Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: L. W. RUSSEL VS Respondent: COMMISSIONER OF INCOME-TAX, KERALA
1963 P T D 553
1963 P T D 553
[Kerala India]
Before M. A. Ansari C. J. and T. C. Raghavan, J
L. W. RUSSEL
Versus
COMMISSIONER OF INCOME‑TAX, KERALA
Income‑tax References Nos. 17 and 18 of 1959, decided on 9th January 1961.
Income‑tax Act (XI of 1922)------
-----S.7(1)‑Income‑Salary-Pension scheme for employees‑Employer s contribution‑ Whether assessable as income of employee ‑ Construction of terms or scheme‑Creation of trust, effect of‑Test of assessability‑Mere contingent interest or expectancy, whether sufficient‑Employer's contribution to deferred annuities‑Assessability.
Contributions made by an employer to provide pensionary or deferred annuity benefits to employees cannot be taxed under section 7 (1) of the Income‑tax Act unless under the scheme the employees get some vested interest in the amounts contributed by the employer. The mere expectation or contingency of getting benefit from such payments if certain conditions are fulfilled would not make such contributions liable to be taxed under section 7 (1). The fact that the employer holds the amounts as a trustee will not give a vested interest to the employees in such contributions and make such contributions liable to be taxed as salary or perquisites of the employee.
A Co‑operative Society, bad by contract of employ ment, provided that the Society would make certain con tributions in order to provide pensionary, or deferred annuity benefits to the Society s employees, the terms of such benefits were incorporated in a trust deed, and certain rules were also framed for the due and proper administration of the trust. Under the aforesaid arrangement the society had to pay every month 1/3 of the premium payable by each employee, who paid the remaining 2/3 for effecting a policy of insurance, and these together constituted 15% of the employee's salary. The annuity thus got became due on the employee's retirement, or on completion of the age of 55, and would not be payable, if the employee left service earlier, or was dismissed in the meanwhile, or died. Were the employment to end because of any of the three events the sums paid by the employee as premiums were refunded to him or his legal representative. Should the discontinuance be the result of ill‑health or unsuitability the Society in its discretion could pay a proportion out of the Society's contribution, to the employee or his legal representative. The arrangement also provided that if the retiring employee elected not to take the annuity, it would be open to him to surrender the right and to get back the amounts paid by him and by the Society in this behalf with interest. In all the cases, the trustee collected the money, the employer Society being constituted the trustee under the terms of the deed :
Held, that on a fair construction of the provisions of the scheme adopted by the Society and the trust deed an employee did not get any vested interest in the contributions made by the Society until the employee attained the age of 55, or completed 10 years of service or his employment was terminated for ill‑health, and in the contingency of his dismissal he was not entitled to any share in the contributions of the employer. Such a contingent benefit in the employer's contribution was not taxable as income of the employee to the year's in which the employer's contributions were made, under section 7 (1) of the Income‑tax Act:
Held further, that, as the payments made by the employer were claimable in certain events, the contributions made by the employer could not be treated as sums payable under a contract for an annuity on the life of the employee:
Held also, that, as the Legislature has not used the word "deferred" with annuity in section 7 (1) of the Act, payments for deferred annuities are not covered by paragraph 5 of section 7 (1) of the Act.
E. D. Sassoon, & Company Ltd. v. Commissioner of Income‑tax (1954) 26 I T R 27 (S C) Cotton Agents Ltd. v. Commissioner of Income‑tax (196.0) 401 T R 135 (SC); Edwards (H. M: Inspector of Taxes) v. Roberts (1934‑35)‑19 Tax Cas. 618 ; Commissioner of Income‑tax v. Bombay‑Burma Trading Corporation Ltd. (1933) 1 I T R 152 and Lady Foley v. Fletcher (1858) 157 E R 678 rel.
Smith v. Stretton (1904) 5 Tax Cas. 36 (K B) distinguished.
STATEMENT OE CASE
By this application, the assessee requires the Appellate Tribunal to refer to the Hight Court certain questions of law, .which are said to arise out of the Tribunal's order dated April 7, 1958, in I. T. A. No. 3067 of 1957‑58. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up a statement of the case, agreed to by the parties, and refer it to the' High Court of Kerala at Ernakulam under section 66 (1) of the Indian, Income‑tax Act.
2. The assessee is one of a number of employees of the English and Scottish Joint Co‑operative Wholesale Society Ltd. The point arises in the case of other employees also and reference applications arising out of assessment orders on them have also been filed. As they all raise the same point, a consolidated state ment of the case, with the consent and at the express request of the counsel for the assessee, is drawn up.
