The Commissioner Of Income-Tax, Delhi Petitioner v. Lala Shri Dhar

Hardayal Hardy, J.:— The question raised in this reference made by the Income-tax Appellate Tribunal (Delhi Bench A) under Section 66 (1) of the Indian Income-tax Act, 1922, is not only interesting but important for its decision may have an effect on numerous policies of personal accident insurance taken by the employers for protecting themselves against the demands for payment of compensation to their employees. Several decisions were cited before us by counsel for the parties, but none of them had a direct bearing on the question. In a way therefore, it may be said, that the question is res integra and its decision turns on the meaning of the word “perquisite” as used in Section 7 of the Indian Income-tax Act, 1922 which will hereafter be referred to as the Act.

The question has arisen in connection with the assessment of the respondent who will hereafter be referred to as the assessee in respect of the assessment years 1959-60, 1960-61, 1961-62 and relates to his income under the head salary. The relevant previous years ended on 31-3-1959, 31-3-1960 and 31-3-1961 respectively.

The respondent Lala Shri Dhar was a director of Madan Mohan Lal Sri Ram and Company (P) Ltd. which will hereafter be described as the “employer company.” He was stationed at the company's works at Calcutta. On 29-1-1957 the Board of Directors of the employer company decided by a resolution, to purchase personal accident insurance under a comprehensive policy in respect of the assessee and one other person, Lala Shri Ram. We are concerned in this case with the assessee only. The policy was effected on 3-2-1958 with the London & Lancashire Insurance Company Ltd. the premium payable being Rs. 1597.19 The duration of the policy was one year.

The Insurance company undertook to pay to the insured the benefits written in the schedule thereof if at any time during the period of the policy the insured, that is, Lala Shri Dhar, sustained any bodily injury caused by violent accidental, external and visible means and such injury resulted in his death or disablement as defined in the Schedule. In brief the insurance company agreed to pay a sum of Rs. 5 lacs in the case of injury causing death of the insured or resulting in the loss of both hands, or both feet or one hand or one foot or loss of sight in one eye or resulting in permanent total disablement, and to pay smaller amounts for lighter injuries. Though the proposal appears to have been filled up and presented by the assessee, the premium was paid by the employer company in each successive year; the employer company directly instructed the insurance company to renew the policy for a further period of each year and paid the premium. That is how the question relates to three successive years.

On the above facts the Income-tax Officer included the premium amount of Rs. 1597/- paid by the employer company on the aforesaid policy as a “perquisite” in the hands of the assessee. There was however no discussion as to how and why this was being done by him.

The assessee objected to the addition of Rs. 1597/- as perquisite in his hands in all the three years under reference, before the Appellate Assistant Commissioner on the ground that as the policy of insurance in question was general insurance policy, the premium paid for the same by the employer cannot be treated as a perquisite in his hands. In support of the said contention the assessee invited a reference to a letter written by Messrs Jardine Henderson Ltd. to Shri F.H Vallibhoy, Commissioner of Income-tax, West Bengal on 16-3-1962 with reference to what was described therein as a similar policy of insurance taken by a company pursuant to a resolution dated 25-1-1956, where a general question regarding such policies was raised and to the reply of the Commissioner of Income-tax, West Bengal conceding that the policies in question were not life insurance policies but were general insurance policies and that the premium payable by the employer company was not liable to be treated as a perquisite in the hands of the concerned employee.

Relying upon the reply given by the Commissioner of Income-tax, West Bengal, in the afore-said letter the Appellate Assistant Commissioner held that the amount of premium paid by the employer-company in the present case was not liable to be treated as a perquisite in the hands of the assessee and deleted the addition of Rs. 1597/- in all the three years under appeal.

The Revenue preferred appeals for all the three years under reference before the Income-tax Appellate Tribunal against exclusion of the Income of Rs. 1597/-. It was contended on its behalf that the payment of premium was covered by clause (v) of Explanation 1 of Section 7 (1) of the Act and ought to have been treated as perquisite in the hands of the assessee.

At the hearing of the appeal, it is not merely with reference to clause (v), but also with reference to clauses (iii) and (iv) of Explanation 1 of S. 7 (1) that arguments were addressed. The Tribunal however took the view that the payment of premium by the employer company was not covered by any of the three clauses in Explanation 1 and thus dismissed the appeal.

At the request of the Commissioner of Income-tax, the Tribunal however referred for the opinion of this Court the following question of law: —

“Whether on the facts and in the circumstances of the case, the premiums of Rs. 1597/- paid by Madan Mohanlal Sriram and Company (P) Ltd. in the three years under reference were perquisites within the meaning of the term “perquisite” as used in Section 7 (1) of the Act.”

