V.R. Ganti vs Commissioner of Income Tax

Syed Shah Mohammed Quadri, J.—The question we are called upon to answer in this R.C. is :

"Whether, on the facts and in the circumstances of the case, the sum of Rs. 10,500 paid to the assessee by his employer as an ex gratia payment is liable to be taxed under the head ''Salary'' u/s 17 of the Income Tax Act ?"

It has come to be referred to this court in the following circumstances :- V. R. Ganti, the assessee, was an employee of Anglo French Drug Co. (Eastern) Ltd., Bombay, for short ("the employer"). On the ground of ill-health he chose to resign the job by tendering his resignation on November 6, 1981. While accepting the resignation, with effect from December 6, 1981, the employer paid to the assessee an amount of Rs. 10,500 (being salary for four months) as ex gratia in addition to the terminal benefits to which he has entitled under law. This amount was assessed to tax u/s 17(3)(ii) of the Income Tax Act by the Income Tax Officer, in the order of assessment dated December 16, 1982. Challenging the correctness of the said order of assessment, the assessee went in appeal before the Appellate Assistant Commissioner of Income Tax who, by his order dated April 30, 1984, allowed the appeal holding that the said amount was not taxable. Aggrieved by the said order of the appellate authority, the Revenue went in appeal before the Income Tax Appellate Tribunal. On March 30, 1985, the Tribunal set aside the order of the appellate authority and restored the order of the Income Tax Officer holding that the said amount was taxable as compensation for loss of employment u/s 17(3)(i) of the Income Tax Act. On the application of the assessee u/s 256(1) of the Income Tax Act, the Tribunal referred the aforementioned question for the opinion of this court.

Mr. Y. Ratnakar, learned counsel for the assessee, vehemently contended that Rs. 10,500 were paid to the assessee as ex gratia; he had no right to receive the same as it was over and above the terminal benefits to which he was entitled; therefore, it must be treated as a personal gift to the assessee and as such it might be held to be not taxable in law.

Mr. S. R. Ashok, learned standing counsel for the Income Tax Department, submitted that the amounts paid to a person by his employer or former employer would be taxable under clause (i) or clause (ii) of sub-section (3) of section 17 of the Income Tax Act and that the Income Tax Appellate Tribunal was right in holding the amount in question taxable.

In this case, though the Income Tax Officer accepted, that the amount of Rs. 10,500 was paid as ex gratia yet he taxed the same u/s 17(3)(ii) being of the view that it partook of the character of profits in lieu of salary. The Appellate Assistant Commissioner pointed out that the phrase "any payment" in clause (ii) of section 17(3) did not include all amounts paid by the employer or former employer but would include only such payments which were made as remuneration for past services. He formulated the test thus : "whether the amount was in the nature of remuneration for the services of the employee by way of voluntary gift or was it merely a case of personal gift having been induced by the loyal services of the employee ?" He noted there is no evidence except the letter of the employer dated November 6, 1981, accepting the resignation of the employee to ascertain the nature of payment and on an interpretation of that letter he came to the conclusion that the long service of the employee induced the payment of the amount which was ex gratia as a gift without being intended as remuneration, so the amount was not taxable. The Income Tax Appellate Tribunal, having interpreted the said letter of the employer, recorded that the employee could not lay any claim to the amount in question under the contract of service and in that sense, it was "ex gratia" and it was "extra compensation" for loss of employment and was taxable u/s 17(3)(i).

Section 17(3) of the Income Tax Act defines the expression "profits in lieu of salary" for purposes of sections 15 and 16 of the Act. It will be useful to read here sub-section (3) of section 17 :

"17. (3) ''profits in lieu of salary'' includes, -

(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

(ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12) or clause (13A) of section 10) due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent to which it does not consist of contributions by the assessee or interest on such contributions."

The amount of compensation due to an assessee-employee as a right under any statute, award or contract of employment or received by him from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions thereof irrespective of his entitlement to receive the same, is now included within the meaning of the expression "profits in lieu of salary" under clause (i) of sub-section (3) of section 17. This clause takes in its fold amounts paid by way of compensation in connection with the termination of the employment or the modification of the terms and conditions relating thereto. Having regard to the contents of the said letter of the employer and the facts of the case, we are of the view that the amount in question has not been paid by way of compensation, for, there has been neither termination of the employment nor any modification of the terms and conditions of the employment by the employer, so the amount cannot properly be brought to tax under clause (i).

