1960 (11) TMI 134 - HC - Income Tax

Payment on Termination of Employment Taxable as Remuneration, Not Compensation

The court held that the amount of Rs. 25,200 received by the assessee upon termination of employment was considered part of the remuneration under the ... - Issues Involved:1. Nature of the payment received by the assessee upon termination of employment.2. Taxability of the payment under the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Nature of the Payment Received by the Assessee upon Termination of Employment:The assessee was employed as the general manager of Messrs. J.K. Iron and Steel Co. Ltd., Kanpur, with a salary of Rs. 2,000 per month and certain allowances. The employment agreement stipulated a service period of five years, with a provision for termination on twelve months' notice or salary in lieu thereof. The assessee's services were terminated effective August 31, 1947, without any default or misconduct on his part, and without the required twelve months' notice. Instead, the company paid the assessee Rs. 18,096, which was the computed salary for twelve months after deducting income tax at source.The key question was whether this amount was compensation for loss of employment or part of the remuneration under the contract. The assessee argued that the amount was compensation for surrendering the right to continue in service for five years. However, the court found that the amount of Rs. 25,200 was part of the remuneration the assessee was entitled to under clause 21 of the contract, which allowed for termination with twelve months' notice or salary in lieu thereof. The court concluded that the payment was not compensation for loss of office but part of the remuneration payable under the employment contract.2. Taxability of the Payment under the Indian Income-tax Act:The Income-tax Officer initially held that the sum of Rs. 25,200 was a revenue receipt liable to be taxed. The Appellate Assistant Commissioner reversed this, considering it compensation for loss of service and thus a capital receipt not liable to tax. However, the Income-tax Appellate Tribunal reinstated the initial view, holding that the amount was salary in lieu of twelve months' notice and therefore taxable.The court upheld the Tribunal's view, citing precedents such as Dale v. de Soissons and Henry v. Arthur Foster, where similar payments were considered part of the remuneration and taxable. The court emphasized that the payment was made under the contract terms and not as compensation for loss of employment. The court also referred to Explanation 2 of section 7 of the Indian Income-tax Act, which states that a payment received from an employer is considered a profit in lieu of salary unless made solely as compensation for loss of employment and not as remuneration for past services.The court distinguished the present case from others like Hunter v. Dewhurst and W.A. Guff v. Commissioner of Income-tax, where payments were made outside the terms of the contract or as ex gratia payments. The court concluded that the sum of Rs. 25,200 was an income receipt and liable to be taxed under the Income-tax Act.Conclusion:The court held that the sum of Rs. 25,200 received by the assessee was part of the remuneration under the employment contract and not compensation for loss of employment. Therefore, it was taxable under the Indian Income-tax Act. The question of law was answered against the assessee and in favor of the Income-tax Department, with the assessee ordered to pay the costs of the reference.