Cyrus A. Bagwadia Vs. Income-tax Officer - Court Judgment

Excerpt:
1. in this appeal, the assessee is challenging the taxability of rs. 21,500 received by him from m/s. du pont far east inc. (hereinafter referred to as the employer).2. the assessee is an individual. the assessment year is 1985-86 and the relevant previous year is the corresponding financial year ended on 31-3-1985.3. the assessee had joined m/s. voltas ltd. on 19-8-1968 and was working for its chemical division. the assessee resigned from the said concern on 1-6-1983. according to the gratuity scheme, the assessee was entitled to receive half month salary for each completed year of service. since the assessee had worked with the said company for 14 years, he was entitled to gratuity of an amount equal to 7 months salary. however, as per the gratuity scheme of the said company, the assessee would have been entitled to receive gratuity at the rate of 1 month salary, if he had completed 15 years of service with the said company. during the negotiations with the employer, the assessee had indicated the financial loss of rs. 21,500, if he leaves m/s. voltas ltd. as was insisted by the employer. the employer, therefore, agreed to compensate the assessee with the loss of rs. 21,500, he would have incurred for leaving m/s. voltas ltd. before completion of 15 years.4. on the aforesaid facts, the assessee received rs. 21,500 during the relevant previous year. it seems that the assessee had not shown this amount in the return filed on 29-7-1985, even though his employer had deducted tax at source on the same. the total income of rs. 44,780 disclosed by the assessee was accepted by the ito in an assessment framed under section 143(7) of the act.5. thereafter the ito was of the view that it was necessary and expedient to verify the correctness and completeness of the return, in view of the fact that the nature and compensation received by the assessee from his employer has not been properly probed into. he, therefore, issued notice under section 143(2) of the act for verifying the correctness of the exemption claimed in respect of rs. 21,500 received by way of compensation from his employer. it may be mentioned that as required under the statute, the ito had obtained prior approval of his iac. during the course of assessment proceedings, relying on the decision in the cases of mahesh anantrai pattani v. cit [1961] 41 itr 481 (sc) and parimisetti seetharamamma v. cit [1965] 57 itr 532 (sc), the assessee took up a stand that compensation of rs. 21,500 received from his employer cannot be brought to tax. however, relyingon the provisions of section 17(5) of the act, the ito negatived the assessee's contention.6. in appeal before the first appellate authority, the assessee challenged the action of the ito in bringing to tax rs. 21,500. apart from this, he also took up an additional ground whereby he challenged the action of the ito in "reopening" the assessment under section 143(2)(b) of the act.7. the first appellate authority, however, rejected both the aforesaid contentions of the assessee. referring to section 143(2)(b)of the act, he was of the view that the ito had rightly took action under that section, as it was necessary/expedient to verify the correctness of the exemption claimed by the assessee in respect of rs. 21,500. referring to section 17(3)(i) of the act, he was of the view that the compensation received by the assessee from his employer cannot be treated as a capital receipt and was exigible to tax by way of "profits in lieu of salary.8. being aggrieved by the order of the first appellate authority, the assessee has come up in appeal before the tribunal. the learned advocate for the assessee reiterated the contentions, which were made before the first appellate authority and strongly urged that the assessment "re-opened" under section 143(2)(b) of the act was clearly bad in law and should, therefore, be set aside. in support of this submission, he relied on the order of the tribunal, in the case of r.krishnarjunan v. ito in it appeal no. 128 (coch.) of 1986. as regards the merits of the case, he submitted that rs. 21,500 received from the employer cannot be brought to tax, as according to him, the same was exempt under section 10(70) of the act. according to him, the onus of bringing rs. 21,500 to tax was on the ito as the provisions of section 17(5) of the act were not applicable in the instant case. in support of his submissions, he relied on number of decisions in the cases of makesh anantrai pattani {supra), cit v. ed. sheppard [1963] 48 itr 237 (sc), parimisetti seetharamamma (supra), jai karan kohli v. cit [1980] 124 itr 706 (delhi), cit v. ajit kumar bose [1987] 165 itr 90 (cal.) and cit v. jamini mohan kar [1989] 176 itr 127 (cal.). he, therefore, urged that the assessment framed under section 143(5) read with section 143(2) of the act should be quashed. in any event, rs. 21,500 should be deleted from the total income of the assessee.9. the learned representative for department, on the other hand, strongly supported the order of the first appellate authority. in this connection, he invited my attention to section 143(2)(b) of the act, along with explanation thereto to urge that the provisions for re-opening the assessment under section 148 of the act were quite different from the provisions contained in section 143(2) of the act.in this view of the matter, he submitted that the aforesaid order of the tribunal should not be followed, as the tribunal has given its decision on the issue of "re-opening" on the basis of the provisions of section \al(p) of the act. as regards the merits of the case, he submitted that on plain reading of section 17(5) of the act, it cannot be denied that rs. 21,500 was taxable as "profits in lieu of salary".in this connection, he also invited my attention to letter dated 9-7-1984 of the assessee's employer contained in the paper book filed on behalf of the assessee to impress upon me that rs. 21,500 was agreed to be paid to the assessee "towards loss of gratuity incurred on leaving your previous employment". he, therefore, urged that i should uphold the order of the first appellate authority.10. i have carefully considered the rival submissions of the parties and i do not find any merit in the appeal preferred by the assessee.under section 143(7) of the act, the ito is empowered to frame the assessment on the basis of the return and accompanied documents filed by the assessee. however, clause (b) of sub-section (2) of the said section gives power to the ito to frame the assessment after calling for certain evidence, which he may require. the relevant portion of clause (b) of subsection (2) of section 143 of the act reads as under: - (p) whether or not an assessment has been made under sub-section (7), the income-tax officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf. explanation to this section is very material, which was not considered by the, tribunal in the aforesaid order. the relevant portion of the said explanation is reproduced below:- (1) an assessment under sub-section (7) shall be deemed to be incorrect, inadequate or incomplete in a material respect, if- (a) the amount of the total income as determined under sub-section (7) is greater or smaller than the amount of the total income on which the assessee is properly chargeable under this act to tax; or (b) the amount of the tax payable as determined under sub-section (7) is greater or smaller than the amount of the tax properly payable under this act by the assessee.it would appear from the above that the conditions for "re-opening" the assessment under section 147/148 are quite different from the proper assessment required to be framed under section 143(7)/143(2) of the act. in this view of the matter, with great respect, i am enable to follow the aforesaid order of the tribunal. i have, therefore, no hesitation in upholding the decision of the first appellate authority that the ito ' ad rightly taken action under section 143(2)(b) of the act.11. as regards the merit, of the case, the stand taken on behalf of the assessee is still weaker. the first appelate authority has rightly referred to section 17(5)(i) of the act, which reads is under :- (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.12. letter dated 9-7-1984 addressed to the assessee by his employer makes it abundantly clear that rs. 21,500 has been credited to the salary account "towards loss of gratuity incurred on leaving your previous employment". in this view of the matter, i do not find any infirmity in the action of the income-tax authorities bringing to tax rs. 21,500 in the hands of the assessee. i have carefully gone through the various reported decisions cited on behalf of the assessee.however, none of them would be of any help to the assessee, as the facts and circumstances obtaining in the instant case are quite different from the one considered in the reported cases. in this view of the matter, i do not deem it fit to discuss the same at length.

