Compensation for loss of employment treated as capital receipt where termination followed a mutual settlement, not salary remuneration.

Payments received from an employer are treated as income under Explanation 2 to section 7(1) of the Indian Income-tax Act, 1922 unless they are made solely as compensation for loss of employment and not as remuneration for past services. On the facts stated, the payment was linked to a later mutual termination arrangement, after objections to an earlier notice were entertained, and the operative notice itself recorded termination pursuant to that settlement. The amount was therefore characterised as compensation for surrender of employment rights rather than salary or other employment remuneration. The receipt was held to be capital in nature and not chargeable as revenue income.

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Issues: Whether the sum of Rs. 7,200 received by the assessee was a revenue receipt chargeable to income-tax or a capital receipt received solely as compensation for loss of employment.

Analysis: Explanation 2 to section 7(1) of the Indian Income-tax Act, 1922 treats payments received from an employer or former employer as profit in lieu of salary unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. The payment here was not made under the original notice as an ordinary contractual termination payment; the first notice was not enforced, the termination was effected through a later mutual agreement, and the operative notice itself recorded that the services were being ended pursuant to that agreement. The surrounding circumstances showed that the assessee had raised objections to the earlier notice, those objections were entertained, and the parties settled the matter by agreeing to terminate the employment on agreed terms. On these facts, the amount paid represented compensation for surrender of employment rights rather than salary or remuneration due under the employment terms.

Conclusion: The amount of Rs. 7,200 was a capital receipt and not a revenue receipt, and the question was answered in favour of the assessee.

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