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I.T.A. No. 1514/KB of 1982-83, decided on 28th August, 1986.

---S. 16--Income-tax--Cessation of employment--Income derived as salary, held, presupposed a relationship of employer and employee governed by express or implied terms and conditions of employment--Such relationship of employer and employee governed by law of Master and Servant wherein words 'dismissal, retirement and termination' were used to denote cessation of agreement of employment--Terms 'dismissal', 'retirement' and 'termination', held, carried special connotation in sphere of law of Master and Servant and were not synonyms of each other but carried distinct and definite meaning.

--- Words 'dismissal' and 'termination'--Not carrying same meaning--Word 'dismissal' connotes bringing to an end service contract for any disciplinary reason and carries a stigma or shows cessation of service contract because of incapability or incapacity of employee caused by old age or medical ground--Word 'termination' means cessation of employment agreement which might be for any reason other than any disciplinary action or due to dismissal or retirement--All dismissals lead to termination of employment agreement but all termination of service contracts would not necessarily tantamount to dismissal.

Noorul Hassan and others v Federation of Pakistan P L D 195bl SC (Pak.) 331; Punjab Province v. Ather Ali P L D 1956 W. P. Lah. 886; Abdul Wahab v. Federation of Pakistan P L D 1956 Sind 62 and Razia Abbas Ahmed v. Government of West Pakistan P L D 1971 (Kar. ) 237 rel.

--- Word 'retirement' means cessation of service agreement on reaching age of superannuation or medical ground.

---S. 16(2)(c)(i)--Taxable income--Retirement benefits-- Assessee retiring on medical ground--Amount given to assessee as retirement benefit for purpose of rehabilitation and not as compensation in lieu of termination of service, held, would neither fall within mischief of S.16(2)(c)(i) of Income-tax Ordinance, 1979 nor would fall within definition of 'salary' and as such would not be taxable.

C.I.T.' v. Shah Wallace & Co. A I R 1932 PC 138; G.F. Cartal v. C.I.T (1963) 49 1 T R 773 and Eishwardas v . C.I.T. (1980) 123 ITR 379 ref.

---S. 16 (2) (c)(i)--Income-tax--Income offered for tax whereas no was chargeable thereon--Income-tax Officer, held, could not cha tax on such an income on ground that it was offered for tax.

(1983) 92 1 T R 341 rel.

Muhammad Farid D.R. for Appellant.

M. Karim for Respondent.

Date of hearing: 25th August, 1986.

--In this appeal quite interesting point of first impression has arisen. The respondent, a Flight Engineer of Pakistan International Airlines Corporation, filed his return for assessment year 1980-81 declaring his income at Rs.51,093 paid to him upto October, 1979 when, as found by the Income-tax Officer, he retired on medical grounds. It appears that in the return of income the respondent also mentioned a receipt of Rs.5,92,425 and mentioned it to be 'rehabilitation' compensation (exempt) to be taxed as separate block of income as gratuity'. It was contended before Income-tax Officer that aforesaid receipt being either capital or casual in nature did not fall within the category of taxable income hence was outside the mischief of section 16(2)(c)(i). The Income-tax Officer, however, turned down this submission of the respondent with the following observation:

"In general law such receipt may be treated as a receipt of capital nature. But if such receipt is made taxable by a specific provision of law it cannot continue to be treated as exempt being a capital receipt. Section 16(2)(c)(i) of the Income-tax Ordinance, 1979 states 'profit in lieu of salary' includes - (i) the amount of any compensation due to, or received by, an assessee from his employer at, or in connection with the termination of, or the modification of any terms or conditions relating to his employment. Prior to 1965 compensation for loss of employment was not taxable in this country. The compensation received by the assessee, in whatever terms worded by the employer, is nothing but a compensation for loss of employment in accordance with the terms and conditions relating to his employment. Hence this amount is taxable in the hands of the assessee as part of his income, and is to be included in the total income for the year under assessment."

But he treated it as separate block of income in view of Central Board of Revenue's Circular No. 1 of 1965. The respondent having been aggrieved and dissatisfied went up in appeal. It was contended before the learned Commissioner of Income-tax (Appeals) that the Income-tax Officer erred in not looking into the nature of aforesaid receipt which was not a compensation but damages for loss of service on medical grounds, hence did not fall within the definition of income. It was urged before learned Commissioner of Income-tax (Ap9eals) that an income is that which is earned as a result of some conscious efforts, is of recurring nature and has a source to spring from. In support of this submission reliance was placed on Privy Council case reported as C.I.T. v. Shah Wallace & Co. A I R 1932 P C 138. It was also argued that the lumpsum payment of Rs.5,92,425 was not result of termination of services of the respondent as the word 'termination' plied a deliberate act. The learned Commissioner of Income-tax appeals, it appears, accepted some of the contentions raised by the respondent before him and ordered deletion of Rs.5,92,425 from the total income of the respondent. The learned Commissioner of Income-tax (Appeals), however, has not given any reasons in support of his order.