Judgment:
1. In this appeal, the assessee is challenging the taxability of Rs. 21,500 received by him from M/s. Du Pont Far East Inc. (hereinafter referred to as the employer).

2. The assessee is an individual. The assessment year is 1985-86 and the relevant previous year is the corresponding financial year ended on 31-3-1985.

3. The assessee had joined M/s. Voltas Ltd. on 19-8-1968 and was working for its Chemical Division. The assessee resigned from the said concern on 1-6-1983. According to the gratuity scheme, the assessee was entitled to receive half month salary for each completed year of service. Since the assessee had worked with the said company for 14 years, he was entitled to gratuity of an amount equal to 7 months salary. However, as per the gratuity scheme of the said company, the assessee would have been entitled to receive gratuity at the rate of 1 month salary, if he had completed 15 years of service with the said company. During the negotiations with the employer, the assessee had indicated the financial loss of Rs. 21,500, if he leaves M/s. Voltas Ltd. as was insisted by the employer. The employer, therefore, agreed to compensate the assessee with the loss of Rs. 21,500, he would have incurred for leaving M/s. Voltas Ltd. before completion of 15 years.

4. On the aforesaid facts, the assessee received Rs. 21,500 during the relevant previous year. It seems that the assessee had not shown this amount in the return filed on 29-7-1985, even though his employer had deducted tax at source on the same. The total income of Rs. 44,780 disclosed by the assessee was accepted by the ITO in an assessment framed under Section 143(7) of the Act.

5. Thereafter the ITO was of the view that it was necessary and expedient to verify the correctness and completeness of the return, in view of the fact that the nature and compensation received by the assessee from his employer has not been properly probed into. He, therefore, issued notice under Section 143(2) of the Act for verifying the correctness of the exemption claimed in respect of Rs. 21,500 received by way of compensation from his employer. It may be mentioned that as required under the statute, the ITO had obtained prior approval of his IAC. During the course of assessment proceedings, relying on the decision in the cases of Mahesh Anantrai Pattani v. CIT [1961] 41 ITR 481 (SC) and Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC), the assessee took up a stand that compensation of Rs. 21,500 received from his employer cannot be brought to tax. However, relyingon the provisions of Section 17(5) of the Act, the ITO negatived the assessee's contention.

6. In appeal before the first appellate authority, the assessee challenged the action of the ITO in bringing to tax Rs. 21,500. Apart from this, he also took up an additional ground whereby he challenged the action of the ITO in "reopening" the assessment under Section 143(2)(b) of the Act.

