04 November 1996
Supreme Court


Case number: Writ Petition (Civil) 1640 of 1986






DATE OF JUDGMENT:       04/11/1996




JUDGMENT:                       J U D G M E N T      Mrs Sujata V. Manohar, J.      The first  petitioner in  this  writ  petition  was  an employee of  M/s Indian  Oxygen  Limited.  He  retired  from service at  the end  of March,  1980 on attaining the age of superannuation.  Indian  Oxygen  Ltd.  has  set  up  a  non- contributory superannuation  fund known as the Indian Oxygen Ltd. Staff  Pension Fund.  It is  a noncontributory approved superannuation fund  set up  under  the  provisions  of  the Income-Tax Act,  1961. On retirement, under the rules of the fund, the  first petitioner  is receiving an annuity under a policy purchased  by the  trustees of the Fund from the Life Insurance Corporation  of India.  The second petitioner is a society  registered   under  the   West   Bengal   Societies Registration  Act,   1961.  Its   membership  constists   of pensioners    of     various    non-contributory    approved superannuation funds.  Petitioner No.1  is the  Secretary of the Association.      It is  the contention  of the  petitioners that certain improvements which have been effected in the executive staff pension fund  of Indian  Oxygen Ltd.  in 1985 should be made available to  the existing  pensioners of  the Indian Oxygen Ltd. and  that  the  denial  of  the  benefits  of  such  an improvement to  the existing  pensioners of the said fund is arbitrary and  violative of  Article 1  of the Constitution. The petitioners have also challenged Clause ll(cc) of Part B of schedule  IV of the Income Tax Act, 1961 as conferring an unguided power  to the  Board to frame rules. They have also challenged Rules  89 and 91 of the Income Tax Rules, 1962 as arbitrary and  violative of Article 14. The petitioners have also alleged  that these  rules  suffer  from  the  vice  of excessive delegation.  They have  further submitted that the appropriation of  the purchase  price of annuities after the death of  the  annuitant/pensioner  by  the  Life  Insurance Corporation of India (respondent No.4) is ultra vires Clause 3 of  Part B  of Schedule IV of the Income Tax Act, 1961 and constitutes an  arbitrary or  excessive use  of  power.  The petitioners  have   contended  that   the  scheme   of  such noncontributory  approved  superannuation  funds  should  be modified so as to provide for disbursement of pension by the



funds themselves  or in  the alternative by a statutory body to be newly constituted under a new scheme.      Under Section  2(6) of  the Income  Tax Act,  1961,  an approved superannuation  fund has  been defined  to  mean  a superannuation fund  or any  part of  a superannuation  fund which  has   been  and  continues  to  be  approved  by  the Commissioner in  accordance with the rules contained in Part B of the fourth Schedule. Under Section 36(1) of the Income- tax Act,  1961, deductions  as provided  in that sub-section shall be  allowed in  respect  of  the  matters  dealt  with therein in  computing the income of an assessee. Clause (iv) of sub-section  (1) of  Section 36  grants  such  deduction, inter alia, in respect of any sum paid by the assessee as an employer  by   way  of   contribution  towards  an  approved superannuation  fund  subject  to  such  limits  as  may  be prescribed for approving the superannuation fund and subject to such  conditions as the Board may think fit to specify as set out  therein. Therefore,  any amount paid by an employer by way  of contribution  towards, inter  alia,  an  approved superannuation fund, subject to such limits as may be prescribed is  deductible in  computing the  income  of  the assessee employer.      Part B of Schedule IV of the Income-Tax Act, 1961 deals with approved  superannuation funds.  Under Clause 3 of Part 8, in  order that  a superannuation  fund  may  receive  and retain approval,  it shall satisfy the conditions set out in the said  clause as  well as  any other conditions which the Board may,  by rules,  prescribe. Under  clause 3 one of the conditions is  to the  effect that  the fund shall be a fund established under  an irrevocable trust in connection with a trade or  undertaking carried on in India. Another condition so prescribed  is that  the 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 dependants of persons who  are or  have been such employes on the death of those persons. Contributions in respect of each employee are required to made by the employer or the fund so set up.      The trustees of the superannuation fund are required to make an application to the Assessing Officer for approval of the fund  under Clause 4 of the said Part B. Clause 11 deals with the  rule making  power of  the Board.  Clause,  11(cc) empowers  the   Board  to  make  rules  for  regulating  the investment  or   deposit  of   the  moneys  of  an  approved superannuation fund.      Part XIII  of the Income-Tax Rules, 1962 covering Rules 82 to  97 and  dealing with Approved Superannuation Funds is framed in  exercise of  the powers  conferred,  inter  alia, under clause 11 (cc) of Part B of Schedule IV. Under Rule 85 of the  Income-Tax Rules, 1962 all moneys 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 any scheduled bank or utilised in  accordance with  Rule 89  for  making  payments 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 twenty-five per cent of his salary  for each  year  as  reduced  by  the  employer’s contribution, if  any,  to  any  provident  fund    (whether recognised or  not) in respect of the same employee for that year. Rule 89 provides as follows:      Rule 89.      "Scheme of insurance or annuity.



