01 April 1964
Supreme Court


Case number: Appeal (civil) 220 of 1963






DATE OF JUDGMENT: 01/04/1964


CITATION:  1965 AIR   49            1964 SCR  (7) 569

ACT: Income  Tax-Scheme to effect a policy of insurance  for  the purpose  of  ensuring  annuity  to  every  employee  on  his attaining  age  of  superannuation  or  on  happening  of  a specified  contingency  Contributions  to be  made  both  by employer  and employee-Whether amount paid by  the  employer towards  premium payable by employee taxable under s.  7(1)- Meaning  of  perquisite-Indian Income-tax Act, 1922  (11  of 1922), s. 7(1).

HEADNOTE: The  respondent is an employee of the English  and  Scottish Joint  Co-operative Wholesale Society Ltd.  incorporated  in England.   The Society established a  superannuation  scheme for  the benefit of the male European members of  its  staff employed in India by means of deferred annuities.  Under the terms  of the scheme, the trustee has to effect a policy  of insurance  for the purpose of ensuring an annuity  to  every member  of  the  ,Society  on  his  attaining  the  age   of superannuation   or   on  the  happening   of   a   specific contingency.   The  Society contributed  ,one-third  of  the premium payable by each employee.  During the year  1956-57, the  Society  contributed  Rs. 3333/-  towards  the  premium payable by the respondent, an employee of the Society.   The Income-tax  Officer included the said amount in the  taxable income of the respondent for the year 1956-57 under s. 7(1), Explanation  1, sub-cl. (v) of the Act.  The appeals of  the respondent  were dismissed both by the  Appellate  Assistant Commissioner  of  Income-tax and  the  Income-tax  Appellate ’Tribunal. The Tribunal referred to the High Court the following  three questions of law:-               (1)   Whether  the  contribution paid  by  the               employer to the assessee under the terms of  a               trust  deed  in respect of a  contract  for  a               deferred  annuity on the life of the  assessee               is a perquisite as contemplated by               s.    7(1) of the Income-tax Act?               (2)   Whether  the  said  contributions   were               allowed to, or due to the applicant by or from               the employer in the accounting year?



             (3)   Whether  the deferred annuity  aforesaid               is  annuity  hit by s. 7(1) and  para  (v)  of               Explanation 1 thereto. The  High Court held that the employer’s contribution  under the  terms  of the trust deed was not a perquisite  as  con- templated by s. 7(1).  The employer’s contributions were not allowed  to or due to the employee in the  accounting  year. The  legislature  not having used the word  "deferred"  with annuity  in s. 7(1) and the statute being a taxing one,  the deferred annuity would not hit para (v) of Explanation 1  to s.  7-(1) of the Act.  Against the decision of  High  Court, the   appellant  came  to  this  Court  by  special   leave. Dismissing the appeal, 570 Held:     The  answers to the questions of law as  given  by the  High Court were correct.  Unless a vested  interest  in the  sum accrues to an employee, it is not taxable.  In  the present  case.  no interest in the sum  contributed  by  the employer under the scheme vested in the employee, as it  was only  a contingent interest depending upon his reaching  the age of superannuation. it is not a perquisite allowed to him by  the employer or an amount, due to him from the  employer within  the meaning of s. 7(1) of the Act.  A perquisite  is only  that amount of money which is allowed to the  employee by  or is due to him from the employer or is paid to him  to effect an insurance on his life. Smyth  v. Stretton, (1904), 5 T.C. 36, and Edwards (H.   M., Inspector  of  Taxes)  v.  Roberts,  (1935),  19  T.C.  618, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  220/  1963. Appeal  by special leave from the judgment and  order  dated January 9, 1961 of the Kerala High Court in I.T.R. Case  No. 17 of 1959. K.   N.  Rajagopal  Sastri and R. N. Sachthey, for  the  ap- pellant. The respondent did not appear. April 1, 1964.  The Judgment of the Court was delivered by SUBBA RAO, J.-This appeal by special leave preferred against the judgment of the High Court of Kerala at Ernakulam raises the question of the interpretation of s. 7(1) of the  Indian Income-tax  Act,  1922  (Act No. XI  of  1922),  hereinafter called the Act. The respondent, L. W. Russel, is an employee of the  English and  Scottish  Joint Co-operative  Wholesale  Society  Ltd., Kozhikode,   hereinafter  called  the  Society,  which   was incorporated in England.  The Society established a superan- nuation scheme for the benefit of the male European  members of the Society’s staff employed in India, Ceylon and  Africa by means of deferred annuities.  The terms of such  benefits were  incorporated  in  a trust deed dated  July  27,  1934. Every European employee of the Society shall become a member of that scheme as a condition of employment.  Under the term of  the  scheme  the  trustee has  to  effect  a  policy  of insurance  for the purpose of ensuring an annuity  to  every member   of  the  Society  on  his  attaining  the  age   of superannuation  or on the happening of a  specified  contin- gency.   The Society contributes 1/3 of the premium  payable by such employee.  During the year 1956-57 the Society  con- tributed  Rs.  3,333/- towards the premium  payable  by  the respondent.   The Income-tax Officer, Kozhikode Circle,  in- cluded the said amount in the taxable income of the  respon-



