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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether the amount received by the assessee on termination of service was exempt as compensation for loss of employment, or was taxable as salary or profits in lieu of salary under the Income-tax Act.
Analysis: The payment arose under the service agreement and was payable on termination of employment for any cause whatsoever, including termination with consent and even in the event of death. The agreement and receipt described it as compensation for cessation of service, not as compensation for loss of employment. On the facts, the payment was a terminal payment made in appreciation of past services and was in addition to salary already earned. It therefore fell within section 7(1), and did not satisfy the exception in Explanation 2, which applies only when the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. The sum paid towards tax by the employer was also part of the taxable receipt, because the employee received the benefit of that tax payment.
Conclusion: The amount was taxable as salary or profits in lieu of salary and was not exempt as compensation for loss of employment; the answer was against the assessee.
Ratio Decidendi: A payment made by an employer on termination of service is taxable under section 7(1) where it is a terminal benefit referable to past services and is not made solely as compensation for loss of employment.
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