Compensation for loss of employment characterised as non-salary; termination payment therefore not taxable as profit in lieu of salary.

Whether a payment on termination constitutes income under section 7(1) turns on its character: payments made solely as compensation for loss of employment, including loss of future prospects rooted in the employer-employee relationship, are not profits in lieu of salary. A factual absence of actual monetary loss does not change the agreed character of a termination payment. Any portion attributable to extinction of future prospects rather than remuneration for past services is not taxable as profits in lieu of salary and does not fall under another head; accordingly the specified termination payment is not assessable under section 7.

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Issues: Whether the sum of Rs. 2,21,000, being the value of shares allotted to the assessee on termination of his employment, is income assessable under section 7(1) of the Income-tax Act.

Analysis: Section 7(1) and Explanation 2 treat payments due to or received from an employer as profits in lieu of salary unless made solely as compensation for loss of employment. The payment in question was made in connection with the termination of employment and was described and evidenced as compensation for loss of employment, including loss of future prospects. Expectations of promotion or partnership are rooted in the employment relationship and, where a payment is made because of the employer-employee relation to compensate for termination (including loss of prospects), it falls within the category of compensation for loss of employment. Further, a factual absence of actual monetary loss (because the assessee obtained other employment immediately) does not alter the character of a payment agreed to be compensation for termination. If a part of the payment relates to extinction of future prospects attributable to the employment rather than remuneration for past services, such part is not a profit in lieu of salary within section 7(1) and Explanation 2 and does not fall under any other head of income.

Conclusion: The amount of Rs. 2,21,000 is not income of the assessee assessable under section 7 of the Income-tax Act.

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