# COMMISSIONER OF INCOME-TAX, KERALA AND COIMBATORE v. L. W. RUSSEL

- **Citation:** [1964] 7 S.C.R. 569
- **Court:** Supreme Court of India
- **Decided:** 1961-01-09
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-kerala-and-coimbatore-v-l-w-russel-3168
- **Pages:** 18

## Headnote

7 S.C.R
SUPREME COURT REPORTS
569
COMMISSIONER OF INCOME-TAX, KERALA AND
COIMBATORE
v.
L. W. RUSSEL
IK. SUBBA RAO, J. c. SHAH AND s. M. SIKRI, JJ.]
Income Tax-Scheme to effect a-policy of i.nsura.nce for the
purpose of ensuring annuity to every employee on his attaini:ng
age of superannuation or on happening of a spec~fied contingency·-Contribution's to be made both by employer and employee-Whether amount paid b11 the employer towards premium payable by employee taxable under s. 7(1)-Meamng of
perquisite-Indian Income-tax Act. 1922 (11 of 1922), s. 7(1),
The respondent is an employee of the English and Scottish
Joint Co-operative Wholesale Society Ltd.
incorporated in
England. The Society established a superannuation scheme for
the benefit of the male European members of its staff employed
in India by means of deferred rnnuities. Under the terms of
the scheme, the trustee has to effect a policy of insurance for
the purpose of ensuring an annuity to every member of the
Society on his attaining the age of superannuation or on the
happening of a specific contingency. The Society contributed
one-third of the premium payable by each empioyee. During
the year 1956-57, the Society contributed Rs. 3333/- towards the
premium payable
by the respondent.
an employee of the
Society. The Income-tax Officer included the said amount in
the taxable income of the respondent for the yeaT 1956-57 under
s. 7(1), Explanatian 1, sub-cl. (v) of the Act. The appeals of the
respondent were dismissed both by the Appellate Assistant
Commissioner of Income-tax and the
Income-tax
Appellate
Tribunal.
The Tribunal referred to the High Court
the following
three questions of law:-
(1) Whether the contribution paid by lhe employer to
the assessee under the terms of a trust deed in respect of a contract for a deferred annuitv on the life
of the assessee is a perquisite as conlernplated by
s. 7(1) of the 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 aforesa'd is annuity
hit by s. 7(1) and para (v) of Explanation 1 thereto.
The High Court held that the
employer's
contribution
under the terms of the trust deed was not a perquisite as contemplated by s. 7(1).
The employer's contributions were not
all~wed to or due t? the employee in the accounting year. The
legislature not havmg used the word "deferred" with annuity
m .s. 7(1) and the statute being a taxing one, the deferred annUity would not hit para (v) of Explanation 1 to s. 7-(1) of the
Act. Against the decision of High Court. the appellant came to
this Court by special leave. Dismissing the appeal,
19G~
April 1
•
1964
Commissioner of
Income-tax,
Kerala and
Coimbatore
v.
L. W. Ruwr::l
570
SUPREME COURT REPORTS
[1964]
Held: The answers to the questions of law as given by the
High Court were correct. Unless a vested interest in the sum
accrues to an employee, it is not taxable. In the present ccse,
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 superannuafon.
lt is not a perqu.isite 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. A perquisite is only that amount of money
which is allowed to the employee by or is due to him from the
employer or is paid to him to elfect an insurance en his life.
Smyth v. Stretton, (1904), 5 T.C. 36, and Edwards (H. M.
Inspector of Taxes) v. Roberts, (1935), 19 T.C. 618, referred to.

## Text

_Characters 0–39,647 of 49,867. This is a partial read: ask again with offset=39647 for what follows._

7 S.C.R
SUPREME COURT REPORTS
569
COMMISSIONER OF INCOME-TAX, KERALA AND
COIMBATORE
v.
L. W. RUSSEL
IK. SUBBA RAO, J. c. SHAH AND s. M. SIKRI, JJ.]
Income Tax-Scheme to effect a-policy of i.nsura.nce for the
purpose of ensuring annuity to every employee on his attaini:ng
age of superannuation or on happening of a spec~fied contingency·-Contribution's to be made both by employer and employee-Whether amount paid b11 the employer towards premium payable by employee taxable under s. 7(1)-Meamng of
perquisite-Indian Income-tax Act. 1922 (11 of 1922), s. 7(1),
The respondent is an employee of the English and Scottish
Joint Co-operative Wholesale Society Ltd.
incorporated in
England. The Society established a superannuation scheme for
the benefit of the male European members of its staff employed
in India by means of deferred rnnuities. Under the terms of
the scheme, the trustee has to effect a policy of insurance for
the purpose of ensuring an annuity to every member of the
Society on his attaining the age of superannuation or on the
happening of a specific contingency. The Society contributed
one-third of the premium payable by each empioyee. During
the year 1956-57, the Society contributed Rs. 3333/- towards the
premium payable
by the respondent.
an employee of the
Society. The Income-tax Officer included the said amount in
the taxable income of the respondent for the yeaT 1956-57 under
s. 7(1), Explanatian 1, sub-cl. (v) of the Act. The appeals of the
respondent were dismissed both by the Appellate Assistant
Commissioner of Income-tax and the
Income-tax
Appellate
Tribunal.
