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CASE NO.: Appeal (civil)  4267 of 2003

PETITIONER: All India Employees Self Contributory Superannuation Pension Scheme

RESPONDENT: Kuriakose V. Cherian & Ors.                      

DATE OF JUDGMENT: 03/10/2005

BENCH: Y.K.Sabharwal & Tarun Chatterjee

JUDGMENT: J U D G E M E N T [With C.A.No.7035-36 of 2003, C.A.No.9372 of 2003 &  C.A.No.2327 of 2004]

Y.K. Sabharwal, J.

       The dispute in these matters basically between the appellant and the  serving employees of Air India on one hand and retired employees on the  other is about the interpretation of Air India Employees Self-Contributory  Superannuation Pension Scheme (hereinafter referred to as ’Scheme’).

       In or about 1994, Air India proposed creation of a Pension Scheme  for its employees.  The Scheme was based on actuarial reports.  The  employees had to contribute to the fund under the Scheme, Air India  contributing a token sum of Rs.100/- per annum for all the employees put  together.  Broadly, Scheme was that all full time employees of Air India  would become members of the Scheme and contribute a percentage of  their salary to be deducted every month and credited to the fund under the  Scheme.  Each member had to contribute for a minimum period of 15  years and for those who did not have sufficient number of years of service  from the date of the commencement of the Scheme upto their  superannuation, an amount was calculated based on the total number of  years in deficit and the member was required to make payment of the  entire sum so calculated either in lump sum or to pay the said amount in  monthly installment along with interest on the total sum due.  On 12th  August, 1996, a deed of trust for incorporating the Scheme was entered  into between Air India and the trustees.  The deed also contained rules  known as ’Air India Employees Self-Contributing Pensionary Scheme  Rules’ (hereinafter referred to as ’the Rules’).  Further, it postulated  creation of a pension fund.  A deed of variation of the trust was executed  on 7th October, 1997 to amend certain provisions of the trust deed.  The  trust deed, inter alia, stipulates that the retiring employees would get  pension equivalent to 40 per cent of the last pay drawn salary, consisting  of basic pay, dearness allowances and personal pay, if any.

       To give effect to the aforesaid, an agreement was entered into with  Life Insurance Corporation of India which issued a master policy stipulating  various terms and conditions.

       Rules stipulate that a member or his beneficiary shall have no  interest in the master policy taken out in respect of the members or any  investment otherwise made by the trustees in accordance with the Rules  or the Scheme but shall be entitled to receive superannuation benefits in  accordance with the Rules and that the trustees shall always administer  the Scheme for the benefit of the members and their beneficiaries in  accordance with the provisions of the Rules.

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       A staff notice dated 30th September, 1996 was issued reproducing  therein salient features of the Scheme.  It stipulated that the Scheme will  take effect from 1st April, 1994.  The main object of the Scheme is to  provide to the members on retirement a fixed amount per month.  The  amount is to be calculated according to the Scheme on superannuation of  an employee and annuity is required to be purchased from Life Insurance  Corporation of India (LIC) so as to ensure payment by LIC of a fixed  monthly sum to the retired employee and on his demise the payment of the  annuity amount to his legal representatives.         Besides the Scheme, the existing employees represented by their  respective associations are the appellants before us.  According to the  appellants, the Scheme was defective inasmuch as large amounts were  given to the retiring employees without having regard to the contributions  made by them towards the Scheme and resultantly the old employees by  making smaller contributions received disproportionately larger amount of  benefits.  No fund would have been available with the Scheme for giving  pension to the employees retiring after 2005 despite they having  contributed large amount to the fund under the Scheme, thus, requiring  corrective action.  Under these circumstances, the Scheme was amended  with effect from 3rd April, 2002.  The amendment requires the pensioners to  make payment of additional contribution towards annuities purchased from  LIC.  The amendment provided that the amount of the pension shall be  corresponding to the contribution made by the respective retired  employees and not on the basis of 40 per cent of the last drawn salary of  the employees.  Corresponding amendments were also made in the Rules,  inter alia, providing that the employees who have retired upto 31st October,  2001 shall contribute the amount so as to make up the difference between  cost of annuity purchased for them from the pension fund from LIC and the  total contribution made by them till date of retirement.  Other consequential  amendments were also made providing that the trustees shall notify LIC for  retrieval of the shortfall in the contribution from the purchase price of the  annuity paid to LIC in respect of such members and for appropriate  reduction in the monthly amount payable to such employees.  The amount  so retrieved is required to be added to and form part of the corpus of the  trust fund to be equally distributed amongst the contributing members.         The validity of the aforesaid amendment of the Scheme was  challenged by the retired employees in writ petition filed under Article 226  of the Constitution of India before the High Court mainly on the ground that  rights in their favour crystallized on purchase of annuities at the time of  their superannuation and the same cannot be subjected to any alteration  or amendment.  The contention urged before the High Court was that the  trustees could only effect amendment to the Scheme for future benefits of  existing employees and had no right to effect any amendment which  adversely affects vested rights of the pensioners in regard to the pension  payable to them as per the amended Scheme.  The plea was that their  pension as per the amended Scheme would be considerably reduced.  It  was contended that on retirement the ex-employees sever all their  relations with the Scheme, which does not envisage making of any  additional contribution, by members after superannuation.  The LIC having  accepted annuity and having made monthly payments to retired  employees cannot refund to the trust any amount or reduce monthly  payment to the detriment of the pensioners.          These appeals have been filed by the Scheme, Air India, Cabin  Crew Association, Ground Staff Association, Officers Association, and  Employees Guild Association.  Learned counsel for the appellants contend  that out of 18,386 employees who were members of the Scheme from the  year 1994 till date, 1852 employees retired leaving 16534 employees in  service.  They pointed out that though retirees were only about 10 per cent  of the employees but had taken 60 per cent of the total contribution made  by all the employees against their contribution of about 17.98 per cent.  If  this trend continues the corpus would get fully exhausted and the result  would be that the employees who retire after the year 2005 will not get any  benefit since by that time no amount will be left in the fund.  It is contended  that the annuities continue to remain the property of the scheme and as  such trustees have a right to review the situation and amend the scheme.  