dent for the year 1956-57 under s. 7(1), Explanation 1  Sub- cl. (v)   of   the  Act.   The  appeal  preferred   by   the respondent against 571 the  said inclusion to the Appellate Assistant  Commissioner of Income tax, Kozhikode, was dismissed.  The further appeal preferred to the Income-tax Appellate Tribunal received  the same  fate.   The assessee thereupon  filed  an  application under  s.  66(1)  of the Act  to  the  Income-tax  Appellate Tribunal for stating a case to the High Court.  By its order dated  December 1, 1958, the Tribunal submitted a  statement of  case referring the following three questions of  law  to the High Court of Kerala at Ernakulam: -               (1)   Whether  the contributions paid  by  the               employer to the assessee under the terms of  a               trust  deed  in respect of a  contract  for  a               deferred  annuity on the life of the  assessee               is  a ’perquisite’ as contemplated by s.  7(1)               of the Indian Income-tax Act?               (2)   Whether  the  said  contributions   were               allowed to or due to the applicant by or  from               the employer in the accounting year?               (3)   Whether  the deferred annuity  aforesaid               is  an annuity hit by section 7(1)  and  para.               (v) of Explanation 1 thereto? On  the  first  question  the  High  Court  held  that   the employer’s  contribution under the terms of the  trust  deed was not a perquisite as contemplated by s. 7(1) of the  Act. On  the second question it came to the conclusion  that  the employer’s  contributions were not allowed to or due to  the employee  in the accounting year.  On the third question  it expressed  the opinion that the Legislature not having  used the word ’deferred" with annuity in s. 7(1) and the  statute being a taxing one, the deferred annuity would not be hit by para.  (v)  of  Explanation 1 to s. 7(1) of  the  Act.   The Commissioner of Income-tax has preferred the present  appeal to  this  Court  questioning the  correctness  of  the  said answers. The three questions formulated for the High Court’s  opinion are  interdependent  and the answers to them turn  upon  the true  interpretation of the relevant part of s. 7(1) of  the Act. Mr.  Rajagopala Sastri, learned counsel for  the  appellant, contends  that the amount contributed by the  Society  under the  scheme  towards the insurance premium  payable  by  the trustees   for   arranging  a  deferred   annuity   on   the respondent’s  superannuation  is  a  perquisite  within  the meaning  of  s. 7(1) of the Act and that the fact  that  the respondent may not have the benefit of the contributions  on the  happening  of certain contingencies will not  make  the said   contributions  any  the  less  a   perquisite.    The employer’s share of the contributions to the fund  earmarked for  paying premiums of the insurance policy,  the  argument proceeds, vests in the respondent as soon as 572 it is paid to the trustee and the happening of a contingency only  ’operates  as a defeasance of the vested  right.   The respondent is ex-parte and, therefore, the Court has not the benefit of the exposition of the contrary view. Before  we attempt to construe the scope of s. 7(1)  of  the Act  it will be convenient at the outset to notice the  pro- visions  of  the scheme, for the scope of  the  respondent’s right   in   the   amounts   representing   the   employer’s contributions  thereunder depends upon it.  The  trust  deed and the rules dated July 27, 1934, embody the superannuation