The Tribunal referred to the High Court
the following
three questions of law:-
(1) Whether the contribution paid by lhe employer to
the assessee under the terms of a trust deed in respect of a contract for a deferred annuitv on the life
of the assessee is a perquisite as conlernplated by
s. 7(1) of the 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 aforesa'd is annuity
hit by s. 7(1) and para (v) of Explanation 1 thereto.
The High Court held that the
employer's
contribution
under the terms of the trust deed was not a perquisite as contemplated by s. 7(1).
The employer's contributions were not
all~wed to or due t? the employee in the accounting year. The
legislature not havmg used the word "deferred" with annuity
m .s. 7(1) and the statute being a taxing one, the deferred annUity would not hit para (v) of Explanation 1 to s. 7-(1) of the
Act. Against the decision of High Court. the appellant came to
this Court by special leave. Dismissing the appeal,
19G~
April 1
•
1964
Commissioner of
Income-tax,
Kerala and
Coimbatore
v.
L. W. Ruwr::l
570
SUPREME COURT REPORTS
[1964]
Held: The answers to the questions of law as given by the
High Court were correct. Unless a vested interest in the sum
accrues to an employee, it is not taxable. In the present ccse,
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 superannuafon.
lt is not a perqu.isite 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. A perquisite is only that amount of money
which is allowed to the employee by or is due to him from the
employer or is paid to him to elfect an insurance en his life.
Smyth v. Stretton, (1904), 5 T.C. 36, and Edwards (H. M.
Inspector of Taxes) v. Roberts, (1935), 19 T.C. 618, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 220/
1963. Appeal by special leave from the judgment and order
dated January 9, 1961 of the Kerala High Court in I.T.R.
Case No. 17 of 1959.
K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant.
The respondent did not appear.
April I, 1964. The Judgment of the Court was delivered
by
SuM,a R.,,,; J.
SuBBA RAO, J.-This appeal by special leave preferred
against the judgment of the High Court of Kerala at Ernakulam raises the question of the interpretation of s. 7(1) of
the Indian Income-tax Act, 1922 (Act No. XI of 1922), hereinafter called the Act.
The respondent, L. W. Russel, is an employee of the
English and Scottish Joint Co-operative Wholesale Society
Ltd., Kozhikodc, hereinafter called the Society, which was
incorporated in England. The Society established a superannuation scheme for the benefit of the male European members of the Society's staff employed in India, Ceylon and
Africa by means of deferred annuities.
The terms of such
benefits were incorpcrated in a trust deed dated July 27,
1934. Every European employee of the Society shall become
a 1i1e111ber of that scheme as a condition of employment.
Under the term of the scheme the trustee has to effect a
policy of insurance for the purpose of ensuring an annuity
to every member of the Society on his attaining the age of
superannuation or on the happening of a specified contingency. The Society contributes I / 3 of the premium payable
by such employee. During the year 1956-57 the Society contributed Rs. 3,333/- towards the premium payable by the
respondent. The Income-tax Officer, Kozhikode Circle, included the said amount in the taxable income of the respondent for the year 1956-57 under s. 7(1), Explanation I Sub-cl.
(v) of the Act. The appeal preferred by the respondent against
7 S.C.R.
SUPREME COURT REPORTS
571
the said inclusion to the Appellate Assistant Commissioner
of Income-tax, Kozhikode, was dismissed. The further appeal
preferred to the Income-tax Appellate . Tribunal received the
same fate. The assessee threupon filed an application under
s. 66(1) of the Act to the Income-tax Appellate Tribunal for
stating a case to the High Court. By its order dated December
1, 1958, the Tribunal submitted· a statement of case referring
the following three questions of law to the High Court of
Kerala at Ernakulam : -
(l) 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 of the assessee is a 'perquisite' as contemplated by s. 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 para. (v) of Explanation 1 thereto?
On the first question the High Court held that the l(mployer's
contribution under the terms of the trust deed was not a
perquisite as contemplated by s. 7(1) of the Act. On the
second question it came to- the conclusion that the employer's
contributions were not allowed to or due to the employee in
the accounting year. On the third question it expressed the
opinion that the Legislature not having used the word
'deferred" with annuity in s. 7(1) and the statute being a
taxing one, the deferred annuity would not be hit by para.