Clause (ii) takes in its fold any payment, other than those excepted therein, which is due or received by an assessee from an employer or a former employer or from a provident or other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions. This does not cover payment of the amount from an approved superannuation fund. The clause "any payment received by an assessee from an employer or a former employer" is wide enough to catch all the payments of the nature paid to the assessee. But then, will any sum, paid by the employer/former employer to the employee at or after the termination of services, on the occasion of the marriage of the employee or for an act of gallantry or for any piece of literature, art or any sum paid for good performance in a cricket test or football match, fall within the ambit of that clause ? The answer to such questions would depend upon whether the amount was paid by the employer or the former employer to the employee qua employee for something done as an employee or in his capacity other than that of an employee as a personal gift in appreciation of his quality of intrepidity, writing, sportsmanship and the like. In the former situation, in our view, it would be taxable but in the latter, it would not be taxable.

The question of payment of an ex gratia amount paid by an employer or former employer at the termination of the employment of an assessee is a vexed question of law and has been coming up for the consideration of the courts from the beginning of the twentieth century. The earliest cases which dealt with that aspect are : Herbert (Rev. G. N.) v. J. A. McQuade [1902] 2 KB 631; 4 TC 489 and Blakiston v. Cooper [1909] AC 104; [1908] 5 TC 347 . In the first case, the question of taxability of an augmentation fund voluntarily given to a minister of religion fell for the consideration of the Court of Appeal. The Master of the Rolls enunciated the test for determination of the question to be whether from the standpoint of the person who received the money it accrued to him by virtue of his office or employment and that if it did, it did not matter whether it was voluntary or it was compulsory on the part of the person who paid it and that the amount would be taxable. In the second case, the question before the House of Lords was whether voluntary Easter offerings given as free gift to the vicar, a benefit as such, for his personal use were assessable to Income Tax as profit accruing to him by reason of his office. Lord Loreburn, the Lord Chancellor, observed that where a sum of money was given to an incumbent substantially in respect of his services as incumbent, it accrued to him by reason of his office and that had it been a gift of an exceptional kind, such as a testimonial, or a contribution for a specific purpose as to provide a holiday, or a subscription peculiarly due to the personal qualities of the particular clergyman, it might not have been a voluntary payment for services, but as a mere present. These two cases were considered by the House of Lords in Reed v. Seymour [1927] 11 TC 625. In that case, Seymour was a cricket player. He was in the employment of a cricket club at a specified salary. A benefit match was held for him on his retirement. The collection thus made, was paid to him. It was the taxability of that amount that took the issue to the House of Lords. Viscount Cave, the Lord Chancellor, approved the question formulated by Rowlatt J., thus (at page 646) :

"The question to be answered is, as Mr. Justice Rowlatt put it, ''Is it in the end a personal gift or is it remuneration''. If the latter, it is subject to the tax; if the former, it is not."

That question was answered by the Lord Chancellor in favour of the assessee holding that when all the facts had been considered, it was not remuneration for services, but a personal gift. All the other law Lords agreed with the opinion of the Lord Chancellor except Lord Atkinson who, in his dissenting opinion, held that when no reason was shown for the gift to an official such as Seymour of the large and substantial prize given to him through the medium of a benefit match, it must in reason be assumed that it had been given to him for the efficient and satisfactory discharge of the duties he had been employed to discharge and if so, that the reward which had accrued to him had come to him from his employment. The sum paid to Seymour was held to be taxable.

In MOORHOUSE (INSPECTOR OF TAXES) Vs. DOOLAND., , the taxpayer was employed by a cricket club. In accordance with the rules of that club a sum of Pounds 48 s. 15 was collected and was paid to him. The taxability of that amount came up for consideration before the Court of Appeal. After referring to the above three cases, the Court of Appeal applied the test that if a voluntary payment was made in circumstances which show that it was given by way of present or testimonial on grounds personal to the recipient, the proper conclusion that was likely to be was that the voluntary payment was not a profit accruing to the recipient by virtue of his office or employment, but a gift to him as an individual, paid and received by reason of his personal qualities. It was found that the said amount was paid to the assessee in terms of his contract of employment and, therefore, it was by way of remuneration or reward and as such liable to tax.