At the hearing of the reference, Mr. G.C Sharma, counsel for the Commissioner, conceded that the Tribunal's analysis of clause (v) of Explanation 1 was correct and therefore no attempt was made by him to justify the criticism of the Tribunal's order under that clause. He however submitted that besides clauses (iii) and (iv), clause (ii) could also be invoked against the decision of the Tribunal and that the payment of premium of Rs. 1597/- was a perquisite within the meaning of that term as used in Section 7 (1) of the Act.

At the very out-set, Mr. Sharma contended that the decision of this question was covered in favour of the Revenue by a judgment of this Court in Controller of Estate Duty v. A.T Sahani, New Delhi (78 I.T.R 508) (1) to which one of us (Hardy J.) was a party. The question raised in that case was one under the Estate Duty Act, 1953. The deceased who was an employee of the Indian Airlines Corporation died on 1-9-1963 in an air crash while on duty. Under Rule 159 of the Indian Airlines Corporation (Flying Crew) Services Rules, a member of the Flying Crew was entitled to certain compensation at specified rates in the event of his death or an injury caused by an accident during or as a result of an air journey performed as such in the Corporation's service. The compensation payable under the said rule was in addition to the compensation which Indian Airlines Corporation had agreed to pay under an agreement described in the Pilot Agreement entered into with the Corporation on 1-4-1960. According to rule (4), which provided that the Corporation shall pay compensation for the death of a pilot, a maximum of 36 times his monthly basic pay if such death occurred in the circumstances mentioned in the above-mentioned Service Rules or while travelling on duty in service transport provided by the Corporation or its nominated agents. In accordance with the terms of the afore-said agreement between the deceased and his employer, a sum of Rs. 68,300/- was received by his widow as compensation. The Assistant Controller of Estate Duty included inter alia, the said amount of compensation in the principal value of the estate of the deceased under the head “Moveables.” On appeal by the “accountable person” the Zonal Appellate Controller of Estate Duty Delhi deleted the amount holding that there could be no question of the deceased having any interest in the company and that the mere right of nomination which the deceased had exercised in that case was of no consequence. The revenue appealed against the decision to the Appellate Tribunal which confirmed the exclusion. On a reference made to this Court, it was held that the right to get compensation as a condition of one's service created such an interest in property as any other interest which a person might have in incorporeal property, such as chose-in-action etc. The circumstance that the occasion for the exercise of that right arose after the death of that person and was also conditional upon death did not in any way detract from the existence of that right and the deceased's interest therein during his life time.

Mr. Sharma contended that although the occasion for the exercise of the right arising out of the policy of personal accident insurance might arise after the death of that person and in the case of other injuries it might arise during his life-time, but that did not in any way detract from the existence of that right and the deceased's interest therein during his life-time.

An examination of that judgment however shows that the entire discussion in that case was with reference to sections 6 to 17 of the Estate Duty Act, 1953 which provided that property passing on death “is deemed to include certain kinds of properties,” or, perhaps more accurately, certain property in certain situations and is not be deemed to include certain property in other situation. On the death of the deceased in that case his widow had received a sum of Rs. 68,300/- on account of compensation and the only question before the Court was whether this amount “could be deemed to pass under Sections 6 to 17 of the Act.” There was no question in that case about the eligibility of the premium paid either by the Indian Airlines Corporation or by the deceased to earn that compensation. The case is therefore no authority for the proposition canvassed for by Shri Sharma on behalf of the Revenue. The question raised in that case can and will arise if any insurance amount is actually paid to the heirs of the deceased on his death or to him in the case of an injury.

Mr. Sharma next relied on clause (iv) which reads: —

“any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee” and contended that in the instant case the policy of insurance was taken by the assessee in his own name. If the employer company refused to pay the premium amount there would be an obligation on the assessee to pay the same in order to keep the insurance alive. The argument is attractive and if accepted, the payment of premium by the employer company would be a “perquisite” included within the definition of that word in Section 7 (1) of the Act. It however seems that this was not the position in the present case. The Tribunal has placed on record an extract from the minutes of the meeting of the Board of Directors of Madan Mohanlal Sriram and Co. (P) Ltd. held on 29-1-57. Resolution No. 2 reads as under: —

“It was felt that Sir Shri Ram who was a working member of the Company in the affairs of the J.E.W and Bengal Potteries Ltd. and Shri Shri Dhar, a Director stationed on Company's works at Calcutta, should be covered by Personal Accident Insurance, under comprehensive policies. It was resolved that suitable policies may be taken and the Company will pay the premium in respect of such insurance.”

