SHRIYANS PRASAD JAIN THROUGH LEGAL HEIRS VS INCOME TAX OFFICER, 1994 PTD-SUPREME-COURT-INDIA 1459 (1993)

(Appeal by special leave from the judgment and order dated March 16, 1979, of the Income-tax Settlement Commission in Application No.6/ 1 /59/78-IT).

(a) Income-tax---

----Reassessment---Income or capital---Compensation for premature termination of employment---Original held not taxable---Commission of inquiry---Finding that terms for period of employment and provision for compensation for premature termination forged pursuant to scheme to defraud revenue-- Reassessment notice---Application to Settlement Commission---Settlement Commission relying upon finding of Commission of inquiry and holding major part of compensation to be taxable---Valid and correct---Indian Income-tax Act, 1922, S.7(1), Expln. 2.

By a letter dated October 11, 1943, the appellant had been appointed as officer in charge of the Bombay office of a company at a fixed salary of Rs.4,000 per month free of income-tax. He claimed that the appointment was for a period of 25 years and that he was to be paid compensation on premature termination at Rs.40,000 per annum for the un expired period. Through a letter dated February 14, 1950, his services were terminated with effect from November 30, 1949, and a sum of Rs.7 Lakh was paid to him on that occasion. In proceedings for assessment for the assessment year 1950-51, the appellant claimed that the amount was not taxable inasmuch as it represented compensation for loss of employment. The Income Tax Officer rejected the claim, but the Appellate Assistant Commissioner and the Appellate Tribunal, on appeal, accepted it. The letter dated October 11, 1943, had been produced by the appellant but when the matter was before the Appellate Tribunal, the Department was not permitted to challenge the genuineness of that letter. Ultimately, in 1965, the High Court, on a reference, held that the sum of Rs.7 Lakh represented compensation for loss of office and was, therefore, not taxable. In the meantime, in 1956, a retired judge of the Supreme Court was appointed as a commission of Inquiry to look into the affairs of certain companies controlled by the Dalmia Jain group, including the company which employed the appellant. In its report submitted in June, 1962, the Commission of Inquiry found that the terms about the period of employment and provision for compensation in the letter dated October 11, 1943, were an afterthought and were in pursuance of a scheme devised latter to defraud the exchequer and that the letter was forged and ante-dated in furtherance of the' scheme. In December, 1965, a notice under section 148 of the Income Tax Act, 1961, was issued to the appellant on the basis of the finding of the Commission of Inquiry. The appellant challenged the validity of the notice for reassessment by way of a writ-petition. The petition was dismissed and the Income Tax Officer completed the assessment in 1977. At that stage the appellant applied to the Settlement Commissioner under section 245C and, after inquiry, the Settlement Commission held that the sum of Rs.7 lakh was of a composite character and apportioned it into two amounts one of Rs.2 lakh representing compensation not subject to tax and the other of Rs.5 lakh taxable under section. 7 of the Indian Income-tax Act, 1922. On appeal to the Supreme Court:

Held, dismissing the appeal, (i) that, though the finding recorded by the Commission of Inquiry might not be binding upon the appellant in proceedings under the Income Tax Act, 1961, they did constitute relevant material. Further, the appellant had been given an opportunity to meet them.

(ii) That the Supreme Court would not go into questions of fact in an appeal from the decision of the Settlement Commission or reverse the findings of fact recorded by the Commission. The Supreme Court would interfere with the order of the Settlement Commission only if it was found to be contrary to the provisions of the Income-tax Act.

Jyotendrasinhji v. S.I. Tripathi (1993) 201 ITR 611 (SC) and R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission (I. T. and W. T.) (1989) 176 ITR 169 (SC) fol.

(iii) That on the fact the Settlement Commission had given eight reasons to support its findings that 'a major portion of the sum of Rs.7 lakh was taxable under section 7. Even assuming that one of them was nor sustainable, the other reasons were perfectly adequate to support the finding of the Commission.

(iv) That the Settlement Commission was right in holding that a substantial portion of the sum of Rs.7 lakh should be treated as taxable under and by virtue of Explanation 2 to section 7 of the Indian Income-tax Act, 1922.

Decision of the Settlement Commission affirmed.

CIT v. S. P. Jain (1965) 56 ITR 724 (Bom.) and Shriyans Prasad Jain v. R. K. Bhalla; ITO (1974) 94 ITR 34 (Bom.) ref.

(b) Income-tax---

----Settlement Commission---Findings of fact---Supreme Court---Will not interfere in appeal---Constitution of India, Art.136---Indian Income Tax Act, 1961, S.245-D.