    For the  purpose of  providing  the      annuities  for  the  beneficiaries,      the trustees shall -      (i)  enter   into   a   scheme   of      insurance with  the Life  Insurance      Corporation established  under  the      Life  Insurance   Corporation  Act,      1956 (31 of 1956), or      (ii) accumulate  the  contributions      in respect  of each beneficiary and      purchase an  annuity from  the said      Life Insurance Corporation of India      at the  time of  the retirement  or      death of  each employee  or on  his      becoming  incapacitated   prior  to      retirement."      Rule 91 is as follows:      "Beneficiary  not   to   have   any      interest in  insurance and employer      not  have  any  interest  in  funds      moneys.      (1) No  beneficiary shall  have any      interest in  any  insurance  policy      taken out by the trustees under the      rules of  a fund  and he  shall  be      entitled only  to an  annuity  from      the fund.      (2) No  money belonging to the fund      shall be receivable by the employer      under any  circumstances nor  shall      the  employer   have  any  lien  or      charge on the fund."      Under the  Indian Oxygen  Executive Staff  Pension Fund which is  an approved  superannuation fund  as per the above provisions, for  the purpose  of providing  annuities to the beneficiaries, the  trustees accumulate  the contribution in respect of each beneficiary and purchase an annuity from the Life  Insurance   Corporation  of   India  at  the  time  of retirement or  death of  each  employee  or  on  his  become incapacitated  prior   to  retirement  as  per  Rule  89(ii) Therefore,  when   an  employee   retires,  all  accumulated contributions in  respect of  the concerned employee made by the employer  to the  pension fund of the trust are utilised for the  purpose of  purchasing an  annuity  from  the  Life Insurance Corporation  of  India  for  the  benefit  of  the employee. The  right of  the employee to receive the annuity and the  quantum of this annuity get crystalised at the time of purchase  of the annuity under hen existing scheme of the Life Insurance Corporation of India. This annuity is payable for a  minimum fixed  period and  thereafter as  long as the recepient is  alive. The Life Insurance Corporation of India Ltd. in  its affidavit  has set out that it is the common to provide that  the annuity  would be  payable for  a selected number of  years irrespective  of whether  the annuitant  is alive or  not. At the end of the selected number of years if the annuitant  is alive, the annuity is Continued throughout the life-time of the annuitant.      Rules 85  and 89  are meant  to  safeguard  the  moneys deposited in  the superannuation  fund and  to secure to the annuitant the  annuity amount. Undoubtedly, Rule 89 requires the trustees  to purchase an annuity from the Life Insurance Corporation of  India to  the exclusion of anyone 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  Life Insurance  Corporation of India are backed by a



government guarantee  which is provided by Section 37 of the Life Insurance Corporation Act, 1956. The payment of annuity is thus properly secured.      The petitioners  contend that  any improvements made in the existing  pension scheme  after the  retirement  of  the employees should  also be  made available  to  such  retired employees who  are the  existing pensioners of the Fund. The denial of  the benefit  of such  improvements in the pension schemes to  the existing  pensioners is ultra vires Articles 14, 19,  21. 31  and 300A of the Constitution of India. This contention is  based on  a misunderstanding of the nature of the annuity  which is  purchased in respect of each employee as and  when he retires. The right of an employee to receive the annuity and the quantum of this annuity gets determined at the  time when  the annuity  is purchased. Any subsequent improvements in  a given  Pension Fund  scheme would  not be available  to   those  persons   whose  rights  are  already crystalised under  the annuity  scheme  by  which  they  are governed because  the amounts contributed by the employer in respect of  such persons  are  already  withdrawn  from  the Pension  Fund   to  purchase   an  annuity.  Any  subsequent improvement in  the Pension  Fund will  benefit  only  those whose moneys form a part of the Pension Fund.      