judgement:
Appeal No.232 of 1960.
Appeal from the Judgment and Order dated October 6, 1958, of the Bombay High Court in Income Tax Reference No. 10 of 1958.
R. J. Kolah, Dwaraka Das, section N. Andley, Rameshwar Nath, J. B. Dadachanji and P. L. Vohra for the Appellants.
Hardyal Hardy and D. Gupta for the Respondent.
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 to a certificate of the High Court of Bombay against the judgment and order of that Court in Income tax Reference No. 10 of 1958, answering the question referred to it against the assesses whose legal representatives are 744 the appellants before, us, the respondent being the Commissioner of Income tax.
The facts which have given rise to the appeal are that the late Mr. Annantrai P. Pattani, hereinafter called the assessee was, by Hazur Order dated December 10, 1937, appointed the Chief Dewan of Bhavnagar State.
On January 15, 1948, the Maharaja of Bhavnagar introduced responsible Government in his State 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. Premchand 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 instructions 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 rendered 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 745 date.
The assessability of this sum of Rs. 5 lacs was raised in the course of the assessment proceedings for the assessment year 1951 52 and at the request of the ' assessee which is stated to be oral the Maharaja wrote on March 10, 1953, the following: "I confirm that in June 1950, 1 gave you a sum of rupees five lacs (Rs. 5,00,000) which wag a gift as a token of my affection and regard for you and your family.
This amount was paid to you by Premchand Roychand & Sons according to my letter of 31st May, 1950, 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 section 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 conscientiously to us and our State".
We would, therefore, hold that the amount of Rs. 5 lacs is a taxable receipt falling under Section 7(1) read with Explanation 2.
" At the instance of the assessee the following question of law was referred to the High Court: 746 "Whether the sum of Rs. 5 lacs has been properly ,brought to tax in the hands of the assessee for the assessment year 1951 52?" and a further question as to the applicability of section 4(3) (vii) of the Income tax Act was not referred on the ground that it did not arise out of the order of the Tribunal.
The High Court, on the findings given by the Tribunal came to the conclusion that section 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 therefore it could not be treated as a mere gift by an employer 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 section 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 nonrecurring 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 representatives 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 section 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 747 Maharaja had granted to the assessee a monthly pension of Rs. 2,000, which was paid to the assessee even after the merger and of the establishment of the United States of Saurashtra from out of the public revenue.
At the time when Rs. 5,00,000 were paid, the State of Bhavnagar as such had ceased to exist.
The Maharaja was no longer a Ruling Chief but was the Governor of the State of Madras.
The order by which Messrs. Premchand Roychand & Sons, Bombay, 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 described 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.
The Income tax Appellate Tribunal took into account the two documents the first of which has been described as an order of December 27, 1950, which was treated as a "contemporaneous document" and the other the letter of March 10, 1953, which was about two years later.
The Tribunal did not accept the correctness of what was stated in the letter but attached a great deal of importance to the document of December 27, 1950, which the Tribunal thought was a con temporaneous document.
It appears to us that the Tribunal was in error in treating the document of December 27, 1950, as a contemporaneous document and because of this erroneous approach the finding that it has given cannot be treated as a finding of fact which should bind the court in its decision.
It is obvious that the reason why the 748 Tribunal attached all this importance to the document of December 27, 1950, was that it was contemporaneous.
It would be difficult to accept that a document written six months after the fact of payment could be termed as contemporaneous document particularly when the object of that document was only to instruct an accountant as to how he should make a particular entry.
The letter which was written by the Maharaja on March 10, 1953, was rejected because of the circumstances of the case one of which was the contemporaneous document.
It does not appear to us that the Tribunal gave sufficient or any consideration to the fact that the Maharaja had already passed an order of a liberal and almost generous grant of a pension of Rs. 2,000 per mensem which was in lieu of the services rendered by the assessee both to the State as well as to the Maharaja and his family and that pension was ordered before the merger of the State and when the employment of the assessee as the Dewan terminated.
According to what was stated in the letter of the Maharaja dated March 10, 1953, the sum of Rs. 5,00,000 was given as a gift in token of Maharaja 's affection and regard for the assessee and the assessee 's family.
There is no reason shown why the Maharaja should have aided and abetted the assessee in escaping income tax.
The only reason stated by the Tribunal is based on a wrong assumption as to the nature of the document of December 27, 1950.
The payment of Rs. 5,00,000 was sought to be brought within the purview of section 7(1) of the Act read with explanation (2).
This section at the relevant time provided: section 7(1) "The tax shall be payable by an assessee under the head "Salaries" in respect of any salary or wages, any annuity, pension or gratuity and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are due to him from; whether paid or not or are paid by or on behalf of. . . any private employer. . . . .
Explanation 2: A payment due to or received by 749 an assessee from an employer or former employer or from a provident or other fund, is to the extent to, which it does not consist of contributions by the ', assessee or interest on such contributions a profit received in lieu of salary for the purpose of this subsection, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services;. . . .
Counsel for the appellants contended that the payment did not fall within this section because it was a gift made on account of personal qualifications and was a testimonial unconnected with any service rendered.
The submission was that the assessee had already been compensated for his services to the Maharaja personally and the State and this sum of Rs. 5 lacs was a gift in token of affection and regard and not as a payment in consideration of the services already rendered to the State or the Maharaja or both.
It will not be inappropriate to mention that in the document dated December 27, 1950, it is stated that Rs. 5,00,000 was paid to the assessee as ex Dewan of Bhavnagar State in consideration of his having rendered loyal and meritorious services to Bhavnagar State.
There is no mention in the document of December, 1950, of any services rendered to the Maharaja and it does not seem to have been considered by the Tribunal as to why the Maharaja should make out of his personal account the gift of such a large amount for something which was not done for the Maharaja specifically, particularly when the services to the State and to the Maharaja and his family had already been well compensated.
This lends support to the submission of the appellants that the amount was paid merely as a gift in token of Maharaja 's affection and regard for the assessee.
Mr. Kolah for the appellants relied on several cases in support of his contention that the amount was not liable to tax under section 7.
In Beynon vs Thorpe (1) the assessee resigned his position as a Managing Director of the Company; did no work for the company; did (1) 95 750 not attend any Board meetings and received no remuneration as a Director of the Company.
It was, however, a custom of the company to give to its retiring employees voluntary pension or allowance and the company voted a pension of pound 5,000 a year to the assessee but this resolution was rescinded and by another resolution pound 5,000 was voted to the assessee" not as or because he is a Director but as a personal gift".
The assessee was assessed under Schedule 'E ' in respect of both the pension and the final payment but these assessments were discharged on appeal by the Special Commissioners who decided that the allowances were gifts of personal nature only.
It was hold that the payments were not income assessable to income tax in the hands of the assessee.
Rowlatt, J., said at p. 14: "Now the question is whether this ceases to be a mere gift because what has led to it is a past employment, an employment which has ceased.
It has been made abundantly clear by the Court in Scotland in Duncan 's case(1) that this sort of sums received by a person cannot possibly be put as receipts from his office or in respect of his office or employment, and they said in terms of that kind in a case like this that these emoluments cannot be taxed under Schedule 'E ', and I am bound to say I think that goes a very long way to conclude this case.
But it is said that nevertheless they are in respect of the employment.
