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 deferred annuity benefits to the societys 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 administration 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 employees salary. The annuity thus got became due on the employees 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 societys 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 night 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 not 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 to 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 rate of three per cent. 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 representative, should he 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 representatives.
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 societys 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 contribution 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 societys contributions is not taxable, and section 7(1) is attracted only where the employees get vested rights 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 (S.C.).], a managing agency had been assigned, where certain commission amounts were payable at specified intervals. The question 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 (S.C.).], where the words 'income which accrues of arises' were again interpreted according to what has been laid down in Sassoons case [[1954] 26 I.T.R. 27 (S.C.).]. The proposition is further established by Edwards (II.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 companys 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 1927-28 on the amount of the current market value of the shares at the date of transfer, which order was appealed against. The ground taken was that notwithstanding the liability to forfeiture in certain events, immediately a sum was paid by the company to the trustees of the fund, the respondent became invested with a beneficial interest in the payment which formed part of the emoluments for the year in which it was made, and such a payment would be liable to tax only in the year of the payment and not when the assessee got the amount. The learned judges rejected the argument holding that as the respondent did not obtain a vested interest in the yearly payments made to the trustees on the dates when they were respectively made they would not constitute additional remuneration of the year in which they were paid, and would only be such when the assessee got the shares. In this connection Lord Hanworth M.R. observes as follows :
'Are those sums appropriated year by year Are they sums which are paid by way of additional salary and which, although they cannot be immediately enjoyed by the employee, are none the less his salary deferred until the lapse of six years I have come to the conclusion, not I confess without some doubt, that this is an emolument which accrued and was payable not in each successive year, but in the sixth year, and was to be paid when it was handed over in 1927 and not before. It is quite true that a proportion of this amount might have been paid ex gratia by the employers if death had supervened, or if under clause 9 he had been deemed unfit to go on with his service. Taking the normal course, he was not entitled to anything until the lapse of six years, and his right could have been entirely defeated by the events which are tabled in... agreement.'
Also Romer L.J. says as follows :
'If an employer agrees to pay his employee a salary of so much a year and agrees that when the employee leaves the service or is dismissed he shall receive, say, a lump sum of Pounds 500 in addition, it is impossible to say that that Pounds 500 is an emolument in respect of any year other than the last year of service.'
It follows that the person should have some vested interest in the amounts paid by the employer in order to attract the liability under section 7(1), and mere contingency of getting some benefit from the payments would not justify being taxed under the Indian Income-tax Act. In further support of this view we may refer to Commissioner of Income-tax v. Bombay Burma Trading Corporation Ltd. [[1933] 1 I.T.R. 152 (Rang.).] where the question referred to was 'whether the interest paid by the companys own contribution to the provident fund account of that member is income falling under the head salaries as defined in section 7, Income-tax Act', and the answer at page 157 reads as follows :
'In my opinion, upon a true construction of section 7(1) unless and until the salary has been received by the employee and has been paid by the company to him, such salary is not assessable to income-tax. The construction that I am disposed to put upon section 7(1) is supported by the terms of section 18(2)...'
It follows that the benefit in money, for which the person is being made liable to the tax, should be vested in order to be treated as salary, wages, annuity, pension, gratuity, fee, or commission; otherwise annuity under will, while the testator be still alive, would be taxable under section 7(1).
The proposition which the learned Government pleader has urged is that the employers transferring money into the account of the employee and converting his position into that of a trustee for a certain purpose, should attract the liability to tax under section 7(1), even though the employer had not surrendered his rights in the amounts. He has argued that with parting of the control in the amounts the employees would become vested with some rights though enjoyment of the benefits would be postponed, and such postponement would not delay the liability to pay the tax. We think the case relied on by the learned Government pleader in support of his arguments only holds that delayed enjoyment of full right would not postpone the liability to pay the tax and is explainable on the ground of the right in the case having become vested with the result of the liability to pay the tax having arisen, though part enjoyment of the salary has been circumscribed by the scheme. The case is Smith v. Stretton [(1904) 5 Tax Cas. 36 (K.B.).], where the taxpayer was an assistant master at Dulwich College, and was assessed to tax on a sum, which included Pounds 35 that was placed to his credit for the year 1900 under the college provident fund scheme. Under the scheme certain increases of salary were granted subject to the increase being detained by the Governors for the purpose of forming the provident fund and the master in the case contended that he had no actual enjoyment of Pounds 35 due to its being in the nature of a bonus at the end of his career. The court found that this contention was not correct, and the reason for the rejection was that the scheme was to increase the salary as well. Should the effect of the deed and rules in the cases before us be that the employees obtained some vested benefit in the employers 1/3rd contribution in the year of assessment the principle of the decision in the case would apply. The position of the employer, under rule 13, however, is that a member on retirement at the age of 55 alone would be entitled to receive the pension, and the provision of rule 15 excludes a member from the benefit should he leave or be dismissed from the service for any reason, before reaching the pension age, when such an employee would be only paid portion of the premium paid by the society. Another difficulty in applying the aforesaid principle to the facts of the case before us is that Table C excludes employees with less than ten years service from the benefit of the employers contribution. It follows that on a fair reading of the provisions the assessees till the pensionable age be reached obtain no rights in the employers contributions and in those circumstances we cannot hold the employers contribution would attract the liability under section 7(1).
The learned Government pleader has further urged that paragraph 5 of Explanation 1 to section 7(1) covers the employers contribution in the case due to their being sums payable under a contract for annuity on the life of the assessee. We feel that the aforesaid paragraph to the Explanation contemplates two classes : the first being where a sum is payable by the employer to effect an assurance on the life and where the sum by the employer is paid in respect of a contract for an annuity on the life of the assessee. Obviously the payments taxed here are not covered by the first, and the learned Government pleader has urged that they are in respect of a contract for an annuity. The taxing authorities have also assessed as though the second class covered the payments. But even such payments must confer some present interest on the assessees, and should not be held for the person paying until some future event that may not happen. This is clear by the use of the word 'annuity' in the paragraph, for the word has been described in Lady Foley v. Fletcher [(1858) 157 E.R. 678; 3 H. & N. 769, 785.] by Watson B. in these words :
'But an annuity means where an income is purchased with a sum of money, and the capital has gone and has ceased to exist, the principal having been converted into an annuity.'
It follows that a payment still claimable by the person making it would not be in respect of contract for an annuity, where its being capital had not ceased to exist. We, therefore think that contributions by the society have been wrongly taxed, and that being the position our answers to the several questions are as follows :
(1) The employers contribution under the terms of a trust deed are not perquisites as contemplated by section 7(1) of the Income-tax Act.
(2) The employers contributions were not allowed or due to the employees in the account year as they conferred no immediate benefit on the employees in that year.
(3) The legislature not having used the word 'deferred' with annuity in section 7(1) and this being a taxing statute we think deferred annuity would not be hit by paragraph (v).
Let the aforesaid answers be accordingly sent and Rs. 100 be costs in each reference. This judgment will govern both the cases.
References answered accordingly.