# ALL INDIA REPORTER LTD., NAGPUR v. RAMACHANDRA DHONDO DATAR

- **Citation:** [1961] 2 S.C.R. 773
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeal No. 327of1959
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/all-india-reporter-ltd-nagpur-v-ramachandra-dhondo-datar-2040
- **Pages:** 7

## Headnote

Income Tax-Decree for compensation for wrongful termination
of service-Arrears of salary, interest and costs, if amount to salary--
Power of employer to deduct income-tax from salary-Indian Income
Tax Act, 1922 (II of 1922), ss. 18(2), 46(5).
In a civil suit the respondent obtained a decree against his
employer the appellant company for a sum which included compensation for wrongful termination of bis service, arrears of
salary, interest and costs of the suit, and then applied for execution of the decree. The Income-tax Officer served a notice upon
the respondent under s. 46 of the Indian Income-tax Act and
applied to the District Judge that the appeJlant be permitted to
deduct at source the income-tax, surcharge and super tax on the
sum awarded to the respondent and pay the same in the Government Treasury. The appellant-company also moved Ute executing court for a declaration that they were entitled and bound to
deduct the tax due on the amount. The District Judge directed
the appeJJant company to pay the income-tax and super-tax to
the Income Tax Department and pay the balance in Court together with a receipt for the income tax paid. In appeal the High
Court reversed the order of the District Judge and directed the
execution of the decree as claimed by the respondent. On appeal
by the appeJJant company,
Held, that as no tax was assessed against the respondent
the Income Tax Officer could not issue i. notice under s. 46(5)
requiring the appellant company to deduct tax from the decretal
amount.
·
A substantial part of the decn;tal amount did not represent
"salary" of the respondent: it consisted of compensation for
wronglul termination of the respondent's service, salary in lieu
of six months' notice, interest and costs of the suit. It was a
judgment-debt and rio provision for payment of income. tax was
made in the decree which was liable to be executed as prayed
by the respondent. The appellant company was not therefore
entitled ·or bOund to deduct income tax under s. 18 sub-s. (2) of
the Act.

## Text

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2 S.C.R. SUPREME COURT REPORTS
773
ALL INDIA REPORTER LTD., NAGPUR
v.
RAMACHANDRA DHONDO DATAR
(J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.)
Income Tax-Decree for compensation for wrongful termination
of service-Arrears of salary, interest and costs, if amount to salary--
Power of employer to deduct income-tax from salary-Indian Income
Tax Act, 1922 (II of 1922), ss. 18(2), 46(5).
In a civil suit the respondent obtained a decree against his
employer the appellant company for a sum which included compensation for wrongful termination of bis service, arrears of
salary, interest and costs of the suit, and then applied for execution of the decree. The Income-tax Officer served a notice upon
the respondent under s. 46 of the Indian Income-tax Act and
applied to the District Judge that the appeJlant be permitted to
deduct at source the income-tax, surcharge and super tax on the
sum awarded to the respondent and pay the same in the Government Treasury. The appellant-company also moved Ute executing court for a declaration that they were entitled and bound to
deduct the tax due on the amount. The District Judge directed
the appeJJant company to pay the income-tax and super-tax to
the Income Tax Department and pay the balance in Court together with a receipt for the income tax paid. In appeal the High
Court reversed the order of the District Judge and directed the
execution of the decree as claimed by the respondent. On appeal
by the appeJJant company,
Held, that as no tax was assessed against the respondent
the Income Tax Officer could not issue i. notice under s. 46(5)
requiring the appellant company to deduct tax from the decretal
amount.
·
A substantial part of the decn;tal amount did not represent
"salary" of the respondent: it consisted of compensation for
wronglul termination of the respondent's service, salary in lieu
of six months' notice, interest and costs of the suit. It was a
judgment-debt and rio provision for payment of income. tax was
made in the decree which was liable to be executed as prayed
by the respondent. The appellant company was not therefore
entitled ·or bOund to deduct income tax under s. 18 sub-s. (2) of
the Act.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
327of1959.