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The contention is that the trustees have unrestricted power to amend or  alter the Scheme even retrospectively.  Further, it is urged that strictly  speaking the amendment is not retrospective inasmuch as the revision of  the pension is prospective.  The amount of the pension would be reduced  on non-fulfillment of the conditions by the retiring employees after the date  of the amendment.   The High Court by the impugned judgment held that the impugned  amendment to the Trust Deed to the extent it applies in future is legal and  valid but the amendment cannot apply to the employees who have retired  before the date of amendment and such employees shall continue to  receive pensionary benefits as before, namely, the benefits which existed  at the time of amendment.         For the aforesaid conclusion, the main ground which prevailed with  the High Court is that the right to annuity in favour of retired employees  crystallized on the date of superannuation and the same cannot be  changed by amendment. The High Court held that annuitant has no connection with the  quantum of the remaining trust fund; whether it increases or decreases  and that on retirement of the employee, the quantum of corpus, which  yields the annuity, is paid over to the LIC and physically leaves the trust  fund.  The retiree gets a life long annuity and on his demise his heirs get  the designated corpus.  Thus the designated corpus which leaves the trust  on date of superannuation never returns.  The trust is created because of  the requirement of Income Tax Act and for the purpose of administrative  convenience.  Annuitants are in no way concerned with the financial health  of the trust fund which originally purchased the annuities.  They are not  entitled to look to original trust for any assistance in case the interest rate  of LIC falls and they cannot claim any additional benefit even if trust  decides to increase the benefits for such existing employees.   Challenging the impugned judgment, learned counsel for the  appellants contend that the beneficiaries, namely, retired employees  cannot have any interest in the insurance policy entered by the trustees;  the entire fund is within the control of the trustees; legal obligation is cast  on the trustees that none of the member is deprived of pension.  The  trustees have not only right but an obligation to correct the mistake and  amend the Scheme so that the employees retiring after 2005 also get  pension and are not deprived of it despite having contributed to the fund  from their salary.  Amendment became necessary on finding out that the  funds are likely to be depleted as a result of the bona fide mistake.  It is  because of such mistake disproportionate amounts have been paid to the  retirees without regard to the contributions made by them.           The crucial question is whether the benefits, which the retired  employees are getting, can be curtailed because of reduction of the fund  amount.   In support of these appeals, three contentions have been urged: (1)  depletion of the fund amount if not checked would result in the retirees  after the year 2005 not getting any pension.  Therefore, there was the  requirement to make the impugned amendments; (2) the trustees in terms  of Deed and the Rules have unrestricted power to amend the Scheme so  as to apply amendment to also those who stand retired; and (3) the  Scheme is not amenable to the writ jurisdiction.  The appellants are neither  an instrumentality or agency of the State nor other authority contemplated  by Article 12 of the Constitution.                       Taking the last contention first, the High Court rejected it observing  that the creation of pension fund flows from the socio economic  obligations of the States and that the pension is not a charge or bounty  nor is it a gratuitous payment depending on the whims of the employer.  The High Court is of the view that writ is maintainable as it was mainly  directed against LIC.  It is, however, contended on behalf of the  appellants that the nature of the Scheme under consideration is different.   Despite use of the term ’pension’, the benefit under the Scheme is not  ’pension’ as understood in service jurisprudence.  The observations  made in the impugned judgment relying upon various earlier precedents  dealing with pension and holding that it is not a bounty may not strictly  apply to the benefits stipulated for the retiring employees under the