(v) of Explanation 1 to s. 7(1) of the Act. The Commissioner
of Income-tax has preferred the present appeal to this Court
questioning the correctness of the said answers.
The three questions formulated for the High Court's
opinion are interdependent and the answers to them turn
upon the true interpretation of the relevant part of s. 7(1) of
the Act.
Mr. Rajagopala Sastri, learned counsel for the appellant,
contends that the amount contributed by the Society under
the scheme towards the insurance premium payable by the
trustees for arranging a deferred annuity on the respondent's
superannuation is a perquisite within the meaning of s. 7(1)
of the Act and that the fact that the respondent may not have
the benefit of the contributions on the happening of certain
contingencies will not make the said contributions anytheless
a perquisite. The employer's share of the contributions to the
fund earmarked for paying prei_niums of the insurance policy,
the argument proceeds, vests m the respondent as soon as
19G4
Co11nni1Jsicmer of
Income-fax
Kerala and
Coimbatore
v.
L. W. Russel
1964
Com.missionef' ·of
lncome-ta:r.,
Kerala and
CoimbatGre
v.
L. W. Russel
Subba RafJ, J,
572
SUPREME COURT REPORTS
[1964]
it is paid to the trustee and the happening of a contingency
only operates as a defeasance of the vested right. The respondent is ex-parte and .• therefore, the Court has not the
benefit of the exposition of the contrary view.
Before we attempt to construe the scope of s. 7(1) of
the Act it will be convenient at the outset to notice the provisions of the scheme, for . the scope of the respondent's right
in the amounts representing the employer's contributions
thereunder depends upon. it. The trust deed and the rules
dated July 27, 1934, embody the superannuation scheme. The
scheme is described as the English and Scottish Joint Co-operative Wholesale Society Limited Overseas European Employees' · Superannuation
Scheme,
hereinafter called the
Scheme. It is established for the benefit of the male European
members of the Society's staff employed in India, Ceylon
and Africa by means of deferred annuities. The Society itself
is appointed thereunder as the first trustee. The trustees shall
act as agents for and on behalf of the Society and the members respectively; they shall 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 the 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. The
object of the Scheme is to provide for pensions by means of
deferred annuities for the members upon retirement from
employment on attaining certain age under the conditions
mentioned therein, namely, every European employee of the
Society shall be required as a condition of employment to
apply to become a member of the Scheme from the date of
his engagement by the Society and no member shall be entitled to relinquish his membership except on the termination
of his employment with Society; the pension payable to a
member shall be provided by means of a policy securing a
deferred annuity upon the life of such member to be effected
by the Trustees as agents for and on behalf of the Society
and the members respectively with the Co-operative Insurance Society Limited securing the payment to the Trustees
of an annuity equivalent to the pension to which such member shall be entitled under the Scheme and the Rules; the
insurers shall agree that the Trustees shall be entitled to surrender such deferred annuity and that, on such deferred annuity being so surrendered, the insurers will pay to the
Trustees the total amount of the premiums paid in respect
thereof together with compound interest thereon; all moneys
received by the Trustees from the insurers shall be held by
them as Trustees for and on behalf of the person or persons
entitled thereto under the Rules of the Scheme; any policy
or policies issued by the insurers in connection with the
7 S.C.R.
srPRE~IE COURT REPORTS
57::>
Scheme
shall
be deposited with the Trustees; the Society
shall contribute one-third of the premium from time to time
payable in respect of the policy securing the deferred annui·
ty in respect of each member as thereinbefore provided and
the member shall contribute the remaining two-thirds; the
age at which a member shall no1 mally retire from the service
of the Society shall be the age of 55 years and on retirement
at such age a member shall be entitled to receive a pension
of the amount specified in Rule 6; a member may also, after
following the prescribed procedure. commute the pension to
which he is entitled for a payment in cash in accordance with
the fourth column of tl~e Table in the Appendix annexed to
the Rules; if a member shall leave or be dismissed from the
service of the Society for any reason whatsoever or shall die
whi:e in the service of the Society there shall be paid to him
or his legal personal representatives the total amount of the
portions of the premiums paid by such member and if he
shall die \vhilst in the service of the Society there shall be
pad to him or his legal personal representatives the total
amount of the portions of the premiums paid by such mem·
ber and if he shall die whilst in the service of the Society or
,ha!I leave or be dismissed from the service of the Society
on account of permanent breakdown in health
(as: to the
/Jona /ides of whi ;h the Trustees shall be satislied). such further proportion (if any) of the total amount of the portions
of the premiums paid by the Society in respect of that memh~r shaH be payable in
iiccordance with Table C in the
Ap;:i~nch to the Rules; if the total amount of the pbrtions
of ti1e premiums in respect of
such
member paid by the
S iciety together with interest thereon as aforesaid shall not
be paid c'J the Trustees to him or his legal personal representatives under sub-s. (I) of r. 15 then such proportion or
the whole, as the case may be. of the Society's portion of
such premiums and interest thereon as aforesaid as shall not
be paid by the Trustees to such member or his legal personal
rep;·esentatives as aforesaid shall be paid by the Trustees to
the SJciety; the rules may be altered, amended or rescinded
and new rules may be made in accordance with the provisions of the Trust Deed but not otherwise.
