Air India Employees Self
Contributory Superannuation Pension Scheme Vs. Kuriakose V. Cherian & Ors 
Insc 529 (3 October 2005)
Y. K. Sabharwal & Tarun
Chatterjee J U D G E M E N T [with C.A.No.7035-36 of 2003, C.A.No.9372 of 2003 &
C.A.No.2327 of 2004] Y.K. Sabharwal, J.
The dispute in these matters basically between the appellant and the serving
employees of Air India on one hand and retired employees on the other is about
the interpretation of Air India Employees Self-Contributory Superannuation Pension
Scheme (hereinafter referred to as 'Scheme').
In or about 1994, Air India proposed creation of a Pension Scheme for its
employees. The Scheme was based on actuarial reports. The employees had to
contribute to the fund under the Scheme, Air India contributing a token sum of
Rs.100/- per annum for all the employees put together. Broadly, Scheme was that
all full time employees of Air India would become members of the Scheme and
contribute a percentage of their salary to be deducted every month and credited
to the fund under the Scheme. Each member had to contribute for a minimum
period of 15 years and for those who did not have sufficient number of years of
service from the date of the commencement of the Scheme upto their
superannuation, an amount was calculated based on the total number of years in
deficit and the member was required to make payment of the entire sum so
calculated either in lump sum or to pay the said amount in monthly installment
along with interest on the total sum due. On 12th August, 1996, a deed of trust for incorporating the Scheme was entered into between Air India and the
trustees. The deed also contained rules known as 'Air India Employees
Self-Contributing Pensionary Scheme Rules' (hereinafter referred to as 'the
Rules'). Further, it postulated creation of a pension fund. A deed of variation
of the trust was executed on 7th October, 1997 to amend certain provisions of
the trust deed. The trust deed, inter alia, stipulates that the retiring
employees would get pension equivalent to 40 per cent of the last pay drawn
salary, consisting of basic pay, dearness allowances and personal pay, if any.
To give effect to the aforesaid, an agreement was entered into with Life
Insurance Corporation of India which issued a master policy stipulating various
terms and conditions.
Rules stipulate that a member or his beneficiary shall have no interest in
the master policy taken out in respect of the members or any investment
otherwise made by the trustees in accordance with the Rules or the Scheme but
shall be entitled to receive superannuation benefits in accordance with the
Rules and that the trustees shall always administer the Scheme for the benefit
of the members and their beneficiaries in accordance with the provisions of the
A staff notice dated 30th September, 1996 was issued reproducing therein
salient features of the Scheme. It stipulated that the Scheme will take effect
from 1st April, 1994. The main object of the Scheme is to provide to the
members on retirement a fixed amount per month. The amount is to be calculated
according to the Scheme on superannuation of an employee and annuity is
required to be purchased from Life Insurance Corporation of India (LIC) so as
to ensure payment by LIC of a fixed monthly sum to the retired employee and on
his demise the payment of the annuity amount to his legal representatives.
Besides the Scheme, the existing employees represented by their respective
associations are the appellants before us. According to the appellants, the
Scheme was defective inasmuch as large amounts were given to the retiring
employees without having regard to the contributions made by them towards the
Scheme and resultantly the old employees by making smaller contributions
received disproportionately larger amount of benefits. No fund would have been
available with the Scheme for giving pension to the employees retiring after
2005 despite they having contributed large amount to the fund under the Scheme,
thus, requiring corrective action. Under these circumstances, the Scheme was
amended with effect from 3rd April, 2002. The amendment requires the pensioners
to make payment of additional contribution towards annuities purchased from
LIC. The amendment provided that the amount of the pension shall be
corresponding to the contribution made by the respective retired employees and
not on the basis of 40 per cent of the last drawn salary of the employees.
Corresponding amendments were also made in the Rules, inter alia, providing
that the employees who have retired upto 31st October, 2001 shall contribute
the amount so as to make up the difference between cost of annuity purchased
for them from the pension fund from LIC and the total contribution made by them
till date of retirement. Other consequential amendments were also made
providing that the trustees shall notify LIC for retrieval of the shortfall in
the contribution from the purchase price of the annuity paid to LIC in respect
of such members and for appropriate reduction in the monthly amount payable to
such employees. The amount so retrieved is required to be added to and form
part of the corpus of the trust fund to be equally distributed amongst the
The validity of the aforesaid amendment of the Scheme was challenged by the
retired employees in writ petition filed under Article 226 of the Constitution
of India before the High Court mainly on the ground that rights in their favour
crystallized on purchase of annuities at the time of their superannuation and
the same cannot be subjected to any alteration or amendment. The contention
urged before the High Court was that the trustees could only effect amendment
to the Scheme for future benefits of existing employees and had no right to
effect any amendment which adversely affects vested rights of the pensioners in
regard to the pension payable to them as per the amended Scheme. The plea was
that their pension as per the amended Scheme would be considerably reduced. It
was contended that on retirement the ex-employees sever all their relations
with the Scheme, which does not envisage making of any additional contribution,
by members after superannuation. The LIC having accepted annuity and having
made monthly payments to retired employees cannot refund to the trust any
amount or reduce monthly payment to the detriment of the pensioners.
