S. K. Das, J. - (1.) This is an appeal on a certificate of fitness granted by the High Court of Bombay under S. 66-A(2) of the Indian Income-tax Act, 1922.
(2.) The relevant facts lie within a narrow compass. The Commissioner of Income-tax Bombay is the appellant before us and the assessee, E. D. Sheppard, is the respondent. Killick Nixon and Company was a partnership concern carrying on business on a fairly large scale in India. It owned various mills and managing agencies of a number of limited companies. This partnership firm used to employ officer-assistants, mostly Europeans, on the basis of a contract for three years; if the services of the assistants so employed were found satisfactory, extensions were invariably given after every three years on increased salary. Subject to their work being satisfactory, the assistants so employed expected to become partners of the firm one day. The assessee was one of such assistants who joined the firm in 1930. The original contract relating to the assessee's employment was not placed on record. What was placed on record as a specimen copy of the initial agreement, was the contract with one W. J. Heygate. It was undisputed that the terms of employment regarding the assessee were the same as those of the contract with W. J. Heygate. Clause 10 of the said agreement provided that notwithstanding anything contained in it, the firm might terminate the agreement without assigning any reasons after giving the assessee one calendar month's previous notice of its intention so to do. The assessee continued in the employment of the firm and his contract of service was renewed from time to time. On November l, 1947, was made the last renewal. The terms of this last renewal were the same as those of J.G. Miline, a copy of whose renewed contract was placed on record. This renewal provided for a contract of service from November 1, 1947, to October 31, 1950. Under this contract the assessee was to receive a salary of Rs. 1,200/- per month plus a commission of 2-l/2 percent on the net profits of the partnership. The Appellate Tribunal found that if the partnership had continued to do business, the assessee would have got approximately Rs. 50,000/- per annum. Sometime about the last quarter of the year 1947 the firm decided to reorganize its business and with that end in view two limited companies were floated, one was called the Kollick Industries Ltd., which was a public limited company, and the other was called Killick Nixon and Company which was a private limited company. This private limited company was to take over the business previously carried on by the partnership. This arrangement necessitated the termination of the services of the firm's employees and the assessee received a notice from the firm dated December 29, 1947. This notice stated that in view of the changes proposed, the assessee's employment with the firm would terminate as from January 31, 1948. The assessee was then about 38, years old. There were in all sixteen officers including the assessee who were employed with the firm on "contract terms '. With the exception of one all these sixteen officers were Europeans. The three years' contracts expired on different dates depending upon the original date of employment in respect of these sixteen officers. So far as the assessee was concerned, it appears that the new company styled Killick Industries Ltd., agreed to take over the services of the assessee on new terms under which his salary was increased but the commission was disallowed, but be was left in more or less the same position financially. The assessee entered the employment of Killick Industries Ltd. on these new terms on February l, 1948. Killick Nixon and Company transferred their assets to the new Company and received shares of the new companies in lieu thereof a large number of shares of Killick Industries Ltd. were put on the Indian market. The shares were of the face value of Rs. 100/- only but were quoted in the market at Rs. 130/- per share. Some of these shares were kept by the partners of Killick Nixon and Company. All the members of the covenanted staff in the partnership firms (who were officers), were given shares of Killick Industries Ltd. free of payment. The assessee received an allotment of 1700 shares of the face value of Rs. 2,21,0001-. The assessee's case was that the share were given by the partnership to the members of the staff as compensation for loss of employment resulting from premature termination of their services. The Income-tax Officer, however, sought to bring the shares of value of Rs. 2,21,000/- to tax on the footing that the shares were allotted to the assessee in consideration of past services. The assessee produced before the Income-tax Officer a letter purporting to be written by one D. R. C. Hartley on October 1, 1952 on behalf of the firm, in which the assessee was informed that the firm had caused 1,700 shares in Killick Industries Ltd. to be allotted as "compensation for loss of employment". In appeal to the Appellate Assistant Commissioner, the order passed by the Income-tax Officer bringing to tax the amount of Rs.. 2,21,000/- was confirmed. Before the Income-tax Appellate Tribunal the assessee produced an affidavit dated February 22, 1954 sworn by five out of the six partners who constituted the firm in the month of January 1948, (the sixth partner having died in the mean while) which affirmed the terms of a memorandum submitted to the Income-tax Officer by Messers Crawford Bayley and Co. on behalf of the assessee. It was recited in paragraph 8 of the affidavit that the partners had decided to discontinue the firm and prior to such discontinuance and on December 27, 1947 they wrote to each assistant who was then employed by the firm terminating his services from January 31, 1948 and stating that a further communication would be addressed to him regarding "the question of compensation for loss of employment." It was further recited in paragraph 8 that the intention of the partners on the discontinuance of the firm in causing allotments of certain shares to be made to the assistants was to compensate them for loss of employment and it was "in no sense a reward for past services'. It was then recited that all the assistants had accepted the allotment as "compensation for the loss of employment" in terms of the letter of December 27, 1947 and in view of such allotment no claim was made by any assistant against the firm and that a confirmatory letter from the partnership to the assistants was some time thereafter written "for purpose of record's.
(3.) The two members of the Tribunal differed in their views as to the true character of the payment received by the assessee. The accountant member was of the view that the assessee suffered no loss as a result of the termination of his employment with the partnership firm, because from February 1,1948, the day after the termination of his employment with the partnership, he was employed by Killick Industries, Ltd. which gave him almost the same employments; and furthermore, the payment was not made "solely for loss of employment', because the compensation was paid partly for loss of expectations and future prospects which the assessee had in the partnership firm. Lastly, the accountant member held that the employment of the assessee was terminable on one month's notice and in any event the unexpired portion of his employment would not have amounted to Rs. 2,21,000/-; therefore, the payment could not be treated as compensation for loss of employment, and at best it was a payment "under the contract" and not for "loss of the contract". The Judicial member disagreed, and expressed the view that the assessee's services were determined by the firm which was ultimately dissolved and the allotment of shares was made to the assessee "at or in connection with the termination of his employment and solely as compensation for loss of employment" and there was no material in the record to support the view that the payment was in lieu of past services. On a difference between the two members of the Tribunal, the question was referred to the President who agreed with the Judicial member and expressed the view that the payment was made to the assessee solely for loss of employment and it was immaterial that the assessee secured another employment, equally advantageous, under another employer on the next day after the termination of his employment with the partnership firm. Referring to the evidence adduced on behalf of the assessee namely the affidavit filed by the partners, the President said that there was no camouflaging as suggested by the department, and both the Judicial member and the President accepted the evidence given in support of his claim by the assessee.;