Well, it seems to me that is a complete fallacy.
It is nothing but a gift moved by the remembrance of past services already efficiently remunerated as services in themselves; it is merely a gift moved by that sort of gratitude or that sort of moral obligation if you please: it is merely a gift of that kind.
In this ease it happens to be very large; in many cases it is very small, but in all the cases it seems to me, whether it is large gift like this or whether it is a small gift to a humble servant they are exactly on the same footing as gifts which are made to a child or gifts which are made to any other person whom the giver thinks he ought to supply with funds for one reason or another; and as the (1) 751 Lord President in Scotland points out it is only a matter of history that the feeling between the parties which has generated the gift arises out of an employment."
Mr. Kolah also relied on Reed vs Seymour (1).
In that case a committee of a Cricket Club granted a benefit match to a professional cricketer in their service.
Out of the profits of the benefit match the beneficiary, who was the assessee purchased a farm and assessment was made on him under Schedule 'E ' in respect of the proceeds of the benefit match but this was discharged by the General Commissioner on appeal.
This sum was held to be in the nature of a personal gift and not assessable *to income tax.
Viscount Cave in his speech posed the question which Rowlatt, J., put, i.e., "is it in the end a personal gift or is it remuneration"; if the latter it is subject to tax, if the former it is not.
In that case the test applied by Viscount Cave was that the terms of the assessee 's employment did not en title him to a benefit; the purpose for which the amount was paid was to express gratitude of the employers and of the cricket loving public for what he had done and in their appreciation of his personal qualities.
It was also stated that if the benefit had taken place after Seymour 's retirement no one would have sought to tax the proceeds as his income and the circumstance that it was given before but in contemplation of, retirement does not alter its quality and the whole sum was a testimonial and not a perquisite and therefore it was not a remuneration for services but a personal gift.
Counsel also relied on Moorehouse vs Dooland (2).
In that case a cricket professional was employed under a contract in which it was provided that collections shall be made for any meritorious performance by him in accordance with the rules for the time being of the employing Cricket League Club.
The assessee played twenty matches and on eleven occasions collections were made on his behalf under the rules of the Club and a total sum of pound 48 15s was collected.
This was sought to be taxed as fees, wages perquisites or profits (1) [1927] XI T.C. 625.(2) 752 arising from his employment.
It was held that (1) the test of liability to tax on voluntary payments from the standpoint of the person who receives it was that it accrued to him by virtue of his office or employment, i.e., byway of remuneration of his services; (2) that if the assessee 's contract of employment entitled him to receive voluntary payments and (3) that the payment was of a periodic and recurring character.
On the other hand if a voluntary payment was made in circumstances which showed that it was given by way of a present or a testimonial on grounds personal to the recipient, the proper conclusion was that the payment was not profit accruing to the recipient by virtue of his office or employment but a gift to him as an individual paid and received by reason of his personal needs or by reason of his personal qualities.
Applying these principles the proceeds were by the terms of the contract of employment received by way of remuneration and were liable to tax.
In that case the payment was treated as being subject to tax because it was substantially in respect of services and accrued to the assessee by reason of his office.
It is quite clear that had the gift been as a testimonial or a contribution for specific performance peculiarly due to the personal qualities of the recipient, it would have been treated as a mere present.
The next case relied upon was David Mitchell vs Commissioner of Income tax (1) where the test laid was whether the payment was made in appreciation of .the personality and character of the assessee or in appreciation of the professional services rendered by him in order to give him an extra profit over and above the share of profit he might get from the firm for the services rendered.
Counsel for the respondent argued that the gift made by the Maharaja was not in respect of personal qualities of the recipient but was relatable to his office although made by an ex employer and was therefore taxable; that the gift was voluntary is clear but it is not quite clear how the amount can be said to be relatable to the office held by the recipient.
Even (1) 753 according to the case of the respondent the amount was paid about two years after the assessee had ceased to be an employee of the Maharaja or the State and immediately on his ceasing to be the Dewan of Bhavnagar State, the Maharaja had granted him a pension from out of the public funds for his services to the State as Dewan and for services rendered to the Maharaja and his family a handsome and a generous monthly pension of Rs. 2,000 per mensem.
Apart from the fact that the Tribunal relied upon a document which was not contemporaneous, it seems to have overlooked the fact that there was a gap of two years before the amount of Rs. 5,00,000 was paid by the Maharaja out of his personal funds.
Counsel for the respondent relied upon a judgment of this Court in P. Krishna Xenon vs The Commissioner of Income tax, Mysore, Travancore Cochin and Coorg, Bangalore (1).
In that case the assessee was a teacher who taught his disciples Vedanta philosophy without any motive or intention of making any profit.
One of the disciples made gifts of money to him on several occasions and it was contended by the assessee that he was not liable to tax on the amounts received from his disciple as he was not carrying on any vocation.
But it was held that in teaching Vedanta philosophy the assessee was carrying on a vocation and that the payments made by the disciple were received by the recipient from his vocation.
It was also held that if the voluntary payments had been made for reasons purely personal to the donee and not connected with his office or vocation, they would not be taxable but if they were made because of the office they would be taxable.
The question was not what the donor thought he was doing but why the donee received it.
The first thing to notice about that case is that those gifts were not made by the disciple as a gift to mark his esteem and affection for his preceptor but as was stated by the disciple in his affidavit he had paid those amounts because he had obtained the benefit of the teachings by the preceptor on Vedanta.
It was found in that case and the disciple admitted (1) [1959] Supp. 1 S.C.R. 133. 754 that he had received benefit from the teaching of his preceptor and that the gifts that he had made, even though as a mark of esteem and affection, were the result of teaching imparted by the preceptor and because the amounts were paid to the preceptor as preceptor and the imparting of the teaching was the causa causans of the making of the gift,; it was not merely causa sine qua non.
The payments were repeated and came with some regularity as the disciple visited the preceptor for receiving instructions.
It was in these circumstances that this court held the payments to the preceptor as payments because of the imparting of the teaching and therefore they were income arising from the vocation of the recipient as a teacher of Vedanta philosophy.
In our opinion the sum of Rs. 5,00,000 was not paid to the assessee in token of appreciation for the services rendered as a Dewan of Bhavnagar State but as a personal gift for the personal qualities of the assessee and as a token of personal esteem.
The appeal is therefore allowed and the order of the High Court set aside and the reference is answered against the Commissioner of Income tax.
The appellants will have their costs throughout.
HIDAYATULLAH, J. I have had the advantage of reading the judgment just delivered by my brother, Kapur, J.
I regret very much my inability to agree that the appeal should be allowed and the order of the High Court set aside.
In my opinion, the High Court had correctly answered the question referred to it.
The facts of the case have been stated in detail in the judgment of my learned brother, and I need not repeat them but refer only to some of them briefly.
On June 12, 1950, a sum of Rs. 5 lakhs was given by the Maharaja of Bhavnagar to the predecessor of the appellants, who was an ex Dewan of the State.
This was paid by Messrs. Premchand Roychand & Sons, Bombay, with whom the Maharaja had an account.
There is no contemporaneous record to show why this payment was made; but it appears that when the accountant of the Maharaja enquired how the amount 755 was to be entered in the books of account, the Maharaja issued an order on December 27, 1950, to the following effect: "In consideration of Shri Annantrai P. Pattani the Ex Diwan of our Bhavnagar State having rendered 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."