His observation is as under:----

"Records of the case have been examined and the arguments of the learned authorised representative of the appellant have duly been considered. Some of, the grounds on which the impugned order has been assailed are quite valid and appeal to reason. In view of the peculiar facts and circumstances of the case, it is my considered opinion that the amount of Rs.5,92,425 not fall under the purview of taxable income for the year under appeal and is, therefore, deleted."

2. This has given rise to the departmental appeal.

3. Mr. Muhammad Farid, the learned Departmental Representative, submitted before us that before 1965 compensation for loss of employment was not taxable in Pakistan. He invited our attention to Explanation 2 of section 7 of the repealed Income-tax Act, which defines the profit in lieu of salary for the purposes of taxation of income falling under head of salaries and reads as under:---

"

.--A payment due to or received by an assessee from an employer or former employer including compensation due to or received by him at, or inconnection with the termination of his employment or the modification of the terms or conditions of his employment or from a provident or other fund shall to the extent to which it does not consist of contributions by the assessee or interest on such contributions be deemed to be a profit received in lieu of salary for the purposes of this subsection:

Provided that nothing herein contained shall render liable to income-tax any payment from a provident fund to which the Provident Funds Act, 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 employments in connection with which the fund is established."

Turning to clause (i) of paragraph (c) of subsection (2) of section 16 of the Ordinance, the learned Departmental Representative pointed out that the legal position remained same and the compensation paid to the respondent even if it is paid on medical grounds is failing within the mischief Of aforesaid aforesaid section and was rightly taxed by the Income-tax Officer aforesaid provision of paragraph (c) of subsection (2) of section 16 reads as under:-

(c) profits in lieu of salary' includes--

(i) the amount of any compensation due to, or received by, an assessee from his employer at or in connection with, the termination of, or the modification of any terms or conditions relating to, his employment;

(ii) any payment due to, or received by an assessee from a provident or other fund to the extent to which it does not consist of contributions by the assessee and the interest on such contributions."

4. Mr. Muhammad Farid, the learned Departmental Representative further invited our attention to the return of income and stated that the respondent himself had offered aforesaid amount for income as gratuity. According to him the Income-tax Officer, therefore, rightly taxed it as per instructions of C.B.R. contained in Circular No. 1 of 1965. The learned Departmental Representative concluded that the order of Commissioner of Income-tax (Appeals) be reversed and that of the Income-tax Officer be restored.

5. Mr. Muqtada Karim, the learned Advocate for the respondent, reiterated all his submissions made before the learned Commissioner of Income-tax (Appeals), which we have already reproduced above and for the sake of brevity need not reproduce again. Explaining the last submission of Mr. Muhammad Farid that the respondent himself offered the aforesaid receipt at Rs.5,92,425 as separate block of income as gratuity the learned Advocate pointed, out that the aforesaid entry was regarding items (c) and (d) jointly and was result of type mistake. Elaborating his argument he submitted that- in the return paragraph (c) mentions arrears of accumulated leave salary of earlier years amounting to Rs.1,03,876 and the respondent referred it as a receipt to be separately taxed as separate block of income. According to him the receipt of Rs.5,92,425 was shown to be rehabilitation compensation exempted from tax.

6. We have heard both the learned Departmental Representative as well as learned counsel for the respondent and have also perused both the assessment as well impugned orders. AS far as paragraph (i) of clause (c) of subsection (2) of section 16 of the Income-tax Ordinance, hereinafter referred to as the 'Ordinance', is concerned, it is precisely the same as is contained in paragraph (i) of clause (3) of section 17 of the Indian Income-tax Act, hereinafter referred to as 'the Act' with the exception that in the Indian provision the words 'or former employer' also find place. Let us also mention here that Explanation 2 of the repealed Income-tax Act, hereinafter referred to as 'the repealed Act' was also couched in the same language and contained even the words 'former employer, which are missing from the provisions of the Ordinance. Be it as it may, when we refer to renowned commentaries on Income-tax Law from Indian Jurisdiction we find that all of them lend support to the submission of Mr. Muhammad Farid, the learned Departmental Representative. Starting with Sundram's Law of Income-tax, Volume I, 1982 Edition, we find the following observation of the learned authors regarding the effect of clause (i) of subsection (3) of section 17 of the Act. The learned authors have observed at page 79:-

"Clause (i) nullifies various rulings (under the 1955 law) of which there are many, holding that compensation for loss of a source of income is not income at all. The clause has now (since 1961) been expanded to cover compensation for modification of terms of service. The compensation will be caught even if it is voluntary and not compulsory."