This resolution clearly shows that the decision to take the policy was taken by the Board of Directors of the employer company. It was not a voluntary act of the assessee himself. It also shows that the proposal of the policy was to be filled in by the assessee, but it was the duty of the employer company to pay the premium in respect of such insurance. There is nothing on the record to show that the assessee himself wanted to take that insurance or that if the employer company stopped paying the premium the policy would still have been taken or that if it had been taken, it would have been renewed from year to year. It is well-known that under the Insurance law if the person taking a policy, either on his own life or in respect of personal accidents, does not pay the premium the policy lapses and the person has no right to claim any insurance from the insurance company by the mere fact that he had signed the proposal for insurance and no payment of premium was made by him to the insurer. The Tribunal therefore appears to us to be right when it says that clause (iv) of Explanation 1 did not apply as it was not possible to hold that the assessee would have been obliged to pay the premium himself if the employer company had not paid it. The assessee had not voluntarily taken the insurance policy. It was the employer company which had taken the same for obvious reasons and if therefore the employer company was keen on keeping the policy alive it was upon it to pay the premium.

There is also another way of looking at this matter. Under the law providing for payment of compensation for injuries etc. to its employees or in the event of the death of an employee, for payment of compensation to his legal representatives, it is the duty of the employer company to make funds available for payment of compensation, so long as the accident, fatal or otherwise, takes place in the course of the employment. If the employer company did not take a policy of insurance, the responsibility for providing funds in the event of such an accident lay on it. It was a matter of no consequence at all to the employee concerned to take an insurance against such risk. Willy or nilly, the employer company will have to provide funds to pay up the compensation. If in order to protect itself against that contingency the employer company took up an insurance its purpose was to protect itself and not to protect the employee. There was thus no obligation cast on the assessee to keep the policy alive. Clause (iv) would therefore be obviously inapplicable.

Mr. Sharma then referred to clause (iii) which reads as under: —

“the value of any benefit or amenity granted or provided to an assessee not being an assessee to whom the provisions of clause (ii) apply by his employer free of cost or at concessional rate in any case where the income of the assessee under the head “salaries” exclusive of the value of all benefits or amenities not provided for by way of monetary payment exceeds eighteen thousand rupees;”

The question for consideration is whether the payment of the premium by the employer company to the Insurance company can be said to be a benefit granted to the assessee free of cost. It is possible to argue that the insurance effected against any injury to the assessee for a period of one year, is a benefit inasmuch as it secures to him a right to claim compensation in the event of the accident. The contention urged on behalf of the assessee is that no benefit was actually derived by him as the payment of the amount under the policy depended upon events which may or may not take place. The mere covering of risk of accident cannot be said to be a benefit till the policy matures. We have already said that policy was taken out by the employer company to safe-guard its own interest and to provide itself with a cover that in the event of the assessee being involved in an accident, the compensation amount would be paid by the insurer. The payment of premium in respect of such a policy or acquiring cover in the form of insurance policy could not be said to be a benefit granted to the assessee. Clause (iii) is therefore clearly inapplicable to the facts of the case.

This takes us to clause (ii) which reads as under: —

“the value of any benefit or amenity granted or provided by a company free of cost or at concessional rate to an employee who is a director thereof or who is substantially interested in the company within the meaning of sub-clause (iii) of clause (6c) of section 2;”

This clause has reference to sub-clause (iii) of clause (6c) of section 2 which reads as under: —

“the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by any other person who has a substantial interest in the company that is to say, who is concerned in the management of the business of the company, being the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent, of the voting power, and any sum paid by any such company in respect of any obligation which but for such payment would have been payable by the director or other person aforesaid;”

Under clause (ii) of S. 7 (1) the Director to whom that clause will apply will be a person who besides being a Director is also an employee of the company or who is substantially interested in the company within the meaning of sub-clause (iii) of clause (6c) of section 2. There is no material on record to show that the assessee in the present case had a kind of interest which is provided for .in sub-clause (iii) of clause (6c) of section 2. The question therefore does not arise. We therefore cannot see the application of clause (ii) to the facts of the present case.

On behalf of the assessee, we have been referred to certain cases although none of those cases has any direct bearing on the question before us. The case of P. Newcome v. Commissioner of Income-tax, Kerala (45 I.T.R 52) (2) decided by the Kerala High Court relates to clause (v) of Explanation 1 of Section 7 (1) of the Act and since that clause has not been pressed into service by the counsel for the Revenue we do not think any useful purpose will be served by dealing with the same.