After the assessment proceedings had commenced in this case, the original assessee produced a letter written by the Maharaja on March 10, 1953, as follows: "I confirm that in June, 1950, I gave you a sum of rupees five lacs (Rs. 5,00,000) which was a gift as a token of my affection and regard for you and your family.This amount was paid to you by Premchand Roychand & Sons according to my letter of 31st May, 1950, from moneys in my account with them."
The question in this case was whether section 7(1) of the Income tax Act read with Explanation 2 to that section as it stood prior to the amendment in 1955, applied to this payment.
That section, so far as it is material, is as follows: "7(1).The tax shall be payable by an assessee under the head 'Salaries ' in respect of any salary or wages, any annuity, pension or gratuity and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of any private employer;. . . . .
Explanation 2. A payment due to or received by an assessee from an employer or former employer or from a provident or other fund, is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu of salary for the purpose of this subsection, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services;. . .".
To determine whether the second Explanation applies 756 to the facts in this case, it has to be found if this pay ment was received by the assessee from a former employer by way of remuneration for past services.
The Tribunal did not accept the letter of the Maharaja, and observed as follows: "In support of the latter view Mr. Tricumdas strongly relied upon the letter dated 10 3 1953 addressed by the Maharaja to the assessee, vide para 2 above.
We have already indicated the circumstances in which that letter came to be written and would merely observe that we find it difficult to bring ourselves to believe in (sic) the contents of that letter and would leave the matter at that.
" This, in my opinion, is a finding upon the evidentiary value of the letter of the Maharaja, and though the order of the Tribunal is worded mellifluously, the Tribunal 's decision is quite clearly that it was not per suaded to accept it.
Indeed, of the two documents, greater worth has to be attached to one which was issued before the controversy started and was written not to the assessee but to the Maharaja 's accountant who enquired how the account was to be adjusted.
The use of the word 'contemporaneous ' to describe the order to the accountant meant no more than this that it was earlier in time and very soon after the amount was given.
The Tribunal did not rely on any extra neous evidence in reaching its conclusion, but on something which had proceeded from the Maharaja himself.
The motive of the Maharaja may be irrelevant, because what has to be seen is not why the payment was made but for what the assessee had received it.
The Maharaja no doubt had been generous in fixing the pension at Rs. 2,000 per month.
But the payment of such a large sum was not just bounty but to reward the past services, which judged from the scale of the pension had not adequately been paid for in the past.
In this connection, the words of the Maharaja himself (and what better evidence can there be?) were that the amount was paid "in consideration of Shri Annantrai P. Pattani the Ex Dewan of our Bhavnagar State having rendered loyal and meritorious services Rs. 5,00,000 are given to him as gift".
757 The word gift ' does not alter the nature of the payment.
The Maharaja indeed made a gift, as he had stated over again; but this order quite clearly disclosees that it was by way of remuneration for past services.
The case, therefore, falls within the ruling of the a Supreme Court reported in P. Krishna Menon vs The Commissioner of Income tax, Mysore, Travancore Cochin and Coorg, Bangalore (1), and is indistinguishable from it.
In the earlier case of this Court, the person who gave the money did not even mention any past services; but this Court found that because the recipient had taught him Vedanta philosophy, the payment was really in the nature of remuneration for past services.
The facts in P. Krishna Menon 's case (1) were that the assessee was teaching his disciples Vedanta philosophy without any motive or intention of making a profit out of such activity.
One J. H. Levy who used to go to Travancore from England at intervals attended his teachings.
Levy had an account with Lloyd 's Bank at Bombay, and on December 31, 1944, Levy transferred the entire amount of Rs. 2,41,103 11 3 to the credit of an account which Levy got the assessee to open in his ' own name.
Levy made further remittances and by August 19, 1951, had paid about Rs. 4,50,000.
It was held by this Court that the assessee was carrying on a vocation.
In deciding the question whether the amounts were assessable to tax, this Court observed as follows: ". it seems to us that the present case is too plain to require any authority.
The only point is, whether the moneys were received by the appellant by virtue of his vocation.
Mr. Sastri contended that the facts showed that the payments were purely personal gifts.
He drew our attention to the affidavit of Levy where it is stated 'all sums of money paid into his account by me have been gifts to mark my esteem and affection for him and for no other reason '.
But Levy also there said, 'I have had the benefit of his teachings on Vedanta '.
It is important to remember however that the point is not what the donor (1) [1959] Supp.1 S.C.R. 133.96 758 thought he was doing but why the donee received it".
Sarkar, J., then referred to the dictum of Collins, M. R., in Herbert vs Mc Quade (1), which may be quoted here: "Now that judgment, whether or not the particular facts justified it, is certainly an affirmation of a principle of law that a payment may be liable to income tax although it is voluntary on the part of the persons who made it, and that the test is whether, from the standpoint of the person who receives it, it accrues to him in virtue of his office; if it does, it does not matter whether it was voluntary or whether it was compulsory on the part of the persons who paid it.
That seems to me to be the test; and if we once get to this that the money has come to or accrued to, a person by virtue of his office it seems to me that the liability to income tax is not negatived merely by reason of the fact that there was no legal obligation on the part of the persons who contributed the money to pay it." The learned Judge also referred to the observations of Rowlatt, J., in Reed vs Seymour (2) and of Viscount Cave, L. C., in Seymour vs Reed (3), and observed that the real question was, is the payment in the nature of a personal gift or is it a remuneration?, and quoted as the reply the words of the Lord Chancellor "If the latter, it is subject to the tax; if the former, it is not." Sarkar, J., also referred to the observations of Lord Ashbourne in Blakiston vs Cooper (4), which were: "It was suggested that the offerings were made as personal gifts to the Vicar as marks of esteem and respect.
Such reasons no doubt played their part in obtaining and increasing the amount of the offerings, but I cannot doubt that they were given to the vicar as vicar and that they formed part of the profits accruing by reason of his office.", and concluded as follows: "We have no doubt in this case that the imparting (1) (3) (2) (4) [1909] A.C. 104.
759 of the teaching was the causa causans of the making of the gift; it was not merely a causa sine qua non.
The payments were repeated and came with the same regularity as Levy 's visits to the appellant for receiving instructions in Vedanta.
We do not feel impressed by Mr. Sastri 's contention that the first payment of Rs. 2,41,103 11 3 was too large a sum to be paid as consideration.
In any case, we are not concerned in this case with that payment.
We are concerned with payments which are of much smaller amounts and as to which it has not been said that they were too large to be a consideration for the teaching.
And one must not forget that these are cases of voluntary payments and the question of the appraisement of the value of the teaching received in terms of money is not very material.
If the first payment was too big to have been paid for the teaching received, it was too big to have been given purely by way of gift.
" In my opinion, the case of this Court concludes the matter, and 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.
I thus agree with the High Court in the answer which it gave, in agreement on facts with the Tribunal, and the reasons for which the answer was given.
I would, therefore, dismiss the appeal with costs.
BY COURT: In view of the majority judgment of the Court, the appeal is allowed with costs throughout.
Appeal allowed.


judgement:
Appeal No. 517 of 1958.