3. The English and Scottish Joint Co‑operative Wholesale Society Ltd. (hereinafter referred to as the "Society") granted certain benefits of superannuation to its employees. In the con tract of employment entered into between the assessee and his employer, it was provided that the company should make certain
contributions for providing pensionary or alternatively deferred annuity benefits to the assessee. The terms on which these benefits were to be granted were incorporated in a trust deed dated July 27, 1934, said to have been entered into between the employer and the employee at the time the trust was created and sub sequently as and when each employee was individually granted the said benefits. A copy of this trust deed is Annexure "A" and forms part of the case. Certain rules were also framed for the due and proper administration of the trust, copy of which rules is Annexure "B" and forms part of the case. Pursuant to the terms and conditions of the trust deed and the agreements, the society paid every month one‑third of the premium payable by each employee like the assessee and the latter paid the other two‑thirds for effecting a policy of insurance, and these two sums constituted 15 percent. of the salary. The annuity was payable on retire ment of the employee or on completion of the age of 55 as per clause 13 of the deed. There was a provision in clause 15 of the deed that it was not so payable if the employee left service earlier or was dismissed in the meanwhile or died and sums paid as premium by the employee were to be refunded to him or his legal representative. There was another provision in clause 15 by which if the discontinuance took place as a result of ill‑health or unsuitability to the tropics or of sudden death, the society, in its discretion, could pay a certain proportion out of its contribution to its employee or legal representative. It was also provided that in case the retiring employee elected not to take an annuity, it was open to him to surrender that right and in lieu to get back all the amounts paid by him and by the society in this behalf with interest. In all the cases, it was the trust that collected the money, the society itself being constituted the trustee under the terms of the deed, which, in its turn, paid the premia to the insurer and received from the insurer later. Under these terms, for the year of account, the society contributed a sum of Rs. 3,333 for Mr. L. W. Russel, Rs. 1,733 for Mr. J. N. Marsh, Rs. 752 to Mr. G E. Glover, Rs. 1,467 to Mr. L. M. Stephen, Rs. 582 to Mr. C. M. Menon, Rs. 1,066 to Mr. K. C. Mandanna, Rs. 1,286 to Mr. D. A. Cook, Rs. 1;466 to Mr. D. T. Marson, and Rs. 1,467 to Mr: W. S. Heron as its contribution to the insurance scheme in respect of the several assessees. The Income‑tax Officer, having regard to the amendment of the Income‑tax Act in 1954, held that this con tribution by the employee was taxable as a perquisite under sub section (v) of Explanation 1 to section 7 (1) of the Indian Income tax Act, 1922. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner and came on second appeal to the Income‑tax Appellate Tribunal.
4. The contentions of the assessee before the Tribunal were as follows:
"(a) That the annuity was payable only on the attainment of the age of 55 and was not payable for any of the reasons mentioned in clause 15 of the trust deed ; and that consequently, as these contingencies envisaged did not arise in the year of account, it was not a receipt liable to be taxed ;
(b) that the payments made were never lost, for, they came back either in the form of annuity or repayment of instalments paid with interest;
(c) that the employee got the right to draw the society's contributions only on surrender or on completion of the full term ;
(d) that the society never lost sight of the contributions ;
(e) following from the above, that as the society had always preserved its hold upon its contributions, the assessee never, except on the occurrence of the contingency, which entitled him to claim it, got the money as his income."
It was next urged placing reliance on the language of section 7 (1) of the Income‑tax Act that even assuming that the contributions by the society were perquisites, it being a condition precedent to the taxability of the perquisite, it ought to be due to the assessee, in so far as it did not become due to him in the year of account, that section had no application. It was said that the accrual of the right to get the amount was only on surrender, which itself occurred only on giving up the right to the annuity and opting for it. As an alternative to the above, it was argued that the contributions made by the society could be taxed if at all as part of the salaries and if that was the basis of taxation the benefit of section 15 ought to be given for payment to be made on behalf of the assessee and out of moneys due to him though payable later. The next contention was that "perquisites" did not come within the mischief of sub‑clause (v) of Explanation I to section 7 (1) and that further the word "annuity" occurring in section 7 (1) was intended to catch in annuities paid periodically by way of income and not annuities, as in this case, which were payable only on retirement, to wit, at the age of 55 ; these payments did not come within section 7 (1).
5. On this aspect of the case, the Departmental Representative ‑pointed out that the payments came within the ambit of clause (v) of Explanation 1 to that section and, at any rate, a one‑third contribution under rule 9 of the trust deed having been made to this end, in respect of a contract for an annuity on the life of the assessee, it was a perquisite within the meaning of the Explana tion. The answer of the learned counsel to this was that even if it was a perquisite, it must be due or allowed to the assessee in the accounting year and that the two conditions cannot be read disjunctively but together. The Tribunal held that this sum was allowed and was due to the assessee in the year of account as per the conditions of employment but payment was postponed or to l await the occurrence of a contingency.