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Scheme in question.  Further, it is possible to contend that LIC is only a  proforma party to the litigation and that it cannot be said that writ is  directed mainly against LIC, the main question being the power of the  trustees to amend the Scheme with retrospective effect.  We need not,  however, examine, in the present case, the aforesaid question and the  correctness of the view of the High Court on the aspect of maintainability  of the writ petition since learned counsel challenging the correctness of  the impugned judgment, have adopted a pragmatic and fair approach  that this Court having heard the matter in detail, it would not serve either  the interest of the retired employees or the employees in service or the  Scheme, if the parties are relegated to litigation before other forums on  this court reversing view of the High court on the question of  maintainability of the writ petition.  Under these circumstances, we leave  open the question of maintainability of the writ to be decided in an  appropriate case.           Now, we will examine other two contentions.  The object of  introducing the Scheme was to enable the employees to obtain monetary  benefit on their superannuation and/or payment to the beneficiaries in the  event of death of the employee.  How it was sought to be achieved shall  have to be considered in the light of the Scheme, the stand of the  appellants and also the provisions of the Income Tax Act and the Rules.   Air-India Employees’ Superannuation Pension Trust (for short ’Trust’) was  established to administer the pension scheme also in fulfillment of the  requirement under the Income Tax Act, 1961.  The pension scheme was  approved by the Commissioner of Income Tax.         Under Section 2(6) of the Income Tax Act,  ’approved  superannuation fund’ has been defined to mean superannuation fund or  any part of the superannuation fund which has been and continues to be  approved by the Chief Commissioner or Commissioner in accordance with  the Rules contained in Part B of the Fourth Schedule. Part B of Schedule IV of the Income Tax Act, 1961 deals with  approved superannuation funds.  Under clause 3 thereof, in order that the  superannuation fund may receive and retain approval, it shall satisfy the  conditions set out in the said clause and any other conditions which the  Board may, by Rules, prescribe.  One of the conditions is their fund shall  be a fund established under an irrevocable trust.  Another condition is that  fund shall have for its sole purpose the provision of annuities for  employees in the trade or undertaking on their retirement at or after a  specified age or on their becoming incapacitated prior to such retirement,  or for the widows, children or dependents of persons who are or have been  such employees on the death of those persons.         Part XIII of Income Tax Rules, 1962 covering Rules 82 to 97 dealing  with approved superannuation funds is framed in exercise of the powers  conferred, inter alia, under clause 11 (1)(cc) of Part B of Schedule IV.   Under Rule 85, it is, inter alia, stipulated that all monies contributed to the  approved superannuation fund are required to be invested in a post office  savings bank account in India or in a current account or in a savings  account with scheduled bank or utilized in accordance with Rule 89 for  making payment under a scheme of insurance or for purchase of annuities  referred to in that rule.  Under Rule 87, the ordinary annual contribution by  the employer to a fund in respect of any particular employee shall not  exceed 25% of his salary for each year as reduced by the employer’s  contribution, if any, to any provident fund (whether recognized or not) in  respect of the same employee for that year. Rule 89, inter alia, provides that for the purpose of providing the  annuities for the beneficiaries, the trustees shall enter into a scheme of  insurance with LIC and accumulate the contributions in respect of each  beneficiary and purchase an annuity from the said LIC at the time of the  retirement or death of each employee or on his becoming incapacitated  prior to retirement.         Clause 3 of the trust deed, inter alia, provides that pension fund is to  be established under irrevocable trust and the fund shall have for its sole  purpose the provision of annuities for employees. Clause 14 provides that power of appointing the Trustee shall be  vested in the employer.  The Board of Trustees shall consist of three

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representatives of the employer and eight members who are employees.   The employer shall appoint, its representatives, the representatives of the  members, who shall be the employees.  The employer shall exercise  power of filling up any vacancies and removing any Trustee and the  employer shall nominate one of its representative Trustees as Chairman of  the Trust.         Clause 19 provides that the employer shall have the power to  appoint any officer to act as Secretary of Fund who will be invested with  such powers of management of the Trust as the Trustees may from time to  time in their discretion determine.  With the consent of the employer the  trustees shall have power to employ any person or persons to do any  legal, accountancy or other work.         The Trust deed shows that the trustee agreed to act as such of the  pension fund at the behest of the employer.  It further shows that the  employer has considerable control over the functions as well as the  administration of the Scheme.         Clause 5 of the trust deed deals with power to amend.  It reads as  under: "The Trustees may at any time with the previous  concurrence and/or approval in writing of the  employer alter, vary or amend any of the trusts or  provisions of this Deed and the Rules.

Provided that no such alteration or variation shall  be inconsistent with the main objects of the trusts  hereby created.

Provided further that no such alteration or  variation shall be made without the prior approval  of the Commissioner of Income-tax having  jurisdiction over the Fund."                   Clause 8 provides that members to have no legal right.  It reads  thus: "Except as provided for in this Deed or in the  Rules, no Member, Beneficiary or other person  claiming right from such Member shall have any  legal claim, right or interest in the Fund."

