1963 PLP 753 (PTD)
P. NEWCOME Versus COMMISSIONER OF INCOME TAX, KERALA
| Citation | 1963 PLP 753 (PTD) |
| Forum / Court | Kerala India |
| Bench Members | M. A. Ansari, C. J and M. Madhavan Nair, J |
| Parties | P. NEWCOME Versus COMMISSIONER OF INCOME TAX, KERALA |
| Primary Law | Income tax Act (XI of 1922) |
Q1: What are the key laws and sections cited in 1963 PLP 753 (PTD)?
This judgment primarily cites: Income tax Act (XI of 1922) as referenced in Pakistani case law index.
Q2: Which judicial bench decided the case 1963 PLP 753 (PTD)?
The case was heard and decided by the Kerala India bench comprising: M. A. Ansari, C. J and M. Madhavan Nair, J.
Q3: What is the official citation format for this judgment on Pakistan Law Portal?
Cite this legal precedent as: 1963 PLP 753 (PTD) (P. NEWCOME Versus COMMISSIONER OF INCOME TAX, KERALA). Read the full summary and cross-referenced laws free on Pakistan Law Portal.
Laws Cited
Representation
- The assessee's learned Advocate has argued that the Tribunal has erred in treating the payment by the employer to have become vested in the assessee subject to defeasance under certain circumstances, that the assessee is not entitled to the insurance money until the trustee's assurance matures, that before such maturing, the money paid by the employers is neither due nor allowed, nor a payment under clause (v). In support he relies on Russel v. Commissioner of Income tax ((1962) 44 I T R 816), in which we had held that the payment to be chargeable under section 7 of the Act must become vested in the person who is being charged ; and, if the benefit arising thereof be dependent on contingencies, the payment would not be one to which section 7 of the Act would apply. To reach that conclusion, we had relied among other cases on Edwards (H. M. Inspector of Taxes) v. Roberts (19 T C 618) where the respondent was employed by a company under an agreement, which 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 company's 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 being 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. That objection was rejected on the ground 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. The principle, on which the aforesaid decision rests, would apply whenever payment is made to trustees, in which the employee would not get immediate vested interest, and for this purpose the relevant parts of the trust deed should be given.
- The learned Government Advocate has argued that the payments are towards life assurance of the employee and covered by sub clause (v) of Explanation I to section 7(1) of the Act. We feel that the aforesaid sub clause would not cover payments towards life assurance, which is liable to be surrendered, on certain events happening, and the benefit thus got becoming payable at the direction of the employer. The employee gets, in payments towards such an assurance only contingent interest in the years in which they are paid, because the possibility of the benefit being diverted at the employer's direction is not then excluded, and we think such payments are not covered by the aforesaid clause.
Headnotes / Summary
S. 7 (1), Expl. 1(v) Salary Trust for insuring employee's lives Contribution of employer towards annual premium Whether taxable as "perquisite" of employee. A company had a "Staff Group Insurance Scheme" which consisted in the creation of a trust for effecting insurance on the employees, the employee contributing 10 per cent. of his salary and the employer contributing 5 per cent. of his salary. The trust took out policies on the lives of the employees and held them in trust. Under the scheme the sum assured became payable to an employee only after he attained 52 years on certain dates mentioned in the scheme, and if before that date the employee left the service, or was dismissed, the trustee had to surrender the policies and pay its cash surrender value to the employee. Under the above arrangement the company paid Rs. 2,160 to the trustee being the annual premium on the assurance taken by the trust on the life of the assessee, who was an employee of the company, in the year 1955-56; Held, that the assessee did not obtain an indefeasible title or vested interest in the payments made by the employer in the years in which the payments were made, and the amount m question was not therefore assessable as a "perquisite" of the assessee under sub clause (v) of the Explanation I to section 7(1) of the Income-tax Act. Russel v. Commissioner of Income tax (1962) 44 1 T R 816 fol. Edwards v. Roberts (1934) 19 T C 618 rel. STATEMENT OF CASE By this application, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law said to arise out of the Tribunal's order in I. T. A. No. 6866 of 1957 58 dated October 9, 1958. As, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Kerala at Emakulam under section 66(1) of the Indian Income tax Act. 2. The assessee is an employee of Messrs Pierce Leslie & Co. Ltd., Kozhikode (hereinafter referred to as "the company"). There are a number of European executives working on the staff of the company. In order to assist them to make provision for their old age, the company instituted "a Staff Group Insurance Scheme". The scheme consisted in the creation of a trust to which periodical contributions were made by the company. The trust in turn was to take out policies on the lives of the employees brought within the scope of the scheme. On maturity of a policy or on the death of the assured, the claim was to be collected and paid into the provident fund separately maintained by the company. On leaving service, the employee was to receive the amount due to him under the scheme from out of the provident fund. The conditions under which the scheme was to function were embodied in a trust deed dated 31st December, 1934, entered into between the company on the one part and three trustees on the other part. The deed contains 5 clauses besides certain regulations included in a schedule and has also a memorandum appended thereto. A copy of the deed together with the memorandum is annexed hereto as Annexure "A" and forms part of the case. Clauses Nos. 1, 2 and 3 and regulations Nos. 6 and 7 are reproduced below. Clause No. 1. The regulations set out in the First Schedule hereto subject to any modifications that may from time to time be made as hereinafter provided, shall be deemed to be incorporated herein, and shall be binding upon the employer, the trustees and the employees and all persons acting under or in trust for them or any of them respectively. 