Commissioner Of Income-Tax, Kerala And... vs L. W. Russel
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 220/1963
Decision Date: 1 April, 1964
Coram: J.C. Shah, S.M. Sikri, Subba Rao
The case titled Commissioner of Income‑Tax, Kerala and others versus L W Russel was listed for argument on 1 April 1964 before the Supreme Court of India. The Bench comprised Justice J C Shah and Justice S M Sikri. The appeal, numbered Civil Appeal 220 of 1963, was filed by way of special leave against the judgment and order dated 9 January 1961 of the Kerala High Court in Income‑Tax Appeal Case 17 of 1959. The appellant was represented by counsel, while the respondent did not appear before the Court.
Justice Subba Rao delivered the judgment of the Court. He observed that the appeal raised three interrelated questions concerning the interpretation of section 7(1) of the Indian Income‑Tax Act, 1922 (Act No XI of 1922), hereinafter referred to as the Act. The first question asked whether contributions made by the employer to the assessee under a trust deed, in respect of a contract for a deferred annuity on the life of the assessee, should be treated as a “perquisite” within the meaning of section 7(1). The second question inquired whether such contributions were allowed to or were due to the applicant from the employer during the relevant accounting year. The third question sought to determine whether the deferred annuity fell within the ambit of an annuity covered by section 7(1) and paragraph (v) of Explanation 1 to that provision.
The High Court had answered the first question by holding that the employer’s contribution under the trust deed was not a perquisite as contemplated by section 7(1). It answered the second question by concluding that the contributions were neither allowed to nor due to the employee in the accounting year in question. Regarding the third question, the High Court opined that because the legislature had not employed the word “deferred” in relation to annuities in section 7(1), and because the statute served a taxing purpose, the deferred annuity could not be caught by paragraph (v) of Explanation 1.
The Commissioner of Income‑Tax therefore preferred the present appeal, challenging the correctness of the High Court’s conclusions on all three issues. Justice Subba Rao noted that the three questions were interdependent and that their answers depended upon a proper construction of the relevant portion of section 7(1). He proceeded to examine the text of section 7(1), which provides that 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. For the purpose of this section, Explanation I defines “perquisite” and includes, among other things, paragraph (v) which covers any sum payable by the employer, directly or through a fund, to effect an assurance on the life of the assessee or in respect of a contract of annuity on the life of the assessee.
The provision identified as clause (v) states that any amount payable by an employer, either directly or through a fund that is not governed by Chapters IX‑A and IX‑B, for the purpose of obtaining a life‑insurance policy on the employee or for a contract of annuity on the employee’s life, is covered by the section. This section creates a liability to tax the remuneration received by an employee and assumes that an employer‑employee relationship exists.
In the matter before the Court, the question was whether the payments under consideration fall within 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 term “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 section 7(1) of the Act provides an expansive definition of this term.
Clause (v) of that Explanation expressly includes, within the meaning of “perquisites,” any sum that the employer pays, whether directly or through a fund exempt from the provisions of Chapters IX‑A and IX‑B, for the purpose of securing a life‑insurance policy on the employee or for an annuity contract on the employee’s life. When the substantive part of section 7(1) is read together with clause (v) of the Explanation, it becomes evident that if a sum of money is allowed to the employee, is due to him, or is paid to him so that he can obtain a life‑insurance policy, that sum is a perquisite as defined in section 7(1) and is therefore subject to tax.
However, for such a sum to become taxable it must first be either paid to the employee or be allowed to him, or be due to him from the employer. The term “paid” is straightforward; it includes every receipt that the employee gets from the employer, irrespective of whether the amount was originally due to the employee. The term “due,” qualified by the words “whether paid or not,” indicates that the employer has an obligation to pay the amount and that the employee possesses a right to claim it.
The Court explained that the word “allowed” carries a broader connotation. It encompasses any credit entered in the employer’s accounts. This term was inserted into the section by the Finance Act of 1955. In legal terminology, “allowed” is equivalent to “fixed, taken into account, set apart, granted.” Consequently, it includes perquisites that are given in cash, in kind, as a monetary value, or as amenities that cannot be converted into cash. The expression implies that a benefit is conferred on the employee with respect to those perquisites. The Court further observed that a perquisite cannot be said to be “allowed” to an employee if the employee does not have a vested right to that benefit.
