Lyons (India), Ltd. vs Income Tax Officer

Boss, J.—This is an application under Article 226 of the Constitution for Writs in the nature of mandamus, certiorari and prohibition, for cancellation of orders issued by the income tax officer, dist. V(A), Calcutta, calling upon the Petitioner to pay a sum of Rs. 21,538 under the provisions of Section 18(7) of the Indian income tax Act and also for prohibiting the Respondents from giving effect to the said orders.

The Petitioner is a company incorporated in India and carries on business at Pollock House, Calcutta.

Both the Petitioner company and one Heath and Co; (Calcutta), Ltd., are subsidiaries of J. Lyons and Co., Ltd., incorporated in the United Kingdom.

It appears that Heath and Co., Ltd., employed one J.G. Siewert in their service on salary plus commission basis by a letter dated August 11, 1938. The terms of the employment were subsequently varied by an agreement on January 23, 1946, under which the amount of monthly salary and the rate of commission were varied and certain minimum guaranteed commission was provided (by the agreement).

By arrangement with Heath and Co., Ltd., the Petitioner used to pay the salary of Mr. Siewert and included the name of Siewert in the return made u/s 21 of the Indian income tax Act.

In pursuance of a scheme of general re-organisation the services of Siewert were dispensed with from the end of February, 1948, and it is alleged that he was paid a sum of Rs. 35,248 by way of compensation for loss of office.

Heath and Co., Ltd., claimed deduction for such payment in its assessment in respect of income tax but such deduction was disallowed and the said sum suffered tax in the hands of Health and Co., Ltd.

Thereafter by a letter, dated December 12, 1950, the income tax officer, dist. V(A), ordered the Petitioner to pay a sum of Rs. 21,538 under the provision of Section 18(7) of the income tax Act, on the ground that the sum of Rs. 35,248 paid to Siewert was in the nature of a gratuity forming part of the salary and, as such, the amount should have been shown in the Return u/s 21 and the tax due should have been deducted at source.

But before issuing the said order, dated December 12, 1950, the income tax officer did not hold any enquiry nor allowed the Petitioner any opportunity of being heard in the matter.

By a letter, dated December 19, 1950, the Petitioner requested the income tax officer to send to the Petitioner a notice of demand u/s 29 of the income tax Act obviously with the object of having an opportunity to prefer an appeal from the order of the income tax officer, but the income tax officer by his letter, dated January 13, 1951, declined to issue any notice of demand u/s 29 on the ground that there was no need to issue such notice in respect of demand made u/s 18(7) of the Act for short recovery of tax at source.

By a letter, dated January 18, 1951, the Petitioner company again asked for the issue of a notice of demand u/s 29 of the Act and further pointed out that the letter of the income tax officer, dated January 13, 1951, had not been signed by the latter.

On January 27, 1951, the income tax officer sent a copy of the said letter of January 13, 1951, duly signed by him, but he did not issue any notice of demand u/s 29 of the Act.

On February 13, 1951, the Petitioner moved this Court for the reliefs stated above and a rule nisi was issued on that date.

The Respondent No. 1, the income tax officer, dist. V(A), who passed the order, dated December 12, 1950, has affirmed the affidavit in opposition, dated March 14, 1951. It is stated in the affidavit that in course of the assessment proceedings of Heath and Co., Ltd., the fact of this payment of Rs. 35,248 to Mr. Siewert was brought to the notice of the income tax officer, who was dealing with that case and he after fully investigating into the matter and after hearing the representative of Heath and Co., Ltd., was of the view that the said sum did not constitute a compensation in connection with the termination of employment but was in the nature of ex gratia payment, and the said income tax officer, therefore, refused to allow any deduction in respect of the said sum out of the profits of Health and Co., Ltd.

The deponent states that he made such enquiries as he thought fit and was satisfied that the sum paid constituted "salary" within the meaning of the income tax Act. He was acting in an executive or administrative capacity. There was no obligation upon him to hold any enquiry or give a hearing nor did the Petitioner expect or demand a hearing.

