Mahesh Anantrai Pattani And Another v. The Commissioner Of Income-Tax, Bombay North,Ahmedabad

Iy6o November z9 SUPREME COURT REPORTS [1961] MAHESH ANANTRAI PATTANI AND ANOTHER v. THE COMMISSIONER OF INCOME-TAX, BOMBAYNORTH,AHMEDABAD (J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.) Income Tax-Gift or Remuneration for past services-Payment to retired Dewan. of 1-ndian State ~Ex-Ruler-Liability to· tax-Indian Income-tax Act, r922 (II of r922), s.7(r), Explanation (2). A who was the Dewan of the State of Bhavnagar before responsible government was introduced in the State, was grant-ed a monthly pension of Rs. 2,000 by the Maharaja of the State by an order dated January 15, 1948. On March I, 1948 the State of Bhavnagar was merged in the United States of Saurash-tra and the Maharajah ceased to be the Ruler of the State. Subsequently on May 31, 1950, the Maharaja directed his banker in Bombay to pay A a sum of Rs. 5 lakhs out of the amount lying to his credit an<l when he was asked for instructions as to how that sum was to be entered in the books of account he pass-ed an order on December 27, 1950, to the effect that in conside-ration of A having rendered loyal and meritorious services the said sum was given to him as a gift and that the amount should be debited to his personal expense account. The liability of the above sum for income-tax was raised during tbe course of the assessment proceedings of A for the year 1951-52, and the asses-see produced a• letter dated March IO, 1953, written by the Maharajah at the request of the former, as follows: "I confirm that in June 1950, I gave you a sum of Rs. 5 lakhs which was a gift as a token of my affection and regard for you and your family ..... .''. The Income-tax Officer held that the amount was liable to income-tax under s. 7(1), read with explanation (2), of the Indian Income-tax Act, 1922. The Appellate Tribunal took into account the two documents dated December 27, 1950, and March ro, 1953, written by the Maharajah and considered that the first which clearly mentioned why the said sum was paid to the assessee, was more reliable for the reason that it was contempo-raneous, than the second which was written more than 2 years later and the correctness of which they were not inclined to accept. The Tribunal agreed with the Income-tax Officer that the amount was a taxable receipt. Held, (per Kapur and Shah, JJ.; Hidayatullah, J., dissenting), that on the facts of the case the sum of Rs. 5 lakhs was given to the assessee not as a payment in consideration of the services already rendered by him as the Dewan of the State, but merely as a gift in token of the Maharajah's affection and regard for the assessee, and, therefore, was not liable to be assessed to tax under s. 7{I), explanation (2), of the Indian Income-tax Ac.t, r922 The Tribunal was in error in treating the document dated Mahes~ Anantrai December 27, 1950, as a contemporaneous document while as a Pattani &·Another matter of fact it was written six months after the fact of pay-v ... ... ment, and because of this erroneous approach as a result of which The Commissioner the second letter had been rejected, the finding given by the of Income-tax, Tribunal could not be treated as binding on the Court. Bombay North, v ... ... The Commissioner of Income-tax, Bombay North, Ailmedabad P. Krishna Menon v. The Commissioner of Income-tax, Mysore, Travancore-Cochin and Coorg, Bangalore, [r959] Supp. I S.C.R. 133, distinguished. Per Hidayatullah, J.-The use of the word "contempora-neous" to describe the order to the banker meant no more than this that it was earlier in time and very soon after the amount was given. The word "gift" did not alter the nature of pay-ment; the Maharaja indeed made a gift, as he had stated over again, but the order disclosed that it was by way of remunera-tion for past services. 1960 742 743 1922 133 , 744 The Tribunal was within its rights in accepting one piece of evidence in preference to another, and the finding on the evidentiary value of the letter of the Maharaja was a matter essentially for the Tribunal to decide finally. The decision in P. Krishna Menon v. The Commissioner of Income-tax, Mysore, Travancore-Cochin and Coorg, Bangalore, [r959] Supp. r S.C.R. r33, was applicable and concluded the present case. CIVIL APPELLATE JURISDICTION: 232 of 1960. Civil Appeal No. Appeal from the Judgment and Order dated Octo-ber 6, 1958, of the Bombay High Court in Income Tax Reference No. 10 of 1958. R. J. Kolah, Dwaraka Das, S. N. Andley, Rameshwar Nath, J.B. Dadachanji and P. L. Vohra for the Appel-lants. Hardyal Hardy and D. Gupta for the Respondent. 