7. The learned authors of Yengar's Law of Income-tax 1983 Edition, Volume I, have discussed the legal position at page 983 in the following words:

"The words 'termination of employment' would apply to a termination in the natural course of events, the term of employment having run out and the period of retirement having arrived, and also to a case of premature termination of employment there being a break in the stipulated tenure. It would include also a termination by death or voluntary resignation. Decisions which interpreted the phrase 'compensation for loss of employment' under Explanation (2) to section 7(1) of 1921 Act, in the context of wrongful dismissal or break in service, etc., have no relevance to the present Act."

Kanga and Palkhiwala in their Law and Practice of Income-tax, 7th Edition, Volume I, have at page 313 made the following observation:-

"Compensation for loss of employment is a capital receipt under the general law. But this sub-clause brings to charge as profits in lieu of salary any compensation due or received from an employer or former employer at or in connection with the termination of employment or modification of its terms."

Before proceeding further let us mention here that Kanga and Palkhiwala the learned author's of the Law of Income-tax have not quoted any case law in support of their observations, reproduced above. However, the learned authors of Sundram's Law of Income-tax have mentioned a case reported as G.P. Cartal v. C.I.T., (1963) 49 I T R 773, in which on reconstruction of a partnership into a private company, an employee, who felt aggrieved on his being deprived of the chance of being a partner, was given free shares in the new company. The question arose as to whether the free shares received by the employee were compensation from his former employer in connection with termination as his appointment and, as such, were taxable The Calcutta High Court answered aforesaid question in affirmative. The learned authors of Yengar's 'Law of income-tax have also cited a case reported as Eishwardas v. C.I.T. (1980) 123 I T R 379, in which the assessee was appointed Managing Director of private company for a period of 10 years on certain salary plus percentage of profit but his services were terminated prematurely and on his protest the Board of Directors paid him Rs.15,200 by way of compensation for estimated loss due to his premature retirement. A Division Bench of Delhi High Court held that aforesaid amount was taxable under section 17(3)(1) of the Act. Our attention has not been drawn to any case-law from Pakistani jurisdiction on the point under discussion. However, with profound respect to the learned authors of three text-books and two High Courts, mentioned above, we think that the law has not been properly interpreted. Our reasons are as follows: In our considered judgment since section 16 of the Ordinance deals with income derived as salary it pre-supposes a relationship of employer and employee governed by express or implied terms and conditions of employment. This relationship of employer and employee leads us inevitably to the realm of law of Master and Servants and when we go through it, we find that the words dismissal, retirement and termination are frequently used to denote the cessation of the agreement of employment. The dictionary meaning of word 'dismiss' means to send away, whereas the 'retirement' means giving up office or work or causing to give up work or office. Similarly, the word 'termination' means bringing to an end. However, these three words carry special connotation in the sphere of law of Master and Servant. They are not, let us emphasise, synonyms of each other but carry distinct and definite meaning. Let us point out that in the Ordinance itself this distinction has been maintained. For example, in clause (i) of paragraph (c) of subsection (2) of section 16 the word 'termination' has been used, whereas in entry 27 Part I of Second Schedule the word 'retirement' finds place. Entry 27 is as under:----

"(27) Any income representing any payment received by way of gratuity or commutation of pension by an employee on his retirement or, in the event of his death, by his heirs as does not exceed--

(i) in the case 'of an employee of the Government or a local authority or a statutory body or corporation established by any law for the time being in force, the amount receivable in accordance with the rules and conditions of his service;

(ii) any amount receivable from any gratuity fund approved by the Commissioner of Income-tax in accordance with the rules contained in Part III of the Sixth Schedule;

(iii) in the case of any other employee, the amount not exceeding eighty thousand rupees receivable under the scheme applicable to all employees of the employer and approved by the Central Board of Revenue for the purposes of this sub-clause; and

(iv) in the case of any employee to whom sub-clauses (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or twenty-five thousand rupees, whichever is the less:

Provided that nothing in this sub-clause shall apply--

(a) to any payment which is not received in Pakistan;

(b) to any payment received from a company by a director of such company who is not regular employee of such company;

(c) to any payment received by an employee who is not a resident of Pakistan; and

(d) to any gratuity received by an employee who has already received and gratuity from the same or any other employer."