Appeal from the order dated June 28, 1956, of the
Bombay High Court at Nagpur in Misc. First Appeal
No. 15 of 1954.
.
·
98
I960
November a9.
774
SUPREME COURT REPORTS
(1961]
i96o
A. V. Viswanatha Sastri, Shankar Anand and A.G.
All India Repor- Ratnaparkhi, for the appellant.
ter Ltd., Nagpur
K. N. Rajagopal Sastri, as amicus curiae.
Ramac:~ndra
1960. November 29. The Judgment of the Court
Dhondo Datar was delivered by
Shah J.
SHAH, J.-Ramachandra Dhondo Datar-hereinafter referred to as the respondent--was employed by
the appellant company in its publicat'ons branch.
By agreement dated March 23, 1943, the appellant
company agreed to pay to the resp::mdent as from
April 1, 1943, remuneration per an'J.um equal to
3!% of the gross sales or Rs. 12,000 whichever
was greater. The agreement was to remain in operation for ten years from April 1, 1943, in the first instance and was renewable at the option of the
respondent for such period as he desired. By notice
dated April 19, 1948, served on the respondent on
April 22, 1948, the appellant coinpany terminated
the employment of the respondent. The respondent
then filed a civil suit in the court of the Fifth Additional District Judge, Nagpur, for a decree for Rs.
1,30,000 being the amount of compensation for wrongful termination of employment, arrears of salary and
interest. On July 17, 1953, the court after giving
credit for the amount received by the respondent
passed a decree for Rs. 42,359 (which was inclusive of
Rs. 36,000 as compensation for tel'mination of employment and Rs. 6,000 as salary in lieu of six
months' notice and interest) and costs and interest on
judgment. The respondent then applied for execution
of the decree and claimed Rs. 54,893-12-0 less Rs.
18,501-10-0 decreed against him in a cross suit filed
by the appellant company. The Income Tax Officer,
Nagpur, served a notice under s. 46 of the Indian
Income Tax Act up:>n the respondent and also gave
intimation to the District Judge, Nagpur, that the
appellant company be permitted to deduct at source
and to pay into the Government Treasury Rs. 15,95613-0 as income-tax, surcharge and super-tax due on
the sum of Rs. 50,972-2-0 awarded to the respondent.
The appellant company also applied that the
( •
2 S.C.R. SUPREME COURT REPORTS
775
executing Court do declare that the appellant comi96o
pany was entitled and in law bound to deduct the All 1 d'
R
tax due on the amount. The learned Judge direct- ter L~.:~a:/:;·
ed the appellant company to pay to the Income
v.
Tax Department Rs. 15,956-13.0 on account of inRamachandra
come.tax and super.tax on the amount due to the
Dhondo Datar
respondent and directed it to pay the balance in
court after filing a receipt for payment of tax from
the Income Tax department. In appeal to the High
Court of Judicature at Nagpur, the order passed by
the District Judge was reversed and execution as
claimed by the respondent was directed.
The appellant company contends that under s. 18(2)
of the Income Tax Act, it was bound to deduct the
tax computed at the·appropriate rate on the salary
payable to the respondent as the amount due under
the decree represented salary. Section 18 sub-s. (2)
of the Income Tax Act in so far as it is material provides that any person paying any amount chargeable
under the head "salaries" shall at the time of payment deduct income.tax and super-tax at the rate
representing the average of the rates applicable to
the estimated total income of the assessee under the
head "salary". E;ub-s. (7) declares that a person failing to deduct the taxes required by the section shall
be deemed to be an assessee in default in respect of
such tax. The Legislature has, it is manifest, imposed upon the employer the duty to deduct tax at the
appropriate rate on sal.ary payable to the employee
and if he fails to do so, the tax not deducted may be
recovered from him. But the liability to deduct arises
in law, if the amount is due and payable as salary.
