Sasadhar
Chakravarty & Anr Vs. Union of India
& Ors [1996] INSC 1385 (4 November 1996)
A.M.
Ahmadi, K.S. Paripoornan, Sujata V. Manohar Mrs Sujata V. Manohar, J.
ACT:
HEAD NOTE:
The
first petitioner in this writ petition was an employee of M/s Indian Oxygen
Limited. He retired from service at the end of March, 1980 on attaining the age
of superannuation. Indian Oxygen Ltd. has set up a non- contributory
superannuation fund known as the Indian Oxygen Ltd. Staff Pension Fund. It is a
noncontributory approved superannuation fund set up under the provisions of the
Income-Tax Act, 1961. On retirement, under the rules of the fund, the first
petitioner is receiving an annuity under a policy purchased by the trustees of
the Fund from the Life Insurance Corporation of India. The second petitioner is a society registered under the
West Bengal Societies Registration Act, 1961. Its membership constists of
pensioners of various non-contributory approved superannuation funds.
Petitioner No.1 is the Secretary of the Association.
It is
the contention of the petitioners that certain improvements which have been
effected in the executive staff pension fund of Indian Oxygen Ltd. in 1985
should be made available to the existing pensioners of the Indian Oxygen Ltd.
and that the denial of the benefits of such an improvement to the existing
pensioners of the said fund is arbitrary and violative of Article 1 of the
Constitution.
The
petitioners have also challenged Clause ll(cc) of Part B of schedule IV of the
Income Tax Act, 1961 as conferring an unguided power to the Board to frame
rules. They have also challenged Rules 89 and 91 of the Income Tax Rules, 1962
as arbitrary and violative of Article 14. The petitioners have also alleged
that these rules suffer from the vice of excessive delegation. They have
further submitted that the appropriation of the purchase price of annuities
after the death of the annuitant/pensioner by the Life Insurance Corporation of
India (respondent No.4) is ultra vires
Clause 3 of Part B of Schedule IV of the Income Tax Act, 1961 and constitutes
an arbitrary or excessive use of power. The petitioners have contended that the
scheme of such noncontributory approved superannuation funds should be modified
so as to provide for disbursement of pension by the funds themselves or in the
alternative by a statutory body to be newly constituted under a new scheme.
Under
Section 2(6) of the Income Tax Act, 1961, an approved superannuation fund has
been defined to mean a superannuation fund or any part of a superannuation fund
which has been and continues to be approved by the Commissioner in accordance
with the rules contained in Part B of the fourth Schedule. Under Section 36(1)
of the Income- tax Act, 1961, deductions as provided in that sub-section shall
be allowed in respect of the matters dealt with therein in computing the income
of an assessee. Clause (iv) of sub-section (1) of Section 36 grants such
deduction, inter alia, in respect of any sum paid by the assessee as an
employer by way of contribution towards an approved superannuation fund subject
to such limits as may be prescribed for approving the superannuation fund and
subject to such conditions as the Board may think fit to specify as set out
therein. Therefore, any amount paid by an employer by way of contribution
towards, inter alia, an approved superannuation fund, subject to such limits as
may be prescribed is deductible in computing the income of the assessee
employer.
Part B
of Schedule IV of the Income-Tax Act, 1961 deals with approved superannuation
funds. Under Clause 3 of Part 8, in order that a superannuation fund may
receive and retain approval, it shall satisfy the conditions set out in the
said clause as well as any other conditions which the Board may, by rules,
prescribe. Under clause 3 one of the conditions is to the effect that the fund
shall be a fund established under an irrevocable trust in connection with a
trade or undertaking carried on in India. Another condition so prescribed is that the 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
dependants of persons who are or have been such employes on the death of those
persons. Contributions in respect of each employee are required to made by the
employer or the fund so set up.
The
trustees of the superannuation fund are required to make an application to the
Assessing Officer for approval of the fund under Clause 4 of the said Part B.
Clause 11 deals with the rule making power of the Board. Clause, 11(cc)
empowers the Board to make rules for regulating the investment or deposit of
the moneys of an approved superannuation fund.
Part
XIII of the Income-Tax Rules, 1962 covering Rules 82 to 97 and dealing with
Approved Superannuation Funds is framed in exercise of the powers conferred,
inter alia, under clause 11 (cc) of Part B of Schedule IV. Under Rule 85 of the
Income-Tax Rules, 1962 all moneys 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 any scheduled bank or utilised
in accordance with Rule 89 for making payments 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 twenty-five per cent of his salary for each year as
reduced by the employer's contribution, if any, to any provident fund (whether recognised
or not) in respect of the same employee for that year. Rule 89 provides as
follows:
Rule
89.