The Court explained that an employee cannot be said to have a perquisite if the employee does not possess a right to that benefit. Consequently, the concept of “allowed” perquisites cannot be applied to payments whose receipt is contingent on a future event that has not yet occurred. In other words, the employee must hold a vested right to the amount in order for it to fall within the meaning of section 7(1) of the Act. Applying that interpretation, the Court held that the sums paid by the Society to the Trustees for administration in accordance with the rules framed under the Scheme could not be characterised as perquisites that were allowed to, or were due to, the respondent. Until the respondent attained the age of superannuation, those amounts remained vested in the Trustees, and the identity of the ultimate beneficiary under the trust could be determined only upon the occurrence of one of the contingencies specified in the trust deed. The Court noted that when one specific contingency occurs, the employer becomes the beneficiary, whereas a different contingency would make the employee the beneficiary. Counsel for the appellant relied heavily upon the decision of the King’s Bench Division in Smyth v. Stretton (1). In that case, an Assistant Master of Dulwich College named Stretton had been assessed to income tax in the amount of pounds 385 for his emoluments received from the Governors of Dulwich College for the fiscal year ending 5 April 1901. Stretton contested the assessment on the ground that it incorporated pounds 35, which he argued was not taxable because it represented an amount credited to him under a Provident Fund Scheme for the year 1900. The learned judge, Channell, J., after some deliberation, concluded that the questioned sum was indeed taxable. The case involved a scheme designed to establish a provident fund for the benefit of permanent Assistant Masters of Dulwich College. Paragraph 1 of the scheme stipulated salary increases for Assistant Masters based on years of service, with clause (a) providing a five‑percent increase for those with at least five but fewer than fifteen years of service, and clause (b) providing a seven‑and‑a‑half percent increase for those with fifteen years or more. Clause (c) authorized an additional increase equal to the amounts specified in clauses (a) and (b), subject to the conditions set out in paragraph 5. Paragraph 5 stated that Assistant Masters with less than ten years of service who resigned or otherwise left the College, except due to ill health, would be entitled to receive the total increase sanctioned by clause (a) and its accumulations, but would not receive the additional increase sanctioned by clause (c) or its accumulations. If an Assistant Master retired on grounds of ill health, the Governors could, in addition to the increase under clause (a), grant him the further five percent sanctioned by clause (c) together with its accumulations. The Court therefore rejected the argument that the amount payable under clause (c) of paragraph 1 was merely a contingent sum without vested character, holding that the binding obligation created between the Assistant Masters and the Governors meant that the sum had effectively been added to salary and was therefore taxable.
In this matter, the Court explained that when an Assistant Master died while still employed by the College, the five per cent increase that was authorized under clause (c) of the salary scheme, together with the corresponding accumulations, as well as the increase sanctioned under clause (a) with its accumulations, had to be paid to the Master’s legal representatives. The contention raised by the appellant was that the amount payable under clause (c) of paragraph 1 was merely contingent and lacked any vested character, and therefore it could not be characterised as income. The learned Judge examined the language of the scheme, interpreted its provisions, and rejected that contention. The Judge’s reasoning was set out in the following words: “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.” While recognising that a different court might interpret the scheme differently, the Judge concluded that clause (c) of paragraph 1 of the scheme expressly provided an additional salary to the Assistant Masters. The Court also referred to the earlier decision in Edwards (H. M. Inspector of Taxes) v. Roberts, where the Court of Appeal interpreted a similar scheme in a contrary manner. In that case, the respondent had been employed under a service agreement dated 21 August 1921, which, among other things, provided that besides his annual salary he would have an interest in a “conditional fund.” The fund was to be created by the company making, after each financial year, a payment out of its profits to the trustees of the fund, who would invest the sum in the purchase of the company’s shares or debenture stock. Subject to possible forfeiture on certain events, the respondent was entitled to receive the income generated by the fund at the end of each financial year, to receive a portion of the fund’s capital (or, at the trustees’ option, the corresponding investments) after five years and after each subsequent year, and, in the event of his death while in the company’s service or upon termination of his employment, to receive the entire amount then standing as the capital of the fund (or the actual investments). The respondent resigned from the company in September 1927, and at that time the trustees transferred to him the shares that they had purchased with the contributions made by the company from 1922 to 1927. He was then assessed to income tax on the current market value of those shares at the date of transfer.
In this case, the Court referred to the authority reported in (1935) 19 T.C. 618, 638, 640, concerning the valuation of LP(D)ISCI‑17 shares at the date of transfer. The assessee argued that immediately after the company paid a sum to the trustee of the fund, he acquired a beneficial interest in that payment, which he claimed formed part of his emoluments only for the financial year in which the payment was made and for no other year. Accordingly, the assessee contended that the income‑tax assessment for the year 1927‑28 should not, in any event, exceed the total of the sums paid by the company to the trustees, because the difference between that amount and the market value of the investments at the date of transfer represented a capital appreciation that was not liable to tax in any year. The Court of Appeal rejected this contention. Lord Hanworth, M. R., while rejecting the contention, observed that the employee had not acquired a vested interest in the successive sums placed to his credit; rather, he only had a chance of receiving a sum at the end of six years if all conditions were met. That opportunity had now materialised, and the employee received the benefit by reason of his employment or by exercising a profit‑making employment within Schedule E. Lord Maugham, L. J., expressed a similar view, stating that “the true nature of the agreement was that the employee was 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 appellate court had heavily relied on the decision of Channel J. in Smyth v. Stretton (1904) 5 T.C. 35, but the learned judges distinguished that case on the ground that, under the scheme considered in Smyth, the sums taxed were essentially additions to the salary of the Assistant Master, and therefore the decision should be confined to those facts. The principle laid down by the Court of Appeal—that a sum is not taxable unless a vested interest in it accrues to an employee—applied equally to the present case. As previously pointed out, no interest in the sum contributed by the employer under the scheme vested in the employee, since it was only a contingent interest dependent on his reaching the age of superannuation. Consequently, the amount could not be characterized as a perquisite allowed to him by the employer or as an amount due from the employer within the meaning of section 7(1) of the Act. The Court therefore held that the High Court had correctly answered the questions of law referred to it by the Income‑Tax Appellate Tribunal. In the result, the appeal failed and was dismissed, with the Court ordering the appeal to be dismissed.