1964 (4) TMI 4 - SC - Income Tax

Employer's Deferred Annuity Contributions Not Taxable Perquisite

The court held that employer contributions to a deferred annuity were not considered a 'perquisite' under section 7(1) of the Indian Income-tax Act, 1922. ... Perquisite - vested right - contingent interest - allowed to or due to him (whether paid or not) - perquisite by way of employer contribution to assurance or annuity (Explanation 1(v))Perquisite - perquisite by way of employer contribution to assurance or annuity (Explanation 1(v)) - Whether the employer's contribution to a trust to effect a deferred annuity on the employee's life is a perquisite within section 7(1) read with Explanation 1(v) of the Act. - HELD THAT: - Section 7(1), read with Explanation 1(v), brings within 'perquisite' any sum payable by the employer to effect an assurance on the life of the assessee or in respect of a contract of annuity on his life. However, before such a sum is exigible to tax under that head it must be 'allowed to' the employee or 'due to' him. The Court construed 'allowed' and 'due' as importing the existence of a right in the employee - in effect a vested interest - not a mere contingency. Under the scheme before the Court the employer's contributions were paid into a trust to secure deferred annuities; until the employee attained super-annuation the employer's contributions vested in the trustees and the employee's entitlement was contingent on specified events. Because no vested right accrued to the employee until super-annuation (and, in some contingencies, the employer might be entitled), the employer's contributions were not perquisites 'allowed to or due to' the employee under section 7(1) and Explanation 1(v).The employer's contributions to effect a deferred annuity under the Scheme are not perquisites within section 7(1) read with Explanation 1(v) because the employee had no vested right in them until super-annuation.Allowed to or due to him (whether paid or not) - vested right - contingent interest - Whether the employer's contributions were 'allowed to' or 'due to' the employee in the accounting year 1956-57. - HELD THAT: - The Court held that the statutory phrase requires an obligation on the employer to pay and a right in the employee to claim the amount; the addition of 'allowed' (introduced by the Finance Act, 1955) likewise presupposes a right conferred on the employee. The Scheme conferred only a contingent right until super-annuation (with trustees holding the sums and possible reversion to the employer in certain contingencies). Consequently, the contributions paid into the trust during 1956-57 were neither 'allowed to' nor 'due to' the employee in that year.The employer's contributions were not 'allowed to' or 'due to' the employee in the accounting year 1956-57 because no vested right in the employee had arisen in that year.Contingent interest - vested right - Whether a deferred annuity, as provided by the Scheme, falls within the scope of annuity liable under section 7(1) and Explanation 1(v) when the benefit is contingent. - HELD THAT: - The Court emphasised that the Legislature did not use the word 'deferred' in section 7(1) but the taxing provision must be read so as to tax only those emoluments which are allowed to or due to the employee. A deferred annuity secured by a trustee-funded policy where the employee's entitlement is contingent and the employer's contributions do not vest in the employee until super-annuation cannot be treated as an annuity 'allowed to' or 'due to' the employee for the purpose of immediate taxation under section 7(1). Authorities relied upon were analysed and distinguished on their facts, reinforcing the principle that absence of a vested interest precludes taxation under this head.A deferred annuity, the benefit of which is contingent and in respect of which no vested right has accrued to the employee, is not hit by section 7(1) and Explanation 1(v) for taxation at the time of employer contribution.Final Conclusion: The High Court's answers were correct: the employer's contributions to the Scheme for a deferred annuity did not constitute perquisites 'allowed to' or 'due to' the employee in 1956-57 because the employee had only a contingent, not a vested, interest; the appeal is dismissed. Issues Involved:1. Interpretation of section 7(1) of the Indian Income-tax Act, 1922.2. Whether employer contributions to a deferred annuity are considered a 'perquisite' under section 7(1).3. Whether the contributions were 'allowed to' or 'due to' the employee in the accounting year.4. Whether the deferred annuity is hit by section 7(1) and paragraph (v) of Explanation 1.Detailed Analysis:1. Interpretation of section 7(1) of the Indian Income-tax Act, 1922:The judgment focuses on the interpretation of section 7(1) of the Indian Income-tax Act, 1922, specifically regarding the inclusion of employer contributions to a deferred annuity as taxable income. The court analyzed the substantive part of section 7(1) and clause (v) of Explanation 1 to determine whether such contributions qualify as a 'perquisite' and are therefore taxable.2. Whether employer contributions to a deferred annuity are considered a 'perquisite' under section 7(1):The court examined the scheme under which the employer, the English and Scottish Joint Co-operative Wholesale Society Ltd., contributed to a deferred annuity for its employees. It was argued that these contributions should be considered a 'perquisite' under section 7(1). The court noted that the term 'perquisite' includes any sum payable by the employer to effect an assurance on the life of the employee or in respect of a contract of annuity on the life of the employee.3. Whether the contributions were 'allowed to' or 'due to' the employee in the accounting year:The court analyzed whether the contributions made by the employer were 'allowed to' or 'due to' the employee in the accounting year. It was determined that the contributions did not vest in the employee until the age of superannuation was reached. Until that point, the contributions remained with the trustees and were contingent upon the employee reaching the age of superannuation or other specified contingencies.4. Whether the deferred annuity is hit by section 7(1) and paragraph (v) of Explanation 1:The court concluded that the deferred annuity contributions were not hit by section 7(1) and paragraph (v) of Explanation 1 because the employee did not have a vested right in the contributions until the age of superannuation. The court emphasized that the employee's right to the contributions was contingent and not vested, and therefore, the contributions could not be considered a perquisite allowed to or due to the employee in the accounting year.Conclusion:The court held that the High Court correctly answered the questions of law submitted to it by the Income-tax Appellate Tribunal. The contributions made by the employer towards the deferred annuity did not constitute a perquisite under section 7(1) of the Act as they were contingent and not vested in the employee. Consequently, the appeal was dismissed.