B. Sen, Senior Advocate, (S : R. Agarwal, Ms. Sarita Kapur and Ms. Bina Gupta, Advocates, with him) for Appellants.

P. S. Poti, Senior Advocate (D. S. Mehra, V. U. K. Eradi, Ms. Malini Poduval and Ms. A. Subhashini, Advocates, with him) for Respondents.

JUDGMENT

B.P. JEEVAN REDDY, J. ---This appeal is preferred against the judgment and order of the Settlement Commission (Income-tax and Wealth Tax). New Delhi, disposing of the application. filed by the appellant with certain directions. The matter pertains to the assessment year 1950-51.

The appellant, Shriyans Prasad Jain (since deceased), was appointed as the officer-in-charge of the Bombay office of the Dalmia Cement and Paper Marketing Co. Ltd. (D.C.P.M.) by an order dated October 11, 1943. His salary was fixed at Rs.4,000 per month, free of income-tax: According to the appellant, the -order of appointment further stipulated that the period of employment shall be 25 years and that in case his services are terminated before the expiry of the said period, he shall be paid compensation at the rate of Rs.40,000 per annum for the un expired period. The Revenue, of course, disputes the aforesaid stipulations relating to period of service and the provision for compensation in case of premature termination.

Through a letter dated February 14, 1950, the services of the appellant were terminated with effect from November 30, 1949. An amount of Rs.7 lakh was paid to the appellant on that occasion.

In the assessment proceedings relating to the assessment year 1950-51, the appellant claimed that the said sum of Rs.7 lakh received by him was not taxable inasmuch as it represented compensation for loss of employment He submitted that, according to the law as it then stood the amount paid by wav of compensation towards loss of employment was not taxable. The Income Tax Officer did not agree with the submission and included the said amount in his income. On Appeal, the Appellate Assistant Commissioner upheld the appellant's plea and allowed the appeal, whereupon the Revenue went in appeal to the Tribunal. This appeal was dismissed on August 13, 1956. An application filed by the Revenue under section 66(1) of the Indian Income-tax Act, 1922, was dismissed by the Tribunal. An application under section 66(2) was also dismissed by the High Court, whereupon the Revenue approached this Court under Article 136 of the Constitution. This Court directed the Tribunal to refer the following question for the opinion of the High Court under section 66(2) of the 1922 Act: "Whether, on the facts and circumstances of the case, the sum of Rs.7 lakh is liable to tax under section 7 of the Indian Income-tax Act, 1922?"

On February 8, 1965, the High Court at Bombay answered the reference in favour of the appellant and against the Revenue. It held that the sum of Rs.7 lakh represented compensation for loss of office and was therefore, not taxable. The decision is reported in CIT v. S.P. Jain (1965) 56 ITR 724. Against the order of the Bombay High Court, the Revenue filed a special leave petition in this Court but withdrew it later.

On. December 11, 1956, the Government of India appointed Justice Vivian Bose, a retired Judge of this Court, as Commission of Inquiry to look into the affairs of certain companies controlled by the Dalmia-Jain group. The Commission submitted its report in June, 1962. The Commission found several irregularities and fraudulent transactions by and. between the companies controlled by the Dalmia-Jain group including the Dalmia Cement and Paper Marketing Co. Ltd. The Commission also dealt with the aforesaid payment of Rs.7 lakh to the appellant. The main question considered in regard was the truth and genuineness of the letter dated October 11, 1943. In other words, the question was whether there was any such letter of appointment prescribing the period of employment as 25 years and also providing for the amount of compensation payable in case of premature terminature. The findings of the Commission relevant for the purpose of this appeal are to the following effect:

"Actually there was no decision about this (about the genuineness of the letter dated October 11, 1943) on the merits because of a slip at the original stage, the question of its genuineness was shut out at the later stages. But, so far as we are concerned, it would not have mattered whether the matter was considered and finally decided on the merits or not. Even if there was a final decision on the merits, it would be final only for the purposes of those Tribunals and would not bind other Tribunals or this Commission investigation the matter afresh for any other purposes. "

"The question before the income-tax authorities was whether the receipt of Rs.7 lakhs was taxable or not in the hands of Shriyans Prasad Jain. We are not, however, looking into this question, viz., taxability or otherwise of the payment of Rs.7 lakh. What we are concerned with is the propriety of the transaction itself. "'

The Commission had further observed:

"We do not deny that Shri Shriyans Prasad worked for D. C. P. M. from 1943 and that he drew remuneration specified in the liquidator's letter of May 1, 1953, to Messrs D. P. Khosla and Co., nor did we questioned that the income-tax was paid as stated during that period. We have questioned in another place the reasonableness of the terms but not the fact of appointment on those terms. What we are questioning here are the terms about the period of employment and the provision about the payment of compensation for the breach that finds place in the impugned letter. In our opinion, that was an afterthought. We are of the view that those terms do not appear in the original contract. The scheme to defraud the exchequer by these ingenious devices was devised later and the impugned letter was forged and ante-dated in furtherance of that scheme.