These appeals have been filed by the Scheme, Air India, Cabin Crew
Association, Ground Staff Association, Officers Association, and Employees
Guild Association. Learned counsel for the appellants contend that out of
18,386 employees who were members of the Scheme from the year 1994 till date,
1852 employees retired leaving 16534 employees in service. They pointed out
that though retirees were only about 10 per cent of the employees but had taken
60 per cent of the total contribution made by all the employees against their
contribution of about 17.98 per cent. If this trend continues the corpus would
get fully exhausted and the result would be that the employees who retire after
the year 2005 will not get any benefit since by that time no amount will be
left in the fund. It is contended that the annuities continue to remain the
property of the scheme and as such trustees have a right to review the
situation and amend the scheme.
The contention is that the trustees have unrestricted power to amend or
alter the Scheme even retrospectively. Further, it is urged that strictly
speaking the amendment is not retrospective inasmuch as the revision of the
pension is prospective. The amount of the pension would be reduced on
non-fulfillment of the conditions by the retiring employees after the date of
The High Court by the impugned judgment held that the impugned amendment to
the Trust Deed to the extent it applies in future is legal and valid but the
amendment cannot apply to the employees who have retired before the date of
amendment and such employees shall continue to receive pensionary benefits as
before, namely, the benefits which existed at the time of amendment.
For the aforesaid conclusion, the main ground which prevailed with the High
Court is that the right to annuity in favour of retired employees crystallized
on the date of superannuation and the same cannot be changed by amendment.
The High Court held that annuitant has no connection with the quantum of the
remaining trust fund; whether it increases or decreases and that on retirement
of the employee, the quantum of corpus, which yields the annuity, is paid over
to the LIC and physically leaves the trust fund. The retiree gets a life long
annuity and on his demise his heirs get the designated corpus. Thus the
designated corpus which leaves the trust on date of superannuation never
returns. The trust is created because of the requirement of Income Tax Act and
for the purpose of administrative convenience. Annuitants are in no way
concerned with the financial health of the trust fund which originally
purchased the annuities. They are not entitled to look to original trust for
any assistance in case the interest rate of LIC falls and they cannot claim any
additional benefit even if trust decides to increase the benefits for such
Challenging the impugned judgment, learned counsel for the appellants
contend that the beneficiaries, namely, retired employees cannot have any
interest in the insurance policy entered by the trustees;
the entire fund is within the control of the trustees; legal obligation is
cast on the trustees that none of the member is deprived of pension. The
trustees have not only right but an obligation to correct the mistake and amend
the Scheme so that the employees retiring after 2005 also get pension and are
not deprived of it despite having contributed to the fund from their salary.
Amendment became necessary on finding out that the funds are likely to be
depleted as a result of the bona fide mistake. It is because of such mistake
disproportionate amounts have been paid to the retirees without regard to the
contributions made by them.
The crucial question is whether the benefits, which the retired employees
are getting, can be curtailed because of reduction of the fund amount.
In support of these appeals, three contentions have been urged: (1)
depletion of the fund amount if not checked would result in the retirees after
the year 2005 not getting any pension. Therefore, there was the requirement to
make the impugned amendments; (2) the trustees in terms of Deed and the Rules
have unrestricted power to amend the Scheme so as to apply amendment to also
those who stand retired; and (3) the Scheme is not amenable to the writ jurisdiction.
The appellants are neither an instrumentality or agency of the State nor other
authority contemplated by Article 12 of the Constitution.
Taking the last contention first, the High Court rejected it observing that
the creation of pension fund flows from the socio economic obligations of the
States and that the pension is not a charge or bounty nor is it a gratuitous
payment depending on the whims of the employer.
The High Court is of the view that writ is maintainable as it was mainly
directed against LIC. It is, however, contended on behalf of the appellants
that the nature of the Scheme under consideration is different.
Despite use of the term 'pension', the benefit under the Scheme is not
'pension' as understood in service jurisprudence. The observations made in the
impugned judgment relying upon various earlier precedents dealing with pension
and holding that it is not a bounty may not strictly apply to the benefits
stipulated for the retiring employees under the Scheme in question. Further, it
is possible to contend that LIC is only a proforma party to the litigation and
that it cannot be said that writ is directed mainly against LIC, the main
question being the power of the trustees to amend the Scheme with retrospective
effect. We need not, however, examine, in the present case, the aforesaid
question and the correctness of the view of the High Court on the aspect of
maintainability of the writ petition since learned counsel challenging the
correctness of the impugned judgment, have adopted a pragmatic and fair
approach that this Court having heard the matter in detail, it would not serve
either the interest of the retired employees or the employees in service or the
Scheme, if the parties are relegated to litigation before other forums on this
court reversing view of the High court on the question of maintainability of
the writ petition. Under these circumstances, we leave open the question of
maintainability of the writ to be decided in an appropriate case.