As regards  the improvements  made in the Indian Oxygen Limited Executive  Staff Pension  Fund Scheme  in 1585,  the trustees of  the said fund in their affidavit have explained that an  improvement in  the pension  scheme of  an approved superannuation fund  is effected  on the basis of the fund’s financial position  as  determined  by  actuarial  valuation based  on   current  resources   of  the   fund  and  future contributions to  be received by the fund only in respect of the existing members in service. An employer cannot make tax deductible contributions  to the fund in respect of its past employees. Therefore,  there is  no scope for augmenting the resources of  the fund to meet any obligation that may arise on account  of extending  the benefit  of improvement to the past employees  who are  existing  pensioners.  The  amounts contributed in  regard  to  such  existing  pensioners  have already been  transferred from the corpus of the fund to the Life Insurance  Corporation of  India  for  the  purpose  of purchasing an annuity. Hence there is no accretion coming to the said fund from out of the transferred corpus relating to such existing  pensioners. Hence  the improvements which are determined by  actuarial  valuation  based  on  the  current resources of  the fund and its future expectations cannot be made available to the existing pensioners.      In these  circumstances the ratio of D.S. Nakara & Ors. v. Union  of India  (AIR 1983  SC 130)  cannot be applied to extend the  benefit of improvement in the pension schemes of such funds to the existing pensioners. By the very nature of this scheme,  such benefits are available only to members in service. In  the present  case, the  Pension Fund is created out of  contributions made by the employer in respect of its employees who  are in  service in  the manner provided under the Income-Tax Act and the Rules. The contribution is in the form of  a  fixed  percentage  of  salary  of  each  of  the employees. There is, therefore, no provision for an employer making  any  additional  payment  in  respect  of  its  past employees who  are the existing pensioners. In Nakara’s case (supra) the  increase in  pension  could  ba  met  from  the general revenue  of the  Central Government. No such reserve of funds  is  available  to  the  trustees  of  an  approved superannuation fund.  As soon  as an employee retires and 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  improvements  made  subsequently  in  the pension scheme of a fund. Since the existing pensioners form a distinct  class, there  is no question of any violation of Article 14 in this connection or of any other Article of the Constitution.      The  Life   Insurance  Corporation   of  India  in  its affidavit has pointed out that with effect from 1.4.1985 the Corporation decided  to increase  the pensions payable under their annuity  scheme. They  decided to  make this  increase available not  only to  new  pensionrers  but  also  to  the annuities which  were in the course of payment. Accordingly, the first  petitioner’s pension  under his  existing annuity policies was  increased  with  effect  from  1.4.1985.  This decision of  the Life  Insurance Corporation  to enhance the pension was only with a view to grant relief to the existing pensioners and  was not  based on any contractual obligation of the  Corporation. The Corporation has further pointed out in its  affidavit that  it has  now introduced a new annuity scheme. An  option has been given to the existing members to switch  over  to  the  new  scheme.  Under  the  new  option available to  the pensioners  the value  of the  outstanding instalments is  determined and  the same  is applied  in the purchase of an annuity. Such annuity would be payable during the  lifetime   of  the  annuitant  and  the  value  of  the outstanding  instalments  is  returned  to  the  annuitant’s nominee on  his death.  The benefit  of changing over to the new scheme is thus made available to the existing pensioners also. There  is, therefore, no discrimination in this regard as against the existing pensioners.      The petitioners contend that Clause 11(cc) of Part B of Schedule IV  of the Income-Tax Act. 1961 and Rules 85 and 91 of the  Income-Tax Rules,  1962 which  are framed  under the rule-making  power   conferred  by   Clause  11(cc)  are  an arbitrary  and   uncanalised  exercise  of  power  and  are, therefore, violative  of Articles  14 and  19(1)(g)  of  the Constitution.   