1. This appeal filed by the revenue arises out of the proceedings taken for assessment of a sum of 35,000 equivalent to Rs. 5,47,688, in the hands of the assessee.
2. The assessee joined the Warren Tea Group (WTG) as their resident representative on 1-3-1977, upon the terms and conditions set out in the letter from Warren Tea Group, dated 29-1-1977. Now Warren Tea Group is not a separate entity as such, but comprised of three sterling companies, of which the Dhekhari Tea Co. Ltd. was one, which paid the salary to the assessee as per the terms contained in the letter. The letter was issued in Warren Tea Group's letter-head, which also mentioned the names of the three sterling companies comprising the group, and was signed by one CD. Jakes, Finance Director of Warren Tea Holdings Ltd. (WTH). WTH held 100% shares in all the three sterling tea companies comprising WTG; the entire shares of WTH were in turn held by Warren Plantation Holdings Ltd. (WTH), a public limited company registered in the United Kingdom. Consequent to the "Indianisation" of the sterling companies in November 1977, a public limited company by name Warren Tea Co. Ltd. (WTC) was formed and registered in India, and the assessee was appointed its managing director from 1-7-1978. The appointment was initially for one year, but thereafter the assessee was reappointed for five years with effect from 1-7-1979. His appointment on the terms and conditions set out in the agreement was duly approved by the Central Government with slight modifications that are not relevant for the purpose of the appeal.
3. In October 1981, the controlling shares in WPH were acquired by Macleod Russel pl.c of Vernon place, London, U.K. and became what in commercial parlance is called the "parent company". It is stated - and that is not disputed by the Assessing Officer - that Macleod Rusell p.l.c. (MR) at that point of time assured the employees of WPH and all the subsidiary companies down the line that their career prospects will not be jeopardised by its acquisition of the controlling interest in WPH. This assurance is adverted to by the Assessing Officer in the assessment order.
4. Some time in March 1983, MR sold its controlling interest in WPH to Derrysel Ltd. (DL) said to belong to the Ruia Group of companies.
Consequent to this turn of events, DL intimated that the assessee's services would no longer be required and that he would be replaced by one V.K. Goenka, as Vice-Chairman and Managing Director of WTC.Subsequently, the assessee resigned on 4-4-1983 and the contract which would have run upto 30-6-1984 in the normal course, came to an end. At that juncture, MR requested the assessee to visit the U.K. in May/June 1983 and when the assessee went to U.K., it paid a sum of 35,000 by cheque to the assessee on 24-5-1983.
5. It is the nature of this receipt and the liability of the assessee to pay tax thereon which is in dispute before us.
6. The amount (Indian rupee equivalent Rs. 5,47,688) was brought to assessment as 'salary' on the ground that it fell within the ambit of Section 17(3)(ii) as "profits in lieu of salary". The CIT(A) did not agree with the Assessing Officer. The Department is in appeal.
7. The Ld. Deptl. Representative submitted that there was no provision in the Income-tax Act exempting the receipt from tax. It was pointed out that every receipt is taxable unless exempt by the provisions of the Act or by way of circular issued by the Central Board of Direct Taxes. The assessment was sought to be supported by reference to the provisions of Section 17(3)(ii) of the Act. The Ld. counsel for the assessee supported the order of the CIT(A) and canvassed the same for our acceptance. He referred to the following decisions in support of the assessee's claim that the receipt was not taxable under Section 17(3)(i7): A paper book was also filed on behalf of the assessee containing the relevant documents, such as, the terms of appointment, correspondence, etc.
8. We have carefully examined the rival contentions. The facts are not in dispute, at least upto the point where the cheque was handed over by MR to the assessee in U.K. on 24-5-1983. There is some dispute as to the fact whether the assessee was, under what he terms a "Gentlemen's agreement" with MR, bound to repay the amount if any charge of misappropriation of funds is levelled against him within a year of such payment. But that point based on the "gentlemen's agreement" was raised by the assessee before the ITO only in support of his alternative contention that the amount, if at all, could be assessed only in the assessment year 1985-86 when the period of one year would expire on 24-5-1984. But the facts upto the point of the receipt of the money are not disputed and those are the facts from which the nature and character of the receipt have to be judged in order to determine the assessability of the same to income-tax.