We have given the relevant part of the Scheme and the
Rules. The gist of the Scheme may be stated t)lus:
The
object of the Scheme is to provide for pensions to its employees. It is achieved by creating a trust. The Trustees
ap!)ointed thereunder are the agents of the employer as well
as of the employees and hold the mnneys received from the
employer. the employee and the insurer in trust for and on
behalf of the person or persons entitled thereto under the
rules of the Scheme. The Trustees are en joined to take out
policies of insurance securing a deferred annuity upon the
1!.Jtu
Com111i8si1;nr1· of
/nr<J111!'-f(l:r,
K1r11laa·11J1
Coirnfmlnr<'-
v.
L. Tr. Ru.~8el
S11J;b11 Ran, J.
l!J6.J
(,'onimissioner of
lncome~lax.
K1:r,tfc1 and
OrJimlmJIJTI~
v.
L. IV. Ru,ssel
Su9b11. R11(J, .J.
574
SUPllEME COURT HEPORTS
[1964]
life of each member, and funds are provided by contributions
from the employer as well as from the employees. The Trustees realise the annuities and pay the pensions to the employees. Under certain contingencies mentioned above, an
employee would be entitled to the pension only after superannuation. If the employee leave the service of the Society
or is dismissed from
service or dies in the service of the
Society, he will be entltled only to get back the total amount
of the portion of the premium paid by him, though the trustees in their discretion under certain circumstances may give
him a proportion of the premiums paid by the Society. The
entire amount representing the contributions made by the
Society or part thereof, as the case may be, will then have
to be paid by the Trustees to the Society. 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. Till that
date that amount vests in the Trustees to be administered in
accordance with the rules; that is to say, in case the employee
ceases to be a member of the Society by death or otherwise,
the amount contributed by the employer with interest thereon, subject to the discretionary power exerciseable by the
trustees, become payable to the Society. If he reaches the age
of superannuation, the said contributions irrevocably become
fixed as part of the funds yielding the pension. To put it in
other words, till a member attains the age of superannuation
the employer's share of the contributions
towards the premiums does not vest in the employee. 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.
Now let us look at the provisions of s. 7(]) of the Act
in order to ascertain whether such a contingent right is hit
by the said provisions. The material part of the section
reads:-
Section 7(1)-The tax shall be payable by an assessee
under the head "salaries" in respect of any salary
or wages, any annuity, pension or gratuity, and
any fees, commissions, 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, from, or are paid by or on
behalf of, ............... a company ................... ".
Explanation I-For the purpose of this section perquisite includes-.
*
•
•
•
(v) any sum payable by the
employer,
whether
directly <lr through a fund to which the pro·
visions of Chapters IX-A
and JX-B do not
7 S.C.R.
SlTPREl\IE COURT REPORTS
575
apply, to effect an assurance on the life of the
assessee or in respect of a contract of annuity
on the life of the assessees.
This section imposes a tax on the remuneration of an
employee. It presupposes the existence of the relationship of
employer and employee.
The present case is sought to be
brought under the head "perquisites 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, from, Or are paid by or on
behalf of a company". The expression "perquisites" is defined in the Oxford Dictionary as "casual emolument, fee or
profit attached to an office or position in addition to salary
or wages". Explanation I to s. 7(1) of the Act gives an inclusive definition. Clause (v) thereof includes within the meaning
of "perquisites" any sum payable by the employer, whether
directly or through a fund to which the provisions of Chs.
IX-A and IX-B do not apply, to effect an assurance on the
life of the asscssee or in respect of a contract for an annuity
on the life of the assessee. A combined reading of the substantive part of s. 7(1) and cl. (v) of Exp!. I thereto makes it
clear that if a sum of money is allowed to the employee by
or is due to him from or is paid to enable the latter to effect
an insurance on his life, the said sum would be a perquisite
within the meaning of s. 7(1) of the Act and, therefore, would
be exigible to 'tax. But before such sum becomes so exigihle.
it shall either be paid to the employee or allowed to him by
or due to him from the employer. So far as the expression
"paid" is concerned, there is no difficulty,
for it takes in
every receipt by the employee from the employer whether it
was due to him or not. The expression "due" followed by
the qualifying clause "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.