Now,   the   entire   scheme   of   approved superanuation funds  is so framed as to ensure safety of the Fund so that the beneficiaries are assured of an annuity for the requisite  period. Hence  under Part B of Schedule IV of the Income-Tax Act the approved superannuation funds require the approval  of the  Chief Commissioner or the Commissioner of Income-tax.  The purpose  of such  approval is clearly to ensure that  the fund  is established  under an  irrevocable trust for  the benefit of the employees of any establishment or undertaking  and to  ensure that  the fund shall have for its sole purpose provision of annuities for the employees on their retirement or on their becoming incapaciated or in the event of their death for the benefit of their dependants. It is necessary  that the  funds should be invested in a manner which secures  them over  a period of time for this purpose. Clause 11 (1)(cc) gives to the Board the power to make rules for the  purpose of  regulating the investment or deposit of moneys of  an approved  superannuation fund.  This cannot be called as  an arbitrary conferment of power on the Board. By the very  nature of  the scheme  as framed,  the purpose  of regulating investment  of the trust funds is to ensure their safety.      In pursuance  of this  rule-making  power  Rule  89  is framed.  Under   Rule  89,  for  the  purpose  of  providing annuities  for   the  beneficiaries,   the  trustees   of  a superannuation fund  are required  either to  enter  into  a scheme of  insurance with  the Life Insurance Corporation of India  or   they  have   the  option   to   accumulate   the contributions in respect of each beneficiary and purchase an



annuity from  the Life Insurance Corporation of India at the time of  the retirement  or death of each employee or on his becoming incapacitated  prior to  retirement. The annuity is purchased from the accumulated contributions made in respect of each  beneficiary  which  are  a  part  of  the  approved superannuation fund. The petitioners have contended that the trustees of  the superannuation fund should not be compelled to purchase  an annuity  from the Life Insurance Corporation of India  and that  the investment  of the  contribution  in respect of  each beneficiary could be made in another manner which would  fetch to the beneficiary a higher return. It is however, pointed  out by the Life Insurance Corporation that the secruity which is provided by purchasing an annuity from the Life Insurance Corporation of India is not comparable to other  kinds   of  investments   because  all  contracts  of insurance entered into by the Life Insurance Corporation are backed by  a  government  guarantee  which  is  provided  by Section 37  of the  Life Insurance  Corporation  Act,  1956. Therefore, from  the point of view of safety and security of the moneys  of the  superannuation fund, an investment in an annuity through  the Life  Insurance  Corporation  of  India provides valuable  security to  a beneficiary.  By  ensuring that the  investment is  made in  a manner which ensures the safety of  the Fund  and the payment of an annuity the Board has  ensured  that  the  Fund  is  not  misutilised  or  the pensioner is  not deprived  of his annuity. of course, it is possible to  envisage other types of schemes and other types of investments,  which may have varying safety and different returns. But that does not mean that Rule 89 is arbitrary or unreasonable. The  entire scheme  is framed  on the basis of relevant considarations and cannot be called unreasonable or arbitrary.      Rule 91  provides that  the beneficiary  shall not have any interest  in any  insurance  policy  taken  out  by  the trustees under  the rules of a fund and he shall be entitled only to the annuity. It is contended by the petitioners that the Life  Insurance  Corproation  appropriate,  the  capital purchase price  on the  death  of  the  annuitant  and  this amounts to  an  unjust  enrichment  of  the  Life  Insurance Corporation at  the cost  of the beneficiary. The submission is based  on a  misconception of the manner in which annuity is calculated.  