Appeal from the judgment and order dated October 31, 1957, of the Kerala High Court in O. P. No. 215 of 1957.
G. B. Pai and Sardar Bahadur, for the appellant.
Hardyal Hardy and D. Gupta, for the respondents.
November 29.
The Judgment of the Court was delivered by SHAH, J.
C. A. Abraham hereinafter referred to as the appellant and one M. P. Thomas carried on business in food grains in partnership in the name and style of M. P. Thomas & Company at Kottayam.
M. P. Thomas died on October 11, 1949.
For the account years 1123, 1124 and 1125 M.E. corresponding to August 1947 July 1948, August 1948 July 1949 and August 1949 July 1950, the appellant submitted as a partner returns of the income of the firm as an unregistered firm.
In the course of the assessment proceedings, it was discovered that the firm had carried on transactions in different commodities in fictitious names and had failed to disclose substantial income earned therein.
By order dated November 29, 1954, the Income Tax Officer assessed the suppressed income of the firm in respect of the assessment year 1124 M.E. under the Travancore Income Tax Act and in respect of assessment years 1949 50 and 1950 51 under the Indian Income Tax Act and on the same day issued notices under section 28 of the Indian Income Tax Act in respect of the years 1949 50 and 1950 51 and 767 under section 41 of the Travancore Income Tax Act for the year 1124 M.E., requiring the firm to show cause why penalty should not be imposed.
These notices were served upon the appellant.
The Income Tax Officer after considering the explanation of the appellant imposed penalty upon the firm, of Rs. 5,000 in respect of the year 1124 M. E., Rs. 2,O00 in respect of the year 1950 51 and Rs. 22,000 in respect of the year 1951 52.
Appeals against the orders passed by the Income Tax Officer were dismissed by the Appellate Assistant Commissioner.
The appellant then applied to the High Court of Judicature of Kerala praying for a writ of certiorari quashing the orders of assessment and imposition of penalty.
It was claimed by the appellant inter alia that after the dissolution of the firm by the death of M. P. Thomas in October, 1949, no order imposing a penalty could be passed against the firm.
The High Court rejected the application following the judgment of the Andhra Pradesh High Court in Mareddi Krishna Reddy vs Income Tax Officer, Tenali (1).
Against the order dismissing the petition, this appeal is preferred with certificate of the High Court.
In our view the petition filed by the appellant should not have been entertained.
The Income Tax Act provides a complete machinery for assessment of tax and imposition of penalty and for obtaining relief in respect of any improper orders passed 'by the Income Tax authorities, and the appellant could not be permitted to abandon resort to that machinery and to invoke the jurisdiction of the High Court under article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Tribunal.
But the High Court did entertain the petition and has also granted leave to the appellant to appeal to this court.
The petition having been entertained and leave having been granted, we do not think that we will be justified at this stage in dismissing the appeal in limine.
On the merits, the appellant is not entitled to relief.
The Income Tax Officer found that the appellant had, with a view to evade payment of tax, (1) 768 deliberately concealed material particulars of his income.
Even though the firm was carrying on transactions in food grains in diverse names, no entries in respect of those transactions in the books of account were posted and false credit entries of loans alleged to have been borrowed from several persons were made.
The conditions prescribed by section 28(1)(c) for imposing penalty were therefore fulfilled.
But says the appellant, the assessee firm had ceased to exist on the death of M. P. Thomas, and in the absence of a provision in the Indian Income Tax Act whereby liability to pay penalty may be imposed after dissolution against the firm under section 28(1)(c) of the Act, the order was illegal.
Section 44 of the Act at the material time stood as follows: "Where any business,. carried on by a firm. has been discontinued . every person who was at the time of such discontinuance . a partner of such firm,. shall in respect of the income, profits and gain of the firm be jointly and severally liable to assessment under Chapter IV for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.
" That the business of the firm was discontinued because of the dissolution of the partnership is not disputed.
It is urged however that a proceeding for imposition of penalty and a proceeding for assessment of income tax are matters distinct, and section 44 may be resorted to for assessing tax due and payable by a firm business whereof has been discontinued, but an order imposing penalty under section 28 of the Act cannot by virtue of section 44 be passed.
Section 44 sets up machinery for assessing the tax liability of firms which have discontinued their business and provides for three consequences, (1) that on the discontinuance of the business of a firm, every person who was at the time of its discontinuance a partner is liable in respect of income, profits and gains of the firm to be assessed jointly and severally, (2) each partner is liable to pay the amount of tax payable by the firm, and (3) that the provisions of Chapter, so far as may be, apply to such assessment.
The liability declared by section 44 is 769 undoubtedly to assessment under Chapter IV, but the expression "assessment" used therein does not merely mean computation of income.
The expression "assessment" as has often been said is used in the Income Tax Act with different connotations.
In Commissioner of Income Tax, Bombay Presidency & Aden vs Khemchand Ramdas (1), the Judicial Committee of the Privy Council observed: "One of the peculiarities of most Income tax Acts is that the word "assessment" is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable and sometimes the whole procedure laid down in the Act for imposing liability upon the tax payer.
The Indian Income tax Act is no exception in this respect. . ".
A review of the provisions of Chapter IV of the Act sufficiently discloses that the word "assessment" has been used in its widest connotation in that chapter.
The title of the chapter is "Deductions and Assessment".
The section which deals with assessment merely as computation of income is section 23; but several sections deal not with computation of income, but determination of liability, machinery for imposing liability and the procedure in that behalf.
Section 18A deals with advance payment of tax and imposition of penalties for failure to carry out the provisions there in.
Section 23A deals with power to assess individual members of certain companies on the income deemed to have been distributed as dividend, section 23B deals with assessment in case of departure from taxable territories, section 24B deals with collection of tax out of the estate of deceased persons; section 25 deals with assessment in case of discontinued business, section 25A with assessment after partition of Hindu Undivided families and sections 29, 31, 33 and 35 deal with the issue of demand notices and the filing of appeals and for reviewing assessment and section 34 deals with assessment of incomes which have escaped assessment.
The expression "assessment" used in these sections is not used merely in the sense of computation of income and there is in our judgment no ground for holding (1) 770 that when by section 44, it is declared that the partners or members of the association shall be jointly and severally liable to assessment, it is only intended to declare the liability to computation of income under section 23 and not to the application of the procedure for declaration and imposition of tax liability and the machinery for enforcement thereof.
Nor has the expression, "all the provisions of Chapter IV shall so far as may be apply to such assessment" a restricted content: in terms it says that all the provisions of Chapter IV shall apply so far as may be to assessment of firms which have discontinued their business.
By section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee.
It is true that this liability arises only if the Income tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case.
The penalty is not uniform and its imposition depends upon the exercise of discretion by the Taxing authorities; but it is imposed as a part of the machinery for assessment of tax liability.
The use of the expression "so far as may be" in the last clause of section 44 also does not restrict the application of the provisions of Chapter IV only to those which provide for computation of income.
By the use of the expression "so far as may be" it is merely intended to enact that the provisions in Ch.
IV which from their nature have no application to firms will not apply thereto by virtue of section 44.
In effect, the Legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place.
It is enacted manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms.
By a fiction, the firm is deemed to continue after discontinuance for the purpose of assesment under Chapter IV.
