Employment inducement payment may be split between capital receipt and salary, affecting tax deduction at source.

A lump-sum payment made to induce an employee to join service was not compensation for loss of employment, because that exclusion applies only where there is prior employment, termination, and a causal nexus with the loss of that employment. The payment also was not wholly salary, since part of it was intended to secure future services and to offset benefits lost on leaving former employment, giving that portion a capital character. The balance was linked to service under the payer and formed part of emoluments. The amount was therefore apportioned equally between capital receipt and salary, with tax deduction at source inapplicable to the capital half and exigible on the salary half.

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Issues: Whether the sum of Rs. 1,00,000 paid to the employee under the service agreement was compensation for loss of employment, or salary within the meaning of section 7 of the Income-tax Act, 1922, and if partly capital and partly salary, how it was to be treated for deduction of tax at source.

Analysis: A payment can qualify as compensation for loss of employment only when there is a prior employment relationship, a cessation or termination of that employment, and a nexus between the payment and the loss so caused. Here, the payment was made by the petitioner to induce the employee to enter its service and to secure his services for seven years; it was not paid for termination of any employment with the petitioner, because no such employment existed earlier. The receipt therefore did not fall within the statutory exclusion for compensation for loss of employment. At the same time, the lump sum was not wholly salary, because part of it was paid to procure the employee's services and to make good the benefits he would lose by leaving his former employment, which gave that part a capital character. The balance, however, was connected with the employee's service under the petitioner and operated as an addition to his emoluments.

Conclusion: The payment was neither wholly compensation for loss of employment nor wholly salary. It was rightly apportioned equally between capital receipt and salary, so tax deduction at source was not exigible on the capital half, but was payable on the salary half.

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