http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: ALL INDIA REPORTER LTD., NAGPUR

       Vs.

RESPONDENT: RAMACHANDRA DHONDO DATAR

DATE OF JUDGMENT: 29/11/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR  943            1961 SCR  (2) 773

ACT: Income-Tax--Decree for compensation for wrongful termination of service--Arrears of salary, interest and costs, if amount to  salary--Power  of  employer to  deduct  income-tax  from salary--Indian Income Tax Act, 1922 (11 of 1922), SS. 18(2), 46(5).

HEADNOTE: In a civil suit the respondent obtained a decree against his employer the appellant company for a sum which included com- pensation  for wrongful termination of his service,  arrears of salary, interest and costs of the suit, and then  applied for execution of the decree.  The Income-tax Officer  served a  notice  upon  the respondent under s. 46  of  the  Indian Income-tax  Act and applied to the District Judge  that  the appellant  be permitted to deduct at source the  income-tax, surcharge and super tax on the sum awarded to the respondent and pay the same in the Government Treasury.  The appellant- company  also  moved the executing court for  a  declaration that  they were entitled and bound to deduct the tax due  on the  amount.   The  District judge  directed  the  appellant company  to pay the income-tax and super-tax to  the  Income Tax Department and pay the balance in Court together with  a receipt  for the income tax paid.  In appeal the High  Court reversed  the order of the District judge and  directed  the execution  of the decree as claimed by the  respondent.   On appeal by the appellant company, Held, that as no tax was assessed against the respondent the Income  Tax Officer could not issue a notice under s.  46(5) requiring  the  appellant  company to deduct  tax  from  the decretal amount. A substantial part of the decretal amount did not  represent salary" of the respondent: it consisted of compensation  for wrongful termination of the respondent’s service, salary  in lieu of six months’ notice, interest and costs of the  suit. It  was  a  judgment-debt-and no provision  for  payment  of income  tax  was made in the decree which was liable  to  be executed as prayed by the respondent.  The appellant company was  not  therefore entitled or bound to deduct  income  tax under s. 18 sub-s. (2) of the Act.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 327 of 1959. Appeal  from  the order dated June 28, 1956, of  the  Bombay High Court at Nagpur in Misc.  First Appeal No. 15 of 1954. 98 774 A.   V.   Viswanatha  Sastri,  Shankar  Anand  and   A.   G. Batnaparkhi, for the appellant. K. N. Rajagopal Sastri, as amicus curiae. 1960.  November 29.  The Judgment of the Court was delivered by SHAH, J.-Ramachandra Dhondo Datar-hereinafter referred to as the respondent-was employed by the appellant company in  its publications branch.  By agreement dated March 23, 1943, the appellant  company agreed to pay to the respondent  as  from April 1, 1943, remuneration per annum equal to 3 1/2% of the gross  sales  or  Rs. 12,000  whichever  was  greater.   The agreement  was  to remain in operation for -ten  years  from April  1, 1943, in the first instance and was  renewable  at the option of the respondent for such period as he  desired. By notice dated April 19, 1948, served on the respondent  on April  22,  1948,  the  appellant  company  terminated   the employment  of the respondent.  The respondent then filed  a civil  suit  in the court of the Fifth  Additional  District Judge,  Nagpur,  for  a decree for Rs.  1,30,000  being  the amount   of   compensation  for  wrongful   termination   of employment,  arrears  of salary and interest.  On  July  17, 1953, the court after giving credit for the amount  received by the respondent passed a decree for Rs. 42,359 (which  was inclusive  of Rs. 36,000 as compensation for termination  of employment  and  Rs. 6,000 as salary in lieu of  six  months notice  and  interest) and costs and interest  on  judgment. The respondent then applied for execution of the decree  and claimed Rs. 54,893-12-0 less Rs. 18,501-10-0 decreed against him  in  a cross suit filed by the appellant  company.   The Income  Tax Officer, Nagpur, served a notice under s. 46  of the Indian Income Tax Act upon the respondent and also  gave intimation to the District Judge, Nagpur, that the appellant company be permitted to deduct at source and to pay into the Government Treasury Rs. 15,95613-0 as income-tax,  surcharge and  super-tax due on the sum of Rs. 50,972-2-0  awarded  to the respondent.  The appellant company also applied that the 775 executing  Court do declare that the appellant  company  was entitled  and  in  law bound to deduct the tax  due  on  the amount.  The learned Judge directed the appellant company to pay to the Income Tax Department Rs. 15,956-13-0 on  account of  income-tax  and  super-tax  on the  amount  due  to  the respondent and directed it to pay the balance in court after filing  a  receipt for payment of tax from  the  Income  Tax department.   In appeal to the High Court of  Judicature  at Nagpur, the order passed by the District Judge was  reversed and execution as claimed by the respondent was directed. The  appellant company contends that under s. 18(2)  of  the Income  Tax Act, it was bound to deduct the tax computed  at the appropriate rate on the salary payable to the respondent as  the  amount  due under the  decree  represented  salary. Section 18 sub-s. (2) of the Income Tax Act in so far as  it is  material  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