       We may also reproduce clauses 24, 26, 27, 32 and 33 which read as  under: "24.Trust Fund\027The Fund shall consist of the  contributions as specified in this Deed and the  Rules governing the Fund and contributions  received by the Trustees from the Company and  of the accumulations thereof and of the securities  and the annuities purchased therewith and  interest thereon and of any capital gains arising  from the sale of the capital assets of the Fund.   The Trustees shall hold the Fund upon such trust  and with and subject to such powers and  provisions as are or shall be contained in this  Deed and the Rules for the time being in force to  the intent that the said Fund shall be established  for the benefit of the Members and/or their  Beneficiaries.  The Fund shall be vested in the  Trustees.  The Trustees shall have the entire  custody, management and control of the Fund.   No monies belonging to the Fund shall be  recoverable by the Employer under any  circumstances nor shall the Employer have any  lien or charge over the Fund, except or any loans  that may be lent by the Employer to the Fund for  meeting its immediate liabilities.

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26.Provisioins of Benefit\027The trustees may  enter into any Scheme of insurance or contracts  with the Life Insurance Corporation of India to  provide for all or any part of the benefits which  shall be or may become payable under these  presents and may pay out of the Fund all  payments to be made by it under such Scheme or  contracts.

27.Investment of Funds\027(a) All monies from  time to time in the hands of the Trustees and not  immediately required for the purpose of the Trust  shall be deposited/invested by the Trustees within  15 days from the date of receipt or accrual, as the  case may be, in accordance with Rule 85 of the  Income-tax Rules, 1962 or any modification or re- enactment or reframing or renumbering thereof.

(b) The Trustees shall have power at any time  and from time to time to vary, transpose or sell  such investments and reinvest the Funds in other  investments of the nature hereby authorised,  within the guidelines, notifications or Rules issued  by the Government from time to time.

32.Review of Funds\027 The Trustee shall review  the availability of Funds of the Scheme annually  or at such intervals as may be deemed fit by the  Trustees and to decide any revision in the  maximum benefit or rate of the member’s  contribution under the Scheme.

33.Review of Benefits\027Notwithstanding  anything to the contrary contained in these  presents or in the rules the Trustees shall have  and shall always be deemed to have the right to  review any limit the benefits payable to the  Beneficiaries including the right to reduce the  benefits payable in accordance with the rules in  the event of any or all the members ceasing or  reducing to make contribution to the Fund in  accordance with these presents and the Rules.          

Rule 14 provides that members or his beneficiary shall have no  interest in the master policy.  It reads as under:

"A member or his beneficiary shall have no  interest in the Master Policy taken out in respect  of the members or any investment otherwise  made by the Trustees in accordance with the  Rules of the Scheme but shall be entitled to  receive superannuation benefits in accordance  with the Rules.  Provided always that the  Trustees shall administer the Scheme for the  benefit of the members and their beneficiaries in  accordance with the provisions of these Rules."

       Dealing now with the first contention as to the depletion of the fund  amounts, case of the appellants is that the scheme was based upon  actuarial valuation carried out in the year 1993/1994 on assumptions as  under:

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(1)     Basic pay and DA were taken as pre- revised scales. (2)     Assumption that the contribution will start  flowing on monthly basis from April, 1994.  (3)     Rate of interest was assumed at 12 per  cent. (4)     Contribution of Rs.350 per month was  supposed to increase by 10% per annum. (5)     Total number of members of the Scheme at  any given time would remain constant i.e.  retirees are replaced by recruits.

It is urged that when the Scheme was launched in 1996 none of the  above assumptions were found to be in existence as evidenced from the  following:- (1)     With the wage agreement in 1996, the  salary scales were substantially revised. (2)     Monthly deductions of contribution started  only from September, 1996 and arrears of  contributions for the period April, 1994 to  August, 1996 were received by the Trust  from March 2000 only.  (3)    Rate of interest has been progressively  declining. (4)     The contribution of Rs.350 p.m. has not  been escalated by 10% per annum.

(5)     Number of employees contributing to the  Scheme has progressively declined in view  of non-recruitment since 1995.

       Further, according to the appellants, there was shortfall of Rs.155  crores which is as under:                                                               "Rs. in Crores (a)     Increase in annuity cost on account of  65 revision of grades and pay scales

       (b)     Non-escalation of additional contributions      60                 since 1995 @ 10%

       (c)     Loss of interest on contribution from April     30                 1994 to April 1996                                                                    ______                                                                    Rs.155"

It is contended that the aforesaid deficit of Rs.155 crores, as  assessed by the actuaries, only represents the gap between the present  value of all future pension liability of the Trust as per the original defined  benefit scheme and the present value of all future contributions to be  collected by the trust, as originally determined.  The actuaries had  assessed the increase in annuity cost on account of revision of pay scale  at Rs.65 crores.  This is sought to be illustrated by the appellants by giving  figures of pre-revised Basic + DA and pension calculated at the rate of  40% and cost of annuity and contribution of retiring employee and also  giving figures of revised scales and resultant increase of cost of annuity  without proportionate increase at employee’s contribution.         The break up of 60 crores on account of non-increase in the  additional contribution of Rs.350 has also been given.  The break up of  deficit of Rs.30 crores has also been given.  As per the Scheme, the  contribution of the members was in two parts (a) 1% to 5% contribution of  Basic and D.A. and (b) additional contribution of Rs.350 per month.   Further, all members who retired in the period from April, 1994 to August,  1996 did not make the additional contribution of Rs.350 p.m. in their 15  years lump sum contribution.  The impact of non-escalation of additional

