Compromise payment for wrongful dismissal was capital compensation for loss of employment, not taxable salary income.

A lump-sum compromise payment made after repudiation of a service contract was treated as compensation for loss of employment, not as taxable salary or profit in lieu of salary. The payment was made in settlement of a wrongful-dismissal claim and in return for the employee abandoning all contractual rights, so the earlier service arrangement and its terminal-payment clause did not govern the compromise. The inclusion of a salary claim in the suit did not change the character of the receipt. The amount was therefore characterised as a capital receipt arising from termination of employment and excluded from assessment as salary income.

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Issues: Whether the sum received on compromise of the wrongful-termination claim was a capital receipt solely as compensation for loss of employment, or a taxable payment in lieu of salary under Explanation 2 to section 7(1) of the Income-tax Act, 1922.

Analysis: The payment was made after the employer had repudiated the service contract and the assessee had sued for damages for wrongful dismissal. The compromise amount was paid in settlement of that claim and in return for the assessee abandoning all rights under the contract. The earlier service arrangement and its terminal-payment clause did not govern the later compromise. On the facts, the amount was not remuneration for past services or a deferred contractual salary payment, but damages for the loss of employment and the extinction of contractual rights. The inclusion of a salary claim in the suit did not alter the character of the entire compromise amount.

Conclusion: The receipt was solely compensation for loss of employment and was not assessable as profit in lieu of salary under Explanation 2 to section 7(1).

Final Conclusion: The reference was answered so as to exclude the amount from tax as salary income and to treat the compromise payment as a capital receipt arising from the termination of employment.

Ratio Decidendi: A lump sum paid on compromise of a wrongful dismissal claim, in consideration of the employee's abandonment of all contractual rights after repudiation of the service contract, is a capital receipt solely as compensation for loss of employment and not taxable as salary or profit in lieu of salary.

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