Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that theamount of Rs. 95,000 received by the assessee during this year is to be assessed only under s. 28(ii) of the IT Act, 1961, and that thereby the assessee is entitled to the deduction under s. 80S of the IT Act, 1961 ?

Sections 10(10), 17(3)(i), 28(ii)

Asst. year 1968-69

Decision in favour of Assessee, Matter remanded

Counsel Appeared

R.C. Pandey with Smt. Premlata Bansal, for the Petitioner : None, for the Respondent

ORDER

ARIJIT PASAYAT, C.J. :

On being moved by the Revenue under s. 256(1) of the IT Act, 1961 (in short, the ‘Act’), following questions have been referred for opinion of this Court by the Appellate Tribunal, New Delhi (in short, the ‘Tribunal’) :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that theamount of Rs. 95,000 received by the assessee during this year is to be assessed only under s. 28(ii) of the IT Act, 1961, and that thereby the assessee is entitled to the deduction under s. 80S of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that where s. 28(ii) applies, ss. 15/17(3)(i) of the IT Act, 1961, will not apply even though the assessee is to be described as an employee ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that for the purpose of computing the exemption on account of gratuity under s. 10(10) the word “Salary” in that section would include the commission earned by the assessee this year ? 2. Factual position, as indicated in the statement of the case is as follows: Assessee is an individual earning income from property, salary and dividends. He was one of the founder-directors of M/s Jullundur Motor Agency Private Limited Company (hereinafter referred as a company). He was originally appointed as a general manager of the company under a resolution of the Board dt. 26th Dec., 1949. In terms of that resolution, he was allowed a remuneration of Rs. 900 per month, in addition to commission at 10 per cent of net profits w.e.f. 1st Jan., 1960. By resolution dt. 31st Dec., 1959, the assessee’s designation was changed to ‘managing director’. For the asst. yr. 1968-69, relating to previous year ended on 31st March, 1968, following amounts were received by the assessee from the company : It is to be noted that company’s accounting year relevant to the said assessment year ended on 31st Dec., 1967. For the aforesaid payments, two resolutions dt. 27th Aug., 1967, and 23rd Oct., 1967, are relevant. They are as follows : 27th Aug., 1967 : “Resolved that on his retirement following the sale of the shares in the company, Shri D.R. Sondhi be paid for 1967 upto the date of his retirement commission on profits quantified at Rs. 40,000.” 23rd Oct., 1967 : “Resolved that a sum of Rs. 95,000 be and is hereby agreed to be paid to Shri D.R. Sondhi, the outgoing managing director, in lieu of his premature retirement and transfer of his shares to which he has agreed leaving no other claim by him regarding the compensation for premature retirement and annuity.” “Resolved further that Shri D.R. Sondhi be paid a sum of Rs. 25,000 for his past services to the company by way of gratuity to which Shri D.R. Sondhi agreed leaving no other claim regarding gratuity on the company.” “Further resolved that the aforesaid two amounts of Rs. 95,000 and Rs. 25,000 by way of compensation for premature retirement, annuity and Rs. 25,000 gratuity being paid to Shri D.R. Sondhi is in view of his special position in the company for his bringing the company to great success and these payments would not be treated as a precedent for the future.”

3. The AO was of the view that the assessee was an employee of the company. He held that the sum of Rs. 25,000 representing gratuity payment was exempt only upon the limit of the salary specified in s. 10(10) of the Act, and in terms of s. 17. ‘Salary’ would include commission, and it would be relevant only for assessment under the head ‘Salary’ and not otherwise. According to him, for the purpose of s. 10(10), ‘Salary’ meant only the fixed periodical payment made to a person doing other than manual mechanical work and would not cover payments of commission made/determined with reference to the profits of the employer. He allowed Rs. 6,750 as exemption out of Rs. 25,000. So far as sum of Rs. 40,000 received by the assessee is concerned, it was held that the amount would be covered by s. 28(ii) and would qualify for relief under s. 80S. Regarding payment of Rs. 95,000, it was held that payment was mixed up with the services rendered by the assessee as an employee-director and not for the services rendered in his capacity as a person controlling the majority shares of the company, who managed its affairs through such shareholding. It was held that the payment was nothing but a payment in lieu of salary within the meaning of s. 17(3)(i) of the Act, which also qualify for relief under s. 89 of the Act.