The two cases reported in 44 I.T.R 816 and 53 I.T.R 91 relate to the same person. The decision in 53 I.T.R 91 is on appeal before the Supreme Court against the decision of Kerala High Court in 44 I.T.R 816. The decision is actually with reference to clause (v) of the Explanation. According to the decision of the Supreme Court the English and Scottish Joint Co-operative Wholesale Society Ltd. had established a superannuation scheme for the benefit of certain class of its employees. Every such employee became a member of the scheme as a condition of employment. Under the terms of the scheme, which were incorporated in a trust deed and certain rules, the Society had to contribute every month 1/3rd of the premium payable by each employee. The remaining 2/3rds for effecting a policy of insurance was paid by the employee concerned. The Society as trustees had to take out policies of insurance securing a deferred annuity upon the life of each employee equivalent to the pension to which he would be entitled on his attaining the age of superannuation. If an employee left the service of the Society or was dismissed from service or died in the service of the Society he was entitled only to be repaid the total amount of the portions of the premiums paid by him. Though the trustees in their discretion under certain circumstances, could give him a proportion of the premiums paid by the Society. It was also open to a retiring employee to elect to surrender the right to the annuity and receive the amounts paid by him and by the Society by way of premiums with interest. It was held that (i) until an employee attained the age of superannuation he did not acquire any vested right in the employer's share of the contribution towards the premiums: at best he had a contingent right therein and (ii) that the expression “perquisites” “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” in Section 7 (1) of the Act, applied only to such sums in regard to which there was an obligation on the part of the employer to pay and a vested right on the part of the employee to claim. It could not apply to contingent payments to which the employees had no right till the contingency occurred. The employer's contribution towards the premiums was not “perquisites allowed to the employee by the employer or amounts to him from the employer within the meaning of Section 7 (1) read with clause (v) of the Explanation thereof.” What was said in that case was that so far as the expression “paid” was concerned, there was no difficulty, for it took 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” in Section 7 (1) showed that there shall be an obligation on the part of the employer to pay that amount and a right on the part of the employee to claim the same. The word “allowed” was introduced in the section by the Finance Act of 1955. The said expression in the legal terminology was equivalent to “fixed, taken into account, set apart, granted.” It took in perquisites given in cash or in kind or in money or money's worth and also amenities which are not convertible into money. It implied that a right was conferred on the employee in respect of those perquisites. It could not be said that a perquisite was allowed to an employee if an employee had no right to the same. It could not apply to contingent payments to which the employee had no right till the contingency occurred. In short, the employee must have a vested right therein.

In the present case, it cannot be said that the assessee had any vested right in the premium amount which the employer company was paying for taking out an insurance with the insurer.

Mr. Sharma argued that in 53 I.T.R 91 the Supreme Court was considering clause (v) and that the other clauses were not being considered. His emphasis was mainly on clause (iv) but as we have said, that clause has no application to the facts of the present case.

Before concluding, it may be mentioned that though the decision of the question in the present case is based on the facts stated by the Tribunal, the Tribunal has actually not gone into the question of correspondence between Messrs Jardine Henderson Ltd. and Shri F.H Vallibhoy, Commissioner of Income-tax, West Bengal. The reason is quite apparent. In the resolution which the Commissioner of Income-tax, West Bengal was asked to consider, the Insurance policies were taken out by the company concerned on its own behalf and as agent of the associated companies in respect of the employees of such companies. The annual premiums were paid by the company each year and on the introduction of the scheme the employees of the company or associated companies concerned, were advised by means of a circular letter that while such employees did not have any contractual right to any benefit arising from the policy, it was the intention of the company or associated companies as the case may be, to apply any moneys paid by the insurer for the benefit of the employee or his dependents subject to adjustments in respect of tax liability to which the employer may be liable in respect thereof.

While replying to this letter the Commissioner made it clear that it was not obligatory on the employer company to pass on the insurance money to the employees or their dependents, the latter having no contractual right to any benefit arising from the policy. The receipt from the insurance company was therefore to be regarded as the income of the employer company; but if such insurance money was paid on by the company to its employees or their dependents, deduction to that extent could be allowed in the assessment of the employer company.

This does not seem to be the position in the present case where according to the facts stated by the Tribunal the entire amount received by the employer company was to be paid to the dependents of the assessee or to him as the case may be.

In the result, the question is answered against the Revenue and in favour of the assessee. The premiums of Rs. 1597/- paid by the employer company in the three years under reference, could not be treated as perquisites within the meaning of that term as used in Section 7 (1) of the Act. We however do not wish to make any orders as to costs in this case.

Reference answered accordingly.