J.E. Rutherford vs Commissioner of Income Tax

Courtney-Terrell, C.J.—The first question for our decision is whether the sum of Rs. 75,575 granted to Mr. Rutherford falls within the Exception of Section 4(3), paras. (5) or (7), Income Tax Act. In my opinion this payment must be regarded as a capital sum received in commutation of the whole of a pension and so falls within Section 4(3), (v) and is exempt from taxation.

The paragraph referred to makes no distinction between pensions which may be demanded as of legal right and those which are granted voluntarily and between those payable by Government and those payable by any private body or individual.

It has been the custom of the Bettiah Raj under the management of the Court of Wards to grant a lump sum to its managers when they lay down their office. This practice has been sanctioned by the Government in the cases of successive managers and it is one of the inducements offered to candidates for the office. It is recognized that there is no legal obligation upon the Raj or the Government to make the payment, but having regard to established practice it is nevertheless a matter of reasonable expectation and an incentive to accept an onerous office at a comparatively small salary and to perform the duties in an efficient manner.

The finding of fact is as follows:

No doubt, the Court of Wards do not pay pensions, or guarantee gratuities, but allow a gratuity in each case as an act of grace. But it is nonetheless true that the Court of Wards do invariably pay gratuities to their deserving servants on retirement. This is plain from the extract above quoted from the letter of the Board of Revenue; Officers of the Court of Wards, if the finances of an Estate permit, are treated in the same manner as Government servants. Officers of the Court of Wards know when they join the service of the Court, that there is practical certainty of their receiving a gratuity on retirement, if their work has been considered satisfactory. If it were not for the expectation of this gratuity, the Court of Wards would have to pay higher salaries to their officers.

It is not possible for the Court of Wards to offer the candidate a pension consisting of periodical payments because the payment might be repudiated by the owners after the Estate is released from the management of the Court. Therefore the practice has been established of treating officers of the Court, if the finances of the Estate permit, in the same manner as Government servants and of paying to them a sum equal to that payable as commutation of pension on the scale set forth for such commutation appended to the civil service regulations plus in very meritorious cases one-fourth of such amount. Mr. Rutherford''s case was considered as specially meritorious and he was granted a sum of Rs. 58,860 as calculated by the regulations plus one fourth of that sum amounting in all to Rs. 75,575. The candidate therefore enters upon his office under the Court of Wards with a definite salary and the expectation that he will receive at the end of his service the equivalent of a pension but he knows that he will not after his retirement be given a series of periodical payments but in lieu thereof he will get a lump sum In other words he is to get a pension, which will certainly be commuted.

It is argued by counsel for the Crown that this payment is a gratuity and not a pension. The single sum paid in commutation of a pension may be a gratuity but it is nonetheless exempt from taxation on that account.

It is true in the Government letter which sanctioned the payment to Mr. Rutherford it is repeatedly emphasized that payment is in the nature of a gratuity, but even if the term does not include a commuted pension the terms employed by the Government or the recipient to describe the transaction ares immaterial. As in the case of the terms "penalty" and "liquidated damages" the real nature of the transaction must be found as a matter of fact and them the Court must decide as a matter of law whether the terms used in the statute are applicable to such facts.

It was argued for the Crown that in order to make the payment a sum paid in commutation of a pension there must first be pension and that the commutation must follow in point of time. But this argument is not well founded. The Government might in view of the political situation or for any other reason decide in future to commute all pensions, and persons appointed to Government service might enter upon their office on those terms. The sums received at the termination of service would nonetheless be in commutation of pension although no single payment of an instalment of pension was ever made to the officer.

The assessee argues that the payment is also exempt from taxation tinder para. (7), 8. 4(3). But in order to qualify for this exemption the payment must present two characteristics:

(i) It must not have arisen from business or the exercise of a profession, vocation or occupation, and

(ii) it must be of a casual and nonrecurring nature.

In my opinion it has neither of these qualities. As I have pointed out Mr. Rutherford may be taken to have been induced to accept the office of the Manager by the prospect of a commuted pension and the payment must be considered as having "arisen from" his occupation. The facts that it was granted after his service had ended and that there was no obligation to pay it are immaterial: see In Re: Turner Morrison and Co. Ltd., . To use a humble analogy the tip given to a waiter at a restaurant by a departing guest arises from the waiter''s occupation. And being a matter of reasonable expectation, and not merely a matter of hope (as would be the chance of winning a sweepstake), it cannot be considered as of a casual nature.