scheme.  The scheme is described as the English and Scottish Joint   Co-operative  Wholesale  Society  Limited   Overseas European   Employees’  Superannuation  Scheme,   hereinafter called the Scheme.  It is established for the benefit of the male  European members ’of the Society’s staff  employed  in India,  Ceylon  and Africa by means of  deferred  annuities. The  Society  itself is appointed thereunder  as  the  first trustee.  The trustees shall act as agents for and on behalf of  the  Society and the members  respectively;  they  shall effect  or cause to be effected such policy or  policies  as may  be necessary to carry out the scheme and shall  collect and arrange for the payment of the moneys payable under such policy  or policies and shall hold such moneys  as  trustees for and on behalf of the person or persons entitled  thereto under the rules of the Scheme.  The object of the Scheme  is to  provide for pensions by means of deferred annuities  for the  members  upon retirement from employment  on  attaining certain age under the conditions mentioned therein,  namely, every European employee of the Society shall be required  as a condition of employment to apply to become a member of the Scheme from the date of his engagement by the Society and no member shall be entitled to relinquish his membership except on  the  termination  of his employment  with  Society;  the pension payable to a member shall be provided by means of  a policy  securing  a deferred annuity upon the life  of  such member  to be effected by the Trustees as agents for and  on behalf of the Society and the members respectively with  the Co-operative Insurance Society Limited securing the  payment to  the Trustees of an annuity equivalent to the pension  to which such member shall be entitled under the Scheme and the Rules;  the insurers shall agree that the Trustees shall  be entitled  to  surrender such deferred annuity and  that,  on such  deferred  annuity being so surrendered,  the  insurers will  pay to the Trustees the total amount of  the  premiums paid  in  respect thereof together  with  compound  interest thereon;  all  moneys  received by  the  Trustees  from  the insurers  shall  be  held by them as Trustees  for  and  ’on behalf  of the person or persons entitled thereto under  the Rules  of the Scheme; any policy or policies issued  by  the insurers in connection with the 573 Scheme  shall  be deposited with the Trustees;  the  Society shall contribute one-third of the premium from time to  time payable  in  respect  of the policy  securing  the  deferred annuity in respect of each member as thereinbefore  provided and  the member shall contribute the remaining  two-thirds-, the  age  at which a member shall normally retire  from  the service  of the Society shall be the age of 55 years and  on retirement at such age a member shall be entitled to receive a  pension of the amount specified in Rule 6; a  member  may also, after following the prescribed procedure, commute  the pension  to  which he is entitled for a payment in  cash  in accordance  with  the  fourth column of  the  Table  in  the Appendix annexed to the Rules; if a member shall leave or be dismissed  from  the service of the Society for  any  reason whatsoever or shall die while in the service of the  Society there   shall  be  paid  to  him  or  his   legal   personal representatives  the  total amount of the  portions  of  the premiums  paid by such member and if he shall die whilst  in the service of the Society there shall be paid to him or his legal  personal  representatives  the total  amount  of  the portions of the premiums paid by such member and if he shall die  whilst in the service of the Society or shall leave  or be  dismissed from the service of the Society on account  of permanent breakdown in health (as to the bona fides of which