2. All moneys received by the trustees pursuant to the said regulations shall be held by them in trust for the objects hereinafter defined. 3. The employer and the trustees may from time to time by deed alter, cancel, or modify all or any of the provisions of this trust deed and by memorandum under hand, signed in the case of the employer by a director duly authorised, alter, cancel, or modify all or any of the said regulations provided that no such alteration, cancellation or modification shall authorise the application of any of the moneys held or to be held by the trustees for any purpose other than the benefit of the employees or such other persons as hereinafter provided. Regulation No. 6. The employer shall so long as an employee remains in his service and so long as the authority given by the employee under regulation No. 7 is in force punctually pay over to the trustees the amounts required to meet the premiums as and when they become due under the trustees' assurance. Regulation No. 7. Each employee shall give the employer a written authority in the form set out in the Second Schedule hereto to pay to the trustees when due all premiums under the employee's assurance and to deduct the amounts so paid from any salary, wages or other sums payable by the employer to the employee. 3. The aforesaid provident fund was not recognised by the Commissioner of Income tax for purpose of Chapter IXA. 4. Under the above arrangement, for the year ended 31st March, 1956, being the previous year corresponding to the assessment year 1956 57, the company paid Rs. 2,160 to the trustees aforesaid the annual premium on the assurance taken by them on the life of the assessee. 5. The assessee showed the above amount of Rs. 2,160 in part D of his return and claimed that it was not taxable. The Income tax Officer, however, taxed it as a contribution to an unrecognised provident fund, 6. The assessee appealed to Appellate Assistant Commissioner raising, inter alia, the following grounds : The Income tax Officer should have found that the above said amount was contributed by the petitioner's employer under the terms and conditions of a deed dated 31st December 1934, and the regulations annexed thereto entered into between the employer, the trustees and an insurance company therein mentioned, that the petitioner is not a party thereto ; that according to the terms and conditions thereof the employer paid the said amount to the trustees as premia on an insurance policy (referred to as trustees assurance) taken in the name of the trustees' themselves though on the life of the assessee and further that the vesting of the title to the premia so paid by the employer, the policy taken in their name and the benefit derivable thereunder are postponed until some future uncertain events specified therein shall or shall not happen and that under certain circumstances such vesting depend on the absolute discretion of the employer. It should have therefore been found that any benefit to the assessee under this scheme is only contingent and indeterminate. The Income tax Officer should have therefore found that the above said amount of Rs. 2,160 is neither salary nor wages nor any perquisite, benefit, profit or other taxable income of the petitioner liable to be taxed in the hands of the petitioner. 7. The Appellate Assistant Commissioner upheld the decision of the Income tax Officer for the following reasons extracted from this order : "(5) The first argument of the appellant is that the contribution is not payable to the employee. This is quite true, no doubt, but the section does not require that the contribution should be necessarily to the employee. The argument, therefore, cannot be sustained. (6) It was then contended that there was no certainty that the employee would ultimately receive the sum. In this connection it was pointed out that the provisions of clauses 11(a),12 and 14 of the trust deed, expressly mentioned certain contingencies under which the employee may conceivably not receive the sum at all, for instance, when he leaves the services of the employer of his own accord or is dismissed for misconduct or inefficiency. (7) The contingencies referred to are calculated to safeguard the legitimate interests of the employer. It is patent that so long as the employee fulfils his legitimate obligations as a servant of the company, he has a right to expect his employer to make the periodical contributions to the trust on his behalf. It is not left to the will or discretion of the company to discontinue the contributions. Clause 1 of the trust deed says, "The regulations shall be binding upon the employer, the trustees and the employees . . . . . . " The argument of the appellant's representative on this ground again cannot be sustained. (8) It was finally contended that on the maturity of the policy it was obligatory on the part of the trustees to pay the amount of the policy to the provident fund and not to the employees directly. This according to him showed that the employee was not a direct beneficiary. (9) If the provident fund referred to is a recognised provident fund, then the position might have been different. In the instant case, the fund is not a recognised provident fund. Therefore, the fact that the payment is ultimately received by the employee through a fund cannot take the case out of the purview of sub-clause (v)." 