A payment made to an employee in lieu of notice is taxable as income, as it is considered to be part of the employee's remuneration for services rendered.

Judgment

S. K. DAS, J. : V. D. Talwar, who was assesses before the taxing authorities and whose legal representatives on his death are appellants before us, was employed as the General Manager of Messrs. J. K. Iron and Steel Company Ltd., Kanpur. The terms of his employment as agreed upon by the assesses and the company were incorporated in an appointment letter dated February 7, 1946. A formal memorandum of agreement was also executed between the parties on February 9, 1946. The assesses actually joined the service of the company on May 1,1946. According to the service agreement the pay of the assesses was fixed at Rs. 2,000/- per month with an increment of Rs. 100/- p.a. subject to certain deductions for income-tax, absence of duty etc., which need not be set out in detail for the purpose of this case. According to the agreement the period of service was for five years. Clauses (5) and (6) of the appointment letter read-

"(5) Period of agreement of service to be five years.

(6) Termination of service if within five years to be on notice of twelve months on either side or salary in lieu thereof."

Clause (1) of the memorandum of the agreement dated February 9, 1946 said that the employee shall serve the employer faithfully and difigently for a term of five years from the date be joins, and Cl. 21 read as follows :

"If during the currency of this agreement, the employee desires to leave the services of the employers for any reasons whatsoever, he shall be at liberty to terminate the agreement by giving twelve calendar months notice in writing only after repaying to the employer joining money and all expenses if they have been allowed too the employee, and the employers shall have full power to take all necessary steps in order to enforce such payment. The employers may terminate the service of the employee by giving twelve calendar months notice in writing or (in the case of breach of any of the terms or conditions contained herein at any time without any notice) or paying any salary in lieu thereof".

2. We have stated earlier that the assessee joined his power as General Manager on May 1 1946. The services of the assessee were however terminated with effect from August 31, 1947. It is the admired case of the parties that the services of the assessee were not terminated for any default or misconduct on the part of the assessee, but the services were terminated because the company did not want to continue the assessee in their employment. It is also the admitted case that no notice of twelve months for the termination of the service was given by the company to the assessee as required by the contract. In lieu of the notice the company paid to the assessee on September 12, 1947 a sum of Rs. 18,096-1-0 which was the amount computed as salary for twelve months after deduction of income.-tax at the source. The company calculated the salary for the twelve months at Rs. 25,200/- and deducted therefrom the sum of Rs. 7,103-l5-0 as income-tax. The assessee gave a stamped receipt to the company for having received Rs. 18,096-1-0 "in full and final settlement of all his claims and dues against the employer company".

3. In making the assessment for the Year 1948-1949 the Income- tax officer held that the sum of Rs. 25,200/- was a revenue receipt of the assessee liable to be taxes under the Indian Income-tax Act, 1922 and rejected the claim of the assessee that the said sum was compensation for loss of employment and the tax amounting to Rs. 7,103,-15-0 should be refunded to him. The assessee took an appeal to the Appellate Assistant Commissioner who held that the sum of Rs. 25,200/- though calculated on the basis of twelve times his monthly salary was nothing but compensation for the loss of service and was therefore not taxable as income in the shape of salaries. Then, there was an appeal to the Income-tax Appellate Tribunal which reversed the finding of the Appellate Assistant Commissioner and held that the amount of Rs. 25,200/- paid to the a