Compensation for loss of employment may fall outside salary income where a share allotment is not remuneration for past services.

Section 7 of the Income-tax Act taxed salary, wages, commissions, perquisites and profits in lieu of salary, but Explanation 2 treated payments from an employer or former employer as taxable only unless they were made solely as compensation for loss of employment and not as remuneration for past services. On that basis, a share allotment made to an employee on termination of employment was analysed by its substance, and the employee's immediate re-employment did not change its character. Where the payment was in substance compensation for loss of employment, it was not taxable as salary or profits in lieu of salary. The stated amount was therefore not assessable as income or a revenue receipt.

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Issues: Whether the value of shares allotted to an employee on termination of his employment was taxable as income under section 7 of the Income-tax Act, or was a capital receipt paid as compensation for loss of employment.

Analysis: Section 7(1) taxed salary, wages, commissions, perquisites, and profits in lieu of or in addition to salary or wages. Explanation 2 treated a payment from an employer or former employer as profit received in lieu of salary unless it was made solely as compensation for loss of employment and not by way of remuneration for past services. The employee's immediate re-employment did not alter the character of the payment. A payment made because of the employment relationship, even if it also reflected loss of future prospects attached to that employment, did not necessarily become salary or profits in lieu of salary if it was in substance compensation for termination of employment.

Conclusion: The amount of Rs. 2,21,000 was not income assessable under section 7 of the Income-tax Act and was not taxable as revenue receipt.

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