The Legislature has expressly enacted that the provisions of Chapter IV shall apply to the assessment of 771 a business carried on by a firm even after discontinuance of its business, and if the process of assessment includes taking steps for imposing penalties, the plea that the Legislature has inadvertently left a lacuna in the Act stands refuted.
It is implicit in the contention of the appellant that it is open to the partners of a firm guilty of conduct exposing them to penalty under section 28 to evade penalty by the simple expedient of discontinuing the firm.
This plea may be accepted only if the court is compelled, in view of unambiguous language, to hold that such was the intention of the Legislature.
Here the language used does not even tend to such an interpretation.
In interpreting a fiscal statute, the court cannot proceed to make good deficiencies if there be any: the court must interpret the statute as it stands and in case of doubt in a manner favourable to the tax payer.
But where as in the present case, by the use of words capable of comprehensive import, provision is made for imposing liability for penalty upon tax payers guilty of fraud, gross negligence or contumacious conduct, an assumption that the words were used in a restricted sense so as to defeat the avowed object of the Legislature qua a certain class will not be lightly made.
Counsel for the appellant relying upon Mahankali Subbarao vs Commissioner of Income Tax (1), in which it was held that an order imposing penalty under section 28(1)(c) of the Indian Income Tax Act upon a Hindu Joint Family after it had disrupted, and the disruption was accepted under section 25A(1) is invalid, because there is a lacuna in the Act, submitted that a similar lacuna exists in the Act in relation to dissolved firms.
But whether on the dissolution of a Hindu Joint Family the liability for penalty under section 28 which may be incurred during the subsistence of the family cannot be imposed does not fall for decision in this case: it may be sufficient to observe that the provisions of section 25A and section 44 are not in pari materia.
In the absence of any such phraseology in section 25A as is used in section 44, no real analogy between the content of that section and section 44 may be assumed.
Undoubtedly, (1) 772 by section 44, the joint and several liability which is declared is liability to assessment in respect of income, profits or gains of a firm which has discontinued its business, but if in the process of assessment of income, profits or gains, any other liability such as payment of penalty or liability to pay penal interest as is provided under section 25, sub section
(2) or under section 18A sub sections
(4), (6), (7), (8) and (9) is incurred, it may also be imposed, discontinuation of the business notwithstanding.
In our view, Chief Justice Subba Rao has correctly stated in Mareddi Krishna Reddy 's case (supra) that: "Section 28 is one of the sections in Chapter IV.
It imposes a penalty for the concealment of income or the improper distribution of profits.
The defaults made in furnishing a return of the total income, in complying with a notice under sub section
(4) of section 22 or sub section
(2) of section 23 and in concealing the particulars of income or deliberately furnishing inadequate particulars of such income are penalised under that section.
The defaults enumerated therein relate to the process of assessment.
Section 28, therefore, is a provision enacted for facilitating the proper assessment of taxable income and can properly be said to apply to an assessment made under Chapter IV.
We cannot say that there is a lacuna in section 44 such as that found in section 25A of the Act.
We are unable to agree with the view expressed by the Andhra Pradesh High Court in the later Full Bench decision in Commissioner of Income Tax vs Rayalaseema Oil Mills (1), which purported to overrule the judgment in Mareddi Krishna Reddy 's case (supra).
We are also unable to agree with the view expressed by the Madras High Court in section V. Veerappan Chettiar vs Commissioner of Income Tax, Madras (2).
In the view taken by us, the appeal fails and is dismissed with costs.
(1) Appeal dismissed.

dataset_name: IN-Abs

summary:
The appellant who was carrying on business in food grains in partnership with another person submitted the returns of the income of the firm for the accounting years even after his partner 's death.
It was found that certain income of the firm was concealed and the Income tax Officer not only assessed the firm to tax for the suppressed income but also imposed penalties for concealing the said income.
Appeals to the higher income tax authorities failed and the appellant then applied to the High Court for a writ of certiorari quashing the orders of assessment and imposition of penalty on the ground inter alia that the firm was dissolved by his partner 's death and no penalty could be imposed after dissolution of the firm, The High Court rejected the petition.
On appeal with the certificate of the High Court, Held, that by virtue of section 44 and other provisions of the Income Tax Act a partner of a dissolved partnership firm may not only be made liable to assessment for income tax for the accounting years but despite dissolution of the firm he may be made liable to pay penalty for concealing the income of the firm under section 28(1)(c) of the Act.
The analogy of dissolution of a Hindu joint Family does not apply to dissolution of a partnership.
Mareddi Krishna Reddy vs Income tax Officer, Tenali, , approved.
Commissioner of Income tax vs Ravalaseema Oil Mills, and section V. Veerappan Chettiar vs Commissioner of Income tax, Madras, , disapproved.
Mahankali Subbarao vs Commissioner of Income tax, , distinguished.
The Legislature intended that the provisions of Ch.
IV of the Act shall apply to a firm even after discontinuance of its business.
In interpreting a fiscal statute the Court cannot proceed to make good deficiencies if there be any.
In case of doubt it should be interpreted in favour of the tax payer.
The expression "assessment" has different connotations an has been used in its widest connotation in Ch.
IV and section 44 97 766 he Act.
It is not restricted only to computation of tax but includes imposition of penalty on tax payers found in the process of assessment guilty of concealing income.
Commissioner of Income tax, Bombay Presidency and Aden vs Khemchand Ramdas, , referred to.
The Income tax Act provided a complete machinery for obtaining relief against improper orders passed by the Income tax Authorities and the appellant could not be permitted to abandon that machinery, and invoke the jurisdiction of the High Court under article 226 of the Constitution against the orders of the taxing authorities.


judgement:
Appeals Nos. 490 and 491 of 1958.
Appeals from the judgment and decree dated February 18, 1955, of the Madras High Court in Second Appeals Nos.
2038 and 2039 of 1950.
N. R. Raghavachariar, M. R. Krishnaswami and T. V. R. Tatachari, for the appellant.
R. Ganapathi Iyer and D. Gupta, for the respondent.
November 29.
The Judgment of the Court was delivered by KAPUR, J.
Two suits were brought by the appellants for a declaration against the levy of sales tax by the State of Madras and an injunction was also prayed for.
Both the suits were decreed by the Subordinate Judge of Salem and the decrees were confirmed on appeal by the District Judge of Salem.
Two appeals were taken to the High Court by the State of Madras against those decrees and by a judgment dated February 18, 1955, the decrees were set aside by a common judgment.
Against these decrees the appellants have brought these appeals by a certificate of that Court.
The appellants are merchants dealing in cotton yarn.
They obtained a license under section 5 of the Madras General Sales Tax Act (Act IX of 1939), hereinafter referred to as the 'Act '.
This license exempted 738 them from assessment to sales tax under section 3 of the Act on the sale of cotton yarn and on handloom cloth "subject to such restrictions and conditions as may be prescribed including conditions as to license and license fees".
The license was issued on March 31,1941, and was renewed for the following years.
On September 20, 1944, the Commercial Tax Authorities made a surprise inspection of the premises of the appellants and discovered that they were maintaining two separate sets of account on the basis of one of which the appellants submitted their returns to the Department.