There are two letters annexed to the affidavit in opposition which were apparently filed before the income tax authorities in connection with the assessment proceedings of Heath and Co., Ltd. One of such letters is dated February 4, 1948, written by Lyons and Co., Ltd., London, to Heath and Co. (Calcutta), Ltd., and which authorised the Calcutta company to pay some amount to Mr. Siewert by way of compensation for loss of office over and above the payment of full salary due up to date (i.e., February 28, 1948) when his contract of employment was terminated and his services were dispensed with. The letter also sets out the basis on which the calculation of this amount of compensation is to be made. The other letter is dated March 21, 1949, written by Messrs. Lovelock and Lewes to the income tax officer, dist. II, who was in charge of the assessment case of Heath and Co., Ltd.

It is stated in this letter that Siewert was anxious to continue in service and was in good health and being 46 years of age when his services were dispensed with, he could reasonably be expected to continue in service up to at least the age of 55, if not more. He had been in service with Heath and Co., Ltd., for 10 years and had to be discharged for no fault of his due to general reorganisation of the office staff from the end of February, 1948. He was responsible for satisfactory development of the company''s business by introduction of various new customers during his service for 10 years. Taking into consideration all these factors and other factors, the company felt that it was under a moral liability to pay the sum of Rs. 35,248. The different items which formed the basis of calculation of Rs. 35,248 are set out in the letter. It is pointed out that the amount of compensation paid to him was not even equivalent to one year''s salary.

The assessment order made by the income tax officer in Heath and Co.''s assessment case, dated May 18, 1949, has been annexed to the affidavit in reply. It appears therefrom that the income tax officer has given his reasons for disallowing the deduction claimed in respect of the sum paid to Siewert as compensation on termination of his employment. His reasons are that as there was no contract between the company and Siewert to the effect that he would serve a number of years and a compensation would be payable to him on termination of service earlier, and as the appointment letter of Siewert stipulated that on termination of arrangement for any reason whatever he would have no claim for commission other than commission accrued due, the amount paid to Siewert on termination of service was to be regarded as ex gratia payment and so no deduction could be allowed.

It appears that Heath and Co. filed an application for review before the Commissioner of income tax u/s 33A of the income tax Act. The Commissioner in rejecting the claim of Heath and Co., Ltd., has given certain reasons in his order. He finds that as the amount paid comprised six months'' salary, passage money to United Kingdom and some portion of commission on business secured by Mr. Siewert, it was nothing but a voluntary ex gratia payment in the nature of a gratuity and the company should have deducted the tax due on such amount u/s 18(2) of the Act. He further finds that payment of such a big gratuity of Rs. 35,248 cannot be regarded as a payment by way of commercial expediency.

The Respondent No. 1 adopts the views expressed by the income tax officer, Mr. Chatterjee, and the Commissioner of income tax in Heath''s assessment case and on that basis he has passed the order, dated December 12, 1950, which is complained of in this proceeding. He does not even think it worth while to give the Petitioner a hearing although the Petitioner is a different legal entity altogether and although an independent statutory liability is sought to be foisted on the Petitioner u/s 18(7) of the Act.

The income tax officials in making assessments under the income tax Act or in determining whether a person has become liable to pay any tax under the provisions of the income tax Act are exercising quasi judicial functions. As observed by Beaumont C.J. in the case of DINSHAW DARABSHAW SHROFF Vs. COMMISSIONER OF Income Tax, CENTRAL., ,

Although, no doubt, an income tax officer making an assessment is not strictly acting as a court of law, it is clear from Section 37, income tax Act, that he is acting in a quasi judicial capacity, and he ought to conform to the mere elementary rules of judicial procedure....

It is clear that in this case their Lordships would have interfered if Section 226 of the Government of India Act, 1935, had not operated as a bar to the maintainability of the application.

In my view it is incumbent upon the income tax officer to observe the principles of natural justice and to give the person on whom tax is imposed "a fair opportunity to correct or "contradict any relevant statement prejudicial to his view" before he can be saddled with liability to pay the tax, Board of Education v. Rice [1911] A.C. 179, 182 Not only the principles of natural justice have been violated in the present case but the attitude taken up by the income tax officer (Respondent No. 1) is that his functions are executive or administrative and so there is no duty to hold any enquiry or to give any hearing to the Petitioner.