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contribution of Rs.350 has been assessed at Rs.60 crores.  It has been  pointed out that the Scheme was applicable to all employees who retired  from 1st April, 1994 but actual deductions of contributions from monthly  salary commenced from September, 1996.  It is stated that various unions  representing the members were not agreeable for their members making a  lump sum contribution and requested Air India Management to appropriate  and pay the Trust such arrears of contribution for the period April, 1994 to  August, 1996 from the wage agreement arrears as and when these were  paid.  Air India was facing a severe financial crunch at that point of time  and the Management had signed agreement with the Unions to the effect  that though revised pay scales were implemented immediately, arrears  would be paid only when the company’s liquidity position permitted the  same.  It was understood that the Management was not to pay any interest  on such deferred payment of arrears.  The payment of arrears of pension  contribution to the Trust, therefore, was also deferred until the settlement  of wage arrears i.e. till March 2000.  This resulted in loss of interest on  such arrears.         The aforesaid financial position has been disputed and retirees have  sought to explain that the facts and figures given and conclusions drawn  by the Scheme are entirely incorrect and misleading.  It was pointed out  that in addition to the simple computation mistakes, the projection has not  taken into account the interest accrual.  According to retirees, as per the  correct position the shortfall if at all will be minimal and in any case it was  to be borne in mind that the Scheme as originally formulated was rolling  scheme and benefits were not confined to the extent of contributions  made. The retirees have also given facts and figures giving calculations  based on pre-revised Basic and DA with accrued interest (without  escalation) as also calculations based on revised Basic and DA without  escalation and the calculations based on with escalation. Further, according to the retirees, the trustees took no steps to either  approach Air India to recover the monies which is stated to be due from Air  India nor they approached the Income Tax Officer for permission to invest  amounts in short term deposits nor have they taken steps to revise  contributions.  According to them, the trustees to save their own skin  attempted to recover the amounts from the retirees under the guise of  acting fairly to balance out the difference without explaining as to what  prevented them from taking requisite steps while the retirees were still in  employment.  They have also highlighted the factor of failure of trustees to  take steps for making the recoveries from Air India which kept amount after  deducting the same from the salaries of the employees. It is not necessary to go into detail calculations.  It does appear that  there is shortfall in the Fund though a lot can be said in respect of  calculation submitted by both sides.   No doubt, the amount which went out  of the fund for purchase of annuity for retiring employee was considerably  more than what was contributed by the outgoing employee but it is also  true, at the same time, that the huge amounts did not come to the fund  from Air India and some of assumptions on which Scheme was formulated  did not hold good on commencement of the Scheme.  The reason for the  position of the fund which necessitated the amendment cannot be  attributed entirely on account of the gap between the amount contributed  by the retiring employee and the amount used for purchase of annuity.  It  may also be noted that the appellant’s own case is that there was basic  fallacy in the Scheme from its inception.  The Scheme, as originally  conceived was flawed, is the stand of the appellants in CA No.4267 of  2003.  It is further their own stand that concept of granting annuities on a  defined benefit basis in a self-contributory fund is inherently fallacious as in  the self-contributory scheme the only consideration is the contributions  made by the members and hence the benefit has to necessarily flow from  their contributions and the interest accrued thereon.  As against this, the  present is a case of defined benefit Scheme.  This basic fallacy in the  Scheme was never rectified from inception.  It is the own case of the  appellants that in addition to this inherent fallacy in the formation of the  Scheme, the situation was aggravated by various factors noticed above.         We would assume that there were several contributory factors as a