9. We have to therefore proceed to a consideration of the true nature of the receipt. Now, the nature of a receipt has to be judged from the point of view of the recipient. The first question to be asked is from whom was the amount received? Was it from the employer? The answer is "no". The assessee quite clearly did not receive the amount from WTC, who was his employer. The provisions of the I.T. Act taxing income by way of salary apply even to amounts received by an assessee from his "former employer" but even this extended application of the provisions cannot take in the payment received by the assessee in the present case, since MR, which paid the cheque was never the assessee's employer. Each company being a separate corporate entity, we cannot accept the Assessing Officer's conclusion that the amount in question should be taken to have been received from his "former employer", the reference being to MR, after it sold its controlling interest in WPH to Derrysel Ltd. We cannot accept the conclusion that since all the companies belonged to the same group, the payment by MR is payment by WTC which was the "former employer" of the assessee.
10. The next question to be answered is whether the amount is taxable as salary even if not received from the "employer" or "former employer". Lord Cohen, while delivering judgment in the famous case of Hochstrasser (Inspector of Taxes) v. Mayes [1961] 42 ITR 457 (HL) observed (at page 474) that the contract of employment should be the "causa causans" of the payment and not merely the "causa sine qua non" thereof and "that it is not enough for the Crown to establish that the employee would not have received the sum on which tax is claimed had he not been an employee". The payment in the present case is not referable to the contract of employment. We have perused the terms governing the appointment of the assessee first as resident representative in India of the WTG from 1-3-1977 and thereafter as Managing Director of WTC with effect from 1-7-1978 initially for a period of one year and thereafter for five years from 1-7-1979. Apart from the fixed monthly salary and other usual allowances/perquisites there is no such provision to which the present payment is referable. There is a provision for paying "notice pay" in the event of termination in the terms governing the appointment with effect from 1-7-1979 as per which the assessee was paid six months' salary aggregating to Rs. 30,000 which is found to be assessed as 'salary? part from not being the "causa causans" of the amount of 35,000, the contract of employment is not even the "sine qua non" therefor. It can therefore be stated that the assessee had no expectation that in the event of termination, any payment, other than the notice pay, would be payable to him either by his employer or by any other company of the same group. Even if we were to go by what was assured by MR at the time it acquired control over WPH to the employees of the various companies of the group, there is no evidence or material on record, nor was it even suggested, that MR had promised any payment to the employees if their services were to be terminated by the acquisition of the controlling interest. Even if it had, that would be of no avail to the revenue in this case, since we are concerned with the payment made by MR after it had disgorged its holdings in WPH in favour of Derrysel at which time no such assurance is alleged, by either side before us, to have been given. It is not the case of the revenue before us or at any stage before the matter reached us, that MR had, even at the time of acquiring controlling interest in WPH in October, 1981, assured the employees of the group companies, of which the assessee was one, that their career prospects will not be jeopardised even if at a later point of time the controlling interest were to pass from its hands to others. No such assurance is alleged to have been held out. On these facts, we cannot imagine that the payment was referable to some sort of agreement or understanding between the assessee and MR.11. Correspondingly, it would be proper and logical to assume that there was no obligation on the part of MR to pay the amount to the assessee either in law or on grounds of equity.
12. We have to still find out as to why MR paid the sum to the assessee. A certificate dated 30-11 -1983, issued by MR signed by its joint managing director was furnished before the Assessing Officer.
