Transfer of trustee-held shares on termination not treated as salary under statutory definition, so not taxable as salary.

Whether a transfer by trustees to an employee on termination constitutes "salary" under the statutory definition is addressed by analysing legal and beneficial ownership at the time of transfer. The scheme placed shares in trustees' names with dividends paid to the employee; on registration the legal estate vested in trustees and the beneficial interest remained for the employee. Because the company retained neither legal nor beneficial interest and lacked capacity to control or compel the transfer, the transfer does not qualify as a perquisite or salary under Section 7(1); consequently the transfer is not treated as salary for tax purposes.

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Issues: Whether the transfer by trustees to an employee, on termination of employment, of shares standing to his credit under a company bonus scheme constitutes a payment falling under the head "Salaries" as defined in Section 7(1) of the Income-tax Act.

Analysis: The Court examined the scheme under which annual bonuses were applied to purchase shares which were registered in the joint names of the managing agents and the employee as trustees, with dividends paid to the employee. The Court treated the statutory definition of "Salaries" in Section 7(1) of the Income-tax Act as the governing legal framework. It analysed whether, at the time of transfer by the trustees to the employee on termination, the company retained any legal or beneficial interest in the shares such that the transfer could be characterised as a perquisite or profit received by the employee in addition to salary paid by or on behalf of the company. The Court concluded that upon registration in the trustees' names the legal estate vested in the trustees and the beneficial interest was held for the employee, and that the company possessed neither legal nor beneficial interest and therefore lacked any capacity to control or compel the transfer.

Conclusion: The transfer of the shares by the trustees to the employee on termination of employment is not a payment of "salary" within the meaning of Section 7(1) of the Income-tax Act; accordingly the decision is in favour of the assessee.

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