Because the other set of account books showed black market activities of the firm Balakrishna Chetty was prosecuted and sentenced to six months ' imprisonment for an offence connected with the breach of Cot.
ton Yarn Control Order.
During the pendency of those proceedings the Deputy Commercial Tax Officer made assessments for the years.
1943 44 and 1944 45, the tax for the former was Rs. 37,039 and for the latter Rs. 3,140.
The appellants unsuccessfully appealed against these assessments and their revisions also failed.
On August 24, 1945, the appellants brought a suit for a declaration and injunction in regard to the first assessment alleging that the assessment was against the Act.
On September 2, 1946, a similar suit was brought in regard to the second assessment.
It is out of these suits that the present appeal has arisen.
The controversy between the parties centres round the interpretation of the words "subject to" in section 5 of the Act.
The High Court has held that on a true interpretation of the provisions of the Act and the rules made thereunder, the observance of conditions of the license was necessary for the availability of exemption under section 5; that as the appellants had contravened those conditions they were liable to pay tax for both the years notwithstanding the license which had been issued to them under section 5 of the Act.
it will be convenient at this stage to refer to the provisions of the Act which are relevant for the purpose of this appeal.
section 2(b) " dealer" means any person who carries on the business of buying or selling goods;" 739 section 2(f) " "prescribed" means prescribed by rules made under this Act;".
section 3(1) "Subject to the provisions of this Act, every dealer shall pay in each year a tax in accordance with the scale specified below: (a). . . . . . (b) if his turnover ex One half of I per ceeds twenty cent of such turn thousand rupees.
over".
section 5 "Subject to such restrictions and conditions as may be prescribed, including the conditions as to licenses and license fees, the sale of bullion and specie, of cotton, of cotton yarn and of any cloth woven on handlooms and sold by persons dealing exclusively in such cloth shall be exempt from taxation under Section 3".
section 13 "Every dealer and every person licensed under section 8 shall keep and maintain a true and correct account showing the value of the goods sold and paid by them; and in case the accounts maintained in the ordinary course, do not show the same in an intelligible form, he shall maintain a true and correct account in such form as may be prescribed in this behalf.".
The following rules are relevant for the purpose of this appeal and we quote the relevant portions: R. 5 "(1) Every person who (a). . . . . (b) deals with cotton and/or cotton yarn, (c). . . . . . (d). . . . . . (e) shall if he desires to avail himself of the exemption provided in sections 5 and 8 or of the concession of single point taxation provided in section 6, submit an application in Form I for a licence and the relevant portion of Form III is as follows: "Form III Cotton Licence to a dealer in Cotton yarn cloth woven on handlooms 740 See rule 6(5).
Licence No. dated having paid a licence fee of Rs. (in words) hereby licensed as a dealer in Cotton/Cotton yarn Cotton woven on handlooms for the year ending at (place of business) subject to the provisions of the Madras General Sales Tax Act, 1939, and the rules made thereunder and to the following conditions:".
R. 8 "Every licence granted or renewed under these rules shall be liable to cancellation by the Deputy Commercial Tax Officer in the event of a breach of any of the provisions of the Act, or of the Rules made thereunder or of the conditions of the licence.
" The contention raised on behalf of the appellants was that as long as they held the licence it was immaterial if they were guilty of any infraction of the law and that they were not liable to any assessment of sales tax under the provisions of the Act and the only penalty they incurred was to have their licence cancelled and/or be liable to the penalty which under the criminal law they had already suffered.
The contention comes to this that in spite of the breaches of the terms and conditions of the licence, having a licence was sufficient for the purpose of exemption under the Act.
This contention, in our opinion, is wholly untenable.
Section 3 is the charging section and section 5 gives exemption from taxation but that section clearly makes the holding of a licence subject to restrictions and conditions prescribed under the provisions of the Act and the rules made thereunder because the opening words of that section are "subject to such restrictions and conditions as may be prescribed." Under B. 13 an important condition imposed under the Act is the keeping by the dealer and every person licensed of true and correct accounts showing the value of the goods sold and paid by him.
Next there is r. 5 of the General Sales Tax Rules which provided 741 that if any person desired to avail himself of the exemption provided in section 5, he had to submit an application in Form I for a licence and the Form of the licence shows that the licence was subject to the provisions of the Act and the rules made thereunder which required the licensee to submit returns as required and also to keep true accounts under section 13.
This shows that the giving of the licence was subject to certain conditions being observed by the licensee and the licence itself was issued subject to the Act and the rules.
But it was contended that the words "subject to" do not mean "conditional upon" but "liable to the rules and the provisions" of the Act.
So construed section 5 will become not only inelegant but wholly meaningless.
On a proper interpretation of the section it only means that the exemption under the licence is conditional upon the observance of the conditions prescribed and upon the restrictions which are imposed by and under the Act whether in the rules or in the licence itself ; that is, a licensee is exempt from assessment as long as he conforms to the conditions of the licence and not that he is entitled to exemption whether the conditions upon which the licence is given are fulfilled or not.
The use of the words "subject to" has reference to effectuating the intention of the law and the correct meaning, in our opinion, is "conditional upon".
The appellants have been found to have contravened the provisions of the Act as well as the rules and therefore it cannot be said that they have observed the conditions upon which the exemption under the licence is available.
In that view of the matter, it was rightly held that they were not exempt from assessment under the Act.
The appeals are therefore dismissed with costs.
Appeals dismissed.

summary:
The appellants, who were dealers in Cotton yarn, obtained a license under the Madras General Sales Tax Act, 1939 (IX of 1939).
Section 5 of that Act exempted such dealers from pay ment of sales tax under section 3 of the Act subject to such restrictions and conditions as might be prescribed, including the conditions as to licenses and license fees.
Section 13 required a licensee to keep and maintain true and correct accounts of the value of the goods sold and paid by him.
Rule 5 of the General Sales Tax Rules provided that any person seeking exemption under section 5 of the Act must apply for license in Form 1 which made the license subject to the provisions of the Act and the rules made thereunder.
The appellants on surprise inspection were found to maintain two separate sets of accounts, on the basis of one of which they submitted their returns and the other 737 showed black market activities.
The question for determination in the appeal was whether the appellants who had been refused exemption and were assessed to tax, could claim exemption under the Act.
Held, that the question must be answered in the negative.
Section 5 of the Madras General Sales Tax Act, 1939, pro perly construed, leaves no manner of doubt that an exemption from assessment thereunder is clearly conditional upon the observance by the assessee of the conditions and restrictions imposed by the Act, either in the rules or in the license itself, and the words 'subject to ' used by the section means "conditional upon".
It was not correct to say that licensee was exempt from assessment so long as he held the license notwithstanding any breach of the provision of the law and that the only penalty he could be subjected to was the cancellation of his license or criminal prosecution.


judgement:
Appeal No. 395 of 1959.
Appeal by special leave from the Award dated November 25, 1957 of the Industrial Tribunal, Bombay, in Reference (I. T.) No. 24 of 1956.
N. C. Chatterjee, D. H. Buch and K. L. Hathi, for the appellants.
M. C. Setalvad, Attorney General for India, J. B. Dadachanji and section N. Andley, for the respondent Nos. 1 and 2.
M. C. Setalvad, Attorney General for India, Dewan Chaman Lal Pandhi and I. N. Shroff, for the respondent No. 3. 1960.
November 30.