The expression "allowed", it is said, is of a wider connotation and any credit made in the employer's account is covered therehy. The \\:ord "al1o\ved'' v.r~~s intro~luced in the sec~
tion by the Finance Act of 1955. The said expression in the
legal terminology is equivalent to "fixed. taken into account,
set apart, granted". It takes in perquisites given in cash or in
kind or in money or money's worth and also emenilies which
are not convertible into money. It implies that a light is
conferred on the employee in respect of those perquisites.
One cann"Ot be said to allow a perquisite to an employee if
the employee has no right to the same. It rnnnot 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.
If that be the interpretation of s. 7(1) bf the Act; it is
not possible to hold that the amounts paid by the Society
19(i4
Co1111nis8ioner of
Inrume-fax
K1·ral11 o.ml
Cuimfia.!ore
v.
L. Jr.
Rn-~,~el
1964
-- \
Commissioner of
Income-fax
Kerf/.la and
Coimbrdore
L.1V. Russel
576
SUPREME COUltT REPORTS
(1964]
to the Trustees to be administered by
them in accordance
with the rules framed under the Scheme are perquisites
allowed to the respondent or due to him. Till he reaches the
age of superannuation, the amounts vest in the Trustees and
the beneficiary under the trust can be ascertained only on the
happening of one or other of the contingencies provided for
under the trust deed. On the happening of one contingency,
the employer becomes the beneficiary, and on the happening
of another contingency, the employee becomes the beneficiary. Learned counsel for the appellant strongly relied upon
the decision of the King's Bench Division in Smyth v.
Stretton('). There, one Stretton, one of the Assistant Masters
of Dulwich College, was assessed to income-tax ·in the sum
of £385 in respect of his emoluments as Assistant Master
received from the Governors of Dulwich College for the year
ended the 5th day of April, 1901. He objected to the assessment on the ground that it included £35 not liable to taxation,
being amount placed to his credit by the Governors under
the Provident Fund Scheme for the year I 900. Channell, J.,
with some hesitation, came to the conclusion that the said
sum was taxable. That case was dealing with a scheme for
the establishment of provident fund for the benefit of the
Assistant Masters on the permanent staff of the Dulwich
College. Under para. I of the scheme the salaries of Assistant
Masters were increased. Clause (a) of para. 1 of the scheme
provided that Assistant Masters having not less than five
years, but Jess than fifteen years' service, would be allowed
an increase of 5 per cent, in their salaries; under cl. (b) thereof, Assistant Masters having not Jess than 15 years' of service
and over, would get an increase of 7!· per cent: in their
salaries; under cl. (c)
thereof, a further addition in their
salaries, equal in amount to the above sums, should be
granted from the same date to the Assistant Masters alluded
to in (a) and (b), such addition being, however, subject to
the conditions provided by para. 5. Paragraph 5 read: -
"That Assistant Masters having Jess than ten years'
service
who may resign their appointments, or
from any other cause than i!I-health cease to
belong to the Co1iege, shall be entitled to receive
the total increase sanctioned by (al and the accumulations thereof, but shall not receive the additional increase sanctioned by (c), or the accumulations thereof. In the event of anv such Assistant Master retiring from ill-health the Governors,
in addition to the increase sanctioned by (a), may
grant him the further 5 per cent. sanctioned by
(c), and the accumulations thereof. In the event
of death of any such Assistant l\fa,ter whilst in
( ') (1904) 5 T. C. 36. 46.
7 S.C.R.
SUPREME COURT REPORTS
577
the service of the College, the 5 per cent. due by
(c) as well as under (a), with the accumulations
thereof, shall be paid to his legal representatives".
It was contended that the amount payable under cl. (c) of
para. I was a contingent one without any vested character
and, therefore, could not be described as income in any way.
The learned Judge construed the provisions of the scheme
and rejected the contention. The main reason for his conclusion is stated thus: -
"The result seems to me to be that I must take that
sum as a sum which really has been added to the
salary and is taxable. and it is not the less added
to the salary because there has been a binding
obligation created between the Assistant Masters
and Governors of the Schools that they should
apply it in a particular way".