1960. November 29. The Judgment of J. L. Kapur and J.C. Shah, JJ., was delivered by Kapur, J. M. Hidayatullah, J., delivered a separate Judgment. KAPUR, J.-This is an appeal pursuant t; a certifi- Kaput ]. cate of the High Court of Bombay against the judg-ment and order of that Court in,.)ncome-tax Refe-rence No. 10 of 1958, answering the question referred to it against the assessee whose legal representatives are [1961) the appellants before us, the respondent being the · 196o . Commissioner of Income-tax. JIPattani ,. [, ][h ]" [h-A ]o, Another ••• ,,., Th e .ac " t s w h' IC h h ave given rise o . . t th e appea 1 are v. that the late Mr. Annantrai P. Pattani, hereinafter The Commissioner called the assessee was, by Hazur Order dated Decem-o/ Income-ta" her 10, 1937, appointed the Chief Dewan of Bhavnagar Bombay North, State. On January 15, 1948, the Maharaja ofBhavna-Ahmedabad gar mtro uce • d d respons1 e 'bl G overnmen m t · h' IS St ate Kapu; 1. and appointed the assessee as the Chairman of the Bhavnagar Durbar Bank but he received no salary for that post. On the same date by another Hazur Order the Maharaja granted a monthly pension of Rs. 2,000 to the assessee. The order was in the following terms:- " He looked after us well in our childhood and rendered valuable services sincerely and with single-. minded loyalty to us and our State during extremely difficult period of the last war and thereafter, which has enhanced the prestige and prosperity of the State and given the State and the people a place of pride in India. In appreciation of this, it is (hereby) decided to grant him a monthly pension of Rs. 2,000 two thousand which is the monthly salary he is drawing at present. Date 22-1-1948." On May 31, 1950, the Maharaja directed Messrs. Prem- chand Roychand & Sons, Bombay, with whom he had an account "to pay by cheque to Mr. A.P. Pattani Rs. 5 lacs out of the amount lying to the credit of my account with you." This sum was paid to the assessee on June 12, 1950. It is stated that the accountant of the Maharaja asked for instruction1> as to how that amount of Rs. 5 lacs was to be adjusted in the accounts and on December 27, 1950, the Maharaja made the following order:- "In consideration of Shri Annantrai P. Pattani the Ex-Diwan of our Bhavnagar State having render-ed loyal and meritorious services Rs. 5,00,000 (Rupees Five Lacs) are given to him as gift. Therefore, it is ordered that the said amount should be debited to our Personal Expense Account." On March 1, 1948, Bhavnagar State was merged in the United States of Saurashtra and the Maharaja ceased to be the ruler of the said State as from that date. The assessability of this sum of Rs. 5 lacs was 744 745 746 746 747 748 ............................................................................................................. raised in the course of the assessment proceedings for M h a es h-A nan 1 rai . tlie assessment year 1951-52 and at the request of the Pattani & Another assessee which is stated to be oral the Maharaja wrote v. on March 10, 1953, the following: The Commissioner The Commissioner 0! Income-tax, "I confirm that in June 1950, I gave you a sum of 0! Income-tax, rupees five lacs (Rs. 5,00,000) which was a gift as a Bombay North, Ahmedabad token of my affection and regard for you and your family. This amount was paid to you by Premcha.nd Kapur J. Roychand & Sons according to my letter of 31st May, 19.50, from moneys in my account with them." On these facts the Income-tax Officer held that Rs. 5,00,000 received on June 12, 1950, was liable to income-tax under s. 7(1) read with explanation (2) of that section as it stood before the amendment by the Finance Act, 1955. The assessee took an appeal to the Appellate Assistant Commissioner which was dismissed. Against that order an appeal was taken to the Income-tax Appellate Tribunal but the Tribunal also dismissed the appeal. The Tribunal held that looking to the circumstances they would attach more importance to the "contemporaneous document, i.e., the order of the 27th December, 1950"; which clearly mentioned why the sum of Rs. 5,00,000 was paid to the assessee. The Tribunal was not inclined to "believe in the contents of that letter and would leave the matter at that." The reference is to the letter of the Maharaja dated March 10, 1953. The Tribunal further held that there was no distinction between the Maha-raja and the State and "assuming for a moment that this view of ours is not found to be correct, still it is clear from the Huzur Order No. 13 dated 22-1-1948 (vide para 2 above) that the assessee rendered services not only to the State, if it is distinct from the Maharaja but to the Maharaja as well; for that Huzur Order clearly refers to assessee rendering "valuable services sincerely and conscien-tiously to us and our State". \Ve would, therefore, held that the amount of Rs. 5 lacs is a taxable receipt falling nnder Section 7(1) read with Explanation 2." At the instance of the assessee the following question of law was referred to the High Court: "Whether the sum of Rs. 5 lacs has been properly I96o . brought to t t tax in the hands of the assessee for the assessmen year 1951 -52[?" ]. [. ] M h h A , a es nantrat . brought to t t tax Pattani & Another assessmen year and a a further question as to the applicability of s. as to the applicability of s. to the applicability of s. the applicability of s. applicability of s. of s. s. 4(3) v. and a a further question as to the applicability of s. as to the applicability of s. to the applicability of s. the applicability of s. applicability of s. of s. s. 4(3) The Commissioner (vii) of the Income-tax Act was not referred on the 1b"'0"',~-tox, ground that it did not arise out of the order of the B[o/ ]ont ay north, T 'b l Ahmedabad rI una ' ............................................................................................................. The High Court, on the findings given by the Tri-Kapur J. bunal came to the conclusion thats. 7(1) explanation (2) of the Income-tax Act applied. It held that it was not possible to regard the receipt of this sum of money by the assessee as a windfall nor as a personal gift of the nature of a testimonial; that the gift was not made in appreciation of the personality or character of the assessee nor was it symbolical of its appreciation of his personal qualities; that the consideration for the gift was in terms stated to be past services and there-fore it could not be treated as a mere gift by an em-ployer to an employee when the Court did not know what motivated the making of that gift. On the facts of the case the High Court reached the conclusion, though with some reluctance, that the case fell within the ambit of s. 7(1), Explanation (2). The High Court also held that this sum could not be exempted from tax on the ground that it was merely a casual or non-recurring receipt because once connection with the employment was established there was no question of considering the recurring or the casual nature of the receipt. During the pendency of the proceedings in the High Court the assessee died and his heirs and legal repre-sentatives were brought on the record and hence they are the appellants. It was argued on behalf of the appellants that the facts showed that the sum paid cannot fall within s. 7(1), Explanation (2), of the Income-tax Act. By Hazur Order dated January 22, 1948, the Maharaja had compensated the assessee for' valuable services rendered and single-minded loyalty to the Maharaja and to his State during the difficult period of the war and thereafter, which had added to the prestige and prosperity of the State and in appreciation of that the 2 S.C.R. SUPREME COURT REPORTS 747 Maharaja had granted to the assessee a monthly pen-i96o sion of Rs. 2,000, which was paid to the • assessee even M h h A a es nan 1 rai . after the merger and of the establishment of the Pattani & Another United States of Saurashtra from out of the public v. revenue. At the time when Rs. 5,00,000 were paid, The Commissioner the State of Bhavnagar as such had ceased to exist. of Income-tax, The Maharaja wa.s no longer a Ruling Chief but was B°;;_~~~a~:~h, the Governor of the State of Madras. The order by which Messrs. Premchand Roychand & Sons, Bombay, Kapur J. were directed to pay the sum of Rs. 5,00,000 out of the account of the Maharaja does not mention any reason for payment. When as is alleged an accountant of the Maharaja asked as to how that amount of Rs. 5,00,000 was to be adjusted in the accounts, the Maharaja wrote on December 27, 1950, what is des-cribed as an order and directed that the sum should be debited to his Personal Expense Account. It also stated, why it is not clear, that that sum was to be given to the assessee in consideration of the assessee's loyal and meritorious services as a gift. When asked later to clarify the reasons for making this gift the Maharaja made it clear that the gift was as a token of affection and regard for the assessee and his family and that the amount was paid by Messrs. Premchand Roychand & Sons from out of the private monies of the Maharaja with that firm. 748 749