6. The distinction between "annuity" in section 7 (1) and an annuity in clause (v) of Explanation 1 thereto and of a deferred annuity in section 15 was relied upon for making out that section 7 (1) of the Act provided for annuities and not for deferred annuities which alone was in contemplation in the trust deed aforesaid, and, therefore, the same did not attract the Explana tion to section 7 (1).
7. The Tribunal held that the money had been allowed to the assessee by the employer and that he had got the right to it even though he could not draw it immediately or as and when he liked.
8. Lastly, it was contended that if the payments by the company were to be taxed under section 7 (1) that being taxed as salary, section 15 (2) would be applied and the same should be exempt.
9. The Tribunal rejected the contentions of the assessee that the payment is not liable to be taxed, that the statute left no doubt that the payments of the kind in question were definitely intended to be brought into the taxing net, that as one‑third contribution from time to time by the society in respect of the policy secured to be deferred annuity, was taxable, it followed that the other two‑thirds paid by the assessee and deducted by the society from the salary of the assessee was exempt from tax.
10. On these facts the following questions of law arise:
"(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 section 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 paragraph (v) of Explanation 1 thereto ?"
P. Govindan Nair, K. V. R. Shenoi. P. ,K. K. Kurien, P. Balagangadharan Nair and O. T. G. Nambiar for the Assessee.
G. Rama Iyer for the Commissioner.
JUDGMENT
ANSARI, C. J.‑These references are under section 66 (1) of the Indian Income‑tax Act and raise common questions of law. The relevant facts for deciding the questions in both are that the English and Scottish Joint Co‑operative Wholesale Society Ltd: had, by contract of employment, provided that the society would make certain contributions in order to provide pensionary, or deffered annuity benefits to the society's employees, and the terms of such benefits were incorporated in a trust deed of July 27, 1934, Certain rules were also framed for the due and proper adminis tration of the trust, whose copy has been made Annexure "B" to the cases. Under the aforesaid arrangement the society had to pay every month 1/3 of the premium payable by each employee, who paid the remaining 2/3 for effecting a policy of insurance, and these together constituted 15% of the employee's salary. The annuity thus got became due on the employee's retirement, or on completion of the age of 55, and would not under clause 15 of the deed be payable, if the employee left service earlier, or be dismissed in the meanwhile, or died. Were the employment to end because of any of the three events stated above, the sums paid by the employee as the premiums were to be refunded to him or his legal representative. Under another provision of the arrangement, should the discontinuance be as the result of ill health or unsuitability, the society in its discretion could pay a proportion out of the society's contribution to the employee or his legal representative. The arrangement also provided that were the retiring employee to elect not to take the annuity, it would be open to him to surrender the right and to get back the amounts paid by him and by the society in this behalf with interest. In all the cases, the trustee collected the money, the employer‑Society being constituted the trustee under the terms of the deed which, in its turn, paid the premia to the insurer and received later from the insurer.
In the assessment year 1956‑57 the society had contributed the following sums for the following employees :
Rs.
1.
3,333 for L. W. Russel.
2.
1,733 for J. N. Marsh.
3.
752 for G. E. Glover.
4.
1,467 for L. M. Stephen.
5.
582 for C. M. Menon.
6.
1,066 for K. C. Mandanna.
7.
1,286 for D. A. Cook.
8.
1,466 for D. T. Marson.
9.
1,467 for W. S. Heron.
The Income‑tax Officer, having regard to the amendment of the Act in 1954, held these contributions to be taxable as perquisites under section 7 (1), Explanation 1, paragraph (v) of the Indian Income‑tax Act. The assessees appealed unsuccessfully to the Appellate Assistant Commissioner ; and, having failed, went in appeal to the Income‑tax Appellate Tribunal. There it was urged that even assuming the contributions by the society to be perquisites, the condition precedent to such perquisites being taxed is their becoming due to the employees, and in so far as the amounts taxed had not become vested on the employees in the account year, the section was not applicable. The next argument was that the amounts taxed were not covered by sub‑clause (v) of Explanation 1 to section 7 (1) because the word "annuity" in section 7 (1) was intended to catch annuities received periodically and not such annuities, as were payable only on retirement. The Tribunal rejected the appeal holding that the money having been allowed to the assessees by the employer, they thereby acquired a right in the amounts, even though they could riot be drawn upon immediately, or as and when they liked. The assessees thereafter asked and the following three questions have been referred to us:
"(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 section 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 paragraph (v) of Explanation 1 thereto ?"
These three questions are common to the two references, though one of which, Income‑tax Reference No. 17 of 1959, has been made on the application by L. W. Russel, and the other, Income‑tax Reference No. 18 of 1959, has been referred by petition of the remaining eight employees.
When dealing with the arguments by the learned advocate for the assessees, it would be of advantage to give extracts from the trust deed, as well as summarise the important parts of the rules, under which the contributions have been made.
