1957 (2) TMI 56 - HC - Income Tax

High Court: Termination payment not taxable under Income-tax Act, classified as capital receipt

The High Court determined that the Rs. 12,000 received by the assessee upon termination of employment was a capital receipt exempt from tax under ... - Issues Involved:1. Whether the amount of Rs. 12,000 received by the assessee is a revenue receipt or a capital receipt.2. Whether the payment made to the assessee was compensation for loss of employment or remuneration for past services.Issue-wise Detailed Analysis:1. Whether the amount of Rs. 12,000 received by the assessee is a revenue receipt or a capital receipt:The primary issue in this case revolves around the classification of the Rs. 12,000 received by the assessee upon termination of his employment. The Income-tax Officer initially held that the payment was taxable under section 7 of the Income-tax Act as it was in lieu of six months' notice. The Appellate Assistant Commissioner, however, held that the payment was exempt under Explanation 2 to section 7 of the Income-tax Act, considering it as compensation for loss of employment. The Tribunal later concluded that the payment was not in lieu of six months' notice but was a gratuitous payment for past services rendered, thus classifying it as a gratuity rather than compensation.The High Court, in its judgment, emphasized the interpretation of 'compensation for loss of employment' under Explanation 2 to section 7. The court noted that the term could be interpreted narrowly, implying a legal liability to pay compensation, or broadly, as a solatium for the factual loss of employment. The court favored the broader interpretation, aligning with the Privy Council's decision in Shaw Wallace & Co. v. Commissioner of Income-tax, Bengal, which treated compensation for the cessation of business as a non-taxable capital receipt. The court concluded that the Rs. 12,000 paid to the assessee was indeed a capital receipt, as it was a solatium for the compulsory cessation of employment, regardless of whether it was paid under a legal obligation or voluntarily.2. Whether the payment made to the assessee was compensation for loss of employment or remuneration for past services:The Tribunal had determined that the payment was a gratuity for past services, not compensation for loss of employment. The High Court, however, scrutinized this finding. The court observed that the assessee's employment was terminated due to the closure of the department, and the payment was described by the employer as compensation equivalent to six months' salary for this termination. The court found no substantial evidence to support the Tribunal's view that the payment was for past services. Instead, it was clear that the payment was made due to the termination of employment, which was beyond the assessee's control.The court also discussed the nature of the payment under the contract, noting that the communication from the employer on 23rd March 1948 constituted a notice of termination, fulfilling the contractual requirement of six months' notice. The payment of Rs. 12,000, therefore, was not for past services but was a compensation for the loss of employment due to the department's closure.Conclusion:The High Court concluded that the Rs. 12,000 received by the assessee was a capital receipt, exempt from tax under Explanation 2 to section 7 of the Income-tax Act. The payment was made as compensation for the loss of employment, not as remuneration for past services. The court answered the reference in favor of the assessee, classifying the amount as a capital receipt, and directed the Commissioner to pay the costs.