"Scheme
of insurance or annuity.
For
the purpose of providing the annuities for the beneficiaries, the trustees
shall - (i) enter into a scheme of insurance with the Life Insurance
Corporation established under the Life Insurance Corporation Act, 1956 (31 of
1956), or (ii) accumulate the contributions in respect of each beneficiary and
purchase an annuity from the said Life Insurance Corporation of India at the
time of the retirement or death of each employee or on his becoming
incapacitated prior to retirement." Rule 91 is as follows:
"Beneficiary
not to have any interest in insurance and employer not have any interest in
funds moneys.
(1) No
beneficiary shall have any interest in any insurance policy taken out by the
trustees under the rules of a fund and he shall be entitled only to an annuity
from the fund.
(2) No
money belonging to the fund shall be receivable by the employer under any
circumstances nor shall the employer have any lien or charge on the fund."
Under the Indian Oxygen Executive Staff Pension Fund which is an approved
superannuation fund as per the above provisions, for the purpose of providing
annuities to the beneficiaries, the trustees accumulate the contribution in
respect of each beneficiary and purchase an annuity from the Life Insurance
Corporation of India at the time of retirement or death of each employee or on
his become incapacitated prior to retirement as per Rule 89(ii) Therefore, when
an employee retires, all accumulated contributions in respect of the concerned
employee made by the employer to the pension fund of the trust are utilised for
the purpose of purchasing an annuity from the Life Insurance Corporation of
India for the benefit of the employee. The right of the employee to receive the
annuity and the quantum of this annuity get crystalised at the time of purchase
of the annuity under hen existing scheme of the Life Insurance Corporation of India. This annuity is payable for a
minimum fixed period and thereafter as long as the recepient is alive. The Life
Insurance Corporation of India Ltd. in its affidavit has set out that it is the
common to provide that the annuity would be payable for a selected number of
years irrespective of whether the annuitant is alive or not. At the end of the
selected number of years if the annuitant is alive, the annuity is Continued
throughout the life-time of the annuitant.
Rules
85 and 89 are meant to safeguard the moneys deposited in the superannuation
fund and to secure to the annuitant the annuity amount. Undoubtedly, Rule 89
requires the trustees to purchase an annuity from the Life Insurance Corporation
of India to the exclusion of anyone 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 Life Insurance Corporation of
India are backed by a government guarantee which is provided by Section 37 of
the Life Insurance Corporation Act, 1956. The payment of annuity is thus
properly secured.
The
petitioners contend that any improvements made in the existing pension scheme
after the retirement of the employees should also be made available to such
retired employees who are the existing pensioners of the Fund. The denial of
the benefit of such improvements in the pension schemes to the existing
pensioners is ultra vires Articles 14, 19, 21. 31 and 300A of the Constitution
of India. This contention is based on a
misunderstanding of the nature of the annuity which is purchased in respect of
each employee as and when he retires. The right of an employee to receive the
annuity and the quantum of this annuity gets determined at the time when the
annuity is purchased. Any subsequent improvements in a given Pension Fund
scheme would not be available to those persons whose rights are already crystalised
under the annuity scheme by which they are governed because the amounts
contributed by the employer in respect of such persons are already withdrawn
from the Pension Fund to purchase an annuity. Any subsequent improvement in the
Pension Fund will benefit only those whose moneys form a part of the Pension
Fund.
As
regards the improvements made in the Indian Oxygen Limited Executive Staff
Pension Fund Scheme in 1585, the trustees of the said fund in their affidavit
have explained that an improvement in the pension scheme of an approved
superannuation fund is effected on the basis of the fund's financial position
as determined by actuarial valuation based on current resources of the fund and
future contributions to be received by the fund only in respect of the existing
members in service. An employer cannot make tax deductible contributions to the
fund in respect of its past employees. Therefore, there is no scope for
augmenting the resources of the fund to meet any obligation that may arise on
account of extending the benefit of improvement to the past employees who are
existing pensioners. The amounts contributed in regard to such existing
pensioners have already been transferred from the corpus of the fund to the
Life Insurance Corporation of India for the
purpose of purchasing an annuity. Hence there is no accretion coming to the
said fund from out of the transferred corpus relating to such existing
pensioners. Hence the improvements which are determined by actuarial valuation
based on the current resources of the fund and its future expectations cannot
be made available to the existing pensioners.
