LexTHE COMMISSIONER OF INCOME-TAX BOMBAY versus E. D. SHEPPARD
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.. I S.C.R. SUPREME COURT REPORTS 16:J THE COMMISSIONER OF INCOME·TAX BOMBAY v. E. D. SHEPPARD (S. K. DAS, J. L. KAPUR, A. K. SARKAR, and RAGHUBAR DAYAL, JJ.) Income Tax-Partnership terminating service• of employ•• by notice-Transfer of assets of partnership to new compani .. - Firm giving shares of new company to employee-Such shar .. , if compensation for loss of employment-Employee, if liable to tax-Indian Income-tax Act, 1922 (11 of 1922), •· 7 (1) Explanation 2. In 1930 the respondent assessee was employed as an offi- cer·assistant in a partnership concern on the basis of a contract fo,· three years. The agreement provided that the firm might terminate the contract after giving the assessee one calendar month's notice of its intention to do so. Subject to his work being satisfactory. the assessee, like other aasistants employed in the firm, expected to become a partner of the firm one day. The assessee continued in the employment of the firm and his cont- ract of service was renewed from time to time. In I 94 7 the firm decided to re-organise its business and with that end in view two limited companies were floated, Killick Industries Ltd. which was a public iimited company, and Killick Nixon and Company, a private limited company, which was to take over the business previously carried on by the partnership. On December 29,1947, the respondent received a notke from the firm stating that in view of the changes proposed the assessee'• employment with the firm would terminate as fromJanuary 31, I 948. The new company Killick Industries Ltd., agreed to take over the services of the assessee an:l on February 1,1948, he entered their employment. The partnership firm transferred their assets to the new companies and received shares of the new companies in lieu thereof. All the members of the covenanted staff in the partnership firm were given shares of Killick In- dustries Ltd., free of payment, and the assessee received an allotment of I, 700 shares of the fase value __ of Rs. 2 ,21,000j-. The assessee's case was that the shares were given by the partner .. ship to the members of the staff as co-npensation for loss of employment resulting from premature termination of their services. The Income-tax Officer, however, sought to bring the shares of the value of Rs. 2,21,000 1- to tax on the footing 1901 1962 T Iii Ccmmissionn of lnc"1Tl1·ta:c, Bctdqf •• I:.' D. Sl.1pprnd 164 SUPREME COURT REPORTS [1964] VOL. that the shares were allotted to the assessec in consideration of past services. The Appellate Tribunal held on the evidence before it that the payment was made solely as compensation for loss of employment, and was not liable to tax in view of Explanation 2 to s. 7 (I) of the Indian Income-tax Act, 1922. It was contended for the Commissioner of Income-tax that under the Explanation, the word "compensation" meant what wM payable or compellable at law as compen«1tion, and any payment received by an assessec from his employer or former employer was profit received in lieu of salary, and that judged from that point of view, the payment of Rs. 2,21,000/- to the assessee was not compensation solely for loss of employment. Held (Raghubar Dayal,]., di .. w1ling), that the expression ucompensation for loss of employment" in Explanation 2 to •· 7 (I) of the Indian Income-tax Act, 1922, referred to any payment made, whether under a legal liability or voluntarily, to compensate or act as a Solatium for the lo" of employment suffered by the employee, and was not restricted to compensa- tion which was payable or compellable at law; and that the payment of Rs. 2,21,000/ ., found by the Tribunal to be a payment made solely a> compensation for lo<S of employment was not liable to tax, because the Explanation excepted such payment from being treated as a profit received In lieu of salary. Chibbet v. JoReph Robinaon & So118, (1924) 9 Tax Cas. 49, Commis8ioner of Inwme-tax v. Shaw Wallau and Company, (193~) L. R. 59 I. A. ?.06, W. A. Guff v. Commi•.ioner of Income-tax, Bombay City, (19571 31 I. T. R. 826, Commissioner of Income-tax Hyderabad v. Va:ir Sultan and Sona, [1959] Supp. 2 S. C. R. 375 and Mahesh Ananlrai Pattani v. Th• Commisaioner of Income-tax, Bomhay North, Ahmedabcul, [1961] 2 S. C.R. 742, relied on. Per Das, Kapur and Sarkar, JJ.-No distinction could be made between compensation for lo's of employment and compensation for loss of pr
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