Employment relationship and commuted pension characterisation supported exemption for a termination lump sum payment.

The substance of the engagement, not the broker label, determined that the assessee was in an employer-employee relationship because the appointment involved continuing service, fixed monthly remuneration, yearly renewal and incentive-linked payments. On that footing, the lump sum paid on termination was treated as commuted pension, since the correspondence showed that an existing pension liability for long service was discharged in a single payment in lieu of a monthly annuity. The receipt was therefore characterised as salary-related commuted pension and exempt under section 10(10A) of the Income-tax Act, 1961.

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Issues: (i) Whether the assessee's engagement with the foreign company was one of employer and employee, or an independent brokerage arrangement; (ii) whether the lump sum received on termination of service was commuted pension exempt under section 10(10A) of the Income-tax Act, 1961.

Issue (i): Whether the assessee's engagement with the foreign company was one of employer and employee, or an independent brokerage arrangement.

Analysis: The terms of appointment showed a continuing service relationship, with fixed monthly remuneration, renewal from year to year, and additional incentive linked to bookings. The designation as a broker did not change the substance of the engagement, which was to render services to the company on terms characteristic of employment.

Conclusion: The relationship was one of employer and employee, in favour of the assessee on this issue.

Issue (ii): Whether the lump sum received on termination of service was commuted pension exempt under section 10(10A) of the Income-tax Act, 1961.

Analysis: The correspondence surrounding the cessation of service and the subsequent payment showed that the assessee had sought pension for long service and that the employer elected to discharge that liability by a lump sum in lieu of a monthly annuity. The payment was therefore in the nature of commuted pension and not professional fees.

Conclusion: The lump sum was commuted pension exempt under section 10(10A), in favour of the assessee on this issue.

Final Conclusion: The assessee's receipt was treated as salary-related commuted pension arising from an employment relationship, and the exemption claim succeeded.

Ratio Decidendi: Where the substance of the engagement is employment and a pension liability is commuted into a lump sum, the receipt retains its character as commuted pension for exemption purposes.

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