the  Trustees shall be satisfied,) such  further  proportion (if any) of the total amount of the portions of the premiums paid  by  the  Society in respect of that  member  shall  be payable  in accordance with Table C in the Appendix  to  the Rules;  if the total amount of the portions of the  premiums in respect of such member paid by the Society together  with interest  thereon  as  aforesaid shall not be  paid  by  the Trustees to him or his legal personal representatives  under sub-s.  (1) of r. 15 then such proportion or the  whole,  as the  case may be, of the Society’s portion of such  premiums and  interest thereon as aforesaid as shall not be  paid  by the   Trustees  to  such  member  or  his   legal   personal representatives  as aforesaid shall be paid by the  Trustees to  the  Society;  the  rules may  be  altered,  amended  or rescinded  and new rules may be made in accordance with  the provisions of the Trust Deed but not otherwise. We have given the relevant part of the Scheme and the Rules. The gist of the Scheme may be stated thus: The object of the Scheme  is to provide for pensions to its employees.  It  is achieved  by  creating  a  trust.   The  Trustees  appointed thereunder are the agents of the employer as well as of  the employees  and hold the moneys received from  the  employer, the  employee and the insurer in trust for and on behalf  of the  person or persons entitled thereto under the  rules  of the Scheme.  The Trustees are enjoined to take out  policies of insurance securing a deferred annuity upon the 574 life of each member, and funds are provided by contributions from the employer as well as from the employees.  The  Trus- tees  realise  the  annuities and pay the  pensions  to  the employees.  Under certain contingencies mentioned above,  an employee would be entitled to the pension only after  super- annuation.  If the employee leave the service of the Society or  is dismissed from service or dies in the service of  the Society,  he  will be entitled only to get  back  the  total amount of the portion of the premium paid by him, though the trustees in their discretion under certain circumstances may give  him a proportion of the premiums paid by the  Society. The entire amount representing the contributions made by the Society or part thereof, as the case may be, will then  have to be paid by the Trustees to the Society.  Under the scheme the  employee has not acquired any vested right in the  con- tributions  made by the Society.  Such a right vests in  him only  when he attains the age of superannuation.  Till  that date that amount vests in the Trustees to be administered in accordance  with  the rules-, that is to say,  in  case  the employee  ceases to be a member of the Society by  death  or otherwise,  the  amount  contributed by  the  employer  with interest   thereon,  subject  to  the  discretionary   power exercisable by the trustees, become payable to the  Society. If   he  reaches  the  age  of  superannuation,   the   said contributions irrevocably become fixed as part of the  funds yielding  the  pension.  To put it in other  words,  till  a member  attains  the age of  superannuation  the  employer’s share  of  the contributions towards the premiums  does  not vest  in  the employee.  At best he has a  contingent  right therein.   In  ’one  contingency  the  said  amount  becomes payable  to the employer and in another contingency, to  the employee. Now  let us look at the provisions of s. 7(1) of the Act  in order to ascertain whether such a contingent right is hit by the  said  provisions.   The material part  of  the  section reads: -               Section  7(1)-The tax shall be payable  by  an               assessee under the head "salaries" in  respect



             of  any salary or wages, any annuity,  pension               or   gratuity,  and  any  fees,   commissions,               perquisites  or  profits in lieu  of,  ’or  in               addition  to, any salary or wages,  which  are               allowed  to him by or are due to him,  whether               paid or not, from, or are paid by or on behalf               of................                           a               company..................... Explanation I-For               the   purpose  of  this   section   perquisite               includes-               (v)   any sum payable by the employer, whether               directly  or through a fund to which the  pro.               visions of Chapters IX-A and IX-B do not               575               apply,  to effect an assurance on the life  of               the  assessee or in respect ’of a contract  of               annuity on the life of the assessees. This  section  imposes  a  tax on  the  remuneration  of  an employee.  It presupposes the existence of the  relationship if employer and employee.  The present case is sought to  be brought  under  the  head "perquisites in  lieu  of,  or  in addition  to, any salary or wages, which are allowed to  him by or are due to him, whether paid or not, from, or are paid by or on behalf of a company".  The expression "perquisites" is  defined in the Oxford Dictionary as "casual  emoluments. fee or profit attached to an office or position in  addition to  salary or wages".  Explanation 1 to s. 7(1) of  the  Act gives an inclusive definition.  Clause (v) thereof  includes within  the meaning of "perquisites" any sum payable by  the employer,  whether directly or through a fund to  which  the provisions of Chs.  IX-A and IX-B do not apply, to effect an assurance  on  the life of the assessee or in respect  of  a contract  for  an annuity on the life of  the  assessee.   A combined reading of the substantive part of s. 7(1) and  cl. (v) of Expl. 1 thereto makes it clear that if a sum of money is  allowed to the employee by or is due to him from  or  is paid  to  enable the latter to effect an  insurance  on  his life, the said sum would be a perquisite within the  meaning of  s. 7(1) of the Act and, therefore, would be eligible  to tax.   But  before such sum becomes so  exigible,  it  shall either  be paid to the employee or allowed to him by or  due to  him from the employer.  So far as the expression  "paid" is concerned, there is no difficulty, for it takes in  every receipt by the employee from the employer whether it was due to  him  or  not.   The expression  "due"  followed  by  the qualifying  clause  "whether paid or not" shows  that  there shall  be an obligation on the part of the employer  to  pay that  amount and a right on the employee to claim the  same. The expression "allowed", it is said, is of a wider connota- tion and any credit made in the employer’s account is cover- ed  thereby.  The word "allowed" was introduced in the  sec- tion by the Finance Act of 1955.  The said expression in the legal  terminology  is  equivalent  to  "fixed,  taken  into account, set apart, granted".  It takes in perquisites given in  cash  or in kind or in money or money’s worth  and  also amenities which are not convertible into money.  It  implies that  a  eight is conferred on the employee  in  respect  of those perquisites.  One cannot be said to allow a perquisite to an employee if the employee has no right to the same.  It cannot  apply to contingent payments to which  the  employee has  no  right till the contingency occurs.  In  short,  the employee must have a vested right therein. If that be the interpretation of s. 7(1) of the Act, it  is. not possible to hold that the amounts paid by the Society 576