In the circumstances indicated above, specially regarding the destruction of the letter immediately after the Inspector had drawn up his report and in face of the fact that the Inspector had questioned the genuineness of this document and initialed it affixed the rubber stamp of his office to it; and also in view of the failure of Shriyans Prasad Jain to produce before the Commission the original letter which was with him and very important fact that during this period there were some payments of compensation for the supposed breaches of managing agencies and selling agencies agreements in a number of other cases, we are entitled to draw the conclusion is one more instance of a devise adopted to evade and avoid payment of substantial income-tax. "

[Quoted from the paper-book supplied by the appellant].

On December 23, 1965, a notice was issued by the Revenue calling upon the appellant to explain why his assessment relating to the assessment year 1950-51 be not reopened on the basis of the information which had come into the possession of the Department. The findings of the Justice Vivian Bose Commission were sought to be made 'the basis for such action. The appellant submitted a reply to the said notice after considering which a notice under section 148 of the Income Tax Act, 1961, was, issued on March 26, 1966. Soon after receiving the said notice, the appellant approached the Bombay High Court byway of a writ petition under Article 226 of the Constitution challenging the r, validity of the notice under section 148 of the Income Tax Act, 1961. On July 4, 1973 (Shriyans Prasad Jain v. R. K. Balla, ITO (1974) 94 ITR 34 (Bom.)), the writ petition was dismissed by the High Court. The High Court opined (at page 53):

"If upon consideration of material before him, the Income-tax Officer takes a prima facie view and entertains a reasonable belief that the assessee omitted or failed to disclose truly and fully all material and primary facts, then action under section 147(a) is always justified. It is conceivable that such reasonable belief as to omission or failure to disclose may arise as a result of information which may come to his knowledge, but even in such cases, if the assessee has omitted or failed to disclose truly and fully all material and primary facts, it will always be open to take action under section '147(a). Under section 151(1), no notice shall be issued under section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice. The notice under section 148 in the present case has been issued after the expiry of eight years from the end of the assessment year 1950-51, but. the Central Board of Direct Taxes, upon a. report submitted by the Income-tax Officer, has accorded its sanction for initiation of proceedings against the assessee for the assessment year 1950-51 under section 147(a) of the Act. In that view of the matter, it is not possible to take the view that the initiation of proceedings can be regarded as time-barred.

Accordingly, the notice for initiation of reassessment proceedings will have to be upheld in so far as it relates to the item of Rs.7 lakh paid by the company to the petitioner. "

The appellant sought to question the judgment of the Bombay High Court by way of special leave petition in this Court, which was rejected on February 24, 1975. The Income-tax Officer completed the reassessment on July. 30, 1977. At that stage, the appellant approached the Settlement Commission by way of an application under section 245C of the Act. After making the necessary inquiry and after hearing the appellant, and Commission passed order on March 16, 1979. The Commission held that the amount of Rs.7 lakh received by the appellant was of a composite character. It apportioned the said sum into Rs.2 lakh representing compensation for loss of employment (not subject to tax) and Rs.5 lakh taxable under section 7 of the 1922 Act. On this basis, it computed the income of the appellant for the said assessment year and directed him to pay the tax in four equal quarterly instalments, alongwith interest, in the manner specified by it. The Commission further opined that since the issue involved in the settlement is one of law, the question of granting immunity from penalty and prosecution does not arise.

Mr. B. Sen, learned counsel for, the appellant, urged the following contentions:

(1). The Settlement Commission was in error in placing upon the appellant the onus of proving that the said payment was solely in connection with the termination of employment within the purview of Explanation 2 to section 7 of the 1922 Act. In a reassessment proceeding, the burden lies upon the Revenue to establish that there has been concealment and that there has been an escapement of income.

(2) The Revenue led no evidence whatsoever to establish its case and to establish the taxability of the said amount or any part thereof. It merely relied upon the report of the Justice Vivian Bose Commission which was in no way binding upon the appellant. The findings of the Commission have no evidentiary value.

