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Issues Involved:
1. Taxability of the sum of Rs. 42,000 as compensation for loss of employment. 2. Taxability of the amount of Rs. 9,239 towards interest on the sum of Rs. 42,000. Detailed Analysis: 1. Taxability of the sum of Rs. 42,000 as compensation for loss of employment: The primary issue is whether the sum of Rs. 42,000 awarded to the assessee can be considered solely as compensation for loss of employment under section 7(1) and Explanation 2 of the Income-tax Act, 1922. The assessee argued that the amount was compensation for loss of employment, relying on the precedent set in the case of P.D. Khosla [1945] 13 I.T.R. 436 (Lah.). The Department contended that the amount was not compensation but a payment decreed under the terms of the employment agreement. The court analyzed the relevant clauses of the agreement between the assessee and the employer. Clause (3) provided for a payment equal to three years' salary upon termination of service, which was described as compensation for cessation of services. Clause (7) required six months' notice for termination of service. The court noted that the agreement was influenced by the appreciation of the assessee's past services and aimed to reward him for both past and future services. The court concluded that the payment under clause (3) was a terminal payment in appreciation of past services rather than compensation for loss of employment. The payment was due irrespective of the cause of termination, including misconduct or death, indicating it was not solely for loss of employment. The court held that the payment could not be considered solely as compensation for loss of employment within the meaning of Explanation 2 to section 7(1) of the Act. 2. Taxability of the amount of Rs. 9,239 towards interest on the sum of Rs. 42,000: The second issue concerned the taxability of Rs. 9,239 awarded as interest by the decree. The interest comprised Rs. 625 for interest up to the date of the suit and Rs. 8,614 for interest from the date of the suit until realization. The assessee argued that since the principal amount was not taxable, the interest should also be exempt. The court rejected this argument, noting that interest is taxable unless specifically exempted. The court held that the Rs. 8,614 awarded as interest by the court was clearly income and taxable. Regarding the Rs. 625 awarded as damages, the court cited Westminster Bank Ltd. v. Riches [1947] 28 Tax Cas. 159, emphasizing that the nature of the sum (capital or income) determines its taxability, not whether it is termed as damages or interest. The court concluded that the Rs. 625 was taxable income as it constituted interest on amounts payable to the assessee. Conclusion: The court answered the first question by stating that the sum of Rs. 42,000 could not be held solely as compensation for loss of employment within the meaning of Explanation 2 to section 7(1) of the Act. The court answered the second question affirmatively, holding that the amount of Rs. 9,239 towards interest was taxable under the Indian Income-tax Act. The assessee was ordered to pay the costs to the Department.
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