1959 (7) TMI 60 - HC - Income Tax

Compensation for loss of employment in shares not taxable as income under Indian Income-tax Act

The court determined that the payment of Rs. 2,21,000 received by the assessee as compensation for the loss of employment in the form of shares was a ... - Issues Involved:1. Nature of the payment received by the assessee.2. Applicability of Section 7 of the Indian Income-tax Act.3. Determination of whether the payment is a capital receipt or a revenue receipt.Issue-wise Detailed Analysis:1. Nature of the Payment Received by the Assessee:The case revolves around the nature of the payment received by the assessee, E.D. Sheppard, from his employer, Killick Nixon & Co., upon termination of his employment. The firm decided to reorganize its business and convert itself into a public limited company, necessitating the termination of the services of its employees. The assessee was allotted 1,700 shares of Killick Industries Ltd., valued at Rs. 2,21,000, as compensation for the loss of employment. The Income-tax Officer sought to tax this amount, arguing that the shares were allotted in consideration of past services. However, the assessee produced evidence, including a letter and an affidavit from the firm's partners, stating that the shares were allotted as compensation for the loss of employment and not as a reward for past services.2. Applicability of Section 7 of the Indian Income-tax Act:Section 7(1) of the Indian Income-tax Act, as it stood at the material date, provided that tax shall be payable under the head 'Salaries' in respect of any salary, wages, annuity, pension, gratuity, fees, commissions, perquisites, or profits in lieu of salary or wages. Explanation 2 to this section clarified that a payment due to or received by an assessee from an employer or former employer, unless made solely as compensation for loss of employment, would be considered a profit received in lieu of salary. The Tribunal had to determine whether the payment was solely for the loss of employment or included remuneration for past services. The majority of the Tribunal members concluded that the payment was intended as compensation for the loss of employment and future prospects, binding this conclusion upon the court.3. Determination of Whether the Payment is a Capital Receipt or a Revenue Receipt:The primary question was whether the sum of Rs. 2,21,000 was a capital receipt or a revenue receipt in the hands of the assessee. The Tribunal's President agreed with the view that the payment was for the loss of employment and that the assessee's immediate re-employment was immaterial in determining the nature of the payment. The court held that compensation for loss of employment, even if it included loss of future prospects, could not be regarded as salary or profits in lieu of salary under Section 7(1) and the Explanation thereto. The court further stated that if the payment was not related to the employer-employee relationship, it would not fall within the expression 'profit received in lieu of salary.' Thus, the payment was considered a capital receipt and not taxable as income.Conclusion:The court concluded that the amount of Rs. 2,21,000 received by the assessee as the value of shares was not income assessable under Section 7 of the Indian Income-tax Act. The Commissioner of Income-tax was directed to pay the costs of the assessee.