(3) That the Settlement Commission was in error in holding that the letter dated February 11. 1943, was not true and genuine. The said letter was produced by the appellant in the original assessment proceedings and both the Appellate Assistant Commissioner and the Tribunal had in fact gone into the question of its genuineness and found it to be a genuine document. The said finding had become final and could not have been reopened either in reassessment proceedings or by the Settlement Commission in proceedings under Chapter XIX-A of the Act.

(4) The finding of the Tribunal with respect to the said letter is based on no evidence. It is a case of pure guess.

Shri P. S. Poti, learned counsel for the Revenue, supported the reasoning and conclusion of the Settlement Commission. He submitted that the findings recorded by the Commission are not subject to review in this appeal. Learned counsel submitted that in the absence of the appellant establishing that the order of the Commission is violative of any of the provisions of the Act, no relief can be granted to him in this appeal. He relied upon the decision of this Court in Jyotendrasinhji v. S. I. Tripathi (1993) 201 ITR 611.

Section 7 of Indian Income-tax Act, 1922, read as follows at the relevant time:

"Salaries.--(1) The tax shall be payable by en 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, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer ; and for the purposes of this subsection advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received:

[Provisos and Explanation 1 to section 7 omitted as unnecessary.]

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 purposes of this subsection, unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services:

Provided that nothing herein contained shall render liable to income-tax any payment from a provident fund to which the Provident Funds Act, 1925 (XIX of 1925), applies, or any payment from a recognised provident fund within the meaning of Chapter IX-A, if such payment is exempted from payment of income-tax under the provisions of Chapter IX-A, or any payment from an approved superannuation fund within the meaning of Chapter IX-B made on the death of a beneficiary or in lieu of or in commutation of an annuity, or by way of refund of contributions on the death of a beneficiary or on his leaving the employment in connection with which the fund is established?"

[Subsection (2) omitted as unnecessary].

The Revenue relied upon Explanation 2 aforesaid. According to it, the said sum of Rs.7 lakh was a payment received by the appellant from his employer, that it did not comprise or consist of contributions made by the appellant and inasmuch as the appellant has failed to prove that the said payment was made solely as compensation for the loss of employment, the amount is taxable. The Revenue submitted that the said amount can be characterised as remuneration for past services as well. On the other hand, the appellant's case was that the said amount was paid to him solely as compensation for loss of employment and, hence, was not taxable. According to him, the said amount was not paid to him by way of remuneration for past services.

To establish his case that the said amount was paid to him solely as compensation for loss of employment, he relied upon the letter of appointment dated October 11, 1943, aforesaid. According to the appellant, the letter read as follows:

"Dalmia Cement and Paper Marketing Co. Ltd., Dalmianagar.

Syt. Shriyans Prasad Jain.October 11, 1943.

Bombay.

Dear Sir,

Confirming the negotiations that have been carried on between this company and yourself, this is to confirm that you will please look after the Bombay office organisation of this company, for which you will be paid a fixed amount of Rs.4,000 (rupees four thousand only) per month. Income-tax and super-tax due and payable on this amount of remuneration will be paid by the company according to the rate prescribed in the yearly Finance Acts. Conveyance and entertainment allowances will be allowed as may be agreed upon from time to time.

The term of employment will be for a definite period of 25 years commencing from April 1, 1943, and the company reserves to itself the right to depute you to look after the interests of any other concern and arrange for your remuneration being paid either by that other concern or itself meet the same.

You have requested that it should be made clear that should your services be terminated before the expiry of 25 years, then a definite compensation for loss of office and breach of agreement should be provided. In confirming that on the occurrence of any such contingency of our severing connections with each other or terminating the office of employment due to any reason, whatsoever, it is hereby stipulated that you will be entitled to a compensation and the same shall be calculated as equivalent to Rs.40,000 for each un expired year of the duration of your employment.

This is being addressed to you in duplicate. Kindly acknowledge in the duplicate and send the same for our file keeping the original for your own record.

Yours faithfully,

For Dalmia Cement and Paper Marketing Co. Ltd.,

(Sd.) Vishnu Hari Dalmia,

Director."