In this case,.there has been no assessment of tax due
by the Income Tax Officer on the amount payable to
the respondent. Under s. 46(5), any person paying
salary to an assessee may be required by the Income
Tax Officer to deduct arrears of tax due from the l~,tter
and the employer is bound to comply with such a
requisition and to pay the amount deducted to the
credit oft.he Government. But this order can only be
passed if income-tax has been assessed and has
remained unpaid. It 1s undisputed that at the material
Shah].
776
SUPREME COURT REPORTS
(1961]
1960
time, no tax was assessed against the respondent;
An India Repor- th~ Income ~ax Officer had accordingly no authority
1,. Lid., Nagpur to issue a notice under s. 46(5).
Nor could the Income
v.
Tax Officer claim to recover tax due by a proceeding
Ramachandra
in the nature of a garnishee proceeding by applying
Dhondo Dalar to the civil court to attach the Judgment-debt payShah ],.
able by the company. The application submitted by
the Income .Tax Officer must therefore be ignored.
Undoubtedly, the employer is by s. 18 of the Act
liable to deduct from the salary payable by him to his
employee the amount of tax at the average rate applicable to the estimated total income; but can it be said
that as between the appellant company and the respondent the decretal amount represented salary? The
respondent had filed a suit for a decree for arrears of
salary, compensation for wrongful termination of employment and interest. The court having passed a
decree on that claim, it became a judgment-debt. It
may have been open to the appellant company in the
suit to apply to the court for making a provision in
the decree for payment of income-tax due by the respondent, but no such provision was made.
We are not concerned to decide in this appeal whether in the hands of the respondent the amount due
to him under the decree, when paid, will be liable to
tax; that question does not fa.II to be determined in
this appeal. The question to be determined is whether
as between the appellant company and the respondent the amount decreed is due as salary payment of
which attracts the statutory liability imposed by s. 18.
The claim decreed by the civil court was for compensation, for wrongful termination of employment,
arrears of salary, salary due for the period of notice
and interest and costs, less withdrawals on salary
account. The amount for which execution was sought
to be levied was the a.mount decreed against which
was set off the claim under the cross-decree. A substantial part of the claim decreed represented compensation for wrongful termination of employment and it
would be difficult to predicate of the claim sought to
be enforced what part thereof if any represented salary
due.
Granting that compensation payable to an
I
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2 s.c.R. SUPREME COURT REPORTS
777
employee by a.n employer for wrongful termination of
i96o
employment be regarded as in the nature of salary, All 1 d"
RP _
when the claim is merged in the decree of the court, ter L;/aNa:p:~
the claim assumes the character of a judgment-debt
v.
and to judgment-debts s. 18 has not been ma.de a.ppliRamachandra
cable. The decree passed by the civil court must be Dhondo Datar
executed subject to the deductions and adjustments
permissible under the Code of Civil Procedure. The
judgment-debtor may, if he has a cross-decree for
money, claim to set off the amount due thereunder .
. If there be any adjustment of the decree, the decree
may be executed for the amount due as a. result of the
adjustment. A third person who has obtained a decree against the judgment-creditor may apply for
attachment of the decree and such decree may be
executed subjecp to the claim of the third person:
but the judgment-debtor cannot claim to satisfy,
in the absence of a direction in the decree to that
effect the claim of a third person against the judgment-creditor, and pay only the balance.
The
rule that the decree must be executed according to
its tenor may be modified by a statutory provision.
But there is nothing in the Income Tax Act which
supports the plea. that in respect of the amount payable under a. judgment-debt of the nature sought to be
enforced, the debtor is entitled to deduct income-tax
which may become due and payable by the judgmentcreditor on the plea. tp.at the cause of action on which
the decree was passed was the contract of employment
and a part of the claim decreed represented amount
due to the employee as salary or damages in lieu of
salary.
Counsel for the appellant company strongly relied
upon the decision of the House of Lords in Westminster Bank Ltd. v. Riches (1).