I would answer the first question submitted to us by saying that the payment in question is exempt u/s 4(3), para. (5) but not under para. (7).

The second and third questions relate to sums received by Mr. Rutherford from the Provident Fund to which he has contributed for many years. u/s 4, Sub-section (3), para. (5) the accumulated balance at the credit of a subscriber to a Provident Fund to which the Provident Funds Act of 1897, applies is exempt from the Income Tax Act. That Act was repealed and partially re-enacted by the Provident Funds Act of 1925, and it applies (Cl. (2), Section 2) to any Government Provident Fund;

constituted by the authority of Government for any class or classes of its employees or of persons employed in educational institutions or employed by bodies existing solely for educational purposes,

and by Section 8 of the new Act it is also to apply to a Provident Fund for employees of a Local Authority if the Local Government shall so notify in the local Official Gazette. To my mind it is clear that the object of the Provident Funds Act is to facilitate the constitution of Provident Funds whose stability may be assured by Government approval for the benefit of persons, employed by Government or Local Authorities. It is unlikely that the Government on the one hand or a Local Authority on the other would constitute Provident Funds for the benefit of persons, who are not in the service either of the Government or of the Local Authority as the case may be. Government and Local Authorities employ different classes of employees, each class having its own particular importance, responsibility, and closeness of relationship to the employing authority and there will, of course, be differences in the nature of the employment itself. The test of whether any individual person is an employee of the authority for the purposes of the Provident Funds Act is rather whether the authority admits that person to membership of the Provident Fund constituted by it than the particular nature of his employment or his precise legal relationship with the employer.

The Officials of the Court of Wards employed in the Bettiah Estate contribute to a Provident Fund which was constituted by the authority of Government for their benefit. For several years past Mr. Rutherford has so contributed and he has now drawn a sum of Rs. 38,622, as the accumulated balance due to him. Of this amount Rs. 14,889 represents the sum together with accumulated interest contributed by Mr. Rutherford and Rs. 23,731 is the amount contributed, together with interest, by the Estate; the contributions made by Mr. Rutherford have in past assessment been allowed as a deduction from his total assessable income. The department does not now claim to recover Income Tax in respect of the contributions by Mr. Rutherford. It is clear that the exemption of Mr. Rutherford''s contributions to the fund from past assessments was due to the provisions of Section 15, sub Section (1), Income Tax Act. That section is as follows:

The tax shall not be payable by an assessee in respect of any sums paid by him ... as a contribution to any Provident Fund to which the Provident Funds Act 1897, applies.

It will be seen that the department has hitherto always treated this Provident Fund as one to which the Provident Funds Act applies. There is an elaborate manual for the guidance of officers of the Court of Wards and Appendix S of this manual sets forth the rules for Provident Funds of Estates under its management, the officers contribute so much (deducted from his salary) and the Funds of the Estate contribute a proportionate amount, and the sums so contributed are paid into the Post Office Savings Bank to draw interest, and on retirement the officer may withdraw his contribution and accumulated interest plus the proportionate contribution by the Estate with accumulated interest. The fund is under the management and control of the Collector of the district.

It is noteworthy that, by the Government Management of Private Estates Act [Act 10 of 1892, Section 2, Clause (3)] it is enacted that the phrase "Private Estates under Government Management" is to include "Estates under the Court of Wards."

It is now however argued that although this Fund was admittedly constituted under the authority of Government, it was not so constituted for the benefit of any class or classes of its employees, since Officials of the Court of Wards do not, it is said, fall within that category of persons. The question we have to answer depends therefore upon the answer to the preliminary question whether officers of the Court of Wards belong to any class of Government employees.

Now various enactments have dealt with the status of officers of the Court of Wards for various specific purposes. Under the Penal Code such an officer is a "public servant," so that if he should be fraudulent he may receive the heavier punishment awarded to such servants: Section 59-A, Court of Wards Act.