The Judgment of the Court was delivered by WANCHOO, J.
This is an appeal by special leave in an industrial matter.
It appears that the appellants were originally in the service of the Scindia Steam Navigation Co. Ltd. (hereinafter called the Scindias).
Their services were transferred by way of loan to the Air Services of India Limited (hereinafter referred to as the ASI).
The ASI was formed in 1937 and was 813 purchased by the Scindias in 1943 and by 1946 was a full subsidiary of the Scindias.
Therefore from 1946 to about 1951, a large number of employees of the, Scindias were transferred to the ASI for indefinite periods.
The Scindias had a number of subsidiaries and it was usual for the Scindias to transfer their employees to their subsidiary companies and take them back whenever they found necessary to do so.
The ' appellants who were thus transferred to the ASI were to get the same scale of pay as the employees of the Scindias and the same terms and conditions of service (including bonus whenever the Scindias paid it) were to apply.
The Scindias retained the right to recall these loaned employees and it is the case of the appellants that they were entitled to go back to the Scindias if they so desired.
Thus the terms and conditions of service of these loaned employees of the ASI were different from those employees of the ASI who were recruited by the ASI itself.
This state of affairs continued till 1952 when the Government of India contemplated nationalisation of the existing air lines operating in India with effect from June 1953 or thereabouts.
When legislation for this purpose was on the anvil the appellants felt perturbed about their status in the ASI which was going to be taken over by the Indian Air Lines Corporation (hereinafter called the Corporation), which was expected to be established after the , No. XXVII of 1953, (hereinafter called the Act) came into force.
They therefore addressed a letter to the Scindias on April 6, 1953, requesting that as the Government of India intended to nationalise all the air lines in India with effect from 1 June, 1953, or subsequent thereto, they wanted to be taken back by the Scindias.
On April 24, the Scindias sent a reply to this letter in which they pointed out that all persons working in the ASI would be governed by cl. 20 of the Air Corporation Bill of 1953, when the Bill was enacted into law.
It was also pointed out that this clause would apply to all those actually working with the ASI on 103 814 the appointed day irrespective of whether they were recruited by the ASI directly or transferred to the ASI from the Scindias or other associated concerns.
It was further pointed out that if the loaned employees or others, employed under the 'ASI, did not want to join ,the proposed Corporation they would have the option not to do so under the proviso to cl.
20(1) of the 'Bill; but in case any employee of the ASI whether loaned or otherwise made the option not to join the proposed Corporation, the Scindias would treat them as having resigned from service, as the Scindias could not absorb them.
In that case such employees would be entitled only to the usual retirement benefits and would not be entitled to retrenchment compensation.
Finally, it was hoped that all those in the employ of the ASI, whether loaned or otherwise, having been guaranteed continuity of employment in the new set up would see that the Scindias would not be burdened with surplus staff, requiring consequential retrenchment of the same or more junior personnel by the Scindias.
On April 29, 1953, a reply was sent by the union on behalf of the appellants to the Scindias.
It was pointed out that the loaned staff should not be forced to go to the proposed Corporation without any consideration of their claim for re absorption into the Scindias.
It was suggested that the matter might be taken up with the Government of India and the persons directly recruited by the ASI who were with other subsidiary companies might be taken by the proposed Corporation in place of the appellants.
It seems that this suggestion was taken up with the Government of India but nothing came out of it, particularly because the persons directly recruited by the ASI.
who were employed in other subsidiary companies did not want to go back to the ASI.
In the meantime, the Scindias issued a circular on May 6,1953, to all the employees under the ASI including the loaned employees, in which they pointed out that all the persons working with the ASI would be governed by cl.
20(1) when the Bill became law and would be absorbed in the proposed Corporation, unless 815 they took advantage of the proviso to cl.
20(1).
It was also pointed out that such employees as took advantage of the proviso to el.
20(1) would be treated as having resigned from service and would be entitled to usual retirement benefits as on voluntary retirement, and to nothing more.
It was also said that their conditions of service would be the same until duly altered or amended by the proposed Corporation.
The circular then dealt with certain matters relating to provident fund with which we are however not concerned.
It appears that the Act was passed on May 28, 1953.
20(1) of the Act, with which we are concerned, is in these terms: "(1) Every officer or other employee of an existing air company (except a director, managing agent, manager or any other person entitled to manage the whole or a substantial part of the business and affairs of the company under a special agreement) employed by that company prior to the first day of July, 1952, and still in its employment immediately before the appointed day shall, in so far as such officer or other employee is employed in connection with the undertaking which has vested in either of the Corporations by virtue of this Act, become as from the appointed date an officer or other employee, as the case may be, of the Corporation in which the undertaking has vested and shall hold his office or service therein by the same tenure, at the same remuneration and upon the same terms and conditions and with the same rights and privileges as to pension and gratuity and other matters as he would have held the same under the existing air company if its undertaking had not vested in the Corporation and shall continue to do so unless and until his employment in the Corporation is terminated or until his remuneration, terms or conditions are duly altered by the Corporation : Provided nothing contained in this section shall apply to any officer or other employee who has, by notice in writing given to the Corporation concerned prior to such date as may be fixed by the Central Government by notification in the official gazette 816 intimated his intention of not becoming an officer or other employee of the Corporation." After the Act was passed, notice was sent on June 17, 1953, to each employee of all the air companies which were being taken over by the proposed Corporation m and he was asked to inform the officer on special duty by July 10, 1953, if he desired to give the notice contemplated by the proviso to section 20(1).
A form was sent in which the notice was to be given and it was ordered that it should reach the Chairman of the Corporation by registered post by July 10.
The appellants admittedly did not give this notice as required by the proviso to section 20(1).
In the meantime on June 8, 1953, a demand was made on behalf of the appellants in which the Scindias were asked to give an assurance to them that in the event of retrenchment of any loaned staff by the proposed Corporation within the first five years without any fault, the said staff would be taken back by the Scindias.
Certain other demands were also made.
The Scindias replied to this letter on July 3 and pointed out that they could not agree to give an assurance to take back the loaned staff in case it was retrenched by the proposed Corporation within the next five years.
We are not concerned with the other demands and the replies thereto.
On July 8, a letter was written on behalf of the appellants to the Scindias in which it was said that the appellants could not accept the contention contained in the circular of May 6, 1953.
Though the appellants were carrying on this correspondence with the Scindias, they did not exercise the option which was given to them under the proviso to section 20(1) of the Act,.
by July 10, 1953.
First of August, 1953, was notified the appointed day under section 16 of the Act and from that date the undertakings of the "existing air companies" vested in the Corporation established under the Act (except the Air India International).
So on August:1, 1953, the ASI vested in the Corporation and section 20(1) of the Act came into force.
Hence as none of the appellants had exercised the option given to them under the proviso, they would also be governed by the said provision, 817 unless the contention.
raised on their behalf that they could in no case be governed by section 20(1), is accepted.
The tribunal came to the conclusion that, whatever the position of the appellants as loaned staff from the Scindias to the ASI, as they were informed on May 6, 1953, of the exact position by the Scindias and they did not ask for a reference of an industrial dispute immediately thereafter with the Scindias and as they" ' did not exercise the option given to them by the proviso to section 20(1) before July 10, 1953, they would be governed by section 20(1) of the Act.
