Full Judgment Text
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CASE NO.:
Appeal (civil) 4267 of 2003
PETITIONER:
All India Employees Self Contributory Superannuation Pension Scheme
RESPONDENT:
Kuriakose V. Cherian & Ors.
DATE OF JUDGMENT: 03/10/2005
BENCH:
Y.K.Sabharwal & Tarun Chatterjee
JUDGMENT:
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 Rules.
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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 contributing members.
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.
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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 amendment.
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 existing employees.
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
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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 Schedule.
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 retirement.
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
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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 work.
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 Scheme.
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
thus:
"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 Fund\027The 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.
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26.Provisioins of Benefit\027The 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\027(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 thereof.
(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\027 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 Benefits\027Notwithstanding
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:
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(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 annum.
(5) Total number of members of the Scheme at
any given time would remain constant i.e.
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
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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
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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 installments.
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 benefit\027a
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 assets.
However, the pension depends entirely on the
asset performance of accumulated contributions.
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
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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
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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 Fund.
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
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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
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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 second contention.
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.