Taxation Law

Commissioner of Income Tax v. L.W. Russel

[1964] 53 ITR 91 (SC); AIR 1965 SC 49

Citation: [1964] 53 ITR 91 (SC); AIR 1965 SC 49
Court: Supreme Court of India
Date: 1 April 1964
Bench: K. Subba Rao, J.C. Shah and S.M. Sikri JJ.

Facts

L.W. Russel was an employee of the English and Scottish Joint Co-operative Wholesale Society Ltd.
The employer established a compulsory superannuation scheme for certain employees through a trust deed.
Under the scheme:
the trustees obtained a deferred-annuity insurance policy for each employee;
the employee contributed part of the insurance premium;
the employer contributed one-third of the premium.
During the relevant year, the employer contributed ₹3,333 towards the policy relating to Russel.
The annuity would become payable only when Russel:
reached the age of superannuation; or
satisfied another contingency specified under the scheme.
Until that event occurred, Russel had no immediate or unconditional right to receive the employer’s contribution.
The Income Tax Officer included the employer’s contribution in Russel’s salary as a taxable perquisite under section 7(1) of the Income-tax Act, 1922.
The Kerala High Court held that the contribution was not taxable, and the Revenue appealed to the Supreme Court.

Issue

Whether the amount contributed by the employer towards the deferred-annuity policy constituted:
a perquisite allowed to the employee; or
an amount due to the employee from the employer.
Whether a contingent future benefit can be taxed as salary before the employee obtains a vested right in it.

Rule

A benefit becomes taxable as a salary perquisite only when the employee obtains a legally enforceable or vested right to that benefit.
It is not enough that the employer has spent money which may ultimately benefit the employee.
A distinction must be drawn between:
a present benefit or amount due to the employee; and
a contingent possibility of receiving a benefit in the future.
Where the employee’s entitlement depends upon:
continued service;
reaching superannuation;
fulfilment of another future condition, the employer’s contribution may not yet be a taxable perquisite.
The legal character of the employee’s interest must be determined from the terms of the scheme.

Application

The employer paid its contribution to the trustees or insurer, not directly to Russel.
Russel could not withdraw, demand or independently use the employer’s contribution during the relevant year.
His entitlement depended upon his reaching superannuation or the occurrence of another specified event.
Therefore, the payment by the employer did not immediately place money or property at Russel’s disposal.
The Court explained that the possibility of ultimately receiving an annuity was only a contingent interest.
Russel had no vested interest in each individual contribution when the employer made it.
If the required conditions were not satisfied, he might never receive the benefit attributable to that contribution.
A taxable perquisite requires more than a remote or conditional advantage.
There must be a present legal right which has:
accrued to the employee;
been allowed to the employee; or
become due from the employer.
The Revenue’s approach would have taxed the employee before it was known whether he would ever receive the relevant benefit.
The Court distinguished schemes in which an employer’s payment immediately becomes the employee’s property but is merely invested or applied in a particular manner.
In such a case, the employee may already have a taxable vested interest.
Here, however, the scheme itself postponed and conditioned the employee’s entitlement.
The employer’s expenditure could not be converted into Russel’s salary merely because it was made with the possibility of his future benefit.

Held

The Supreme Court held that the employer’s contribution was not a taxable perquisite in the relevant year.
No vested interest in the contribution had accrued to Russel.
The amount was neither:
presently allowed to him; nor
due to him from the employer.
His interest remained contingent upon reaching superannuation or satisfying the conditions of the scheme.
The Revenue’s appeal was dismissed.
The case establishes that an employee must possess a present and vested legal right before an employer-funded benefit can ordinarily be taxed as salary or perquisite.