In
these circumstances the ratio of D.S. Nakara & Ors. v. Union of India (AIR
1983 SC 130) cannot be applied to extend the benefit of improvement in the
pension schemes of such funds to the existing pensioners. By the very nature of
this scheme, such benefits are available only to members in service. In the
present case, the Pension Fund is created out of contributions made by the
employer in respect of its employees who are in service in the manner provided
under the Income-Tax Act and the Rules. The contribution is in the form of a
fixed percentage of salary of each of the employees. There is, therefore, no
provision for an employer making any additional payment in respect of its past
employees who are the existing pensioners. In Nakara's case (supra) the
increase in pension could ba met from the general revenue of the Central
Government. No such reserve of funds is available to the trustees of an
approved superannuation fund. As soon as an employee retires and 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 improvements made subsequently in the pension
scheme of a fund. Since the existing pensioners form a distinct class, there is
no question of any violation of Article 14 in this connection or of any other
Article of the Constitution.
The
Life Insurance Corporation of India in its
affidavit has pointed out that with effect from 1.4.1985 the Corporation
decided to increase the pensions payable under their annuity scheme. They
decided to make this increase available not only to new pensionrers but also to
the annuities which were in the course of payment. Accordingly, the first
petitioner's pension under his existing annuity policies was increased with
effect from 1.4.1985. This decision of the Life Insurance Corporation to
enhance the pension was only with a view to grant relief to the existing
pensioners and was not based on any contractual obligation of the Corporation.
The Corporation has further pointed out in its affidavit that it has now
introduced a new annuity scheme. An option has been given to the existing
members to switch over to the new scheme. Under the new option available to the
pensioners the value of the outstanding instalments is determined and the same
is applied in the purchase of an annuity. Such annuity would be payable during
the lifetime of the annuitant and the value of the outstanding instalments is
returned to the annuitant's nominee on his death. The benefit of changing over
to the new scheme is thus made available to the existing pensioners also. There
is, therefore, no discrimination in this regard as against the existing
pensioners.
The
petitioners contend that Clause 11(cc) of Part B of Schedule IV of the
Income-Tax Act. 1961 and Rules 85 and 91 of the Income-Tax Rules, 1962 which
are framed under the rule-making power conferred by Clause 11(cc) are an
arbitrary and uncanalised exercise of power and are, therefore, violative of
Articles 14 and 19(1)(g) of the Constitution. Now, the entire scheme of
approved superanuation funds is so framed as to ensure safety of the Fund so
that the beneficiaries are assured of an annuity for the requisite period.
Hence under Part B of Schedule IV of the Income-Tax Act the approved
superannuation funds require the approval of the Chief Commissioner or the
Commissioner of Income-tax. The purpose of such approval is clearly to ensure
that the fund is established under an irrevocable trust for the benefit of the
employees of any establishment or undertaking and to ensure that the fund shall
have for its sole purpose provision of annuities for the employees on their
retirement or on their becoming incapaciated or in the event of their death for
the benefit of their dependants. It is necessary that the funds should be
invested in a manner which secures them over a period of time for this purpose.
Clause
11 (1)(cc) gives to the Board the power to make rules for the purpose of
regulating the investment or deposit of moneys of an approved superannuation
fund. This cannot be called as an arbitrary conferment of power on the Board.
By the very nature of the scheme as framed, the purpose of regulating
investment of the trust funds is to ensure their safety.
In
pursuance of this rule-making power Rule 89 is framed. Under Rule 89, for the
purpose of providing annuities for the beneficiaries, the trustees of a
superannuation fund are required either to enter into a scheme of insurance
with the Life Insurance Corporation of India or they have the option to
accumulate the contributions in respect of each beneficiary and purchase an
annuity from the Life Insurance Corporation of India at the time of the
retirement or death of each employee or on his becoming incapacitated prior to
retirement. The annuity is purchased from the accumulated contributions made in
respect of each beneficiary which are a part of the approved superannuation
fund. The petitioners have contended that the trustees of the superannuation fund
should not be compelled to purchase an annuity from the Life Insurance
Corporation of India and that the investment of the contribution in respect of
each beneficiary could be made in another manner which would fetch to the
beneficiary a higher return. It is however, pointed out by the Life Insurance
Corporation that the secruity which is provided by purchasing an annuity from
the Life Insurance Corporation of India is not comparable to other kinds of
investments because all contracts of insurance entered into by the Life
Insurance Corporation are backed by a government guarantee which is provided by
Section 37 of the Life Insurance Corporation Act, 1956.