Now, we will examine other two contentions. The object of introducing the
Scheme was to enable the employees to obtain monetary benefit on their
superannuation and/or payment to the beneficiaries in the event of death of the
employee. How it was sought to be achieved shall have to be considered in the
light of the Scheme, the stand of the appellants and also the provisions of the
Income Tax Act and the Rules.
Air-India Employees' Superannuation Pension Trust (for short 'Trust') was
established to administer the pension scheme also in fulfillment of the
requirement under the Income Tax Act, 1961. The pension scheme was approved by
the Commissioner of Income Tax.
Under Section 2(6) of the Income Tax Act, 'approved superannuation fund' has
been defined to mean superannuation fund or any part of the superannuation fund
which has been and continues to be approved by the Chief Commissioner or
Commissioner in accordance with the Rules contained in Part B of the Fourth
Part B of Schedule IV of the Income Tax Act, 1961 deals with approved superannuation
funds. Under clause 3 thereof, in order that the superannuation fund may
receive and retain approval, it shall satisfy the conditions set out in the
said clause and any other conditions which the Board may, by Rules, prescribe.
One of the conditions is their fund shall be a fund established under an
irrevocable trust. Another condition is that fund shall have for its sole
purpose the provision of annuities for employees in the trade or undertaking on
their retirement at or after a specified age or on their becoming incapacitated
prior to such retirement, or for the widows, children or dependents of persons
who are or have been such employees on the death of those persons.
Part XIII of Income Tax Rules, 1962 covering Rules 82 to 97 dealing with approved
superannuation funds is framed in exercise of the powers conferred, inter alia,
under clause 11 (1)(cc) of Part B of Schedule IV.
Under Rule 85, it is, inter alia, stipulated that all monies contributed to
the approved superannuation fund are required to be invested in a post office
savings bank account in India or in a current account or in a savings account
with scheduled bank or utilized in accordance with Rule 89 for making payment
under a scheme of insurance or for purchase of annuities referred to in that
rule. Under Rule 87, the ordinary annual contribution by the employer to a fund
in respect of any particular employee shall not exceed 25% of his salary for
each year as reduced by the employer's contribution, if any, to any provident
fund (whether recognized or not) in respect of the same employee for that year.
Rule 89, inter alia, provides that for the purpose of providing the
annuities for the beneficiaries, the trustees shall enter into a scheme of
insurance with LIC and accumulate the contributions in respect of each
beneficiary and purchase an annuity from the said LIC at the time of the
retirement or death of each employee or on his becoming incapacitated prior to
Clause 3 of the trust deed, inter alia, provides that pension fund is to be
established under irrevocable trust and the fund shall have for its sole
purpose the provision of annuities for employees.
Clause 14 provides that power of appointing the Trustee shall be vested in
the employer. The Board of Trustees shall consist of three representatives of
the employer and eight members who are employees.
The employer shall appoint, its representatives, the representatives of the
members, who shall be the employees. The employer shall exercise power of
filling up any vacancies and removing any Trustee and the employer shall
nominate one of its representative Trustees as Chairman of the Trust.
Clause 19 provides that the employer shall have the power to appoint any
officer to act as Secretary of Fund who will be invested with such powers of
management of the Trust as the Trustees may from time to time in their
discretion determine. With the consent of the employer the trustees shall have
power to employ any person or persons to do any legal, accountancy or other
The Trust deed shows that the trustee agreed to act as such of the pension
fund at the behest of the employer. It further shows that the employer has
considerable control over the functions as well as the administration of the
Clause 5 of the trust deed deals with power to amend. It reads as under:
"The Trustees may at any time with the previous concurrence and/or
approval in writing of the employer alter, vary or amend any of the trusts or
provisions of this Deed and the Rules.
Provided that no such alteration or variation shall be inconsistent with the
main objects of the trusts hereby created.
Provided further that no such alteration or variation shall be made without
the prior approval of the Commissioner of Income-tax having jurisdiction over
the Fund." Clause 8 provides that members to have no legal right. It reads
"Except as provided for in this Deed or in the Rules, no Member,
Beneficiary or other person claiming right from such Member shall have any
legal claim, right or interest in the Fund." We may also reproduce clauses
24, 26, 27, 32 and 33 which read as under:
"24.Trust FundThe Fund shall consist of the contributions as specified
in this Deed and the Rules governing the Fund and contributions received by the
Trustees from the Company and of the accumulations thereof and of the
securities and the annuities purchased therewith and interest thereon and of
any capital gains arising from the sale of the capital assets of the Fund.