In our judgment, the word 'dismissal' connotes bringing to an end the service- contract for any disciplinary reason and carries a stigma. But, termination, on the other hand, also means cessation of the employment agreement but it may be for any reason other than any disciplinary action. All dismissals lead to the termination of employment agreement but all termination of service contracts could not necessarily tantamount to dismissal. Our view is very much fortified by case-law on the point. The leading case spelling out the difference between dismissal and termination comes from no less an authority than our own Supreme Court, which is reported as Noorul Hassan and others v. Federation of Pakistan P L D 1956 SC (Pak.) 331. In this case services of temporary members of subordinate Police Force were 'dispensed with' for unsatisfactory work. It was argued on behalf of the employees that they were dismissed in contravention of Article 240(3) of Government of India Act, hence their dismissal was without lawful authority. Repelling the argument of Federation of Pakistan that the services of the temporary employees were simply 'dispensed with'. Their Lordships of Supreme Court quashed the order of dismissal. In this case, distinction between the word 'dismissal' and 'termination' is discussed at length. Similarly, in Punjab Province v. Ather Ali P L D 1956 (W.P.) Lah. 886, a temporary employee of Rationing Department was transferred to Food Department on abolition of the former and then his services were terminated without assigning any reason. It was held that it was a case of dismissal and the employee was entitled to the protection of Article 240(3) of Government of India Act. In Abdul Wahab v. Federation of Pakistan P L D 1956 Sind 62, the services of a temporary employee were terminated as per terms of contract of service but in this case it was held that it was not a case of dismissal. In this case the element of agreement implied in the contract of service, which justified the termination of service was very much emphasised. Again in Razia Abbas Ahmed v. Government of West Pakistan P.L D 1971 Kar. 237, petitioner remained absent from service for more than 5 years and an order was passed that she ceased to be Government servant. She however, challenged this order and the Division Bench of Sind High Court held that it was substance of the order and not phraseology, which was important. Their Lordships were of the view that since the effect of impugned order was to oust the petitioner from service it violated provision of Article 177(a) and (b) of late Constitution of 1962.Thus, from all the case-law, discussed above, it is clear that the words 'termination' and 'dismissal' do not carry same meaning.

Now coming to word 'retirement' it appears that under law of Master and Servant it means cessation of service agreement on reaching age of superannuation or on medical ground. In all service contracts it: is implied term and condition of employment that an employee would' have the capability and the capacity to perform the duties for which the employer gave him employment. It is well-known that certain employments carry the risk of what we call occupational disease. As such, if an employee is ever rendered incapable on medical ground to discharge his duties, the employer has a right to retire him. It is, therefore, now obvious that dismissal is for act of indiscipline or misconduct and retirement means cessation of service contract because of incapability or incapacity of the employee caused by old age or medical ground. The word 'termination', therefore, would mean out of logical necessity cessation of service agreement for any reason other than those of dismissal or retirement. Let us also mention at this juncture that this distinction is not the product of the Government of India Act, 1935 or any other statute but is the very basis of common law regarding Master and Servant. Thus, the case of a retiring employee stands on altogether different footing than the case of an employee who is either dismissed or whose services are terminated.

With this discussion in mind let us now revert back to the facts of the appeal. The Income-tax Officer has admitted in the very opening sentence of his assessment order that the respondent retired on medical grounds He has not mentioned anywhere that his services were terminated. The documentary evidence produced before the Income-tax Officer also indicated that the respondent was retired on medical grounds; photo copy of the letter, dated 1st October, 1979 produced by Mr. Muhammad Farid, learned Departmental Representative, and the photo copies of letters, dated 2nd October, 1979 and 10th September, 1980, produced by the learned counsel for the respondent show without any doubt that the respondent was retired on medical ground; Thus, it is clear that Rs.5,92,425 were given to him as retirement benefits for the purposes of rehabilitation. In our considered view, this amount does not fall within the category of compensation given on termination of services. Now if it does not fall within mischief of clause (i) of paragraph (c) of subsection (2) of section 16 of the Ordinance, it would not fall within the definition of 'salary' and, as such, would not be taxable. Let us also mention here that it is not the case of the Department that payment was made either for modifications of any terms and conditions or from provident or other fund. It would also be not out of place to mention here that the two cases of Calcutta High Court and Delhi High Courts revolve round their own facts and are not relevant for our purposes. Similarly we also feel very much constrained to observe, though with profound respect, that the learned authors of Iyengar's Law of Income-tax have stated the law on the subject under discussion in very wide terms without considering various aspects of the matter as discussed above. Before parting with this appeal let us also mention here that the respondent did not offer Rs.5,92,425 for tax. The entry appears to be a type mistake. But even if it was offered for tax, the I Income-tax Officer cannot charge tax on it if it is otherwise not chargeable. (1983) 92 I T R 341 is an authority on this point.

To conclude, we hold that the respondent was retired on medical grounds and received Rs.5,92,425 for rehabilitation purposes. In our judgment, it was not compensation paid to the respondent in lieu of termination of his services falling within the mischief of paragraph (i) of clause (c) of subsection (2) of section 16 of the Ordinance. We, therefore, find no force in this departmental appeal and it is rejected accordingly. The order of learned Commissioner of Income-tax (Appeals) is confirmed for the reasons discussed above.

M.Y.H. Appeal rejected.

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