The Petitioner asked for a formal notice of demand u/s 29 of the Act but this was refused on the ground that there was no need to serve any notice u/s 29. This stand taken up by the Respondent No. 1 in course of the correspondence passing between the parties has been sought to be supported by Mr. Meyer at the hearing. I am unable to accept the contention that Section 29 has no application to a liability arising u/s 18(7) of the Act-

Section 29 is as follows:

When any tax of penalty is due in consequence of any order passed under or in pursuance of this Act the income tax officer shall serve upon the Assessee or other person liable to pay such tax or penalty a notice of demand in the prescribed form specifying the sum so payable.

It is the case of the income tax authorities that "tax is due" and further that the tax has become payable in "pursuance of "this Act", and although the Petitioner may not be an "Assessee" but is deemed to be an Assessee, he is undoubtedly "other person liable to pay such tax" within the meaning of the section I, therefore, fail to see why it was not incumbent upon the income tax officer to serve the Petitioner with a notice of demand u/s 29. It appears to me that it was obligatory upon the Respondent No. 1 to serve a notice of demand u/s 29 of the Act, though it is clear that non-service of the notice does not make the order itself bad.

Further to deny to the Petitioner an opportunity of a hearing or an opportunity to present its case before the Respondent was to deny the principles of natural justice and this, in my view, vitiates the order, dated December 12, 1950, and the steps taken pursuant thereto. The Petitioner might have placed additional materials or evidence which were not in the possession of Heath and Co., Ltd., or it might have put forward arguments upon new lines or from a completely different angle which would have convinced the income tax officer, Respondent No. 1, that the view taken by the officers in Heath''s assessment case was completely wrong.

However, the fact remains that no such opportunity was given.

Mr. Meyer has contended that the order of the Commissioner disallowing the deduction in Heath''s case is absolutely right. It is submitted that the amount paid to Siewert was a payment of a mixed nature. It was partly remuneration for past services and partly for other considerations. Reliance is placed strongly on the letter of Lovelock and Lewes and it is pointed out that "satisfactory" development of the company''s business during 10 years in which Siewert was in the company''s employment was one of the factors which weighed with the company in making the payment of the amount to Siewert and this, according to Mr. Meyer, is nothing but remuneration for past services and hence taxable u/s 7 of the Act. It is submitted that unless the payment is solely by way of compensation for loss of employment, expl. 2 of Section 7 does not apply and the Petitioner cannot avoid liability.

Mr. Meyer has drawn my attention to some decisions reported in the reports of Tax Cases. He relies on the case of Radcliffe v. Holt 11 Tax. CAS. 621 for the purpose that if any payment is made in recognition of past services that is liable to tax. It may be noted that in this case the sum was paid to the directors in addition to their ordinary remuneration for their past services. There was no question of the directors losing their office. They continued in office of the company even after payment. So this case is clearly distinguishable from the case before me.

The next case relied upon by Mr. Meyer is Weston v. Hearn 25 Tax. Cas. 425. Here also the facts are distinguishable. Here bank officials were paid a lump sum and certain National Saving Certificates on completion of 25 years'' service. It was held that the payments were gratuities by way of bonus after 25 years'' continuous service. In other words, the payments were remuneration for services rendered. In this case also no question of any loss of office arose. The officers continued in the service of the company.

Mr. Sukumar Mitra, the learned Counsel for the Petitioner, relies strongly on the case of Chibbett v. Joseph Robbinson and Sons 9 Tax Cas. 49, 60 in which Rowlatt J. held that a payment of �50,000 of 5 per cent. National War Bonds to a firm of ship managers employed by a certain steamship company upon the latter going into voluntary liquidation, as compensation for loss of office whether it was regarded as a testimonial for past services in respect of an office which had terminated, or compensation for loss of employment which need not continue but which was likely to continue, was not taxable.

It is true that in Hunter v. Dewhurst 16 Tax. Cas. 635, 653 Lord Macmillan criticised a particular passage in Rowlatt''s judgment in Chibbett''s case as too widely stated but it appears to me that the conclusion at which the learned Judge arrived in Chibbett''s case is not shaken at all by the criticism. This case has not been overruled nor adversely commented on except to the extent as criticised by Lord Macmillan as pointed out by me already.