The Trustees shall hold the Fund upon such trust and with and subject to
such powers and provisions as are or shall be contained in this Deed and the
Rules for the time being in force to the intent that the said Fund shall be
established for the benefit of the Members and/or their Beneficiaries. The Fund
shall be vested in the Trustees. The Trustees shall have the entire custody,
management and control of the Fund.
No monies belonging to the Fund shall be recoverable by the Employer under
any circumstances nor shall the Employer have any lien or charge over the Fund,
except or any loans that may be lent by the Employer to the Fund for meeting
its immediate liabilities.
26.Provisioins of BenefitThe trustees may enter into any Scheme of insurance
or contracts with the Life Insurance Corporation of India to provide for all or
any part of the benefits which shall be or may become payable under these
presents and may pay out of the Fund all payments to be made by it under such
Scheme or contracts.
27.Investment of Funds(a) All monies from time to time in the hands of the
Trustees and not immediately required for the purpose of the Trust shall be
deposited/invested by the Trustees within 15 days from the date of receipt or
accrual, as the case may be, in accordance with Rule 85 of the Income-tax
Rules, 1962 or any modification or re- enactment or reframing or renumbering
(b) The Trustees shall have power at any time and from time to time to vary,
transpose or sell such investments and reinvest the Funds in other investments
of the nature hereby authorised, within the guidelines, notifications or Rules
issued by the Government from time to time.
32.Review of Funds The Trustee shall review the availability of Funds of the
Scheme annually or at such intervals as may be deemed fit by the Trustees and
to decide any revision in the maximum benefit or rate of the member's
contribution under the Scheme.
33.Review of BenefitsNotwithstanding anything to the contrary contained in
these presents or in the rules the Trustees shall have and shall always be
deemed to have the right to review any limit the benefits payable to the
Beneficiaries including the right to reduce the benefits payable in accordance
with the rules in the event of any or all the members ceasing or reducing to
make contribution to the Fund in accordance with these presents and the Rules.
Rule 14 provides that members or his beneficiary shall have no interest in
the master policy. It reads as under:
"A member or his beneficiary shall have no interest in the Master
Policy taken out in respect of the members or any investment otherwise made by
the Trustees in accordance with the Rules of the Scheme but shall be entitled
to receive superannuation benefits in accordance with the Rules. Provided
always that the Trustees shall administer the Scheme for the benefit of the
members and their beneficiaries in accordance with the provisions of these
Rules." Dealing now with the first contention as to the depletion of the
fund amounts, case of the appellants is that the scheme was based upon
actuarial valuation carried out in the year 1993/1994 on assumptions as under:
(1) Basic pay and DA were taken as pre- revised scales.
(2) Assumption that the contribution will start flowing on monthly basis
from April, 1994.
(3) Rate of interest was assumed at 12 per cent.
(4) Contribution of Rs.350 per month was supposed to increase by 10% per
(5) Total number of members of the Scheme at any given time would remain
retirees are replaced by recruits.
It is urged that when the Scheme was launched in 1996 none of the above
assumptions were found to be in existence as evidenced from the following:- (1)
With the wage agreement in 1996, the salary scales were substantially revised.
(2) Monthly deductions of contribution started only from September, 1996 and
arrears of contributions for the period April, 1994 to August, 1996 were
received by the Trust from March 2000 only.
(3) Rate of interest has been progressively declining.
(4) The contribution of Rs.350 p.m. has not been escalated by 10% per annum.
(5) Number of employees contributing to the Scheme has progressively
declined in view of non-recruitment since 1995.
Further, according to the appellants, there was shortfall of Rs.155 crores
which is as under:
"Rs. in Crores (a) Increase in annuity cost on account of 65 revision
of grades and pay scales (b) Non-escalation of additional contributions 60
since 1995 @ 10% (c) Loss of interest on contribution from April 30 1994 to
April 1996 ______ Rs.155" It is contended that the aforesaid deficit of Rs.155
crores, as assessed by the actuaries, only represents the gap between the
present value of all future pension liability of the Trust as per the original
defined benefit scheme and the present value of all future contributions to be
collected by the trust, as originally determined. The actuaries had assessed
the increase in annuity cost on account of revision of pay scale at Rs.65
crores. This is sought to be illustrated by the appellants by giving figures of
pre-revised Basic + DA and pension calculated at the rate of 40% and cost of
annuity and contribution of retiring employee and also giving figures of
revised scales and resultant increase of cost of annuity without proportionate
increase at employee's contribution.
The break up of 60 crores on account of non-increase in the additional
contribution of Rs.350 has also been given. The break up of deficit of Rs.30
crores has also been given. As per the Scheme, the contribution of the members
was in two parts (a) 1% to 5% contribution of Basic and D.A. and (b) additional
contribution of Rs.350 per month.