Under the Bihar and Orissa Municipal Act and the Bihar and Orissa Local Self-Government Act, the manager of an Estate under the Court of Wards has been declared to be a "Salaried servant of Government," and it was held by Mullick, J., in Hammond''s Election Cases-Vol. 2, p. 99, that a manager under the Court of Wards is a Government servant under the Government of India Act. In these circumstances it seems to me extraordinary that an officer of the Court of Wards cannot be said to fall within any class of employees of Government. It must be remembered that the phrase "Class of employees of Government" must be construed having regard to the Provident Funds Act, and, as I have endeavoured to show, the phrase in that Act was not intended to have any narrow significance. The object of the Act was the establishment and protection of Provident Funds constituted by the authority of Government for public servants and not to define with any strictness the class of persons who might be admitted to membership of the funds.

It is urged on behalf of the Crown that the salary of an officer of the Court of Wards is a charge upon the Estate and is not borne by the Government; and it is said further that the business of the officer is to look after the interests of the ward. These considerations are not sufficient to prevent the officer belonging to "any class of Government employee." The officer is appointed by the Government, his salary is fixed by the Government, he has to obey the orders of the Government, and he can ignore the orders or requests of the ward. The fact that he receives his salary from the funds of the Estate merely means that the Government directs him to help himself from those funds to the defined extent: or in other words, the Government had and exercises the power to direct the ward to pay out of the ward''s own pocket the salary of a particular class of Government employees.

The question put to us is:

Is the sum of Rs. 37, 622 exempted from taxation under the said Section 4(3)(y) as an accumulated balance at the credit of the assessee as a subscriber to a Provident Fund as contemplated by that section?

In my opinion this question should be answered in the affirmative.

The remaining question, having regard to the answer to No. 2, does not now arise.

Dhavle, J.

I agree in the order proposed.

In support of the argument that the sum of Rs. 75,000 granted to the assessee was not a

capital sum received in commutation of the whole or a portion of a pension,

Mr. Agarwala laid stress on two facts. The first was that Section 7 of the Act makes gratuities as well as pensions taxable, and the second that the sum in question was given to the assessee not as a pension but expressly as a gratuity. In the case of a payment of this kind, a payment in consideration of past services, pension and gratuities seem to be generally indistinguishable excepting so far as pensions spell periodical payments. The Civil Service Regulations do not apply proprio vigore to employees under the Court of Wards, but payment to the assessee was calculated on the basis of Article 474 of those regulations. The definition of "pension" givan in Article 41 of the regulations is that

except when the term ''pension'' is used in contradistinction to gratuity, ''pension'' includes ''gratuity.

Under Article 474: the amount of a pension is regulated as follows:

(a) After a service of less than ten years a gratuity not exceeding one month''s emoluments for each completed year of service ...

(b) after a service of not less than ten years, a pension not exceeding the following amount.

The amount paid to the assessee was calculated on the basis of Clause (b) and then capitalized, in accordance with Appendix No. 10 of the Appendices to the Civil Service Regulations. The maximum (sic) "gratuity" under the article is nine (sic) monthly emoluments of the (sic) officer, while the amount given (sic) assessee is nearly 33 times his (sic) emoluments. The distinction (sic) in Article 474, Civil Service Regulations, between gratuities and pensions has (sic) application to Section 7, Income Tax Act, but the consideration that I have set out go far to show how the so-called gratuity given to the assessee is essentially identical in nature with a commuted pension. Mr. Agarwala has contended that no pension was admissible to the assessee and that therefore there was nothing to commute, and it was in fact on this basis alone that he asked that a distinction be made in the present case between a gratuity and a commuted pension. The answer to this contention is that the precise term used is of little moment in interpreting the Income Tax Act. What must be looked (sic) is the real nature of the sum in question and it is clear from the official correspondence that what was given to (sic) assessee on his retirement from service was but the equivalent of a com(sic) pension in essence, in spite of (sic) technical reason for which it was commended and sanctioned under the combination of a gratuity. I agree herefore that the sum of Rs. 75,000 does all within the exemption of Section 4(3)(v).

The assessee''s contention that that (sic) also comes within Section 4(3)(vii) must (sic) be rejected.

The next question to consider is whe (sic) that portion of the amount standing to the credit of the assessee in the (sic) covident Fund, which was contributed (sic) the Bettiah Estate is exempt from (sic) as

the accumulated balance at the credit of subscriber to any such Provident Fund, i, e., (sic) and to which the Provident Funds Act 1897, plies.

