Pension commutation and reduced-salary consideration can be apportioned, with only the remuneration element taxed under Schedule E.

A lump sum paid to commute pension rights was not taxable as profit from office under Schedule E because it was neither pension nor annuity, and the commutation element escaped tax. A separate amount paid in consideration of continued service at reduced salary was taxable as income from employment, since it represented remuneration arising from the office. Where the payment was composite, it could be reasonably apportioned between the non-taxable pension commutation element and the taxable salary-reduction element even without express contractual allocation, so only the taxable component was assessable.

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Issues: (i) Whether the part of the lump sum paid in commutation of pension rights was chargeable to income tax under Schedule E of the Income Tax Act, 1918; (ii) Whether the part of the lump sum attributable to the agreement to continue service at a reduced salary was chargeable under Schedule E; (iii) Whether the composite payment could be apportioned between the two elements for tax purposes.

Issue (i): Whether the part of the lump sum paid in commutation of pension rights was chargeable to income tax under Schedule E of the Income Tax Act, 1918.

Analysis: A pension was treated as a taxable subject distinct from the profits of an office, but a lump sum paid to release an employer from a liability to pay pension was not itself a pension or annuity. Such a payment was not regarded as profit from the office and was not brought within Schedule E merely because the underlying pension would have been taxable if paid periodically.

Conclusion: The commutation element was not chargeable under Schedule E and was in favour of the assessee.

Issue (ii): Whether the part of the lump sum attributable to the agreement to continue service at a reduced salary was chargeable under Schedule E.

Analysis: Where a payment was made in consideration of continued service at reduced annual remuneration, the amount represented a profit arising from the office. A lump sum paid to secure that reduction was treated as income in the nature of remuneration and fell within the charge to tax under Schedule E.

Conclusion: The salary-reduction element was chargeable under Schedule E and was in favour of revenue.

Issue (iii): Whether the composite payment could be apportioned between the two elements for tax purposes.

Analysis: Although the agreement stated a single composite sum, the Court held that the payment could be reasonably apportioned between the non-taxable commutation of pension rights and the taxable consideration for reduced salary. The absence of contractual allocation did not prevent an apportionment by the assessing authority.

Conclusion: Apportionment was permissible, and only the taxable salary-reduction component was to be assessed.

Final Conclusion: The appeal succeeded only to the extent that the pension-commutation component escaped taxation, while the part referable to reduced salary remained taxable and the assessments were sent back for reasonable apportionment.

Ratio Decidendi: A lump sum paid to commute pension rights is not taxable under Schedule E as profit from office, but a lump sum paid in consideration of continued service at reduced salary is taxable as income from the office, and a composite payment covering both elements may be apportioned accordingly.

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