Further, all members who retired in the period from April, 1994 to August,
1996 did not make the additional contribution of Rs.350 p.m. in their 15 years
lump sum contribution. The impact of non-escalation of additional contribution
of Rs.350 has been assessed at Rs.60 crores. It has been pointed out that the
Scheme was applicable to all employees who retired from 1st April, 1994 but
actual deductions of contributions from monthly salary commenced from September,
1996. It is stated that various unions representing the members were not
agreeable for their members making a lump sum contribution and requested Air
India Management to appropriate and pay the Trust such arrears of contribution
for the period April, 1994 to August, 1996 from the wage agreement arrears as
and when these were paid. Air India was facing a severe financial crunch at
that point of time and the Management had signed agreement with the Unions to
the effect that though revised pay scales were implemented immediately, arrears
would be paid only when the company's liquidity position permitted the same. It
was understood that the Management was not to pay any interest on such deferred
payment of arrears. The payment of arrears of pension contribution to the
Trust, therefore, was also deferred until the settlement of wage arrears i.e.
till March 2000. This resulted in loss of interest on such arrears.
The aforesaid financial position has been disputed and retirees have sought
to explain that the facts and figures given and conclusions drawn by the Scheme
are entirely incorrect and misleading. It was pointed out that in addition to
the simple computation mistakes, the projection has not taken into account the
interest accrual. According to retirees, as per the correct position the
shortfall if at all will be minimal and in any case it was to be borne in mind
that the Scheme as originally formulated was rolling scheme and benefits were
not confined to the extent of contributions made.
The retirees have also given facts and figures giving calculations based on
pre-revised Basic and DA with accrued interest (without escalation) as also
calculations based on revised Basic and DA without escalation and the
calculations based on with escalation.
Further, according to the retirees, the trustees took no steps to either
approach Air India to recover the monies which is stated to be due from Air
India nor they approached the Income Tax Officer for permission to invest
amounts in short term deposits nor have they taken steps to revise
contributions. According to them, the trustees to save their own skin attempted
to recover the amounts from the retirees under the guise of acting fairly to
balance out the difference without explaining as to what prevented them from
taking requisite steps while the retirees were still in employment. They have
also highlighted the factor of failure of trustees to take steps for making the
recoveries from Air India which kept amount after deducting the same from the
salaries of the employees.
It is not necessary to go into detail calculations. It does appear that
there is shortfall in the Fund though a lot can be said in respect of
calculation submitted by both sides. No doubt, the amount which went out of the
fund for purchase of annuity for retiring employee was considerably more than
what was contributed by the outgoing employee but it is also true, at the same
time, that the huge amounts did not come to the fund from Air India and some of
assumptions on which Scheme was formulated did not hold good on commencement of
the Scheme. The reason for the position of the fund which necessitated the
amendment cannot be attributed entirely on account of the gap between the
amount contributed by the retiring employee and the amount used for purchase of
annuity. It may also be noted that the appellant's own case is that there was
basic fallacy in the Scheme from its inception. The Scheme, as originally
conceived was flawed, is the stand of the appellants in CA No.4267 of 2003. It
is further their own stand that concept of granting annuities on a defined
benefit basis in a self-contributory fund is inherently fallacious as in the
self-contributory scheme the only consideration is the contributions made by
the members and hence the benefit has to necessarily flow from their
contributions and the interest accrued thereon. As against this, the present is
a case of defined benefit Scheme. This basic fallacy in the Scheme was never
rectified from inception. It is the own case of the appellants that in addition
to this inherent fallacy in the formation of the Scheme, the situation was
aggravated by various factors noticed above.
We would assume that there were several contributory factors as a result of
which the fund position became quite bad. The factors included the non-receipt
of huge funds in time from Air India, lack of proper investment by the trust
resulting in loss of interest in addition to the fallacy in the scheme being
gap between the contribution and the amount required for purchase of annuity to
ensure return of specified amount to the retirees.
It may be that the last of the aforesaid factor contributed most in the
depleted financial position of the fund requiring the trustees to make the
amendments in the scheme on 3rd April, 2002, but it has to be borne in mind
that the original scheme was a 'Benefit Defined Scheme' as opposed to a
'Contribution Defined Scheme'. It has now been conceded on behalf of the
appellants that there was no fraud in formulation or implementation of the scheme.
Besides aforesaid factor, there were other factors, such as, considerable delay
in Air India remitting arrears of pension contribution amounting to Rs.23
crores to the trust, non-payment of interest by Air India on late payments etc.
The retirees received what was receivable by them according to the existing
scheme on the date of retirement. The pension scheme, as originally conceived
and formulated, was a rolling scheme postulating outgoing employees on
retirement and their place being taken by induction of new employees whose
contributions would add to the fund.