4. Matter was carried in appeal by the assessee before the AAC. The said authority held as follows : “(i) Rs. 40,000 could not be treated as capital gain as claimed by the assessee. It was not received, by way of transfer of assets. The payment was made in consideration of the assessee’s “retirement and past services”. The ITO was, therefore, justified in disallowing the assessee’s claim that it represented a capital gain. (ii) Similarly, the amount of Rs. 95,000 received by the assessee could not be treated as capital gain by any stretch of imagination. The ITO, however, was not correct in seeking to assess it under s. 17. It was assessable under s. 28(ii) because it represented compensation received by the assessee on the termination of ‘the managing agency’ and the assessee was, therefore, entitled to relief under s. 80S on this amount. (iii) The ITO was also not correct in limiting the exemption for the gratuity in terms of s. 10(10), to Rs. 6,750 against Rs. 24,000 claimed by the assessee. The assessee’s claim was in order because the expression ‘salary’ in s. 10(10) would include the commission also for the purpose of computation of the exemption thereunder. Hence the assessee was entitled to a deduction of Rs. 24,000 as against Rs. 6,750 allowed by the ITO.” Revenue carried the matter in appeal before the Tribunal challenging AAC’s conclusions. The Tribunal upheld the conclusions. On being moved, reference as aforesaid has been made.

Learned counsel for the Revenue submitted that the Tribunal lost sight of a true import of s. 17 (3)(i) and s. 28(ii) of the Act. Reliance was placed on a decision of this Court in Ishwar Dass vs. CIT (1980) 17 CTR (Del) 188 : (1981) 123 ITR 379 (Del) : TC 58R.563 to buttress the stand’. There is no appearance on behalf of the assessee when the matter was called. Sec. 17(3)(i) and s. 28(ii)(a) which are the pivotal provisions so far as the present case is concerned, read as follows : “Sec. 17. “Salary”, “perquisite” and profits in lieu of “salary” defined—For the purposes of ss. 15 and 16 and of this section : “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 compensation or other payment due to or received by : (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; (c) any person by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto; (d) any person for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business;” “Sec. 28 : Profits and gains of business or profession—The following income shall be chargeable to income-tax under the head “profits and gains of business or profession” Tribunal found that the materials on record show that there were two groups involved in the substantial ownerships of the company. Assessee, who was the managing director, went out of the picture along with his group.

The resolution dt 23rd Oct., 1967, clearly refers to the premature retirement of the assessee and the transfer of his shares while referring to the payment of Rs. 95,000. Finding was recorded by the Tribunal with reference to p. 22 of the assessee’s paper book, that the assessee and his group sold their shareholders (majority interest) in the company at the time of the assessee’s retirement. Sec. 28(ii)(a), to which we have referred to above, deals with a case where any compensation or other payment due to or received by any person, by whatever name called, was managing the whole or substantially whole of the affairs of the Indian company, or in connection with the termination of his management or the modification of the terms and conditions relating thereto. Such income shall be chargeable to income-tax under the head ‘Profits and gains’ of business or profession.

7. As the factual position noticed by AAC and the Tribunal goes to show the assessee and his group sold their shareholding (majority interest) in the company at the time of assessee’s retirement. The resolution dt. 23rd Oct., 1967, also referred to the premature retirement of the assessee. Payment was not extricably linked with theservices rendered by the assessee as an employee-director of the company, as observed by the AO. On the contrary, AAC recorded that there was some controversy between the two groups of shareholders and it was decided that in the interest of the company, one group of shareholders should part with other group in the company. Accordingly, the group headed by the assessee together with other directors representing that group resigned. As a matter of fact, the decision of this Court in case Ishwar Dass (supra) helps the case of the assessee. In that case, the effect of s. 28(ii)(a) was not considered because such a plea was raised for the first time before this Court while reference was being heard. Nevertheless, this Court observed that there was force in the contention raised by the assessee about the applicability of s. 28(ii)(a) of the Act. Not only that the Court observed that, if law permits, the assessee may refer this claim under s. 28 before any authority in accordance with law. While in civil actions, the expression “compensation” may have peculiar significance, the expression as used in the Act does not appear to besusceptible of only that meaning and no other. The primary significance of the word “compensation” is “equivalence” and the secondary or more common meaning is “something given or obtained as an equivalent”. The large number of ways in which this expression “compensation” has been interpreted has one common factor running through them all, that is, that compensation is regarded as an equivalent or recompense that makes good the lack of variation of something else. Flowing from this concept the enlargement of the meaning of this expression takes in that which compensates for loss or provision, amends, remunerates or recompenses. Our answer to the first question, therefore, is in the affirmative, in favour of the assessee and against the Revenue. In view of our answer to the first question, there is no necessity to answer the second question. So far as the third question is concerned, in view of our answer to the first question, the Tribunal shall decide afresh whether in the background of what has been held by us viz-a-viz s. 28 (ii)(a), the allowance under s. 10(10) is permissible to the assessee.

[Citation : 248 ITR 695]