8. On further appeal to the Tribunal, it was contended on behalf of the assessee that the term "payable" in sub clause (v) of Explanation 1 to section 7(1) shows that the employee had no right to enforce payment by his employer and, therefore, the sub-clause was not applicable to the facts in the present case. It was also contended that the amount in question would not be taxable because in certain contingencies the assessee may not ultimately receive the sum assured. In support of this contention certain clauses in the deed were relied upon. A copy of the grounds of appeal is annexed hereto as Annexure "B" and forms part of the case. 9. The Tribunal rejected these contentions as unsound. Its full reasons are extracted below from its order in an identical case dealt with by it simultaneously : "3. Learned counsel for the assessee urged before us that the amount in question was not a `perquisite' within the meaning of sub clause (v) of Explanation 1 to section 7(l). He laid stress on the term `payable' occurring in sub clause (v) and contended that inasmuch as the employee had no right to enforce payment of contribution by his employer, it was not covered by the sub clause. This contention is unsound for it fails to take note of the language of the statute. Under the said sub clause it is clearly stated that any sum payable by the employer whether directly or through a fund to effect an assurance on the life of the assessee or in respect of a contract for an annuity on the life of the assessee is included in the definition of the term 'perquisite' and in the first paragraph of section 7(1) it is stated the tax shall be payable on any 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. The words underlining by us serve to show that the employee need not have right to enforce the payment of the perquisite. There can be no doubt that the sum in question has been `allowed' to the employee by his employers, the company, in order to effect an assurance on his life even if it can be said to be not `due to him' in the sense of his having an enforceable right thereto. We are, therefore, unable to accept the contention of the learned counsel. It seems to us that the language of section 7(1) is sufficiently wide to cover the sum in question. In this view of the matter, was consider it unnecessary to go into the question whether or not the deed of trust conferred on the employee a right to enforce payment of the sum in question. (4) The only other contention raised before us by the learned counsel was that the amount in question would not be taxable in certain contingencies, the assessee may not ultimately receive the sum assured. In this connection, our attention was invited to certain clauses in the deed which provide that in certain contingencies, such as if the employee left the service of the company of his own accord or was dismissed for misconduct or inefficiency he could be deprived of the sum assured. In our view this has nothing to do with taxability of the sum inquestion which, as already stated above, is clearly a `perquisite' within the meaning of the statute. The statute is quite clearly designed to bring within the net of taxation any sum which is allowed to an employee by his employer in order to effect and assurance on his life. So long as the sum in question is such a sum, the mere existence of a defeasance clause in the deed of trust cannot, in our view, affect the question of taxability. It follows that, in our view, the sum in question was rightly taxed." 10. On the above facts, the question of law which arises is . "Whether the aforesaid sum of 17s. 2,160 is assessable as a perquisite under sub clause (v) of Explanation 1 to section 7(1) of the Income tax Act?" K. P. Abraham, George Kurien, M. Pathrose Mathai and K. K. Poulose for the Assessee. G. Rama Iyer for the Commissioner.
Judgment & Decree
ANSARI, C. J. The assessee in this reference is employed by Messrs Peirce Leslie & Co. Ltd. and has been charged income-tax on Rs. 2,! 60 in the following circumstances. The employer had provided for the assessee as well as for other employees' old age, by instituting what is called a staff group insurance scheme. It consists in the creation of a trust for effecting insurance on their lives, and for this purpose the employer had to contribute 5% of the employee's salary, whereas the employee had to give 10% of the pay. The trust, in turn, had to take out two separate policies on the employees' lives, and held them in trust. Under the above arrangement, the employer had, for the year ending March 31, 1956, that being the previous year to the assessment year 1956 57, paid Rs. 2,160 to the trustee, the aforesaid amount being the annual premium on the assurance taken by the trust on the life of the assessee, who showed it in part "D" of his return. The Income tax Officer, however, taxed it as a contribution to an unrecognised provident fund and the assessee having failed before the Appellate Assistant Commissioner appealed to the Appellate Tribunal, which held the amount to be covered by sub clause (v) of Explanation 1 to section 7 (1) of the Income tax Act, hereafter referred to as the Act, and, therefore, to be chargeable. Thereafter petition under section 66(1) of the Act was filed, and the following question has been referred to us. "Whether the aforesaid sum of Rs. 2,160 is assessable as a perquisite under sub clause (v) of Explanation 1 to section 7 (1) of the Income tax Act ?" The assessee's learned Advocate has argued that the Tribunal has erred in treating the payment by the employer to have become vested in the assessee subject to defeasance under certain circumstances, that the assessee is not entitled to the insurance money until the trustee's assurance matures, that before such maturing, the money paid by the employers is neither due nor allowed, nor a payment under clause (v). In support he relies on Russel v. Commissioner of Income tax ((1962) 44 I T R 816), in which we had held that the payment to be chargeable under section 7 of the Act must become vested in the person who is being charged ; and, if the benefit arising thereof be dependent on contingencies, the payment would not be one to which section 7 of the Act