The above cases were referred to and the tests were applied with approval by the Supreme Court in Mahesh Anantrai Pattani and Another Vs. The Commissioner of Income Tax, Bombay North, Ahmedabad, . The assessee in that case acted as Chief Dewan of the native State of Bhavnagar. The Maharaja of that State granted a monthly pension of Rs. 2,000 to the assessee. After the Maharaja ceased to be the ruler of the State on the merger of the State with Saurashtra, by his order a sum of Rs. 5 lakhs was paid to the assessee for his loyal and meritorious service. The Maharaja later confirmed by a letter that the amount was a gift as a token of his affection and regard for the assessee and his family. On the question of the assessability of that amount to Income Tax, the assessee claimed that it was a personal gift and was not taxable but the Income Tax Officer rejected that contention and taxed that amount. On appeal, the Appellate Assistant Commissioner confirmed the order of assessment and dismissed the appeal. The same result followed when the assessee carried the matter in second appeal to the Income Tax Appellate Tribunal. He then sought reference of this question to the High Court of Bombay. The High Court affirmed the view of the Tribunal by answering the question in the affirmative and in favour of the Revenue. In appeal by the assessee to the Supreme Court, after considering the abovementioned cases, it was held by a majority (Hidayatullah J. dissenting) that the sum of Rs. 5 lakhs was paid to the assessee not in token of appreciation for the services rendered as Dewan of the Bhavnagar State, but as a personal gift for the personal esteem, as such the amount was not taxable.

The principle governing the taxability of sums of the nature in question is well-settled; however, the application of the principle in borderline cases has presented some difficulty and given rise to a plethora of case-law on the subject. Therefore, we do not consider it necessary to multiply the cases except to refer to the cases on which reliance is placed by learned counsel.

Mr. Y. Ratnakar relied upon an English decision in Beynon v. Thorpe [1928] 14 TC 1 (KB). In that case, the assessee resigned from his position as the managing director of a company on account of ill-health but continued for about three years as an ordinary director. It had been the custom of the company to give voluntary pensions to retiring employees, accordingly, the board of directors resolved to grant a pension of Pounds 5,000 per year. However, subsequently, a lump sum of Pounds 5,000 was paid to him as personal gift, but not as a director, rescinding the earlier resolution. On the question whether the lump sum amount of Pounds 5,000 paid as personal gift was taxable under the Income Tax Act, Rowlatt J. observed that that amount was nothing but a gift moved by the remembrance of past services, already efficiently remunerated as services in themselves and that it was merely a gift moved by that sort of gratitude or that sort of moral obligation. In that case, no different test was laid down. It was only a case of application of the test already referred to above and on the facts of that case the learned judge came to the conclusion that it was purely a personal gift.

Before concluding, we have to consider two more decisions of the Madras High Court, relied on by Mr. Ratnakar. In Commissioner of Income Tax, Tamil Nadu-I Vs. B.M. Sundaravadanam, , the question was whether the lump sum amount paid to the doctor who treated the patient and was initially paid his bill for the services rendered, was a personal gift to the doctor or was remuneration for the services and was taxable. It was held that the amount in question was a personal gift to the doctor and was not taxable under the Income Tax Act.

In Commissioner of Income Tax Vs. M. Balamuralikrishna, , the assessee was a musician and had completed 30 years of his career. His fans paid the amount collected on that occasion. The controversy there was whether that amount was exigible to Income Tax. It was held by the Madras High Court that the amount was not taxable.

In these cases, no new principle or test was adopted. These cases also present instances of application of the abovesaid principle to the facts of those cases. So they are of no help to the assessee.

Now, reverting to the facts of this case, the finding recorded by the Tribunal is that it had not been shown that the amount was given because of any other relationship past or otherwise as between the employer and the employee. It will be apt to notice the relevant contents of the letter accepting the resignation of the assessee, which reads :

"In token of your long service with the company, we shall pay you as a special case four months extra salary as ex gratia payment in addition to your normal dues."

The above excerpt of the letter shows that from the point of the employee the amount was received by him in token of his long service, ex gratia four months extra salary in addition to normal dues. This suggests that the amount was paid to the assessee not as a personal gift or testimony but for his past services qua the employee and supports the finding recorded by the Tribunal.

In view of the above finding, it is difficult to conclude that the amount was paid as a personal gift in appreciation of the personal qualities of the assessee. Therefore, the amount would be taxable and has been rightly held to be so by the Tribunal.

For the above reasons, the question referred to us is answered in the affirmative, that is, in favour of the Revenue and against the assessee. The reference is accordingly answered. In the circumstances of the case, there shall be no order as to costs.