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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether monthly payments received under a settlement replacing the original employment contract were taxable as revenue receipts under section 7 of the Income-tax Act, 1922, or were capital receipts received solely as compensation for loss of employment.
Analysis: The original contract entitled the assessee to salary and other emoluments for a fixed term and provided compensation on premature dismissal. The later agreement terminated the employment, fixed monthly payments for the unexpired term, and imposed restrictive covenants against carrying on insurance business or divulging business secrets. The restrictive clauses were held to be ancillary restraints intended to protect the former employer and did not show that the assessee remained in service or that any part of the payments represented remuneration for past services. The payment was made because the employment had been brought to an end and was accepted in instalments only as a mode of discharge. On the authorities considered, a payment does not become taxable merely because it comes from a former employer or because restrictive covenants accompany the settlement.
Conclusion: The receipts were not taxable as revenue income in whole or in part and were held to be compensation for loss of employment, not profit in lieu of salary.
Final Conclusion: The reference was answered in favour of the assessee by holding that the payments under the settlement were not assessable to tax as revenue receipts.
Ratio Decidendi: A payment made on termination of employment is not taxable as salary income where it is truly compensation for loss of employment and not remuneration for past services, even if the settlement includes ancillary restrictive covenants and provides for payment by instalments.
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