to  the  Trustees to be administered by them  in  accordance with  the  rules  framed under the  Scheme  are  perquisites allowed  to the respondent or due to him.  Till  he  reaches the age of superannuation, the amounts vest in the  Trustees and the beneficiary under the trust can be ascertained  only on  the  happening  of one or  other  of  the  contingencies provided for under the trust deed.  On the happening of  one contingency,  the employer becomes the beneficiary,  and  on the  happening of another contingency, the employee  becomes the beneficiary.  Learned counsel for the appellant strongly relied  upon  the decision of the King’s Bench  Division  in Smyth  v.  Stretton(1).   There, one Stretton,  one  of  the Assistant  Masters  of  Dulwich  College,  was  assessed  to income-tax  in  the  sum  of pouns 385  in  respect  of  his emoluments  as Assistant Master received from the  Governors of Dulwich College for the year ended the 5th day of  April, 1901.   He objected to the assessment on the ground that  it included  pound  35  not liable to  taxation,  being  amount placed  to his credit by the Governors under  the  Provident Fund  Scheme  for the year 1900.  Channell,  J.,  with  some hesitation,  came  to the conclusion that the said  sum  was taxable.   That  case  was dealing with  a  scheme  for  the establishment  of  provident  fund for the  benefit  of  the Assistant  Masters  on the permanent staff  of  the  Dulwich College.   Under  para.   1 of the scheme  the  salaries  of Assistant Masters were increased.  Clause (a) of para.  1 of the  scheme provided that Assistant Masters having not  less than five years, but less than fifteen years’ service, would be  allowed  an increase of 5 per cent, in  their  salaries; under  cl.  (b) thereof, Assistant Masters having  not  less than 15 years’ of service and over, would get an increase of 7-1/2 per cent. in their salaries; under cl. (c) thereof,  a further  addition in their salaries, equal in amount to  the above  sums,  should be granted from the same  date  to  the Assistant  Masters alluded to in (a) and (b), such  addition being, however, subject to the conditions provided by  para. 5. Paragraph 5 read:-               "That  Assistant Masters having less than  ten               years’   service   who   may   resign    their               appointments,  or  from any other  cause  than               ill-health  cease  to belong to  the  College,               shall   be  entitled  to  receive  the   total               increase  sanctioned  by  (a)  and  the  accu-               mulations  thereof, but shall not receive  the               additional increase sanctioned by (c), or  the               accumulations  thereof.  In the event  of  any               such Assistant Master retiring from ill-health               the  Governors,  in addition to  the  increase               sanctioned by (a), may grant him the further 5               per   cent.   sanctioned  by  (c),   and   the               accumulations thereof.  In the event of  death               of any such Assistant Master whilst in               (1) (1904) 5 T. C. 36, 46.               577               the service of the College, the 5 percent. due               by  (c)  as  well  as  under  (a),  with   the               accumulations  thereof, shall be paid  to  his               legal representatives". It  was contended that the amount payable under cl.  (c)  of para.   I was a contingent one without any vested  character and, therefore, could not be described as income in any way. The learned Judge construed the provisions of the scheme and rejected the contention.  The main reason for his conclusion is stated thus:-               "The result seems to me to be that I must take