Mr. Agarwala has conceded that the Provident Fund of the Bettiah Ward''s Estate was constituted by the authority of the Government, and the only point for decision is whether that Fund could be said to have been constituted for any class or classes of its employees" i.e., of employees of the Government. If these words be strictly construed, I doubt very much whether the answer could be in the affirmative. Under ... Section 20, Court of Wards Act, [Act 9 (B.C.) of 1879] it is the Court and not Government that is to appoint a manager for the property of a ward. Section 14 authorizes the Court, "through its manager," to do all such things requisite for the proper care and management of any property...S. 39, empowers "every manager appointed by the Court" to manage all property which may be committed to his charge; and Section 41 deals with the specific duties of "every manager appointed by the Court."'' At various places in the Wards Manual we find a distinction made between those employees under the Court of Wards who are Government officers and those who are not. Rule 132, at p. 89, for instance, lays down a special procedure for dealing with applications for leave from "Government Officers transferred to the Court," and Rule 63 (at p. 284) of the "rules regarding grant of travelling allowance to employees under the Court of Wards" enables the manager to authorize any of the officers subordinate to him to proceed on duty beyond his jurisdiction...but lays down a special provision that in the case of Government servants journeys outside the province require the sanction of the Local Government.

The last paragraph of Rule 141 at p. 93 of the Manual deals with the "class" to be assigned to "employees who are Government Officers" for the purpose of the travelling allowance rules. The, model rules for the management of Provident Funds (at p. 250 et seq), are apparently intended for servants or employees of wards and other Estates, including all nonpensionable employees holding substantive appointments with a salary of more than Rs. 10 a month; and though Rule 2 of these rules provides that "every servant" shall be required to subscribe at a given rate, there is a note under the rule to the effect that "a Government servant" in receipt of pension from Government is not permitted to subscribe to the Provident Fund. The employees of an Estate under the Court of Wards are, moreover, paid not from public revenues but from the funds of the estate. It is true that the Court of Wards is constituted by the Board of Revenue and that in the exercise of its powers, and in the discharge of its duties, the Court is guided

by such orders and instructions as it may from time to time receive from the Lieutenant Governor": vide Section 69, Court of Wards Act.

But the specific section and rules to which I have referred make it clear that for the purposes of the Court of Wards Act at any rate, a distinction is made, wherever necessary, between Government and non Government Officers serving estates under the Court of Wards. Mr. Jayaswal has referred to Article 750, Civil Service Regulations, and contended, from the mention of "managers of Courts of Wards Estates" in the examples under the second part of the article, that such managers are a class of Government servants. To my mind this is a complete misapprehension of the Civil Service Regulations. Article 750 deals with the two kinds of Foreign Service to which Government Officers may be deputed, and provides that the foreign service to which a Government Officer may be deputed for working as the manager of a Court of Wards Estate is foreign service of the second kind. In other words, what it does show is not that all managers of estates under the Court of Wards are Government servants, but that it is permissible to depute officers already in the employ of Government to work as such managers. We are however now concerned to construe neither the Court of Wards Act nor the Civil Service Regulations, to which reference has been made at the Bar, but the Provident Funds Act read with the Income Tax Act. In this connexion it is not altogether unimportant to note that for about 20 years the assessee''s contribute (sic) tions to the Provident Fund of the Bettiah Estate were treated by the In come-tax Department as coming within the exemption.

It has been conceded that that does not create any estoppel--there can be no estoppel against a statute of course, but the continued treatment of the assessee''s contributions in the past shows that he is not unreasonable in contending that this Provident Fund (sic) be regarded as coming within Section 2 (sic) Provident Funds Act (now Act 19 (sic) As my Lord the Chief Justice (sic) pointed out, the object of the (sic) Funds Act was evidently the statement and protection of Provident Fu (sic) set up by Government for public serve and not the defining with any strictness of the class or classes of persons to be admitted to membership of such a fund. Not only is the Provident Fund in(sic) question conceded to have been constituted by the authority of Government, but there is also in the case of the present assessee the further consideration that his appointment and his retirement were in fact referred by the Court, of Wards to Government. A taxing statute must, moreover, receive a construction in favour of the subject where any doubt arises, and I agree that in the present case the test of whether the assessee was an employee of Government for the purposes of the Provider Funds Act may be taken to be not the particular nature of his employment (sic) his precise legal relationship wil(sic) Government (as distinguished from the (sic) Court of Wards), but whether or not was with an authority traceable (sic) Government that he was admitted the membership of the Provident Fu(sic) Judged by this test, it seems clear that the assessee is entitled to exemption u/s 3(4)(v) in respect of the contributions in question.