Voluntary payment by former employer may be a personal gift, not salary, unless tied to past services or employment.

A voluntary payment by a former employer is taxable as salary or profit in lieu of salary only if it is received in consideration of employment or as remuneration for past services; where the facts show a personal gift made in token of affection and esteem, it falls outside the charging provision. On the evidence discussed, the payment was characterised as a gift rather than a salary-related receipt, because the surrounding circumstances and later confirmation by the donor did not show any employment-linked consideration. The amount was therefore treated as not taxable under section 7(1) read with Explanation 2, while the dissent would have treated it as taxable remuneration for past services.

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Issues: Whether the sum of Rs. 5 lakhs received by the assessee was taxable as salary or profit in lieu of salary under section 7(1) read with Explanation 2 of the Income-tax Act, or was a personal gift outside the charging provision.

Analysis: The majority held that the contemporaneous material relied upon by the Tribunal was misappreciated, and that the later confirmation by the donor, together with the prior grant of pension and the surrounding circumstances, showed that the payment was not made in consideration of employment or as remuneration for past services. The decisive question was the character in which the amount was received by the assessee. On the evidence, the payment was treated as a voluntary personal gift made in token of affection and esteem, rather than a salary-related receipt or a profit in lieu of salary.

Conclusion: The amount was not taxable under section 7(1) read with Explanation 2 and the issue was decided in favour of the assessee.

Dissenting Opinion: Hidayatullah, J. held that the Tribunal was entitled to prefer the earlier document and that the payment was made in consideration of loyal and meritorious past services, bringing it within section 7(1) read with Explanation 2 as remuneration for past services.

Ratio Decidendi: A voluntary payment made by a former employer is taxable only if, on the facts, it is received as remuneration for past services or by virtue of the employment relationship; where the payment is found to be a personal gift made in token of affection or esteem, it does not fall within salary income.

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