No
doubt it is possible for another court to come to a
different conclusion on the construction of the provisions of
the scheme; but the learned Judge came to the conclusion
that cl. (c) of para. I of the scheme provided for an additional
salary to the Assistant Masters. Indeed, the Court of Appeal
in Edwards (H. M. Inspector of Taxes) v. Roberts(') construed a similar scheme and came to the contrary conclusion
and explained the earlier decision on the basis we have
indicated. There, the respondent was employed by a company
under a service agreement dated August 2l. 1921, which
provided inter a/ia, that, in addition to an annual salary, he
should have an interest in a "conditional fund", which was
to be created by the company by the payment after the end
of each financial year of a sum out of its profits to the trustees of the fund to be invested hy them in the purchase of
the company's shares or debenture stock. Subject to possible
forfeiture of his interest in certain events. the respondent was
entitled to ;receive the income produced by the fund at the
expiration of each financial year, and to receive part of the
capital of the fund, (or, at the trustees' option, the investments
representing the same) at the expiration
of five
financial
years and of each succeeding year. and, lln death whilst in
the company's service or on the termination of his employment by the company, to receive the whole amount then
standing to the credit of the capital amount of the fund (or
the actual investments\. The respondent resigned from the
service of the company in September. 1927, and at that date
the trustees of the fund transferred to hi.m the shares which
they had purchased out of the payments made to them by
the company in the years 1922 to 1927. He was assessed to
income-tax on the amount of the current market value of the
(') (1935) 19 T.C. 618, 638, 640.
J,fP(ll)IHCf-17
1964
Oommisaiomr of
I ncome-taz,
Kerala and
Coimbatore
v.
L. W. Russel
Subba Rao, J.
1964
Oammissianer of
Income-tax,
Kenda and
Coimbatore
v.
L. W. Russel
Subba Rao, J.
578
SUPREME COURT REPOR'l S
[1964}
shares at the date of transfer. The assessee contended that
immediately a sum was paid by the company to the trustees
of the fund he became invested with a beneficial interest In
the payment which formed part bf his emoluments for the
year in which it was made, and for no other year, and that,
accordingly, the amount of the assessment for the year 192728 ought not. in any event, to exceed the aggregate of the
sums paid by the company tb the trustees, the difference between the amount and the value of the investments at the
date of transfer representing a capital apprnciation not liable
to tax for any year. The Court of Appeal rejected the contention. Lord Hanwbrth, M. R., in rejecting the contention,
observed: -
·
" .................. ur:der these circumstances there could
not be said to have accrued to this employee a
vested interest in these successive sums placed to
his credit, but only that he had a chance of being:
paid a sum at the end of six years if all went
well. That chance has now supervened, and he
has got it by reasbn of the fact of his employment, or by reason of his exercising an employment of profit within Schedule E.'".
Maugham, L. J., said much to the same effect thus:
"The true nature of the agreement was that he was to
be entitled in the events, and only in the events
mentioned in Clause 8 of the agreement, to the
investments made by the Compa1iy out of the net
profits of the Company as provided in Clause 6."~
The decision of Channell, J., in Smvth v.
Srrettonl') was
strongly relied upon before the appellate court. But the
learned Judges distinguished
that case on the ground that
under the scheme which was the subject-matter bf that decision the sums taxed were really additions to the salary of the
Assistant Master and that. in any view. that decision should
be confined to the facts of that case. The principle laid down
by the Court of Appt:.al. namely, that unless a vested interest
in the sum accrues to an employee it is not taxable, equally
applies to the present case. As we have pointed out earlier,
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 nnt a perquisite allowed to him by the employer or an amount due to him from the tmployer within
the meaning of s. 7(]) of the Act. We, therefore, hold that
the High Court has given correct answers to the questibns of
law submitted to it by the Income-tax Appellate Tribunal.
In the result, the appeal fails and is dismissed.
Appeal dismissed.
(') (1904) 5 T.C. 35. 46.
'I
/
.:
1 S.C.R:,
SUPRE)!E COURT REPORTS
579
'-.... -
J; DALMIA
v.
\
COMMISSIONER OF INCOME-TAX. NEW DELHI
[K. SUB BA RAo. J. C. SHAH AND S. M. SIKRI, JJ.]
Company Law-Resolution of Board of Directors-Interim
dividend-If creates a debt enforceable against the comvanylncome Tax-Payable on the dividend in the year in which it
was actually paid, credited, or distributed OT deemed to be
:paid-"Paid"-Meaning of-Indian Companies Act, 1913 (7 of
1913), s. 17(2), Art. 95 Sch. I-Income-tax Act, 1922 (11 of 1922),
.s. 16(2).
The appellant held shares in a company the Board of
Directors of which by a resolution dated August 30, 1950 declared interim dividends. The appellant received a
dividend
warrant dated December 28, 1950 for a certain amount being
the interim dividend in respect of its share holdings in the company. The appellant's year of accounting had ended on September 30, 1950. The revenue authorities brought to tax the
.amount so received with other income of the appellant in the
assessment year 1952-53 after rejecting the objection of the
.appellant that it represented income for the assessment year
1951-52. In a reference made under s. 66(1) of the Indian Incometax Act, 1922, the High Court agreed with the Revenue authority that the dividend was in view of Art. 95 of the First Sche-
-dule to Indian Companies Act, 1913, liable to be included in the
cassessment year 1952-53.