"salary".   Sub-s.  (7) declares that a  person  failing  to deduct the taxes required by the section shall be deemed  to be  an  assessee  in default in respect of  such  tax.   The Legislature  has, it is manifest, imposed upon the  employer the  duty  to deduct tax at the appropriate rate  on  salary payable  to the employee and if-he fails to do so,  the  tax not  deducted may be recovered from him.  But the  liability to deduct arises in law, if the amount is due and payable as salary.   In this case, there has been no assessment of  tax due  by the Income Tax Officer on the amount payable to  the respondent.  Under s. 46(5), any person paying salary to  an assessee may be required by the Income Tax Officer to deduct arrears of tax due from the latter and the employer is bound to  comply  with such a requisition and to  pay  the  amount deducted  to the credit of the Government.  But  this  order can  only be passed if income-tax has been assessed and  has remained unpaid.  It is undisputed that at the, material 776 time,  no  tax  was assessed against  the  respondent;  -the Income  Tax Officer had accordingly no authority to issue  a notice  under  s. 46(5).  Nor could the Income  Tax  Officer claim to recover tax due by a proceeding in the nature of  a garnishee  proceeding  by  applying to the  civil  court  to attach  the  Judgment-debt  payable  by  the  company.   The application  submitted  by  the  Income  Tax  Officer   must therefore be ignored.  Undoubtedly, the employer is by s. 18 of  the Act liable to deduct from the salary payable by  him to his employee the amount of tax at the average rate appli- cable to the estimated total income; but can it be said that as  between  the appellant company and  the  respondent  the decretal  amount  represented salary?   The  respondent  had filed   a  suit  for  a  decree  for  arrears   of   salary, compensation  for  wrongful termination  of  employment  and interest.   The court having passed a decree on that  claim, it  became  a judgment-debt.  It may have been open  to  the appellant  company  in the suit to apply to  the  court  for making  a provision in the decree for payment of  income-tax due by the respondent, but no such provision was made. We are not concerned to decide in this appeal whether in the hands  of  the respondent the amount due to  him  under  the decree, when paid, will be liable to tax; that question does not  fall to be determined in this appeal.  The question  to be  determined is whether as between the  appellant  company and  the  respondent  the amount decreed is  due  as  salary payment of which attracts the statutory liability imposed by s. 18.  The claim decreed by the civil court was for compen- sation,  for wrongful termination of employment, arrears  of salary, salary due for the period of notice and interest and costs,  less withdrawals on salary account.  The amount  for which  execution  was  sought to be levied  was  the  amount decreed against which was set off the claim under the cross- decree.    A   substantial  -part  of  the   claim   decreed represented   compensation  fir  wrongful   termination   of employment  and  it would be difficult to predicate  of  the claim  sought  to  be  enforced what  part  thereof  if  any represented salary due.  Granting that compensation  payable to an 777 employee   by  an  employer  for  wrongful  termination   of employment be regarded as in the nature of salary, when  the claim  is  merged  in the decree of the  court,’  the  claim assumes  the character of a judgment-debt and  to  judgment- debts s. 18 has not been made applicable.  The decree passed by  the  civil  court  must  be  executed  subject  to   the deductions  and  adjustments permissible under the  Code  of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