According to the figures given above, the shortfall in the fund was in the
sum of Rs.41.83 crores which was sought to be made up from 1852 retirees.
According to the retirees, if they are asked to make good that amount, on
average each pensioner will have to repay a sum of Rs.2,25,863/-. At the same
time, if the amount is contributed by the existing over 16,500 employees to
make good the aforesaid differential amount of Rs.41.83 crore, they would be
required to pay about Rs.25,000/- each which can be split into convenient
On distinction between 'Defined Benefit Plan and 'Defined Contribution Plan'
Mr. Arun S. Murlidhar in 'Innovations in Pension Fund Management' states :
"Defined Benefit Plans In the DB pension plan, participants and/or
sponsors make contributions, and these contributions could change over time.
The scheme then provides a defined benefita prescribed annuity in either
absolute currency or as a faction of a measure of salary (e.g., 50 per cent of
final salary or the average the last five years of salary. The guaranteed
pension benefit could be in either real or nominal terms. The ratio of annuity
or benefit to a measure of salary is known as the replacement rate.
Defined Contribution Plans Under the DC scheme, participants and/or sponsors
make prespecified contributions. These contributions could be specified in
either absolute currency or as a fraction of a measure of salary (e.g. 5 per
cent of annual pretax salary). The participants invest the contributions in
However, the pension depends entirely on the asset performance of
As a result, two individuals with identical contributions could receive very
different pensions. Bader (1995), Bodie, Marcus, and Merton (1988), and Blake
(2000) provide more detailed descriptions of DB and DC plans." (Emphasis
supplied by us) According to learned author, there are several ways in which
the aforesaid plans can be funded. In general, country's social security
systems are pay-as-you-go (PAYG), Defined Benefit schemes which tax current
participants to pay retiree benefits. However, corporate or occupational
defined benefit or defined contribution schemes tend to be funded both
partially and fully. Funding requires allocating funds prior to retirement in
order to service future liabilities.
The scheme envisages a Defined Benefit Plans and not a Defined Contribution
Plans. It also envisages allocating funds at the time of retirement of
employees, i.e. the amount for which the annuity is purchased. None has
questioned the power of the trustees to amend the scheme prospectively from the
date of amendment. We would also assume that there is a corpus deficiency
which, to a considerable extent, has taken place as a result of gap between
contribution and amount of annuity purchased. All the same, the basic question
is whether by the amendment of the scheme, this gap can be bridged by making
recoveries from those who have already retired and are getting benefit from LIC
as a result of purchase of annuity and/or from their heirs who would otherwise
receive annuity amount after the demise of the retiree. This necessarily takes
us to the second question as to the power to amend the scheme retrospectively.
At the outset, it may be noted that there is no merit in the contention,
half-heartedly canvassed, that the amendment is not retrospective on the ground
that the rights of the retirees only after the amendment of the scheme are
being effected as the amount already paid to them under the unamended scheme is
not being asked to be returned. There is fallacy in the argument. It is evident
that the retirees, as a result of amendment, are being asked to pay to make
good the gap between the amount of annuity and the contributions made by them
and, if not, either their monthly pension would be reduced or their heirs would
not get the annuity amount at the relevant stage. The amounts already taken by
the retirees have also been taken into consideration while working out the
figures. Therefore, it cannot be said that the amendment is not retrospective.
Various clauses on the basis whereof learned counsel for the appellants contend
that it is permissible to amend the scheme with retrospective effect have
already been noted hereinbefore. To consider the effect thereof and to
appreciate contentions urged by learned counsel for the appellants, first let
us examine the true meaning of expression 'Annuity'.
The expression 'Annuity' has no statutory definition. However, according to
Black's Law Dictionary, it means an obligation to pay a stated sum usually
monthly or annually to a stated recipient.
An annuity is a right to receive de anno in annum a certain sum; that may be
given for life, or for a series of years; it may be given during any particular
period, or in perpetuity; and there is also this singularity about annuities,
that, although payable out of the personal assets, they are capable of being,
even, for the purpose of devolution, as real estate; they may be given to a man
and his heirs, and may go to the heir as real estate (see : Advanced Law
Lexicon by P Ramanatha Aiyar, 3rd Edition 2005) In Commissioner of Wealth Tax
v. P.K.Benerjee [(1981) 1 SCC 63], this court held that in order to constitute
an annuity, the payment to be made periodically should be a fixed or
pre-determined one, and it should not be liable to any variation depending upon
or on any ground relating to the general income of the fund or estate which is
charged for such payment. The court cited with approval the observations of
observations of Jenkins L. J in In-re Duke of Norfolk Public Trustee v. Inland
Revenue Commr. [(1950) 1 Ch 487] which reads thus:
"An annuity charged on property is not, nor is it in any way equivalent
to an interest in a proportion of the capital of the property charged
sufficient to produce its yearly amount. It is nothing more or less than a
right to receive the stipulated yearly sum out of the income of the whole of
the property charged (and in many cases out of the capital in the event of a
deficiency of income). It confers no interest in any particular part of the
property charged, but simply a security extending over the whole. The annuitant
is entitled to receive no less and no more than the stipulated sum. He neither
gains by a rise nor loses by a fall in the amount of income produced by the
property, except in so far as there may be a deficiency of income in a case in
which recourse to capital is excluded." Learned counsel for the appellants
have, however, placed strong reliance on the Trust Deed and the Rules to
contend that the Trustees have full right to amend the Scheme with
retrospective effect and that the members or beneficiaries have no right, title
or interest in the fund or even in the annuities purchased from the fund on the
retirement of beneficiary.
