Compensatory payment for premature dismissal is remunerative and taxable, not pension commutation or casual receipt.

A lump-sum payment made to compensate an employee for premature dismissal that is calculated by reference to forfeited salary and intended to restore the recipient to the salary position he would have occupied is remunerative in character and falls within the charge to income tax rather than being a capital or casual receipt; therefore such compensatory payments are taxable and do not qualify for exclusion as pension commutation or as a casual/non recurring receipt under the specified exemption clauses of the statute.

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Issues: (i) Whether the sum of Rs. 8,256 paid to the assessee by the Government of Madras on 12th March 1930 is income liable to tax; (ii) Whether the said sum is exempt from tax under Clause (5) or Clause (7), Sub section 3, Section 4 of the Act.

Issue (i): Whether the Rs. 8,256 payment is taxable income.

Analysis: The Act applies to income as described in Section 6 and includes a residuary charge under Section 12 for income not falling under other heads. A payment made to compensate an employee for premature retirement, calculated by reference to the salary he would have earned and the pension actually received, effectively puts him in the position he would have occupied had he remained in service. Such a payment is remunerative in character and traceable to the former Government service; it thus falls within the charging provisions of the Act and the heads of income rather than being outside the Act's ambit.

Conclusion: The sum of Rs. 8,256 is taxable as income.

Issue (ii): Whether the Rs. 8,256 is exempt under Section 4(3)(v) or Section 4(3)(vii) of the Act.

Analysis: The payment is not a capital receipt in commutation of pension within Clause (v) nor is it a casual, non recurring receipt outside taxation under Clause (vii). The payment was calculated as compensation tied to the salary the assessee would have earned and functions as remuneration for service; the language and purpose of Clauses (v) and (vii) do not encompass such a compensatory payment for premature dismissal.

Conclusion: The sum is not exempt under Clause (5) or Clause (7), Sub section 3, Section 4 of the Act; the exemption pleas are rejected.

Final Conclusion: The referred questions are answered by holding that the payment is taxable as income (in favour of the Revenue) and is not covered by the claimed exemptions.

Ratio Decidendi: A compensatory lump sum calculated by reference to salary forfeited due to premature dismissal and intended to restore the recipient to the salary position he would have occupied is remunerative in character and taxable under the relevant charging heads and the residuary provision of the Income tax Act, 1922.

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