Compensation for loss of employment can be capital receipt even when paid voluntarily as a solatium on termination.

A voluntary payment made on termination of employment was treated as capital compensation for loss of employment, not as revenue income or mere gratuity. The Bombay HC noted that the employee's service ended through a notice given under the contractual arrangement, and the surrounding circumstances showed the payment was made because the department was closed and the employment ended without fault on the employee's part. It held that the expression "compensation for loss of employment" in the Explanation to section 7 of the Income-tax Act, 1922, covers even a solatium paid without any enforceable legal liability, and the amount was therefore non-taxable as salary or gratuity.

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Issues: Whether the sum of Rs. 12,000 received by the assessee on termination of employment was a capital receipt or a revenue receipt, and whether it was exempt as compensation for loss of employment under section 7 of the Income-tax Act, 1922.

Analysis: The contractual arrangement provided for six months' notice, and the communication issued by the employer was treated as a notice terminating service. The payment was not under a legal liability arising from breach of contract, but the expression "compensation for loss of employment" in the Explanation to section 7 was held to cover not only legally enforceable compensation but also a voluntary payment made as a solatium for compulsory loss of employment. The surrounding circumstances showed that the amount was paid because the department was closed and the employment ended through no fault of the assessee, and there was no material to support the view that it was remuneration for past services or a mere gratuity.

Conclusion: The sum of Rs. 12,000 was held to be a capital receipt received as compensation for loss of employment and was not taxable as revenue income.

Final Conclusion: The reference was answered in favour of the assessee, and the amount was treated as non-taxable capital compensation rather than taxable salary or gratuity.

Ratio Decidendi: A voluntary or gratuitous payment made by an employer as a solatium for compulsory loss of employment falls within the expression "compensation for loss of employment" under the Explanation to section 7 of the Income-tax Act, 1922, even if there is no legal liability to pay compensation.

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