In this respect, reliance is placed upon Clause 5 of the Trust Deed above
reproduced stating that the Trustee may at any time with previous concurrence
or approval in writing of the employer alter, vary or amend any of the
provisions of the Trust Deed and the Rules. The first proviso to the aforesaid
clause, however stipulates that no such alteration or variation shall be
inconsistent with the main objects of the Trust thereby created.
Reliance has also been placed to Clause 8 of the Trust Deed stipulating that
except as provided for in this Deed or Rules, no member, beneficiary or other
person claiming right from such member shall have any legal claim, right or
interest in the Fund. But, the proviso to the said clause enjoins upon the
Trust Deed to administer the Fund for the benefit of the members and/or their
beneficiaries in accordance with the provisions of the Deed and the Rules.
Reliance on Clause 24 has been strongly placed submitting, inter alia, that the
members' Fund shall consist of contributions as specified in the Trust Deed and
the Rules governing the Fund and contributions received by the Trustees from
the Air India and of the accumulations thereof and of the securities and
annuities purchased therewith and interest thereon and that the said Fund shall
be established for the benefit of the members and/or their beneficiaries and
shall be vested in the Trustees. Further, Clause 26 is relied upon which
stipulates that the trustees may enter into any scheme of insurance or
contracts with the LIC to provide for all or any part of the benefits which
shall be or may become payable under this deed and may pay out of the Fund all
payments to be made by it under such scheme or contracts.
Besides the aforesaid clauses, learned counsel for the appellant have placed
strong reliance on Clause 32 and Clause 33 of the Trust Deed. Clause 32
provides the power of the Trustee to review the availability of Funds of the
Scheme annually or at such intervals as may be deemed fit by the Trustees and
to decide any revision as to the rate of the member's contribution under the
Scheme. Clause 33 i.e. power of review of benefits stipulates the Trustees
right to review any limit the benefits payable to the beneficiaries including
the right to reduce the benefits payable in accordance with the rules in the
event of any or all the members ceasing or reducing to make contribution to the
None of the aforesaid clauses render any assistance to the appellants. The
relied upon clauses deal with the members who continue to contribute to the
Fund. The liability of the retiring member to make any such contribution ceases
on retirement. It is nobody's case that after the retirement any contribution
is made or required to be made by retired employees. The aforesaid clauses only
show the right and power to review the Fund and the benefits payable to the
continuing members/employees. Likewise, reliance on Rule 14 which stipulates
that the member or his beneficiary shall not have any interest in the master
policy taken out in respect of the members in accordance with the Rules of the
Scheme but shall be entitled to superannuation benefits in accordance with the
Rules, has no applicability. The retired employees are not claiming any
interest in the master policy but are claiming right flowing from the annuity
purchased on their retirement.
The rights of the employees to receive the annuity and quantum of the
annuity get crystallized at the time of purchase of the annuity.
In Sasadhar Chakravarty & Anr. v. Union of India & Ors. [(1996) 11
SCC 1], the question arose as to when the right of employee to receive annuity
and the quantum thereof gets crystallized. In that case, the employer had set
up a non-contributory superannuation fund under the provisions of Income Tax
Act, 1961. On retirement, under the rules of the fund, the retired employee was
receiving an annuity under the policy purchased by the members of the fund from
LIC. A writ petition was filed by retired employee contending that certain improvements
have been effected in the executive staff fund to which the pensioners who had
already retired were entitled and denial thereof was arbitrary and violative of
Article 14 of the Constitution. The retired employee claimed right to the
larger benefits which though not available at the time of his retirement but
were being given to the employees who retired after the improvements to the
fund have been made. This Court held that the right of the employee to receive
an annuity and the quantum thereof get crystallized at the time of purchase of
the annuity under the then existing scheme of the LIC and any subsequent
improvements in a given pension fund scheme would not be available to those
persons whose rights are already crystallized under the scheme by which they
are governed because the amounts contributed by the employer in respect of such
persons are already withdrawn from pension fund to purchase the annuity. With
reference to Rules 85 and 89 of Income Tax Rules, this Court held that the same
are meant to safeguard the monies deposited in the superannuation and to secure
the annuitant annuity amount. Undoubtedly, Rule 89 requires the Trustee to
purchase an annuity from the LIC to the exclusion of any one else but this
provision must be judged in the context of the fact that the contracts of life
insurance which are entered into by the LIC are backed by a government
guarantee which is provided by Section 37 of the Life Insurance Act, 1956. The
Court observed right of an employee to receive the annuity and the quantum gets
determined at the time when the annuity is purchased. Any subsequent
improvement in a given pension fund will benefit only those whose moneys form
part of the pension fund. As soon as an employee retires, an annuity is
purchased for his benefit under Rule 89, there remains no scope for any fresh
contribution on his account so as to entitle him to an increased pension
prospectively on the basis of the improvements made subsequently in the pension
scheme of a fund since the existing pensioners form a distinct class.