Civil  Procedure.   The  judgment-debtor may, if  he  has  a cross-decree  for  money, claim to set off  the  amount  due thereunder.   If there be any adjustment of the decree,  the decree may be executed for the amount due as a result of the adjustment.   A  third  person who  has  obtained  a  decree against  the judgment-creditor may apply for  attachment  of the  decree and such decree may be executed subject  to  the claim  of the third person: but the  judgment-debtor  cannot claim  to  satisfy,  in the absence of a  direction  in  the decree  to that effect the claim of a third  person  against the  judgment-creditor, and pay only the balance.  The  rule that the decree must be executed according to its tenor  may be modified by a statutory provision.  But there is  nothing in  the  Income  Tax Act which supports  the  plea  that  in respect  of the amount payable under a judgment-debt of  the nature  sought  to be enforced, the debtor  is  entitled  to deduct  income-tax which may become due and payable  by  the judgment-creditor  on the plea that the cause of  action  on which  the decree was passed was the contract of  employment and  a part of the claim decreed represented amount  due  to the employee as salary or damages in lieu of salary. Counsel  for the appellant company strongly relied upon  the decision  of the House of Lords in Westminster Bank Ltd.  v. Riches  (1).  That was a case in which in an action  brought by one R against the Westminster Bank trustee of the  estate of  one X-R was awarded a decree for pound 36,255  principal and  pound 10,028 as interest.  The Bank thereafter  brought an action for a declaration that it had satisfied the  judg- ment in the action by R by paying him the amount (1)  18 Tax Cases 159. 778 due less pound 5,014, the latter sum representing income-tax on  the interest awarded by the judgment.  It was   held  by the House of Lords that pound 10,028 was "interest of money" within Schedule D and General Rule 21 of the Income Tax Act, 1918, and that income-tax was deductible therefrom.  In that case,  the only argument advanced on behalf of the  Bank  is set out in the speech of Viscount Simon, L. C. at p. 187: "The  appellant  contends that the additional sum  of  pound 10,028  though awarded under a power to add interest to  the amount  of  the  debt, and though  called  interest  in  the judgment,  is  not really interest such as  attracts  Income Tax, but is damages.  The short answer to this is that there is no essential incompatibility between the two conceptions. The real question, for the purposes of deciding whether  the Income  Tax Acts apply, is whether the added sum is  capital or income, not whether the sum is damages or interest." The  House  of Lords in that case by a  majority  held  that pound  10,028  awarded under the  judgment  represented  not capital  but interest and was liable to tax.  In our  view,’ this  case  has no application to the facts of  the  present case.   In the case before us, there is a decree  passed  in favour  of  the respondent: under the scheme  of  the  Civil Procedure Code, that decree has to be executed as it stands, subject to such deductions or adjustments as are permissible under  the  Code.   There was no  tax  liability  which  the respondent  was  assessed to pay in respect of  this  amount till  the  date on which the -appellant  company  sought  to satisfy  the  alleged tax liability of the  respondent.   As between the appellant company and the respondent, the amount did not represent salary; it represented a judgment-debt and for payment of income-tax thereon, no provision was made  in the decree.  The Civil Procedure Code bars an action of  the nature  which was filed in Westminster Bank’s case  (supra). The  defence to the execution if any must be raised  in  the

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

execution  proceeding  and not by a  separate  action.   The amount  payable by the appellant company to  the  respondent was  not salary but a judgment-debt, and before paying  that debt the appellant company could not claim 779 to  deduct  at source tax payable by  the  respondent.   Nor could the appellant company seek to justify its plea on  the ground  that the judgment-creditor was indebted to  a  third person. The principle of the case in Manickam Chettiar v. Income Tax Officer, Madura (1), on which reliance was also sought to be placed  by the appellant company has no application to  this case.   In Manickam Chettiar’s case (1), in execution  of  a money  decree  certain properties belonging to  a  judgment- debtor  were  attached and sold and the sale  proceeds  were received  by  the  court.  The Income Tax  Officer  who  had assessed  the  decree-holder to tax payable by  him  on  his other  income  applied to the court for an  order  directing payment  to  him  out of the sale  proceeds  the  amount  of income-tax  due by the decree-holder.  It was held that  the claim for income-tax was entitled to priority in payment and the  court  had  inherent  power to make  an  order  on  the application for payment of money due as income-tax.  Tax had admittedly been assessed, and proceedings substantially  for recovery  of the tax so assessed were adopted by the  Income Tax  Officer.   It was held in the  circumstances  that  the court had jurisdiction to direct recovery of tax out of  the amount  standing  to the credit of the  decree-holder.   The principle of that case can have no application to the  facts of the present case. The respondent had not appeared before us, but we have  been assisted by Mr. Rajagopala Sastri and we are indebted to him for placing the evidence and the various aspects of the case on  a true appreciation of which the question in issue  fell to be determined. The  appeal  fails  and  is  dismissed.   As  there  was  no appearance  for the respondent, there will be no  order  for costs.                             Appeal dismissed. (1) VI I.T. R. 180. 780