would  have worked  for twelve months and got his salary and  thereafter his  service would have come to an end.  Instead  of  giving him  a notice the company paid him twelve months’ salary  in lieu thereof.  The true position is that he received  twelve Months’ salary in respect of his office though he did not do any work for that period.  By no stretch of imagination  can it be said that the sum paid to him was in consideration  of the  Surrender by the recipient of his rights in respect  of the  office.   It is worthy of note here that in  Henley  v. Murray (1), their lordships came to the conclusion that what was  paid  to  the  appellant  in  that  case  was  paid  in consideration of his surrendering his right to serve on  and be   remunerated  down  to  the  end  of   his   contractual engagement, for in that case the appellant had the right  to continue in service till March 31, 1944 and his service  was terminable by three months’ notice only after that date.  He however resigned at the request of the Bord of Directors  on an earlier date, namely, September 2, 1943.  Therefore,  the principle  laid  down in Henley V. Murray (1),  is  not  the principle which is applicable in the present case, (1) (1950) 31 T, C. 351 528 Learned  counsel for the appellant has then relied  on  Duff (H.  M. Inspector of Taxes) v. Barlow (1).  That was also  a case  where the parties agreed that the arrangement  arrived at  between them should subsist up to 1945 though  no  exact percentage  of  the  remuneration payable  was  fixed.   The arrangement  however  was brought to an end  prematurely  in November   1937  and  in  consideration  of  his   premature termination  some remuneration was paid for services  up  to November,  1937  and  a  sum of  pound  4,000  was  paid  as compensation for the loss of the employee’s right to  future remuneration under the earlier agreement of 1935.  In  these circumstances  it was held that the sum of pound 94,000  was received  by  the  respondent of that  case  not  under  the contract  of  employment nor as  remuneration  for  services rendered or to be rendered but as compensation for giving up a  right  to remuneration.  We are unable to  see  how  that decision  is  of any help to the appellant  in  the  present case.   It  seems clear to us that in the present  case  the appellant  has  surrendered no rights under the  contract  ; what  has been paid to him has been paid under the terms  of contract and as salary which he would have earned if  twelve months’  notice  had been given to him.  As  no  notice  was given  he  was  treated  as though he  was  in  service  and entitled  to salary for twelve months and that was what  was paid to him.  It is difficult to see how such payment can be treated as compensation for loss of office. The  present  case is similar to the two cases of  Henry  v. Arthur  Foster and Henry v. Joseph Foster (2) and  different from  the case of Hunter v. Dewhurst (1).  In the first  two cases  the respondents were directors of a limited  company. They  had no written contracts of services with the  company but  Article 109 of the company’s articles provided that  in the event of any director who held office for not less  than

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

five years, dying or resigning or ceasing to hold office for any cause other than misconduct, (1) (1941) 23 T.C, 633. (2) (1932) 16 T.C. 605.  529 bankruptcy,  lunacy or incompetence, the company should  pay to  him  or his representatives by way of  compensation  for loss  of  office  a  sum equal  to  the  total  remuneration received   by  him  in  the  preceding  five   years.    The respondents  resigned office as director in these two  cases and  received from the company as "compensation"  a  payment calculated  in accordance with Article 109.  It was held  by the Court of Appeal that the payment constituted a profit of the  office  of  Director and  was  properly  assessable  to income-tax.  Lord Hanworth, M. R. said at page 629 :               "Now it is argued that those sums which became               payable  under the terms recorded  in  article               109 were compensation for the loss of  office.               Is that the substance of the matter ?  When  a               man  has  died he is not compensated  for  the               loss  of his life if he resigns  voluntarily’,               why  should  he be paid compensation  for  the               loss of his office?  It would seem as if those               words  were put in in view of the  possibility               thereunder  of  escaping the charge to  tax  ;               but,  as I have said, we, have got to look  at               the substance of the matter, and the substance               of  this payment is this : It is  contemplated               as a part of the remuneration of the  Director               payable to him, and estimated according to his               service during a certain time, and in addition               to  the amount paid to him under  clause  104,               there  shall  be estimated a sum which  is  to               fall to be paid to him under clause 109."               Lawrence L. J. said at page 632 :               "’In  my judgment, the determining  factor  in               the  present case is that the payment  to  the               Respondent  whatever  the  parties  may   have               chosen  to  call it was a  payment  which  the               company had contracted to make to him as               530               part of his remuneration for his services as a               director.   It  is true that payment  of  this               part  of his remuneration was  deferred  until               his  death or retirement or cesser of  office,               and   that  in  the  articles  it  is   called               "compensation  for  loss of  office."  It  is,               however,   a   sum  agreed  to  be   paid   in               consideration of the Respondent accepting  and               serving   in  the  office  of  Director,   and               consequentely   is   a  sum  paid   byway   of               remuneration for his services as Director." It  seems to us that the same principle should apply in  the present  case.  What has been paid to the appellant  is  his salary in lieu of notice.  If that is the true position then the amount paid is taxable under s. 7 of the Indian  Income- tax  Act,  1922.   It  is  not  compensation  for  loss   of employment within the meaning of Explanation 2 thereto. For  the  reasons given above we think that the  High  Court correctly  answered the question.  The appeal fails  and  is dismissed with costs.                                     Appeal dismissed.  531

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8