Held: A declaration of dividend by a company in a general meeting gives rise to a debt.
In re Severn and Wye and Severn Bridge Railway Co.
(1896) 1 Ch. 559, referred to.
But a mere resolution of the Directors resolving to pay a
certain amount as interim dividend does not create a debt enforceable against the company for it is always open to the
Directors to rescind the resolution
before payment of the
dividend.
The Lagunas Nitrate
Schroeder and Company, 17
to.
Campany
(Ltd.) v.
J. Henry
Times Law Reports 625, referred
Commissioner of Income-tax, Bombay v. Laxmidas Mulraj
Khatau, 16 I.T.R. 248, distinguished.
• (ii) The test applied by Chagla C. J. (in C.I.T., Bombay
v. Laxmidas Mulraj Khatau, 16 I.T.R. 248) that because the
dividend becomes due to the assessee who has the right to
deal \vith ·or dispose of the same in any manner he likes, it is
taxable in the year in which it is declared cannot be regarded
as correct.
(iii) Dividend may te said to be paid within the meaning
of s. 16(2} of the Indian Income-tax Act, 1922 when the company
discharges its liability and makes the amount thereof unconditionally available to the member entitled thereto.
Purshottamdas Thakurdas v. C.I.T., Bombay, 34 I.T.R, 204,
referred to.
LiP(D)l8CT-17(a\
1964
.April I
. I
I .
1964
J.Dalmia
-- T.
Commi8sioner of
Income.taz, ·
l!,,..ewDtlhi
Sooh,J.
' '
'
··,,-·.-:-f-,,'/- -~ ;\- '
-- >:;;;r-
/ \) -
;·,•,.....;.-
··'"-~-----~
'
'
'580
· SUPRE)lE COURT REPORTS
(1964}
,
-
_(iv) The declaration of interim dividend capable of being
rescinded 'by the directors does not operate as a payment
under s. 16(2) of the Income-true Act before the company has
parted w<ith the amount of dividend or discharged its obligation by some other act.
·
CIVIL APPELLATE JURISDICTION:
Civil Appeal No. 505
of 1963. Appeal from the judgment and order dated March
6, 1961 of the Punjab High Court (Circuit Bench) at Delhi
in I.T.R. No. 16 of 1959.
S. K. Kapur and B. P. M aheslnvari, for the appellant.
C. K. Daphtary, Attorney-Genera/, K. N. Rajagopal
Sastri and R. N. Sachthey, for the respondent.
April 1, 1964. The judgment of the Court was delivered
by.
SHAH, J.-The appellant which is a Hindu undivided
family was the registered holder of 1,500 shares of M / s
Govan Bros. (Rampurl Ltd. in the year of account October
1, 1950 to September 30, 1951.
Pursuant to a resolution
passed by the board of directors of M/ s Govan Bros.
(Rampur) Ltd.-hereinafter called 'Govan Bros.'-at a meeting held on August 30, 1950, the appellant received a dividend warrant dated December 28, 1950 for R.~. 4,12,500/-
being interim dividend in respect of its share-holding in
Govan Bros. This amount was brought to tax with the other
income of the appellant in the assessment year 1952-53 by
the Revenue authorities, after rejecting the objection of the
appellant that it represented income for the assessment year
1951-52.
At the instance of the appellant the Appellate Tribunal
drew up a statement of the case and referred the question
set out hereinbelow to the High Court of Punjab under s.
66(1) of the Indian Income-tax Act:
"Whether on a true interpretation of Article 95 of the
First Schedule to the Indian Companies Act,
1913, the dividend of Rs. 4,12,500/- was liable
to be included in the assessment year 1952-53."
The High Court recorded an answer to the question in the
affirmative.
Against the order of the High Court, this appeal -
is preferred by the appellant with certificate granted_ by the
High Court.
Even though the question was framed as if article 95 of
the First Schedule to the Indian Companies Act, 1913,-applies to Govan Bros, it i~ common ground that_ the company
7 S.C.R.
SUPREME COURT REPORTS
581
was registered under the Companies Act of the former Rampur State, and it had adopted special Articles of Association
in supersession of Table A of the Companies Act. The
relevant articles of Govan Bros. dealing with declaration or
payment of final and interim dividends were articles 73 and
74. The High Court therefore proceeded to deal with the
question on the footing that it was, by the question referred,
called upon to interpret article 7 4 of the Articles of Association of Govan Bros. It is common ground between the appellant and the Revenue that the provisions of the Companies
Act of the former Rampur State were in terms identical with
the provisions of the Indian Companies Act, 1913.