The decision was sought to be distinguished on the ground that in the said
case, this Court was concerned with the scheme financed by the employer unlike
the present scheme where employer's contribution was almost nil and that it was
self-contributing scheme. We are, however, unable to accept this contention.
The ratio decidendi of the case is that the moment annuity is purchased, the
fund leaves the corpus and the relations between the two are snapped. The
corpus to the extent required for purchase of annuity leaves the trust fund and
all connections between trust fund and retirees are severed. Thus, once the
annuity is purchased, there remained no connection with the quantum of the
fund. Therefore, annuitants are in no way concerned with the financial position
of the fund for which annuity was purchased. They cannot be asked to further
contribute. That is the basic question in the present case. It matters little
that the present case is of reverse position inasmuch as in the case of
Sasadhar Chakravarty this Court was considering the case of a retired employee
who was seeking right in the improvement whereas in the present case the
question is about reducing the benefits or rights of the retired employees. The
question is about applicability of the principle.
Applying the principle in Sasadhar Chakravarty's case to the present case,
we have no doubt that after retirement retirees are not liable for any deficit
in the fund which is sought to be made good by recovery from them which is the
effect of retrospective amendment. Further, as already noted it was a benefit
and rolling scheme as opposed to a contributory scheme.
Neither clauses 32 and 33 or the Trust Deed nor Rule 14 has any
applicability on question of retrospective operation of amendment to the
retired employees. It has been admitted that the form of insurance annuity
policy with LIC was adopted as a result of mandate of the statute. Having done
that, the appellants are bound by the consequences flowing from purchase of
annuity. In view of what we have said above there is neither any substance in
the contention that contract was between LIC and the trustees nor is it of any
consequence in view of our conclusion that the amount, on retirement of
employees, leaves the fund for purchase of annuity and the rights of the
retirees are crystallized on their retirement by purchase of annuity and thus
no amount can be claimed from them by making applicable amendment dated 3rd
April, 2002 with retrospective effect. Therefore, we find no substance in the
The contention that there is no privity of contract between LIC and the
retired employees as contract for purchase of annuities is between trust and
LIC, has also no substance. In Chandulal Harjivandas v.
Commissioner of Income-tax, Gujarat [AIR 1967 SC 816] insurance policy was
purchased by the father of the assessee and the life assured was that of the
assessee. The claim of assessee for rebate of insurance premium under Section
15(1) of the Income Tax Act, 1922 was rejected.
On reference, the High Court upheld this view of the Revenue holding that
contract of insurance with LIC was entered into by the father of the assessee
and that the contracting parties were the father of the assessee and the LIC.
This court reversing decision of the High Court held that the contract of
insurance must be read as a whole; in substance it is a contract of life
insurance with regard to the life of the assessee and that the main intention
of the contract was the insurance on the life of the assessee and other clauses
are merely ancillary or subordinate to the main purpose, under Section 2 (11)
of the Insurance Act, the purchase of annuity amounts to purchase of an
insurance policy. It would make no difference, in the present case, as to who
made the payment.
The LIC having accepted the annuity and having effected monthly payments can
neither reduce the annuity amount nor refund it to the trust to the detriment
of the retirees since the annuity has already crystallized and no change can be
made in such annuity as stipulated by the impugned amendments. LIC has
obligation to fulfill the promise given by it to the retirees, who are assured
under the annuity scheme.
In Commissioner of Wealth Tax, Punjab, J & K, Chandigarh, Patiala v. Yuvraj
Amrinder Singh & Ors. [(1985) 4 SCC 608], it was held that annuities
dependent on human life constitute a species of contract of life insurance. In
Life Insurance Corporation of India & Ors. v. Asha Goel (Smt.) & Anr.
[(2001) 2 SCC 160], interpreting scope of Section 45 of the Insurance Act, 1938,
this Court laid down the parameters within which powers under Section 45 could
be exercised to repudiate the claim under a contract of insurance.
In our opinion, the view of the High Court is unassailable. In the result,
all appeals are dismissed.