Profit in lieu of salary: payment under contractual notice entitlement is taxable as salary rather than ex gratia.

Payment made under an employment contract as salary in lieu of notice is income from salary where the employer paid pursuant to a contractual entitlement; similar precedents treating such payments as part of remuneration were applied and the statutory exception for sums paid solely as compensation for loss of employment does not cover amounts arising from contractual terms forming part of service conditions, so the payment is taxable as profit in lieu of salary.

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Issues: Whether the sum of Rs. 25,200 received by the assessee during the previous year was revenue income liable to tax under the Income-tax Act.

Analysis: The payment arose under the terms of the employment contract which entitled the employer to terminate service on twelve months' notice or pay salary in lieu thereof; the employer paid the amount in accordance with that contractual provision. Precedents treating similar contractual payments as part of remuneration rather than ex gratia compensation were applied. Explanation 2 to Section 7 was examined to determine whether the payment fell within the exception for sums "made solely as compensation for loss of employment"; where a sum is payable by reason of a contractual entitlement forming part of the terms of service, it constitutes remuneration or profit in lieu of salary.

Conclusion: The sum of Rs. 25,200 is part of the assessee's remuneration and is taxable as income under the head "Salaries"; the question referred is answered against the assessee and in favour of the Revenue.

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