would apply. To reach that conclusion, we had relied among other cases on Edwards (H. M. Inspector of Taxes) v. Roberts (19 T C 618) where the respondent was employed by a company under an agreement, which 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 company's 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 being 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. That objection was rejected on the ground 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. The principle, on which the aforesaid decision rests, would apply whenever payment is made to trustees, in which the employee would not get immediate vested interest, and for this purpose the relevant parts of the trust deed should be given. "(1) The regulations set out in the First Schedule hereto, subject to any modifications that may from time to time be made as hereinafter provided, shall be deemed to be incorporated herein, and shall be binding upon the employer, the trustees and the employees and all persons acting under or in trust for them or any of them respectively. (2) All moneys received by the trustees pursuant to the said regulations shall be held by them in trust for the objects hereinafter defined." FIRST SCHEDULE REGULATIONS In these regulations, unless the context otherwise requires, words of the masculine gender shall include the feminine. The expression trustees means the trustees for the time being of the trust deed. The expression society means the Sun Life Assurance Society. The expression employee means each person included in the Third Schedule who shall sign an application in the form set out in the Second Schedule hereto and each further employee of Peirce Leslie & Company Limited whose name shall at any time be notified to the trustees by the employer as a person who is to participate in the benefits of this trust and who shall sign an application in the aforesaid form." "
1. The trustee shall forthwith effect with the society an assurance as described in Regulation No. 2 on the life of each employee whose name appears in the Third Schedule hereto and shall on each anniversary of the date of the inauguration of the scheme effect a similar assurance on the life of each further employee whose name shall have been notified to the trustees by the employer during the preceding year in the form described in the Second Schedule hereto as a person who is to participate in the benefits of this trust, provided always that each employee shall at the same time as the assurance on his life is being effected by the trustee himself effect an assurance on his life as described in Regulation No. 3.
2. Each assurance to be effected by the trustee (hereinafter called the trustees' assurance) shall be an endowment assurance without participation in profits payable on the employee's survival until or on his death before the anniversary of the date of the inauguration of the scheme in the year of age shown in the following table : Age next birth day of??????????????????????????? Year of age in which employee at date of????????????????????????????? assurance would mature. joining the scheme. Male employee resident in India at date of joining the scheme. Up to and including?????????????????? 47??????????????????? 52nd ??????????? ??????????????????????????????????? 48??????????????????? 53rd ??????????? ??????????????????????????????????? 49??????????????????? 54th ??????????? ??????????????????????????????????? 50??????????????????? 55th ??????????? ??????????????????????????????????? 51??????????????????? 56th ??????????? ??????????????????????????????????? 52??????????????????? 57th ??????????? ??????????????????????????????????? 53??????????????????? 58th ??????????? ??????????????????????????????????? 54??????????????????? 59th ??????????? ??????????????????????????????????? 55??????????????????? 60th The date upon which the sum assured would be payable, should the employee so survive, is hereinafter referred to as the Date of maturity. The sum assured under each trustees' assurance shall be such an amount as shall be secured by an annual premium equal to five per cent. of the employee's annual salary at the date when such assurance shall commence." "11(a). If before the sums assured secured by the assurances shall become payable the employee shall leave the service of the employer of his own accord or shall be dismissed for misconduct or inefficiency, the trustee shall surrender the trustees' assurance to the society and pay its cash surrender value to the employee or to his wife or to his next of kin or to the employer, according as the employer may direct." It is obvious that the assessee obtains indefeasible title only when the event of his leaving the service or his dismissal for misconduct or inefficiency is excluded, and the benefit becomes dependent on the direction of the employer, should any such event occur. In such circumstances, the assessee would not be getting any vested interest in the years in which payments may be made in what is paid by the employer for purposes of the trustees' assurance, and the principle on which Russel's case ((1962) 44 I T R 816) has been decided would be applicable to the present case. The learned Government Advocate has argued that the payments are towards life assurance of the employee and covered by sub clause (v) of Explanation I to section 7(1) of the Act. We feel that the aforesaid sub clause would not cover payments towards life assurance, which is liable to be surrendered, on certain events happening, and the benefit thus got becoming payable at the direction of the employer. The employee gets, in payments towards such an assurance only contingent interest in the years in which they are paid, because the possibility of the benefit being diverted at the employer's direction is not then excluded, and we think such payments are not covered by the aforesaid clause. In such circumstances, we answer the question in the negative, which answer be sent to the Tribunal, and there will be no costs in this case. Question answered in the negative.