Salary taxation of voluntary employer payments upheld where contemporaneous records showed recompense for past services.

A voluntary payment by a former employer was held taxable as salary where the contemporaneous order showed it was made in consideration of loyal and meritorious past services. The later description of the payment as a gift did not alter its true character, because Explanation 2 to section 7(1) covered remuneration or recompense for past employment, subject only to the specific exclusion for compensation for loss of employment. Once the receipt arose from the employment relationship and fell within section 7(1), its casual or non-recurring nature did not exempt it from tax. The amount was therefore taxable in the assessee's hands.

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Issues: Whether the sum of Rs. 5 lakhs paid by a former employer to the assessee was taxable as a receipt under the head "Salaries" under section 7(1) read with Explanation 2; and whether the amount could be treated as a personal gift or as a casual and non-recurring receipt outside the charging provision.

Analysis: The payment was made in a context where the assessee had served as Chief Dewan and the contemporaneous order expressly stated that the amount was given "in consideration of having rendered loyal and meritorious services." The Court treated the order as the decisive document and held that the later letter characterising the payment as a gift could not displace the earlier expressed purpose. Explanation 2 to section 7(1) was held to cover not only payments paid by way of salary or wages, but also voluntary payments received from a former employer where the object was to remunerate or recompensate past services, subject only to the specific exclusion for compensation for loss of employment. The Court further held that once the receipt was connected with employment and fell within section 7(1), its casual or non-recurring character did not exempt it from tax.

Conclusion: The amount was taxable under section 7(1) read with Explanation 2 as remuneration for past services and not as a purely personal gift or exempt casual receipt.

Final Conclusion: The reference was answered in the affirmative, upholding the taxability of the amount in the hands of the assessee.

Ratio Decidendi: A voluntary payment by an employer or former employer is taxable under the salary provisions if, on the contemporaneous record and surrounding circumstances, it is made in consideration of past services and not as a purely personal gift unrelated to employment.

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