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result of which the fund position became quite bad.  The factors included  the non-receipt of huge funds in time from Air India, lack of proper  investment by the trust resulting in loss of interest in addition to the fallacy  in the scheme being gap between the contribution and the amount  required for purchase of annuity to ensure return of specified amount to the  retirees.          It may be that the last of the aforesaid factor contributed most in the  depleted financial position of the fund requiring the trustees to make the  amendments in the scheme on 3rd April, 2002, but it has to be borne in  mind that the original scheme was a ’Benefit Defined Scheme’ as opposed  to a ’Contribution Defined Scheme’.  It has now been conceded on behalf  of the appellants that there was no fraud in formulation or implementation  of the scheme. Besides aforesaid factor, there were other factors, such as,  considerable delay in Air India remitting arrears of pension contribution  amounting to Rs.23 crores to the trust, non-payment of interest by Air India  on late payments etc.         The retirees received what was receivable by them according to the  existing scheme on the date of retirement.  The pension scheme, as  originally conceived and formulated, was a rolling scheme postulating  outgoing employees on retirement and their place being taken by induction  of new employees whose contributions would add to the fund.         According to the figures given above, the shortfall in the fund was in  the sum of Rs.41.83 crores which was sought to be made up from 1852  retirees.  According to the retirees, if they are asked to make good that  amount, on average each pensioner will have to repay a sum of  Rs.2,25,863/-.  At the same time, if the amount is contributed by the  existing over 16,500 employees to make good the aforesaid differential  amount of Rs.41.83 crore, they would be required to pay about Rs.25,000/-  each which can be split into convenient installments.           On distinction between ’Defined Benefit Plan and ’Defined  Contribution Plan’ Mr. Arun S. Murlidhar in ’Innovations in Pension Fund  Management’ states : "Defined Benefit Plans In the DB pension plan, participants and/or  sponsors make contributions, and these  contributions could change over time.  The  scheme then provides a defined benefit\027a  prescribed annuity in either absolute currency or  as a faction of a measure of salary (e.g., 50 per  cent of final salary or the average the last five  years of salary.  The guaranteed pension benefit  could be in either real or nominal terms.  The ratio  of annuity or benefit to a measure of salary is  known as the replacement rate.

Defined Contribution Plans Under the DC scheme, participants and/or  sponsors make prespecified contributions.  These  contributions could be specified in either absolute  currency or as a fraction of a measure of salary  (e.g. 5 per cent of annual pretax salary).  The  participants invest the contributions in assets.   However, the pension depends entirely on the  asset performance of accumulated contributions.   As a result, two individuals with identical  contributions could receive very different  pensions.  Bader (1995), Bodie, Marcus, and  Merton (1988), and Blake (2000) provide more  detailed descriptions of DB and DC plans." (Emphasis supplied by us)

       According to learned author, there are several ways in which the  aforesaid plans can be funded.  In general, country’s social security  systems are pay-as-you-go (PAYG), Defined Benefit schemes which tax

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current participants to pay retiree benefits.  However, corporate or  occupational defined benefit or defined contribution schemes tend to be  funded both partially and fully.  Funding requires allocating funds prior to  retirement in order to service future liabilities.          The scheme envisages a Defined Benefit Plans and not a Defined  Contribution Plans.  It also envisages allocating funds at the time of  retirement of employees, i.e. the amount for which the annuity is  purchased.  None has questioned the power of the trustees to amend the  scheme prospectively from the date of amendment.  We would also  assume that there is a corpus deficiency which, to a considerable extent,  has taken place as a result of gap between contribution and amount of  annuity purchased.  All the same, the basic question is whether by the  amendment of the scheme, this gap can be bridged by making recoveries  from those who have already retired and are getting benefit from LIC as a  result of purchase of annuity and/or from their heirs who would otherwise  receive annuity amount after the demise of the retiree.  This necessarily  takes us to the second question as to the power to amend the scheme  retrospectively.         At the outset, it may be noted that there is no merit in the contention,  half-heartedly canvassed, that the amendment is not retrospective on the  ground that the rights of the retirees only after the amendment of the  scheme are being effected as the amount already paid to them under the  unamended scheme is not being asked to be returned.  There is fallacy in  the argument.  It is evident that the retirees, as a result of amendment, are  being asked to pay to make good the gap between the amount of annuity  and the contributions made by them and, if not, either their monthly  pension would be reduced or their heirs would not get the annuity amount  at the relevant stage.  The amounts already taken by the retirees have also  been taken into consideration while working out the figures.  Therefore, it  cannot be said that the amendment is not retrospective.  Various clauses  on the basis whereof learned counsel for the appellants contend that it is  permissible to amend the scheme with retrospective effect have already  been noted hereinbefore.  To consider the effect thereof and to appreciate  contentions urged by learned counsel for the appellants, first let us  examine the true meaning of expression ’Annuity’. The expression ’Annuity’ has no statutory definition.  However,  according to Black’s Law Dictionary, it means an obligation to pay a stated  sum usually monthly or annually to a stated recipient. An annuity is a right to receive de anno in annum a certain sum; that  may be given for life, or for a series of years; it may be given during any  particular period, or in perpetuity; and there is also this singularity about  annuities, that, although payable out of the personal assets, they are  capable of being, even, for the purpose of devolution, as real estate; they  may be given to a man and his heirs, and may go to the heir as real estate  (see : Advanced Law Lexicon by P Ramanatha Aiyar, 3rd Edition 2005)         In Commissioner of Wealth Tax v. P.K.Benerjee [(1981) 1 SCC  63], this court held that in order to constitute an annuity, the payment to be  made periodically should be a fixed or pre-determined one, and it should  not  be  liable to any variation depending upon or on any ground relating to  the general income of the fund or estate which is charged for such  payment.  The court cited with approval the observations of observations  of Jenkins L. J in In-re Duke of Norfolk Public Trustee v. Inland  Revenue Commr. [(1950) 1 Ch 487]  which reads thus: "An annuity charged on property is not, nor is it in  any way equivalent to an interest in a proportion  of the capital of the property charged sufficient to  produce its yearly amount.  It is nothing more or  less than a right to receive the stipulated yearly  sum out of the income of the whole of the  property charged (and in many cases out of the  capital in the event of a deficiency of income).  It  confers no interest in any particular part of the  property charged, but simply a security extending  over the whole.  The annuitant is entitled to  receive no less and no more than the stipulated

