C K KARANAKARAN Vs. UNION OF INDIA

JUDGEMENT

(1.) This appeal raises an interesting and somewhat difficult question regarding the extent, of exemption available under the Income-tax Act, 1961, to a Government servant in respect of a lump sum received by him (on his deemed retirement from service due to his absorption into a public sector undertaking) in place of the payments which he would have been entitled to receive had he retired from Government service in the normal course.

(2.) On general principles, the receipt of a lump sum, by an employee on the commutation of the pension payments which he would otherwise be entitled to receive would be in the nature of a capital receipt (except, perhaps, where the pension is in the nature of deferred remuneration). This general rule stood abrogated by the very comprehensive definition of 'profits in lieu of salary' contained in Explanation 2 to Section 7(1) of the Indian Income-tax Act, 1922. However, it appears that the legislature did not then intend to bring commuted pension to tax for Section 23(2) of the Finance (No.2) Act, 1965, declared:

(3.) Now for the factual background in which the question arises :