7. The first appellate authority, however, rejected both the aforesaid contentions of the assessee. Referring to Section 143(2)(b)of the Act, he was of the view that the ITO had rightly took action under that section, as it was necessary/expedient to verify the correctness of the exemption claimed by the assessee in respect of Rs. 21,500. Referring to Section 17(3)(i) of the Act, he was of the view that the compensation received by the assessee from his employer cannot be treated as a capital receipt and was exigible to tax by way of "Profits in lieu of salary.

8. Being aggrieved by the order of the first appellate authority, the assessee has come up in appeal before the Tribunal. The learned advocate for the assessee reiterated the contentions, which were made before the first appellate authority and strongly urged that the assessment "re-opened" under Section 143(2)(b) of the Act was clearly bad in law and should, therefore, be set aside. In support of this submission, he relied on the order of the Tribunal, in the case of R.Krishnarjunan v. ITO in IT Appeal No. 128 (Coch.) of 1986. As regards the merits of the case, he submitted that Rs. 21,500 received from the employer cannot be brought to tax, as according to him, the same was exempt under Section 10(70) of the Act. According to him, the onus of bringing Rs. 21,500 to tax was on the ITO as the provisions of Section 17(5) of the Act were not applicable in the instant case. In support of his submissions, he relied on number of decisions in the cases of Makesh Anantrai Pattani {supra), CIT v. ED. Sheppard [1963] 48 ITR 237 (SC), Parimisetti Seetharamamma (supra), Jai Karan Kohli v. CIT [1980] 124 ITR 706 (Delhi), CIT v. Ajit Kumar Bose [1987] 165 ITR 90 (Cal.) and CIT v. Jamini Mohan Kar [1989] 176 ITR 127 (Cal.). He, therefore, urged that the assessment framed under Section 143(5) read with Section 143(2) of the Act should be quashed. In any event, Rs. 21,500 should be deleted from the total income of the assessee.

9. The learned representative for department, on the other hand, strongly supported the order of the first appellate authority. In this connection, he invited my attention to Section 143(2)(b) of the Act, along with Explanation thereto to urge that the provisions for re-opening the assessment under Section 148 of the Act were quite different from the provisions contained in Section 143(2) of the Act.

In this view of the matter, he submitted that the aforesaid order of the Tribunal should not be followed, as the Tribunal has given its decision on the issue of "re-opening" on the basis of the provisions of Section \Al(p) of the Act. As regards the merits of the case, he submitted that on plain reading of Section 17(5) of the Act, it cannot be denied that Rs. 21,500 was taxable as "Profits in lieu of salary".

In this connection, he also invited my attention to letter dated 9-7-1984 of the assessee's employer contained in the paper book filed on behalf of the assessee to impress upon me that Rs. 21,500 was agreed to be paid to the assessee "towards loss of gratuity incurred on leaving your previous employment". He, therefore, urged that I should uphold the order of the first appellate authority.

10. I have carefully considered the rival submissions of the parties and I do not find any merit in the appeal preferred by the assessee.

Under Section 143(7) of the Act, the ITO is empowered to frame the assessment on the basis of the return and accompanied documents filed by the assessee. However, Clause (b) of Sub-section (2) of the said section gives power to the ITO to frame the assessment after calling for certain evidence, which he may require. The relevant portion of Clause (b) of subsection (2) of Section 143 of the Act reads as under: - (p) whether or not an assessment has been made under Sub-section (7), the Income-tax Officer considers it necessary or expedient to verify the correctness and completeness of the return by requiring the presence of the assessee or the production of evidence in this behalf.

Explanation to this Section is very material, which was not considered by the, Tribunal in the aforesaid order. The relevant portion of the said Explanation is reproduced below:- (1) an assessment under Sub-section (7) shall be deemed to be incorrect, inadequate or incomplete in a material respect, if- (a) the amount of the total income as determined under Sub-section (7) is greater or smaller than the amount of the total income on which the assessee is properly chargeable under this Act to tax; or (b) the amount of the tax payable as determined under Sub-section (7) is greater or smaller than the amount of the tax properly payable under this Act by the assessee.

It would appear from the above that the conditions for "re-opening" the assessment under Section 147/148 are quite different from the proper assessment required to be framed under Section 143(7)/143(2) of the Act. In this view of the matter, with great respect, I am enable to follow the aforesaid order of the Tribunal. I have, therefore, no hesitation in upholding the decision of the first appellate authority that the ITO ' ad rightly taken action under Section 143(2)(b) of the Act.

11. As regards the merit, of the case, the stand taken on behalf of the assessee is still weaker. The first appelate authority has rightly referred to Section 17(5)(i) of the Act, which reads is under :- (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.

12. Letter dated 9-7-1984 addressed to the assessee by his employer makes it abundantly clear that Rs. 21,500 has been credited to the salary account "towards loss of gratuity incurred on leaving your previous employment". In this view of the matter, I do not find any infirmity in the action of the Income-tax authorities bringing to tax Rs. 21,500 in the hands of the assessee. I have carefully gone through the various reported decisions cited on behalf of the assessee.

However, none of them would be of any help to the assessee, as the facts and circumstances obtaining in the instant case are quite different from the one considered in the reported cases. In this view of the matter, I do not deem it fit to discuss the same at length.