This certificate is reproduced below: This is to certify that the sum of 35,000 was paid to Mr. Arabinda Ray by this company by cheque No. 119564 drawn on Bank of Scotland on May 24th, 1983 handed over in our office. Mr. Ray was for six years the Chief Executive in India of the subsidiaries and associates of Warren Tea Holdings Ltd. until the time we sold our one hundred per cent holdings in Warren Tea Holdings Ltd. to Derrysel Limited, who did not require Mr. Ray to continue his employment with the Indian subsidiary. Mr. Ray had no contract or agreement with us but this payment was made purely on compassionate grounds. The amount in question was debited in our books to A/c re: Sale of Parimbrook.
The payment is seen to have been made "purely on compassionate grounds". The sympathy, MR had towards the assessee, is understandable.
Though there was no obligation to compensate the assessee in any manner, MR had felt that at least on "compassionate grounds" he deserved some payment. It is not a payment for loss of office since the assessee did not hold any office with MR. It is not also a payment in appreciation of services rendered by the assessee, since MR did not have the benefit of his services nor can the payment be characterised a "testimonial" for the personal qualities possessed by the assessee. The payment was personal only in the sense that it arose out of sympathy which MR had for the assessee which in turn had arisen from the fact that he had to give up a lucrative job prematurely - the contract had still one year and a few months to run. It may be that MR would not have made the payment had the assessee not been an employee of one of the companies belonging to the same group but in all such cases the payment is made only because there is some link or some connection between the payer and the payee; it may even be personal. But that, docs not always mean that it arises out of an enforceable obligation or an agreement enforceable in law. Nor is it made under a contract of employment, since we have already found that there is no privity of contract of any nature between the assessee and MR.13. The letter dated 17-1-1984, written by MR to the office of the DDI, Investigation, Calcutta, confirmed the above factual position. This letter, according to the counsel for the assessee, was filed before the ITO. It is as under: Thank you for year letter of 2nd January 1984 concerning Mr.
Arabinda Ray.
You may find it helpful if I first clarify the position that Mr. Ray held within the Macleod Russel Group. Mr. Ray was the Managing Director of Warren Tea Ltd. a company incorporated in India and owned as to approximately 74% by the Macleod Russel Group. As Managing Director, Mr. Ray had a contract of employment with Warren Tea Ltd. but had no contract with Macleod Russel or any of its other subsidiary. When Macleod Russel sold its interest in Warren Tea Ltd. at the end of March 1983, we were informed by the purchasers, Dorrysel Ltd., that following the purchase they would be terminating Mr. Ray' s contract as they wish to appoint a new Managing Director.
Subsequently, Mr. Ray's contract was terminated in April 1983, although he remained a non-executive Director of the Company for some months thereafter.
In view of Mr. Ray's association with the Group over a number of years and his position as Managing Director of one of its largest subsidiary companies the Board of Macleod Russel, when it was informed that his contract with Warren Tea was to be terminated decided to make a payment to Mr. Ray of 35,000. This payment was purely ex gratia and made on compassionate grounds because, as a result of the sale of Warren Tea Ltd., he would not be retaining his position as Managing Director of that Company.
Enclosed are photo copies of the following documents evidencing this payment: 2. Copy of the relevant page of the Macleod Russel current account bank statement.
Further, I can confirm that Mr. Ray was asked by us to visit the UK and USA during May and June of 1983. The purpose of this visit was to enable the Board of Macleod Russel to thank Mr. Ray personally and to enable him to visit relations in those two countries. Some expenses were paid for Mr. Ray by Macleod Russel but these were of a very minor nature as Mr. Ray stayed with his relations, both in the UK and USA. Such expenses as were paid out of petty cash and as such there are no records identifying the amounts paid to Mr. Ray in this respect.
I should be pleased to answer any further queries you may have in connection with this matter.
The assessee has also explained the factual background in its letter dated 2-11-1985 to the ITO and letter dated 18-1-1986 to the CIT. These are part of the paper book.