The appellant contends that the directors of Govan Bros.
had in exercise of authority expressly conferred upon them
by article 74 declared dividend in their meeting dated August
30, 1950 and on such declaration the dividend became a
debt due to the appellant and under the Indian Income-tax
Act it became taxable in the year of assessment 1951-52, for
the previous year of tlie appellant had ended on September
30, 1951. The Commissioner of Income-tax says that the
directors of Govan Bros. had paid by warrant issued on
December 28, 1950 pursuant to a resolution dated August
30, 1950, interim dividend and it was only on payment the
dividend became taxable under s. 16(2) of the Indian Incometax Act. It is said by the Commissioner that dividend final
or interim is taxable not in the year in which it is declared
but only in the year in which it is paid, credited or distributed,
or deemed to be paid, credited or distributed, and that in any
event a resolution by the Board of Directors to pay interim
dividend does not create an enforceable obligation. for it is
always open to the directors to rescind
the resolution for
payment of dividend even if it is one in form declaring dividend.
The Indian Companies Act, 1913 contains no provision
for declaration of dividend either interim or final: it does
not say as to who shall declare the dividend, nor does it say
that dividend may be declared in a general meeting of the
company. But s. 17(2) provides that the company may adopt
all or any of the regulations contained in Table A in the
First Schedule to the Companies Act as its articles of association. and shall in any event be deem~d to contain regulations
identical with or to the same effect, amongst others, as regulation 95 and regulation 97 contained in that T.able.
Regulation 95 of Table A provides that the company in general
meeting may declare dividends, but no dividends shall exeed
the amount recommended by the directors, and regulation 97
states that no dividends shall be paid otherwise than out of
profits of the year or any other undistributed profits. Regulation 96, which is not an obligatory article, provides that the
1964
J, Dalmia
v.
Commiasionef'of
Income-tax,
New Delhi
Shah,J.
1964
J.Dalmia
v.
Oommi...wn.rof
lntomt-tM,
New Delhi
Shah,J.
582
SUPREl\IE COURT HEPORTS
[196iJ
directors may from time to time pay to the members such
interim dividends as appear to the directors to be justified by
the profits of the company. Govan Bros. had in their Articles of Association made the following provision with regard
to dividends:
"Art. 73. The Company in general meeting may declare
a dividend to be paid to the members according
to their rights and interests in the profits.
Art. 74. When in their opinion the profits of the company permit, the directors may declare an interim
dividend.
Art. 77. No dividend shall be payable, except out of
the net profits arising from the business of the
cempany, and no larger dividends shall be declared than is recommended by the directors."
By Art. 80 it was provided that unless otherwise direded
by the company in general meeting any dividends may be
paid by cheque or warrant sent through the post to the registered address of the member entitled to the same.
In Art. 74
relating to payment of interim dividend, there was a slight
departure from the regulation under Table A of the First
Schedule to the Companies Act. Whereas under regulation
96 Table A the flirectors are authorised to pay to the members interim dividends, by Art. 74 of the Articles of Association of Govan Bros. the directors are authorised to deClare
interim dividend. It may be noticed that under s. 17, adoption of an article in form identical with, or to the same effect
as regulation 96 of Table A, is not made obligatory.
The material part of s. 16(2) of the Income-ta)\ Act as it
stood before it was deleted by s. 7 of the Finance Act, 1959
with effect from April 1, 1960, read as follows:
"For the purposes of inclusion in the total income of
an assessee any dividend shall be deemed to be
income of the previous year in which it is paid,
credited or distributed or deemed to have been
paid, credited or distributed to him
•
•
*"
The clause in terms made dividend the income of the year
in which it was paid, credited or distributed or was deemed
to have been paid, credited or distributed.
In the present
case dividend was paid to the appellant on December 28,
1950. It is not the case of the appellant that thj! amount was
either credited in the books of account of Govan Bros. to the
appellant or was distributed or deemed to have been paid,
credited or distributed to the appellant before the close of the
appellant's year of account ending September 30, 1950. But
Mr. Kapur contends that under the law governing companies
/
~ -
' 7 _s.c.R:\ -,~UPRE~[E COURT REPORTS
583
'
'.
• - "<
.-
--
-
-;·-
-··---_---
on declaration, dividend- interim or final becomes due, and
it must fie regarded for the purpose of the Income-tax Act as
paid to the member on the date on which -it is declared.
There is no doubt that a declaration of dividend by a
company in general meeting gives rise to a debt. "When a
company declares a dividend on its shares, a debt imme·
diately becomes payable to each shareholder in respect of his
dividend for which he can sue at law, and the Statute of
limitation immediately begins to run":
In re Severn and
Wye and Severn Bridge Railway Company('). But this rule
applies only in case of dividend declared by the company ill
general meeting. A final dividend in general may be sanctioned at an annual meeting when the accounts are presented to
the members.