Trust Deed
"Paragraph 2.‑The society hereby declares that it will pay the proportion of the premiums payable by the society under the rules of the scheme and will observe and perform its obligations under the scheme".
"Paragraph 3.‑The trustees shall as agents for and on behalf of the society and the members of the scheme respectively 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 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."
Paragraph 6 of the rules says that the annual pension payable in respect of a member shall be the amount calculated in accordance with Table A in the Appendix thereto, having regard to the age of such member at the date he became a member of the scheme. Paragraph 7 provides that the pension shall be provided by means of a policy securing a deferred annuity upon the life of such member to be effected by the trustee, as agents for the society and the member respectively, with the Co‑operative Insurance Society Limited, securing the payment to the trustee of an annuity equivalent to the pension, to which such a member shall be entitled under the rules. The same paragraph further provides that the insurer shall agree that the trustee shall be entitled to surrender such deferred annuity, that on such annuity being so surrendered, the insurers will pay to the trustee the total amount of the premia paid in respect thereof, together with compound interest at the Tate of three percent. per annum computed from the respective dates of payment of such premia with monthly rests up to the date of payment, and that in the event of a member electing to commute the annuity or pension payable to him the insurer will pay to the trustee in respect of such a member the amount calculated in accordance with the fourth column of the Table in the Appendix. The 9th paragraph states that the society shall contribute one‑third of the premium payable in respect of the policy securing the deferred annuity in respect of each member and the member shall contribute the remaining two‑thirds : and paragraph 13 says that the age at which a member shall normally retire from the service‑of the society shall be fifty‑five years, at which age a member shall be entitled to receive a pension of the amount specified in rule 6. The pension shall under paragraph 14 be payable during the life of such member by quarterly instalments, and paragraph 15 says that there would be paid the total amount of the portions of the paid premiums to a member or to his legal representa tive, could be leave or be dismissed from the service of the society' or die whilst in such service. The same paragraph also provides that there would be paid such further proportion of the total amount of the portions of the premiums paid by the society in respect of a member in accordance with Table C in the Appendix, should the member die whilst in the service of the society, or leave, or be dismissed from the service of the society on account of permanent breakdown in health. That Table C among other things provides as follows:
Number of years of service of members with the society in India, Ceylon or Africa.
Proportion of total amount of premiums paid by the society which is payable to the member or his legal personal represen tatives.
Under 10 years
None.
Over 10 years but under 15 years
One‑quarter.
15 20
One‑half.
20 25
Three‑quarters.
25
The whole.
Therefore it is clear that the society's contributions under rule 6 vest in trustee and the employee gets the full benefit of such contributions only on the retirement at the age of 55, or part benefits on completing ten years of service and on the employment being terminated due to ill‑health. It is further clear that the employees during the first ten years of their employment are not entitled to any benefit though the contribu tion has been made by the employer, and in the contingencies of their being dismissed for default they become entitled only to their shares of the contributions, which they made under the scheme. The short argument by the learned Advocate for the employees is that such a contingent benefit in the society's contributions is not taxable, and section 7 (1) is attracted only where the employees get vested rights in the salary, wages, annuity, pension, gratuity, fees, commissions, perquisites or profits in lieu of salary or wages. He has further argued that the words "are allowed to him by or are due to him" in section 7 (1) mean the person to be charged with the tax getting some vested, though not immediate, benefit in the amount and would exclude the benefit that the assessee may or may not obtain. In support the Advocate has relied on two cases, where mere expectancy of benefit has been held not to attract the liability to pay the tax. In E. D. Sassoon & Co. Ltd. v. Commissioner of Income‑tax ((1954) 26 I T R 27), a managing agency had been assigned, where certain commission amounts were payable at specified intervals. The questions then raised was whether the transferor would be liable to pay the tax on the commission amounts earned prior, to transfer, but which would become due afterwards. Bhagwati, J., dealing with the question of when something becomes due, observed at page 51, as follows:
"Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him." The proposition that mere expectancy does not amount to acquisition of right has been again accepted in Cotton Agents Ltd. v. Commissioner of Income‑tax ((1960) 40 I T R 135), where the words "income which accrues or arises" were again interpreted according to what has been laid down in Sassoon's case. The proposition is further established by Edwards (H. M. Inspector of Taxes) v. Roberts ((1934‑35) 19 Tax Cas. 618), which has been relied by the learned Advocate of the assessee. The respondent in the case was employed by a company under an agreement that provided in addition to annual salary an interest in a "conditional fund", which the company had to create by payment at 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. The respondent, who was entitled to the income at the expiration of each financial year and to part of the capital of the fund at the expiration of five financial years, resigned from the service when the trustees transferred to him the shares, which they had purchased out of the payments made to them in the years 1922 to 1927. The Income‑tax authorities assessed the respondent with tax for…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.