             that sum as a sum which really has been  added               to  the salary and is taxable, and it  is  not               the less added to the salary because there has               been a binding obligation created between  the               Assistant Masters and Governors of the Schools               that  they  should apply it  in  a  particular               way". No  doubt  it  is possible for another court to  come  to  a different  conclusion on the construction of the  provisions of the scheme; but the learned Judge came to the  conclusion that  cl.  (c)  of para.  1 of the scheme  provided  for  an additional  salary  to the Assistant Masters.   Indeed,  the Court  of Appeal in Edwards (H.  M. Inspector of  Taxes)  v. Roberts(1)  construed  a  similar scheme  and  came  to  the contrary  conclusion and explained the earlier  decision  on the  basis  we have indicated.  There,  the  respondent  was employed  by  a  company under  a  service  agreement  dated ’August  21,  1921,  which provided  inter  alia,  that,  in addition to an annual salary, he should have an interest  in a "conditional fund", which was to be created by the company by the payment after the end of each financial year of a sum out  of  its  profits  to the trustees of  the  fund  to  be invested by them in the purchase of the company’s shares  or debenture  stock.   Subject to possible  forfeiture  of  his interest  in certain events, the respondent was entitled  to receive the income produced by the fund at the expiration of each  financial year, and to receive part of the capital  of the  fund,  (or, at the trustees’  option,  the  investments representing  the same) at the expiration of five  financial years  and of each succeeding year, and, on death whilst  in the  company’s service or on the termination of his  employ- ment  by  the  company, to receive  the  whole  amount  then standing to the credit of the capital amount of the fund (or the  actual investments).  The respondent resigned from  the service of the company in September, 1927, and at that  date the trustees of the fund transferred to him the shares which they  had purchased out of the payments made to them by  the company  in  the  years 1922 to 1927.  He  was  assessed  to income-tax on the amount of the current market value of the (1) (1935) 19 T.C. 618, 638, 640. LP(D)ISCI-17 578 shares at the date of transfer.  The assessee contended that immediately a sum was paid by the company to the trustee& of the  fund he became invested with a beneficial  interest  in the  payment  which formed part ’of his emoluments  for  the year in which it was made, and for no other year, and  that, accordingly, the amount of the assessment for the year  1927 -28 ought not, in any event, to exceed the aggregate of  the sums  paid  by the company to the trustees,  the  difference between  the amount and the value of the investments at  the date  of  transfer representing a capital  appreciation  not liable  to tax for any year.  The Court of  Appeal  rejected the  contention.   Lord Hanworth, M. R.,  in  rejecting  the contention. observed               be  said  to have accrued to this  employee  a               vested  interest  in  these  successive   sums               placed  to his credit, but only that he had  a               chance  of being paid a sum at the end of  six               years  if all went well.  That chance has  now               supervened, and he has got it by reason of the               fact  of his employment, or by reason  of  his               exercising  an  employment  of  profit  within               Schedule E.".               Maugham.  L. J., said much to the same  effect



             thus:               "The true nature of the agreement was that lie               was to be entitled in the events, and only  in               the  events  mentioned  in  Clause  8  of  the               agreement,  to  the investments  made  by  the               Company out of the net profits of the  Company               as provided in Clause 6.". The  decision of Channel], J., in Smyth v.  Stretton(1)  was strongly  relied upon before the appellate court.  But  the, learned  Judges distinguished that case on the  -round  that under the scheme which was the subject-matter Of that  deci- sion  the sums taxed were really additions to the salary  of the  Assistant Master and that. in any view,  that  decision should be confined to the facts of that case.  The principle laid  down  by the Court of Appeal, namely,  that  unless  a vested interest in the sum accrues to an employee it is  not taxable.  equally applies to the present case.  As  we  have pointed  out earlier, no interest in the sum contributed  by the employer under the scheme vested in the employee. as  it was  only a contingent interest depending upon his  reaching the  age of superannuation.  It is not a perquisite  allowed to  him  by the employer or an amount due to  him  from  the employer  within  the meaning of s. 7(1) of  the  Act.   We, therefore,  hold  that  the High  Court  has  given  correct answers  to  the  questions of law submitted to  it  by  the Income-tax Appellate Tribunal. In the result, the appeal fails and is dismissed. Appeal dismissed. (1)(1904) 5 T.C 35. 46. 579