Case: Commissioner Of Income-Tax, Kerala And Coimbatore Vs. L. W. Russel

2. The respondent, L. W. Russet, is an employee of the English and Scottish Joint Cooperative Wholesale Society Ltd., Kozhikode, hereinafter called the Society, which was incorporated in England. The Society established a superannuation scheme for the benefit of the male European members of the Societys 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 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 specified contingency. The Society contributes 1/3 of the premium payable by such employee. During the year 1956-57 the Society contributed Rs. 3,333/towards the premium payable by the respondent. The Income-tax Officer, Kozhikode Circle, 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 appeal preferred by the respondent against 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 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 I thereto ?On the first question the High Court held that the employers 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 employers 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.3. The three questions formulated for the High Courts opinion are interdependent and the answer to them turn upon the true interpretation of the relevant part of S. 7(1) of the Act.

Court's reasoning:
8. 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 to the Trustees to be administered by them in accordance with the rules framed under the Scheme any 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 thedecision of Channel, J., in (1904) 5 Tax Cas 36 was strongly relied upon before the appellate court. But the learned Judges distinguished that case on the ground that under the scheme which was the subject matter of that decision the sums taxed were really addition 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.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 life of each member, and funds are provided by contributions from the employer as well as from the employees. The Trustees 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 superannuation. If the employee leaves 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 contributions 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 amounts contributed by the employer with interest thereon, subject to the discretionary power exercisable by the trustees, becomes 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 employers share of the contributions towards the premiums does not vest in the employee. At best he has a contingent right herein. In one contingency the said amount becomes payable to the employer and in another contingency, to the employee.