Therefore,
from the point of view of safety and security of the moneys of the
superannuation fund, an investment in an annuity through the Life Insurance
Corporation of India provides valuable security to a
beneficiary. By ensuring that the investment is made in a manner which ensures
the safety of the Fund and the payment of an annuity the Board has ensured that
the Fund is not misutilised or the pensioner is not deprived of his annuity. of
course, it is possible to envisage other types of schemes and other types of
investments, which may have varying safety and different returns. But that does
not mean that Rule 89 is arbitrary or unreasonable. The entire scheme is framed
on the basis of relevant considarations and cannot be called unreasonable or
arbitrary.
Rule
91 provides that the beneficiary shall not have any interest in any insurance
policy taken out by the trustees under the rules of a fund and he shall be
entitled only to the annuity. It is contended by the petitioners that the Life
Insurance Corproation appropriate, the capital purchase price on the death of
the annuitant and this amounts to an unjust enrichment of the Life Insurance
Corporation at the cost of the beneficiary. The submission is based on a
misconception of the manner in which annuity is calculated. The annual instalment
does not consist only of the interest which is earned on the capital used for
the purchase of annuity. The annual instalment contains an element both of
interest as also a part of the capital so that over a period of years as
actuarially calculated, the entire capital and the interest earned thereon are utilised
for the payment of annuities to the beneficiary. Secondly, the Life Insurance
Corporation has introduced a new annuity scheme under which an option has been
given to the existing members to switch over to the new scheme. As per the new
option available to the pensioners the value of outstanding instalments is
determined and this is used for the purchase of an annuity. This new annuity
would be payable during the life time of the beneficiary and the value of the
outstanding instalments is returned to the beneficiary's nominee on his death.
The petitioners have the option to switch over to this new scheme in respect of
their outstanding instalments. Therefore, in any event there can be no question
of the L.I.C. appropriating the capital purchase price of an annuity on the
death of the annuitant.
Rule
91, therefore, in any event, cannot be considered as giving any unjust gains to
the Life Insurance Corporation of India.
Moreover,
under sub-clause (2) of Clause 11, all rules which are made under Clause 11 are
subject to the provisions of Section 296. Section 296 provides that the General
Government shall cause every rule made under this Act to be laid as soon as may
be after the rule is made before each House of Parliament while it is in
session for a total period of thirty days, and the rule shall, thereafter, have
effect only in such modified form as Parliament may suggest, or if it so
decides, may be of no effect, or may be brought into effect without prejudice
to the validity of anything previously done under the rule. This also is an
important check on any arbitrary exercise of rule-making power under Clause 11.
Hence,
the challenge to these rules and to Clause 11 (cc) has no substance.
The
petitioners have also raised some objections to the changes made in the Indian
Oxygen Limited Executive staff Pension Fund in 1984 and 1985. the definition of
"salary" under the old Pension Fund Rules of Indian Oxygen Ltd. did
not include commission payable to whole-time Directors.
However,
by a Deed of Variation dated 9.1.84 the definition of "salary" has
been changed. "Salary" has been defined to mean the basic salary of a
member and to have the same meaning as defined in Rule 2(h) of Part A of the
Fourth Schedule to the Income Tax Act, 1961. In the case of a whole-time Director.
"salary" now also includes the commission on net profits payable to
the Director provided that such commission is a part and parcel of the
remuneration of the whole-time Director according to the terms of his
appointment as approved by the Central Govt. under the Companies Act. The
petitioners object to the commission being included in the salary of a
whole-time Director as now defined. This change has been made in the light of a
decision of this Court in the case of Gestetnet Duplicators P. Ltd. v.
Commissioner of Income Tax, West Bengal (117 ITR page 1) where this Court has
held that the commission payable as per the terms of a contract of employment
at a fixed percentage of turnover falls within the term "salary" as
defined in Rule 2(h) of Part A of the Fourth Schedule to the Income-Tax Act,
1961. The change in the definition is in accordance with the meaning assigned
to "salary" under Rule 2(h). The question of any discrimination on
this score does not arise. In any case, the petitioners who retired prior to
1984 are in no way affected by this change.
The
approved superannuation fund is set up only from the contributions made by the
employer who is given certain tax benefits in order to encourage the setting up
of such superannuation funds. We do not see any reason to strike down any part
of the scheme for such a superannuation fund prescribed under the Income-Tax
Acts 1961 and the Income- Tax Rules, 1962. The petition is therefore,
dismissed. In the circumstances, there will be no order as to costs.
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