TMI Blog1957 (2) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. the assessee received from the company a sum of Rs. 12,000. The company has described this payment as compensation equivalent to six months' salary for the termination of his employment owning to the closure of the department. The letter of the company is annexure ' C ' and forms part of the case. The Income-tax Officer held that the payment of Rs. 12,000 to the assessee was not a payment on account of loss of employment but a payment in lieu of six months' notice, which was taxable under section 7 of the Income-tax Act. 3. The assessee went before the Appellate Assistant Commissioner. He held that the payment in question was exempt under the Explanation 2 to section 7 of the Income-tax Act. 4. The Department came up in appeal to the Tribunal. The Tribunal held that the payment received by the assessee was not six months' salary in lieu of the notice. The assessee left the service of the company after the period of notice of six months had expired and for which period he drew his full salary. The assessee could not claim any compensation for the loss of employment according to the terms of employment. In the opinion of the Tribunal the payment made was at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the London Board of Directors or a formal notice terminating the employment of the appellant. In view of what is said above. I hold that the payment in question is exempt under explanation 2 to section 7 of the Income-tax Act. 2. Explanation 2 to section 7 reads as under : A payment due to or received by an assessee from an employer or former employer... unless the payment is made solely as compensation for loss of employment and not by way of remuneration for past services. The law, in our opinion, clearly distinguishes these payment which are invariably of two distinct types. One is a payment made for loss of employment, i.e., where an assessee has a legal right for a claim of damages. In the present case, it cannot be denied that under the terms of the agreement the assessee had no right to ask for any compensation whatsoever. He was entitled to six months' notice, which had in fact been given. We are not in agreement with the finding of the Income-tax Officer that where six months' salary is paid in lieu of notice it is not a compensation for loss of employment. In the present case it is obviously not six months' salary. The salary was Rs. 2,100 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xing Department sought to being this amount to tax and the contention of the assessee was that this sum represented a compensation for loss of office and therefore it was not liable to tax. The Income-tax Officer took the view against the assessee. The Appellate Assistant Commissioner decided in favour of the assessee; but the Tribunal came to a conclusion contrary to the contention of the assessee. The result is, the assessee has how come on this reference before us. Now there was an agreement of service between Messrs. Thos. Cook and Son Ltd. and the assessee, and that contract of service provided that the assessee was entitled to six months' notice if his services were to be terminated. It also provided that, if six months' notice was not given, he was entitled to salary for six months. On the question of notice the Tribunal has come to the conclusion that the communication to which reference has been made constituted a notice under the contract, and having come to that conclusion, they have taken the view that the assessee was not entitled to anything under the contract and therefore what was paid to him was in the nature of gratuity. They have also stated this was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly point out, the authorities to which our attention has been drawn have given to the expression compensation a wider connotation. It also seems to us, apart from the authorities, that it is the better view to take of this expression, because if an employee loses his employment which is the source of his income, any payment made by his employer for that loss should not be looked upon as income liable to tax, as in its very nature the payment is to compensate for or to act as a solatium for the very source which produced the income and in respect of which the employee is liable to tax. Now, first turing to the very well known decision of the Privy Council in Shaw Wallace Co. v. Commissioner of Income-tax, Bengal ([1932] 2 Comp. Cas 276), the Privy Council held that a sum of money received as compensation for loss or cessation of oil distributing agencies was not income, profits or gains within the meaning of the Income-tax Act. There is nothing in the judgment of the Privy Council which suggests that the compensation that was received by the assessee was a compensation which it was legally entitled to ; and the ratio of the judgment is to be found at page 282, where their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as a solatium the payment would be a capital receipt not liable to tax. Again at page 61 the learned Judge says : But at any rate it does seem to me that compensation for loss of an employment which need not continue, but which was likely to continue, is not an annual profit within the scope of the Income-tax at all. It is true that in this case the employer was not bound to continue the employee in service provided he gave the necessary notice ; but it was equally open to the employer not to give the notice and to permit the employee to continue in service ; and therefore we have here an employment which was likely to continue, and notwithstanding that likelihood, by action on the part of the employer, the employee was deprived of his employment. Lord Justice Romer, in the case of Henry v. Arthur Foster ([1931] 16 Tax Cas. 605 at 634), defines the terms compensation for loss of office, which he characterizes as a well-known terms, as meaning a payment to the holder of an office as compensation for being deprived of profits to which as between himself and his employer he would, but for an act of deprivation by his employer or some third part such as the Legislature, hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by the employer stating that Rs. 12,000 were paid to the employee as compensation equivalent to six months' salary for the termination of his employment owing to the closure of the department. it may be said that the view taken by the employer as to the nature of the payment cannot bind the Tribunal or this Court ; but even when we look at the surrounding circumstances, there is nothing to justify the finding of the Tribunal. The service rendered by the employee was of a short duration ; the salary paid to him was quite a generous salary ; and there is nothing to indicate that there was any reason why the employer should want to appreciate the services of his employee by paying him anything more than what was due to him under the contract. Therefore, on the facts and circumstances of this case, a payment was made by the employer to the employee which was a voluntary payment and which was paid to him, not for past services rendered, but a as compensation or solatium for terminating his employment. It is significant that in this certificate, to which we have referred, the employer mentions that the employment was being terminated owing to the closure of the department. Thus t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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