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sum.  He neither gains by a rise nor loses by a fall  in the amount of income produced by the  property, except in so far as there may be a  deficiency of income in a case in which recourse  to capital is excluded."                                                          Learned counsel for the appellants have, however, placed strong  reliance on the Trust Deed and the Rules to contend that the Trustees  have full right to amend the Scheme with retrospective effect and that the  members or beneficiaries have no right, title or interest in the fund or even  in the annuities purchased from the fund on the retirement of beneficiary.   In this respect, reliance is placed upon Clause 5 of the Trust Deed above  reproduced stating that the Trustee may at any time with previous  concurrence or approval in writing of the employer alter, vary or amend  any of the provisions of the Trust Deed and the Rules.  The first proviso to  the aforesaid clause, however stipulates that no such alteration or variation  shall be inconsistent with the main objects of the Trust thereby created.   Reliance has also been placed to Clause 8 of the Trust Deed stipulating  that except as provided for in this Deed or Rules, no member, beneficiary  or other person claiming right from such member shall have any legal  claim, right or interest in the Fund.  But, the proviso to the said clause  enjoins upon the Trust Deed to administer the Fund for the benefit of the  members and/or their beneficiaries in accordance with the provisions of the  Deed and the Rules.  Reliance on Clause 24 has been strongly placed  submitting, inter alia, that the members’ Fund shall consist of contributions  as specified in the Trust Deed and the Rules governing the Fund and  contributions received by the Trustees from the Air India and of the  accumulations thereof and of the securities and annuities purchased  therewith and interest thereon and that the said Fund shall be established  for the benefit of the members and/or their beneficiaries and shall be  vested in the Trustees.  Further, Clause 26 is relied upon which stipulates  that the trustees may enter into any scheme of insurance or contracts with  the LIC to provide for all or any part of the benefits which shall be or may  become payable under this deed and may pay out of the Fund all  payments to be made by it under such scheme or contracts.         Besides the aforesaid clauses, learned counsel for the appellant  have placed strong reliance on Clause 32 and Clause 33 of the Trust  Deed.  Clause 32 provides the power of the Trustee to review the  availability of Funds of the Scheme annually or at such intervals as may be  deemed fit by the Trustees and to decide any revision as to the rate of the  member’s contribution under the Scheme.  Clause 33 i.e. power of review  of benefits stipulates the Trustees right to review any limit the benefits  payable to the beneficiaries including the right to reduce the benefits  payable in accordance with the rules in the event of any or all the members  ceasing or reducing to make contribution to the Fund.   None of the aforesaid clauses render any assistance to the  appellants.  The relied upon clauses deal with the members who continue  to contribute to the Fund.  The liability of the retiring member to make any  such contribution ceases on retirement.  It is nobody’s case that after the  retirement any contribution is made or required to be made by retired  employees.  The aforesaid clauses only show the right and power to  review the Fund and the benefits payable to the continuing  members/employees.  Likewise, reliance on Rule 14 which stipulates that  the member or his beneficiary shall not have any interest in the master  policy taken out in respect of the members in accordance with the Rules of  the Scheme but shall be entitled to superannuation benefits in accordance  with the Rules, has no applicability.  The retired employees are not  claiming any interest in the master policy but are claiming right flowing  from the annuity purchased on their retirement. The rights of the employees to receive the annuity and quantum of  the annuity get crystallized at the time of purchase of the annuity. In Sasadhar Chakravarty & Anr. v. Union of India & Ors. [(1996)  11 SCC 1], the question arose as to when the right of employee to receive  annuity and the quantum thereof gets crystallized.  In that case, the  employer had set up a non-contributory superannuation fund under the

