1. This appeal and cross-objection relate to the question of taxability of an amount received by the assessee by encashment of unavailed leave.
2. During the previous year relevant to the assessment year 1976-77, the assessee had been employed as a director of the United India Fire & General Insurance Co. On the nationalisation of that company, the assessee opted out of the service and received terminal benefits which included a sum of Rs. 12,823 to which he was eligible by encashment of the earned leave which he had not utilised during the entire period of service from 1962 up to 22-4-1975. The ITO brought this amount to tax and also denied relief under Section 89(1). On appeal, the AAC granted that relief.
3. The revenue is in appeal against the grant of relief under Section 89(1). But the assessee has filed a memorandum of cross objection objecting to the assessment of the amount itself. The assessee's case is that this amount is not income at all and cannot be assessed to tax.
4. After hearing both sides, we are of the opinion that the assessee is entitled to succeed. The difference between income and capital is well recognised, for while the former is a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources, the latter is not. It is well known that upon termination of services employees are generally entitled to certain terminal benefits, such as, gratuity which is a capital receipt and not income liable to tax. Since such amounts have been judicially recognised to be not income, there have been attempts to camouflage a part of the salary of other recurring amounts, which would be income, as terminal benefits to avoid tax. Therefore, the Parliament thought it fit to affirm that salary and such income camouflaged as a terminal benefit would still be taxable by including terminal benefits in the definition of salary and then exempting terminal benefits prescribing the amounts that could reasonably be regarded as terminal benefits and thus capital receipt, by Section 10, Sub-sections (10), (10A), (10B), (11), (12) and (13).
But these exemptions only recognise the capital nature of such receipts. It is in this background we must consider another type of terminal benefit which is the encashment of the unavailed leave which is attributable to the entire service of the employee and not the previous year alone. Since encashment of leave as another form of terminal benefit is of recent origin, it has not yet been specifically made taxable. It is for this reason that corresponding exemption of reasonable amount as in the case of other terminal benefits, has not found a place in the statute. Therefore, in the absence of any specific provisions either taxing Or exempting this terminal benefit, the issue has to be decided only on the basis of the general concept of income and capital. The "A" Bench of the Tribunal, Madras, had occasion to deal with this kind of terminal benefit in the case of N.B. Tendolkar v. ITO  4 Taxman 129 on that basis and in that case (to which one of us was a party) it was held that the amount received by encashment of leave is only a capital receipt. This was because it is received on termination, it is not remuneration for services rendered, but is a receipt for exchange or parting with an intangible asset, namely, the right to avail leave earned during service. It also has certain characteristics closely associated with capital, such as, its being acquired over a period of years as a lump sum and not regularly as a recurring receipt. We may also usefully refer to the case of Jarrold v.Boustead 41 TC 701 (CA) in which it was held that an amount received for giving up amature status will be a capital receipt by giving up an asset (sic). In that case, there is a telling illustration : "Suppose there was a man who was an expert organist but was very fond of playing golf on Sundays. He is asked to become the organist of the Parish Church for the ensuing seven months at a salary of 10 a month for the seven months, but it is expressly stipulated by this strange Parish council that, if he takes up the post, he is to give up Sunday golf for the rest of his life. Thereupon, he says that, if he is to give up golf, he wants an extra 500 ; and they agree to pay it. In such a case, the 500 is not a payment for his services as an organist for seven months. It is a payment for relinquishing what he considered to be an advantage to him". It was held that such a payment for giving up an advantage was a capital sum for there was a permanent asset in his hands. In the same way, the value received by encashment of unavailed earned leave is a payment received for giving up an advantage and is, therefore, a capital receipt and not income which could be taxed under the Income-tax Act. In this view, it is unnecessary to consider the ground of appeal of the revenue that relief under Section 89 should not have been granted. We, therefore, set aside the orders of the authorities below and direct the ITO to recompute the total income after excluding the amount of Rs. 12,823 which is a capital receipt and not income.
5. In the result, the cross objection is allowed and the appeal is dismissed.