Commissioner of Income-Tax, Kerala and Coimbatore v. L.W. Russel (1964)

Salary tax reaches not only cash in hand but "perquisites" — and the 1922 Act expressly included in that word sums the employer pays to secure an annuity on the employee's life. The Revenue read that as covering every rupee an employer puts into a superannuation scheme, the moment it is put in.

Russel is the case that says no. A sum is taxable in the employee's hands as a perquisite only when he has a right to it — when it is paid to him, due to him, or "allowed" to him. If it may, on some contingency, go back to the employer, it has not yet become his, and it cannot be taxed as his income. The principle — no vested interest, no perquisite — is the reason to learn the case.

L.W. Russel was an employee of the English and Scottish Joint Co-operative Wholesale Society Ltd., Kozhikode, a society incorporated in England. By a trust deed dated 27 July 1934 the Society set up a superannuation scheme for the male European members of its staff in India, Ceylon and Africa, by means of deferred annuities. Membership was a condition of employment.

Under the scheme the trustees took out a policy of insurance securing a deferred annuity on each member's life. The Society paid one-third of the premium and the member two-thirds. Normal retirement was at 55, when the member became entitled to a pension. But if he left, was dismissed or died in service, he (or his representatives) got back only his own portion of the premiums; the trustees might in certain cases pay him some proportion of the Society's portion, and whatever of the Society's portion was not so paid went back to the Society.

In 1956-57 the Society contributed Rs. 3,333 towards the premium payable for Russel. The Income-tax Officer added it to his taxable income under s. 7(1), Explanation 1, sub-cl. (v). The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal dismissed his appeals. On a reference, the Kerala High Court answered all three questions in his favour. The Commissioner appealed by special leave. The respondent did not appear, so the Court heard only the Revenue's side.

1. Is the employer's contribution, paid under the trust deed towards a deferred annuity on the employee's life, a "perquisite" within s. 7(1)?
2. Was that contribution "allowed to" or "due to" the employee by or from the employer in the accounting year?
3. Is the deferred annuity an annuity hit by s. 7(1) read with para (v) of Explanation 1?

The appeal was dismissed. The High Court's answers were correct.

What the scheme gave the employee

The Court first worked out the employee's rights under the scheme, because "the scope of the respondent's right in the amounts representing the employer's contributions thereunder depends upon it." Its conclusion: "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." Until then the money is held by the trustees, and "At best he has a contingent right therein. In one contingency the said amount becomes payable to the employer and in another contingency, to the employee."

Reading s. 7(1)

Read with Explanation 1, cl. (v), the section makes such a sum a perquisite, but "before such sum becomes so exigible, it shall either be paid to the employee or allowed to him by or due to him from the employer."

• "Paid" is easy: it takes in every receipt by the employee from the employer.
• "Due", followed by "whether paid or not", "shows that there shall be an obligation on the part of the employer to pay that amount and a right on the employee to claim the same."
• "Allowed" — inserted by the Finance Act 1955 — was said by the Revenue to be wider, catching any credit in the employer's books. The Court held that in legal terminology it means "fixed, taken into account, set apart, granted", and that it implies a right conferred on the employee: "One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein."

The English cases

The Revenue relied on Smyth v. Stretton (1904) 5 TC 36, where Channell J taxed sums credited to a Dulwich College assistant master under a provident fund scheme. The Court explained it as a case where the sums were really additions to salary, and followed the Court of Appeal in Edwards v. Roberts (1935) 19 TC 618, which had distinguished Smyth on that ground and confined it to its facts.

The Court adopted the English principle: "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." Applying it: "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."

An employer's contribution is taxable in the employee's hands as a perquisite under s. 7(1) of the 1922 Act only if it is paid to him, or is due to him, or is allowed to him — and each of "due" and "allowed" requires that the employee have a right to the sum. Where, under a superannuation scheme, the employer's contribution is held by trustees and may revert to the employer on the employee's death or departure before superannuation, the employee has only a contingent interest, and the contribution is not his taxable perquisite for the year in which it is paid.

• Direct question: What is a perquisite under the law of income tax? When is an employer's contribution to a superannuation or annuity scheme taxable in the employee's hands? Define perquisite (the Court used the Oxford Dictionary meaning: "casual emoluments. fee or profit attached to an office or position in addition to salary or wages"), then give the three routes — paid, due, allowed — and the vested-right test.
• Problem question: an employer pays into a fund which the employee receives only if he completes a set period of service, failing which it returns to the employer. Apply Russel: contingent interest, not taxable when paid in. Contrast a scheme where the sums are simply added to salary (Smyth v. Stretton, as explained here).
• Point worth marks: the case was heard ex parte — the Court noted that it "has not the benefit of the exposition of the contrary view" — and still ruled against the Revenue.
• Link: the case is later relied on in Ram Pershad v. C.I.T. (1972) on the taxation of remuneration.