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provisions of Income Tax Act, 1961.  On retirement, under the rules of the  fund, the retired employee was receiving an annuity under the policy  purchased by the members of the fund from LIC.  A writ petition was filed  by retired employee contending that certain improvements have been  effected in the executive staff fund to which the pensioners who had  already retired were entitled and denial thereof was arbitrary and violative  of Article 14 of the Constitution.  The retired employee claimed right to the  larger benefits which though not available at the time of his retirement but  were being given to the employees who retired after the improvements to  the fund have been made.  This Court held that the right of the employee  to receive an annuity and the quantum thereof get crystallized at the time  of purchase of the annuity under the then existing scheme of the LIC and  any subsequent improvements in a given pension fund scheme would not  be available to those persons whose rights are already crystallized under  the scheme by which they are governed because the amounts contributed  by the employer in respect of such persons are already withdrawn from  pension fund to purchase the annuity.  With reference to Rules 85 and 89  of Income Tax Rules, this Court held that the same are meant to safeguard  the monies deposited in the superannuation and to secure the annuitant  annuity amount.  Undoubtedly, Rule 89 requires the Trustee to purchase  an annuity from the LIC to the exclusion of any one else but this provision  must be judged in the context of the fact that the contracts of life insurance  which are entered into by the LIC are backed by a government guarantee  which is provided by Section 37 of the Life Insurance Act, 1956.  The Court  observed right of an employee to receive the annuity and the quantum gets  determined at the time when the annuity is purchased.  Any subsequent  improvement in a given pension fund will benefit only those whose moneys  form part of the pension fund.  As soon as an employee retires, an annuity  is purchased for his benefit under Rule 89, there remains no scope for any  fresh contribution on his account so as to entitle him to an increased  pension prospectively on the basis of the improvements made  subsequently in the pension scheme of a fund since the existing  pensioners form a distinct class. The decision was sought to be distinguished on the ground that in  the said case, this Court was concerned with the scheme financed by the  employer unlike the present scheme where employer’s contribution was  almost nil and that it was self-contributing scheme.  We are, however,  unable to accept this contention.  The ratio decidendi of the case is that the  moment annuity is purchased, the fund leaves the corpus and the relations  between the two are snapped.  The corpus to the extent required for  purchase of annuity leaves the trust fund and all connections between trust  fund and retirees are severed.  Thus, once the annuity is purchased, there  remained no connection with the quantum of the fund.  Therefore,  annuitants are in no way concerned with the financial position of the fund  for which annuity was purchased.  They cannot be asked to further  contribute.  That is the basic question in the present case.  It matters little  that the present case is of reverse position inasmuch as in the case of  Sasadhar Chakravarty this Court was considering the case of a retired  employee who was seeking right in the improvement whereas in the  present case the question is about reducing the benefits or rights of the  retired employees.  The question is about applicability of the principle.   Applying the principle in Sasadhar Chakravarty’s case to the present  case, we have no doubt that after retirement retirees are not liable for any  deficit in the fund which is sought to be made good by recovery from them  which is the effect of retrospective amendment.  Further, as already noted  it was a benefit and rolling scheme as opposed to a contributory scheme.   Neither clauses 32 and 33 or the Trust Deed nor Rule 14 has any  applicability on question of retrospective operation of amendment to the  retired employees.  It has been admitted that the form of insurance annuity  policy with LIC was adopted as a result of mandate of the statute.  Having  done that, the appellants are bound by the consequences flowing from  purchase of annuity.  In view of what we have said above there is neither  any substance in the contention that contract was between LIC and the  trustees nor is it of any consequence in view of our conclusion that the  amount, on retirement of employees, leaves the fund for purchase of

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annuity and the rights of the retirees are crystallized on their retirement by  purchase of annuity and thus no amount can be claimed from them by  making applicable amendment dated 3rd April, 2002 with retrospective  effect.   Therefore, we find no substance in the second contention. The contention that there is no privity of contract between LIC and  the retired employees as contract for purchase of annuities is between  trust and LIC, has also no substance.  In Chandulal Harjivandas v.  Commissioner of Income-tax, Gujarat  [AIR 1967 SC 816] insurance  policy was purchased by the father of the assessee and the life assured  was that of the assessee.  The claim of assessee for rebate of insurance  premium under Section 15(1) of the Income Tax Act, 1922 was rejected.   On reference, the High Court upheld this view of the Revenue holding that  contract of insurance with LIC was entered into by the father of the  assessee and that the contracting parties were the father of the assessee  and the LIC.  This court reversing decision of the High Court held that the  contract of insurance must be read as a whole; in substance it is a contract  of life insurance with regard to the life of the assessee and that the main  intention of the contract was the insurance on the life of the assessee and  other clauses are merely ancillary or subordinate to the main purpose,  under Section 2 (11) of the Insurance Act, the purchase of annuity  amounts to purchase of an insurance policy.  It would make no difference,  in the present case, as to who made the payment. The LIC having accepted the annuity and having effected monthly  payments can neither reduce the annuity amount nor refund it to the trust  to the detriment of the retirees since the annuity has already crystallized  and no change can be made in such annuity as stipulated by the impugned  amendments.  LIC has obligation to fulfill the promise given by it to the  retirees, who are assured under the annuity scheme.   In Commissioner of Wealth Tax, Punjab, J & K, Chandigarh,  Patiala v. Yuvraj Amrinder Singh & Ors. [(1985) 4 SCC 608], it was held  that annuities dependent on human life constitute a species of contract of  life insurance.  In Life Insurance Corporation of India & Ors. v. Asha  Goel (Smt.) & Anr. [(2001) 2 SCC 160], interpreting scope of Section 45  of the Insurance Act, 1938, this Court laid down the parameters within  which powers under Section 45 could be exercised to repudiate the claim  under a contract of insurance. In our opinion, the view of the High Court is unassailable.  In the  result, all appeals are dismissed.