14. The decisions relied on by the Ld. Counsel for the assessee are cases of payment made by the employer to the employee. We are not considering those cases in detail since we have before us a case where the payment, according to us, has not been made by the employer or former employer. The Delhi High Court decision was relied on for the purpose of showing that payments, other than those expressly referred to in Section 17(3)(ii), made by an employer to his employee on personal considerations and without any reference to the terms of employment or to the services rendered by the latter, would not be treated as "profits in lieu of salary" within the meaning of the said clause. It can however be said that the case of the assessee is 'a for tiori' inasmuch as the decisions cited have held that even the payments made by the employer (in the cases before them) would not fall within the provisions of Section 17(3)(ii).
15. We would refer to a decision of the Calcutta High Court in David Mitchell v. CIT [1956] 30 ITR 701. Chakravarthi, C.J., was inclined towards the view that if there is no privity of contract between the payer and the payee, the amount cannot be taxed as salary under Section 7 of the 1922 Act. The passage at page 714 of the report brings out the distinction between sums received by an assessee from his employer pursuant to a contract of employment and those received from persons other than the employer for the purpose of assessing the receipt as salary. It is as under: I may say at once that I do not think that the taxing authorities were right in assessing the value of the shares under Section 7 of the Act. They could only be described, if they at all came under Clause (1) of Section 7, as perquisites or profits, but the section requires that even perquisites or profits must be, if they are to be taxed under the section, "in lieu of or in addition to any salary or wages", which are due to the assessee, whether paid or not. It appears to me that there can be no question of the shares having been paid to the assessee in lieu of or in addition to any salary or wages. The contract of employment in connection with which he had rendered services to the promoters was a contract between them and Messrs Lovelock and Lewes. The assessee was not an employee of the promoters under that contract as an individual, nor could he claim any salary or wages as such. The contract of employment could neither be enforced against him personally and individually, nor could he, acting as an individual, enforce it against the promoters.
He served the promoters only as a member of the firm with whom only there was a contract of employment. Personally, he was not entitled to claim any salary' or wages. It is true that if the engagement resulted in profit, the assessee would share the profit as a member of the firm, but such share would not come to him as salary or wages received from the employers, but only as a share of the profit of the firm received in the altogether different capacity of a partner.
It seems to me to be beyond argument that whether or not the value of the shares was taxable in the hands of the assessee as his income it was not taxable under Section 7(1).
However, the Ld. Chief Justice upheld the assessment of the amount received as professional income under Section 10. The reason was that the assessee in that case, a Chartered Accountant who was a partner of a firm of Chartered Accountants was paid the amount in appreciation of the assistance rendered in the promotion of a joint-stock company and such assistance was of a professional nature. This part of the decision is distinguishable on facts. In that case, services were rendered by the assessee therein to the payer. Since they were professional services rendered by the assessee who was a Chartered Accountant, the amount was held rightly assessable as professional income. A question now arises: cannot the receipt, in the present case, be assessed as "income from other sources" But even under Section 56, the amount received should be 'income' and a mere receipt which docs not possess any of the attributes of 'income' cannot be taxed. An amount paid out of sympathy and on "purely compassionate grounds" but not paid for any services rendered, nor on the basis of any agreement or understanding, cannot be stated to be income. The payment is also voluntary on the part of MR. It is a personal payment. It cannot therefore be characterised as 'income'; the application of the provisions of Section 56 is, therefore, ruled out.
16. In Parimisetti Seelharamamma v. CIT [1965] 57 ITR 532 the Supreme Court held that it is for the Revenue to prove that a particular receipt is taxable as 'income'. In the present case, no case has been made out by the revenue for bringing the receipt of 35,000 by the assessee to tax either as 'salary' or as 'income from other sources' in the assessment of the assessee.
17. In the view we have taken, we have not considered it necessary to deal with the alternative submission of the assessee that even if the amount is held taxable, it is only in the assessment year 1985-86 and not in the assessment year 1984-85.
18. For the foregoing reasdris, we uphold the order of the CIT(A) and dismiss the appeal.