In consequence, they became the employees.
of the Corporation as from August 1, 1953 and would thus have no right there after to claim that they were still the employees of the Scindias and had a right to revert to them.
The consequence of all this was that they were held not to be entitled to any of the benefits which they claimed in the alternative according to the order of reference.
It is this order of the tribunal rejecting the reference which has been impugned before us in the present appeal.
The main contention of Mr. Chatterjee on behalf of the appellants is that they are not governed by section 20 (1) of the Act and in any case the contract of service between the appellants and the Scindias was not assignable and transferable even by law and finally that even if section 20(1) applied, the Scindias were bound to take back the appellants.
We are of opinion that there is no force in any of these contentions.
20(1) lays down that every officer or employee of the "existing air companies" employed by them prior to the first day of July, 1952, and still in their employment immediately before the appointed day shall become as I from the appointed day an officer or employee, as the case may be, of the Corporation in which the undertakings are vested.
The object of this provision was to ensure continuity of service to the employees of the "existing air companies" which were being taken over by the Corporation and was thus for the benefit of the officers and employees concerned.
It is further provided in section 20(1) that the terms of service etc. would be the same until they are duly altered by the Corporation.
One should have thought that the employees of the air 818 companies would welcome this provision as it ensured them continuity of service on the same terms till they were duly altered.
Further there was no compulsion on the employees or the officers of the "existing air companies" to serve the Corporation if they did not want to do so.
The proviso laid down that any officer or other employee who did not want to go into the service of the Corporation could get out of service by notice in writing given to the Corporation before the date fixed, which was in this case July 10, 1953.
Therefore, even if the argument of Mr. Chatterjee that the contract of service between the appellants and their employers had been transferred or assigned by this section and that this could not be done,, be correct, it loses all its force, for the proviso made it clear that any one who did not want to join the Corporation, was free not to do so, after giving notice upto a certain date.
Mr. Chatterjee in this connection relied on Nokes vs Doncaster Amalgamated Collieries Ltd. where it was observed at p. 1018 "It is, of course, indisputable that (apart from statutory provision to the contrary) the benefit of a contract entered into by A to render personal service to X cannot be transferred by X to Y without A 's consent, which is the same thing as saying that, in order to produce the desired result,, the old contract between A and X would have to be terminated by notice or by mutual consent and a new contract of service entered into by agreement between A and Y." This observation itself shows that a contract of service may be transferred by a statutory provision; but in the present case, as we have already said, there was no compulsory transfer of the contract of service between the "existing air companies", and their officers and employees to the Corporation for each of them was given the option not to join the Corporation, if he gave notice to that effect.
The provision of section 20(1) read with the proviso is a perfectly reasonable provision and, as a matter of fact, in the interest of employees themselves.
But, Mr. Chatterjee argues that section 20(1) will only apply to those who were in the employ of the "existing air companies"; it would not (1) , 819 apply to those who might be working for the "existing air companies" on being loaned from some other company.
In other words, the argument is that the, appellants were in the employ not of the ASI but of the Scinaias and therefore section 20(1) would not apply to them and they would not become the employees of the Corporation by virtue of that provision when they failed to exercise the option given to them by the proviso.
According to him, only those employees of the ASI who were directly recruited by it, would be covered by section 20(1).
We are of opinion that this argument is fallacious.
It is true that the appellants were not originally recruited by the ASI.
They were recruited by the Scindias and were transferred on loan to the ASI on various dates from 1946 to 1951.
But for the purposes of section 20(1) we have to see two things: namely, (i) whether the officer or employee was employed by the existing air company on July 1, 1952, and (ii) whether he was still in its employment on the appointed day, (namely, August 1,1953).
Now it is not disputed that the appellants were working in fact for the ASI on July 1, 1952, and were also working for it on August 1, 1953.
But it is contended that though they were working for the ASI they were still not in its employment in law and were in the employment of the Scindias because at one time they had been loaned by the Scindias to the ASI.
Let us examine the exact position of the appellants in order to determine whether they were in the employ of the ASI or not.
It is not disputed that they were working for the ASI and were being paid by it; their hours of work as well as control over their work was all by the ASI.
From this it would naturally follow that they were the employees of the ASI, even though they might not have been directly recruited by it.
It is true that there were certain special features of their employment with the ASI.
These special features were that they were on the same terms and conditions of service as were enjoyed by the employees of the Scindias in the matter of remuneration, leave, bonus, etc.
It may also be that they could not be, dismissed by the ASI and the Scindias may have had to take action in case it was 820 desired to dismiss them.
Further it may be that they could be recalled by the Scindias and it may even be that they might have the option to go back to the Scindias.
But these are only three special terms of their employment with the ASI.
Subject to these special terms, they would for all purposes be the employees of the ASI and thus would in law be in the employment of the ASI both on July 1, 1952 and on August 1, 1953.
The existence of these special terms in the case of these appellants would not in law make them any the less employees of the ASI, for whom they were working and who were paying them, who had power of control and direction over them; who would grant them leave, fix their hours of work and so on.
There can in our opinion be no doubt that subject to these special terms the appellants were in the employ of the ASI in law.
They would therefore be in the employ of the ASI prior to July 1, 1952 and would still be in its employ immediately before August 1, 1953.
Consequently, they would clearly be governed by section 20(1).
As they did not exercise the option given to them by the proviso to section 20(1), they became the employees of the Corporation from August 1, 1953, by the terms of the statute.
The last point that has been urged is that even if section 20(1) applies, the Scindias are bound to take back the appellants.
Suffice it to say that there is no force in this contention either.
As soon as the appellants became by force of law the employees of the Corporation, as they did so become on August 1, 1953, in the circumstances of this case, they had no further right against the Scindias and could not; claim to be taken back in their employment on the ground that they were still their employees, in spite of the operation of section 20(1) of the Act.
Nor could they claim any of the alternative benefits specified in the order of reference, as from August 1, 1953, they are by operation of law only the employees of the Corporation and can have no rights whatsoever against the Scindias.
We are therefore of opinion that the tribunal 's decision is correct.
The appeal fails and is thereby dismissed.
There will be no order as to costs.
Appeal dismissed.

summary:
Section 20(1) of the (XXVII of 1953), read with the proviso, is a perfectly reasonable provision and in the interest of the employees and it is not correct to say that it can apply only to the direct recruits of the existing air 812 companies and not at all to loaned employees working under them.
The two conditions of its applications are (i) that the officer or employee was employed by the existing air company on July 1, 1952, and (ii) that he was still in its employment on August 1, 1953, the appointed day.
In the instant case where the appellants who had been recruited by the Scindia Steam Navigation Co., Ltd., and on purchase by it of the Air Services of India Ltd., loaned to the latter, and were working under its direction and control on and between the said dates and being paid by it, Held, that in law they were the employees of the Air Ser vices of India from the appointed day, notwithstanding the existence of certain special features of their employment, and as such governed by section 20(1) of the Act and since they did not exercise the option given to them under the proviso, they became employees of the Corporation established under the Act and ceased to have any rights against the original employers.
Nokes vs Doncaster Amalgamated Collieries Ltd., [1940] A.C. 1014, considered.