It may be that in the case before me the company in calculating the amount of compensation paid to Siewert, took into consideration the services rendered by Siewert for development of the business of the company but that does not change the character of the payment and make the whole amount paid or any part of it, remuneration for past services. Siewert had no right to claim under his contract of service any amount in respect of any of the items which were comprised in the aggregate sum of Rs. 35,248 which was paid to him by way of compensation. The entire amount was paid to Siewert ex gratia or voluntarily for loss of office. If he remained or continued in service, then none of the items composing the figure of Rs. 35,248 would have been paid to him. The sole consideration for payment of the sum was the abrogation of Siewert''s contract of employment. It was essentially a compensation for loss of employment. The payment is described in the correspondence disclosed, as compensation for loss of employment. Of course, the description given by the parties is not conclusive, and it is a well-recognised rule that the court should not be guided by the nomenclature or the label that the parties may employ for describing the character of the payment but should find out the true nature of the payment. It should look to the substance and not to the form. Tested in that light it appears to me that the payment in question cannot be regarded as anything else than a payment solely for compensation for loss of employment within the meaning of expl. 2 of Section 7 of the income tax Act and, as such, the tax is not exigible. In the case of In Re: P.D. Khosla (1944) 13. ITR 436, 439 it appeared from the intrinsic evidence furnished by the correspondence that payment was made in consideration of something done in the past and something to be done or omitted to be done in the future, yet it was held that the payment made was solely for compensation for loss of office and no tax was payable. The recent decision of the Court of Appeal in England in the case of Henley v. Murray (Inspector of taxes) [1950] 1 All. E.R. 908 confirms the view I have taken. If there had been any term in a service agreement between Mr. Siewert and the company providing that upon termination of employment Mr. Siewert would be entitled to get a certain sum by way of compensation for loss of office then such a payment would be liable to tax. Dale v. De Soissons [1950] 2. All E.R. 460.

It was contended by Mr. Meyer that even if I am of the opinion that the Respondent No. 1 is wrong in adopting the conclusions of the income tax officer and the Commissioner of income tax in Heath''s assessment case, I have no jurisdiction to interfere as this Court is not a court of appeal. This is ordinarily true but where the inferior tribunal decides a fact which is condition precedent to the exercise of its jurisdiction, wrongly, and assumes jurisdiction which it would not have if the decision had been a correct one, the superior court has always the power to interfere and in fact it is its duty to interfere and quash the wrong decision by an order of certiorari. Queen v. The Commissioners for Special Purposes of the income tax (1881) 21 Q.B.D. 313, 319 and Rex v. City of London, etc., Rent Tribunal Ex parte Honig [1951] 1 All E.R. 195, 197-198. In the present case the jurisdiction of the income tax officer to make the Petitioner liable u/s 18(7) is dependent upon the condition precedent that there was a liability to deduct the tax at source on the part of the Petitioner in respect of the amount paid to Mr. Siewert. As in my view this jurisdictional fact does no? exist the order of the Respondent No. 1 must be held to have been passed without jurisdiction.

38.Further, it has been pointed out in the recent case of Rex v. Northumberland Compensation Appeal Tribunal [1951] 1 K.B. 711 that if the order of the inferior tribunal is a "Speaking Order", or in other words, the reasons for making the order appear on the face of the order itself, the superior court can scrutinise the merits of the decision and quash it by Certiorari if the decision of order is found to be wrong. The affidavit of the Respondent No. 1 shows that the reasons for his making the order are the reasons which are set out in the orders of the income tax officer and the Commissioner of income tax in Heath''s assessment case. This makes his order a "Speaking Order" and so this Court has power to go into the merits of his conclusion.

It was contended that the Petitioner had an alternative remedy by way of review u/s 33A of the income tax Act. I do not think that this is an adequate remedy to the Petitioner in the facts and circumstances of this case. The Commissioner has already expressed his view very definitely in Heath''s assessment case and it is extremely unlikely that he would deal with the Petitioner''s application for review, if made, with a fresh and open mind. Moreover, there has been a violation of the principles of natural justice on the part of the Respondent No. 1 in making the order complained of. So the existence of the alternative remedy is no bar to the maintainability of the present application. King v. Wendsworth Justices [1942] 1 K.B. 281.

In my view, this petition must succeed. The Rule is made absolute. The order, dated December 12, 1950, is quashed. The Respondent No. 1 is directed to forbear from giving effect to that order. The Petitioner is entitled to costs of the present proceedings.

The Rule as against the Union of India is discharged.

Rule made absolute.

Attorneys for Petitioner: Orr Dignam and Co.

Attorney for Respondent income tax officer: S.K. Mondal.