That was a case in
which in an action brought by one R against the
Westminster Bank trustee of the estate of one X-R
was awarded,. a decree for £ 36,255 principal and
£ 10,028 as interest. The Bank thereafter brought an
action for a declaration that it had satisfied the judgment in the action by R by paying him the amount
(1) 18 Tax Cases 159.
Shah].
778
SUPREME COURT REPORTS
[1961]
,960
due less £ 5,014, the latter sum representing incometax on.the interest awarded by the judgment. It was
~
11
},~di"zv Rto•- held by the House of Lords that £ 10,028 was "in teer
·~. •g ur rest of money" within Schedule D and General Rule
Ramachandra
21 of the Income Tax Act, 1918, and that income-tax
Dhondo Datar was deductible therefrom. In that case, the only
Shah].
iirgnment advanced on behalf of the Bank is set out
in the speech of Viscount Simon, L. C. at p. 187:
"The appellant contends that the additional sum
of£ 10,028 though awarded under a power to add
interest to the amount of the debt, and though called.
interest in the judgment, is not really interest such as
attracts Income Tax, but is damages. The short answer to this is that there is no essential incompatibility
between the two conceptions. The real question, for
the purposes of deciding whether the Income Tax
Acts apply, is whether the added sum is capital or
income, not whether the sum is damages or interest."
The House of Lords in that case by a majority held
that£ 10,028 awarded under the judgment represented not capital but interest and was liable to tax. In
our view, this case has no application to the facts of
the present case.
In the case before us, there is a
decree passed in favour of the respondent : under the
scheme of the Civil Procedure Code, that decree has
to be executed as it stands, subject to such deductions
or adjustments as are permissible under the Code.
There was no tax liability which the respondent' was
assessed to pay in respect of this amount till the date
on which the appellant company sought to satisfy the
alleged tax liability of the respondent. As between
the appellant company and the respondent, the
amount did not represent salary; it represented a judgment-debt and for payment of income-tax thereon,
no provision was made in the decree.
The Civil Procedure Code bars an action of the nature which was
filed in Westminster Bank's case (supra). The defence
to the execution if any must be raised in the execution
proceeding and not by a separate action. The amount
payable by the appellant company to the respondent
was not salary but a judgment-debt, and before paying that debt the appellant company could not claim
2 S.C.R. SUPREME COURT REPORTS
779
to deduct at source tax payable by the respondent.
r96o
Nor could the appellant company seek to justify its All 1 d"
R
d h
h
. dg
d'
n ta
eporplea on the groun
t at t e JU
ment-cre itor was ter Ltd., Nagpur
indebted to a third person.
.
v.
The principle of the case in Manickam Chettiar v.
Ramachand•a
Income Tax Officer, Madura (1), on which reliance was
Dhondo Datar
also sought to be placed by the appellant company
has no application to this case. In Manickam Chettiar's
case (1), in execution of a money decree certain properties belonging to a judgment-debtor were attached
and sold and the sale proceeds were received by the
court. The Income Tax Officer who had assessed the
decree-holder to tax payable by him on his other
income applied to the court for an order directing
payment to him out of the sale proceeds the amount
of income-tax due by the decree-holder. It was held
that the claim for income-tax was entitled to priority
in payment and the court had inherent power. to make
an order on the application for payment of money due
as income-tax. Tax had admittedly been assessed,
and proceedings substantially for recovery of the tax
so assessed were adopted by the Income Tax Officer.
It was held in the circumstances that the court had
jurisdiction to direct recovery of tax out of the
amount standing to the credit of the decree-holder.
The principle of that case can have no application to
the facts of the present case.
The respondent had not appeared before us, but
we have been assisted by Mr. Rajagopala Sastri and
we are indebted to him for placing the evidence and
the various aspects of the case on a true appreciation
of which the question in issue fell to be determined.
The appeal fails and is dismissed. As there was
no appearance for the respondent, there will be no
order for costs.
Appeal dismissed.
(1) VI I.T.R. 180.
Shah j.