L.W. Russel, the respondent, was an employee of the English and Scottish Joint Cooperative Wholesale Society Ltd., Kozhikode.
The Society established a superannuation scheme for its male European employees in India, Ceylon, and Africa, providing deferred annuities (i.e., retirement insurance plans).
Contributions to the scheme were made by the Society, with the employee contributing two-thirds of the premium and the Society contributing one-third.
The Society's contribution towards the premium payable by Russel in the year 1956-57 was Rs 3333.
The Income Tax Officer included this amount in Russel's taxable income under Section 7(1), Explanation 1 sub-clause (v) of the Indian Income Tax Act, 1922.
Russel's appeal to Appellate Assistant Commissioner of Income Tax, Kozhikode, was dismissed
The Income Tax Appellate Tribunal referred the matter to the High Court of Kerala at Ernakulam.
The High Court held that the employer's contribution under the trust deed was not a perquisite as defined in Section 7(1) of the Act.
The High Court opined that the deferred annuity would not be covered under Explanation 1 to Section 7(1) of the Act.
The Commissioner of Income Tax appealed to the Supreme Court, challenging the High Court's rulings.
ISSUES
Whether the contributions paid by the employer to the assessee under the terms of a trust deed for a deferred annuity contract are considered a "perquisite" under Section 7(1) of the Indian Income Tax Act?
RULE
The principle that unless a vested interest in the sum accrues to an employee it is not taxable, applies to the present case. 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 Section 7(1) of the Act.
HELD
The Supreme Court observed that the section 7(1) of the Act presupposes the existence of the employer-employee relationship.
The court examined the scheme established by the Society, noting that the employee does not acquire a vested right in the employer's contributions until reaching the age of superannuation.
It held that for an amount to be considered a perquisite under Section 7(1), the employee must have a vested right in it.
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
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.
Since Russel's interest in the employer's contributions was contingent upon reaching the age of superannuation, it did not qualify as a perquisite.
The Supreme Court upheld the High Court's decision, stating that the employer's contributions were not taxable as perquisites under Section 7(1) of the Act.
COMMENTARIES RATIO/NOTES -
Personal advantage during employment-Perquisites are taxable under the head "Salaries" only if they are: (a) allowed by an employer to his employee, (b) allowed during the continuance of employment, (c) directly dependent upon service, (d) resulting in the nature of personal advantage to the employee, and (e) derived by virtue of employer's authority. It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-recurring receipt can be perquisite if the aforesaid conditions are satisfied.