Salary in lieu of notice is taxable as contractual remuneration, not compensation for loss of employment.

Salary paid in lieu of twelve months' notice on termination under an employment contract was held taxable as salary income under the Income-tax Act, 1922. The service agreement allowed the employer to end the employment either on notice or by paying salary instead of notice, so the assessee received only the contractual entitlement and suffered no deprivation of contractual rights. On that basis, the payment was characterised as contractual remuneration, not compensation for loss of office or loss of employment, and therefore fell within the charging provision for salary income.

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Issues: Whether the amount paid to the assessee in lieu of twelve months' notice on termination of employment was taxable as salary under the Income-tax Act, 1922, or was a non-taxable compensation for loss of employment.

Analysis: The service agreement had to be read as a whole. While it contemplated service for five years, it also gave the employer the right to terminate the employment on twelve months' notice or by paying salary in lieu of notice. The assessee received exactly what the contract entitled him to receive when the employer chose not to give notice. There was therefore no surrender of contractual rights and no deprivation of any right under the service agreement. On that footing, the amount could not be characterised as compensation for loss of office. It was payment of salary in lieu of notice and fell within the charging provision applicable to salary income.

Conclusion: The amount was taxable as salary income and not as compensation for loss of employment.

Ratio Decidendi: Where termination is effected under the contract by payment of salary in lieu of notice, the payment is contractual remuneration and not compensation for loss of office unless the recipient is deprived of a right under the employment agreement.

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