The letter, if true, does support the appellant's case. The Settlement Commission, however, has doubted the same. It has rejected the very existence of the said letter, relying substantially upon the report of the Justice Vivian Bose Commission quoted hereinbefore. It commented upon the unusual nature of the stipulations with respect to the period of employment and compensation for premature termination contained therein. It also stressed the conduct of the appellant in suppressing the said letter from the Commission as recorded in the report of the Justice Vivian Bose Commission. The Settlement Commission was of the opinion that though the appointment of the appellant was with effect from April 1, 1943, the impugned letter containing the alleged terms and conditions of employment is, strangely enough, dated October 11, 1943---nearly six months later---and further that while there is no letter informing the applicant that his services would no longer be required after November 30, 1949, there is the letter of February 14, 1950, agreeing to pay compensation. This too is somewhat strange, said the Commission. It also noticed the closed relationship between the appellant and the persons controlling the company (D.C.P.M.) and opined that the appellant occupied a special position in the company. Though he was styled as an employee, he was in fact a part of the management. In short, the Commission not only relied upon the finding of Justice Vivian Bose Commission, but also gave several other reasons in support of its findings. It is, therefore, not correct to say that the said finding is based on no evidence or that it is in the nature of a pure guess.

Mr. B. Sen is not right in submitting that the genuineness of the letter was gone into in the original assessment proceedings and that the finding recorded therein in the appellant's favour is not open to review either in the reassessment proceedings or by the Settlement Commission. So far as the Assessing Officer is concerned, admittedly, he did not refer to the said aspect. He did say that the said letter was produced before him but he did not say whether the letter produced before ham was the original or a copy. So far as the Appellate Assistant Commissioner is concerned, he merely observed in his order that "there is on record an agreement dated October 11, 1943". The genuineness of the said letter was not put in issue before him. It is true that before the Tribunal; the Departmental Representative sought to challenge the genuineness of the said letter, but the said challenge was not allowed to be raised. The Tribunal held that it was not open to the Department to attack the genuineness of the said agreement/letter for the first time at the stage of the Tribunal. It is, therefore, not correct to say that the genuineness of the letter was pronounced upon by the authorities in the original assessment proceedings. In this view of the matter, it is not necessary for us to go into the question whether, if any such finding had been recorded, it would operate as a bar to reopening the said question in reassessment proceedings or before the Settlement Commission.

With respect to the objection regarding the relevance and binding nature of the findings recorded by the Justice Vivian Bose Commission, we must say that the finding recorded by the said Commission may not certainly be binding upon the appellant in proceedings under the Act, but it is wrong to say that they do not constitute relevant material. They undoubtedly constitute relevant material. Further, before they were relied and acted upon, the appellant was given an Opportunity to meet the same. It is idle to contend that findings recorded by a Commission manned by an eminent judge are of no evidentiary value. The said findings were recorded after an exhaustive inquiry and examination of the relevant records, account books and other proceedings of the companies controlled by the Dalmia-Jain group.

We are equally unable to agree with Mr. Sen that the order of the Settlement Commission is vitiated by the erroneous placing of the burden of proof upon the appellant. The Commission has given as many as eight specific reasons (mentioned as ' a' to ' j') in support of its finding that a major portion of the said amount is taxable under section 7 of the Act. Even if it is assumed for the sake of argument that one of the said reasons is unsustainable in law that does not vitiate the order of the Commission. The other reasons given by it are perfectly adequate to support the finding of the Commission. By saying so, we should not be understood as upholding Mr. Sens argument with respect to burden of proof. We express no opinion thereon.

Mr. Poti, learned counsel for the revenue, is right in submitting that in this appeal this Court would not go into questions of fact or review the findings of fact recorded by the Commission. As pointed out by this Court in Jyotendrasinhji v. S. I. Tribpathi (1993) 201 ITR 611, this Court can interfere with the Commission's order only if it is found to be "contrary to any of the provisions of the Act". To the same effect is the earlier decision of this Court in R. B. Shreeram, Durga Prasad and Fatechand Nursing Das v. Settlement Commission (I. T. and W. T.) (1989) 176 ITR 169 (SC).

No serious objection has been taken with respect to the apportionment of the said amount of Rs.7 lakh effected by the Commission. Indeed, no such objection could have been taken. Once the letter aforesaid is disbelieved, the Commission's finding in this behalf is perfectly justified.

We are, therefore, of the opinion that the Commission -was right in holding that a substantial portion of the said amount should be treated as taxable under and by virtue of Explanation 2 to 'section 7 of the Indian Income-tax Act, 1922.

Mr. Sen submitted lastly that the matter is more than 40 years old, that the original assessee is dead and that it would be just in these circumstances to direct that the penalty proceedings initiated against the assessee---which are said to be kept pending---be dropped. We are afraid, we cannot make any such direction in this appeal at this stage.

The appeal accordingly fails and is dismissed with cost. The respondents' costs are assessed at Rs.7,500 consolidated.

M.B.A./247/T.F.Appeal dismissed.