Compensation for loss of employment treated as capital receipt; payment characterised as solatium is not taxable under the salary provisions.

Explanation 2 to Section 7 distinguishes payments from an employer as profits in lieu of salary unless made solely as compensation for loss of employment; payments characterised as solatium or compensation for compulsory or factual cessation of employment, including voluntary solatia, are capital in nature. On the facts the employer's termination communication and certificate show the payment was made as compensation for loss of employment and not for past services or contractual dues, and accordingly the receipt is a capital receipt and not taxable under Section 7.

---

---

Issues: Whether the amount of Rs. 12,000 received by the assessee on termination of employment is a revenue receipt (taxable) or a capital receipt (exempt) as compensation for loss of employment.

Analysis: Explanation 2 to Section 7 of the Income-tax Act distinguishes payments received from an employer as profits in lieu of salary unless made solely as compensation for loss of employment. The expression "compensation for loss of employment" encompasses payments made to compensate or act as a solatium for compulsory or factual loss of employment, whether payable as a legal liability or voluntarily. Relevant authorities treat voluntary payments made as a solatium for cessation of employment as capital in nature. On the facts, the employer's communication of 23rd March 1948 amounted to termination/compulsory cessation, and the surrounding circumstances and employer's certificate indicate the Rs. 12,000 was paid as compensation/solatium for termination and not as remuneration for past services or contractual dues.

Conclusion: The Rs. 12,000 is a capital receipt being compensation for loss of employment and is not taxable under Section 7; decision is in favour of the assessee.

---