The annual  instalment does not consist only of the  interest which is earned on the capital used for the purchase of  annuity.  The  annual  instalment  contains  an element both  of interest  as also  a part of the capital so that over  a period  of years as actuarially calculated, the entire capital  and the interest earned thereon are utilised for the  payment of  annuities to the beneficiary. Secondly, the Life  Insurance Corporation has introduced a new annuity scheme under  which an option has been given to the existing members to  switch over  to the  new scheme.  As per the new option available  to the pensioners the value of outstanding instalments is  determined and this is used for the purchase of an  annuity. This new annuity would be payable during the life  time   of  the   beneficiary  and  the  value  of  the outstanding instalments  is returned  to  the  beneficiary’s nominee on  his death.  The petitioners  have the  option to switch  over   to  this  new  scheme  in  respect  of  their outstanding instalments.  Therefore, in  any event there can be no  question of  the  L.I.C.  appropriating  the  capital purchase price  of an annuity on the death of the annuitant. Rule 91,  therefore, in  any event,  cannot be considered as giving any unjust gains to the Life Insurance Corporation of India.      Moreover, under  sub-clause (2) of Clause 11, all rules



which are made under Clause 11 are subject to the provisions of Section  296.  Section  296  provides  that  the  General Government shall  cause every rule made under this Act to be laid as  soon as  may be  after the rule is made before each House of  Parliament while  it is  in session  for  a  total period of  thirty days, and the rule shall, thereafter, have effect only in such modified form as Parliament may suggest, or if  it so decides, may be of no effect, or may be brought into effect  without prejudice  to the  validity of anything previously done  under the  rule. This  also is an important check on  any arbitrary  exercise of rule-making power under Clause 11.      Hence, the  challenge to  these rules  and to Clause 11 (cc) has no substance.      The petitioners have also raised some objections to the changes made  in the  Indian Oxygen  Limited Executive staff Pension Fund  in 1984  and 1985.  the definition of "salary" under the  old Pension  Fund Rules of Indian Oxygen Ltd. did not include  commission  payable  to  whole-time  Directors. However, by  a Deed of Variation dated 9.1.84 the definition of "salary"  has been  changed. "Salary" has been defined to mean the  basic salary  of a  member and  to have  the  same meaning as  defined in  Rule 2(h)  of Part  A of  the Fourth Schedule to  the Income  Tax Act,  1961. In  the case  of  a whole-time  Director.   "salary"  now   also  includes   the commission on  net profits  payable to the Director provided that  such   commission  is   a  part   and  parcel  of  the remuneration of  the whole-time  Director according  to  the terms of  his appointment  as approved  by the Central Govt. under the  Companies Act.  The  petitioners  object  to  the commission being  included in  the salary  of  a  whole-time Director as  now defined.  This change  has been made in the light of  a decision  of this Court in the case of Gestetnet Duplicators P.  Ltd. v.  Commissioner of  Income  Tax,  West Bengal (117  ITR page  1) where this Court has held that the commission payable  as  per  the  terms  of  a  contract  of employment at  a fixed  percentage of  turnover falls within the term  "salary" as  defined in Rule 2(h) of Part A of the Fourth Schedule  to the  Income-Tax Act, 1961. The change in the definition is in accordance with the meaning assigned to "salary" under Rule 2(h). The question of any discrimination on this  score does  not arise. In any case, the petitioners who retired  prior to  1984 are  in no  way affected by this change.      The approved  superannuation fund  is set  up only from the contributions  made by the employer who is given certain tax   benefits in  order to encourage the setting up of such superannuation funds.  We do  not see  any reason  to strike down any  part of  the scheme for such a superannuation fund prescribed under  the Income-Tax   Acts 1961 and the Income- Tax Rules,  1962. The  petition is  therefore, dismissed. In the circumstances, there will be no order as to costs.