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R.B. Shah Vs. the Commissioner of Income-tax, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T.R. No. 69 of 1966
Judge
Reported in(1976)5CTR(Bom)493
ActsIncome Tax Act, 1922 - Sections 16(1)
AppellantR.B. Shah
RespondentThe Commissioner of Income-tax, Bombay
Appellant AdvocateI.M. Munim, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
.....tax act, 1922 - whether entire income from property held under trust deed be included in total income of assessee under section 16 (1) (c) - trust deed provided 50% of income payable to settlor and balance 50% to be spent on maintenance, education, advancement and upbringing of brother and sister - as provisions of deed did not confer right to reassume power directly or indirectly over entire income or assets, deed cannot be regarded as revocable trust under section 16 (1) (c) - deed would be regarded revocable to extent of 50% of income payable to settlor - held, entire income of property held under trust not be included in total income of assessee. - section 31(4) (since repealed) :[tarun chatterjee & h.l.dattu, jj] jurisdiction of high court - respondent, a government company,..........16(1)(c), because the settlor had no right to reassume power directly or indirectly over the income or assets. it was contended that the proviso contemplated two stages, namely, creation of a settlement and subsequent commission of an act which would result in the reassumption of power over the income or assets of the trust and that in the instant case all that had happened was that the assessee had settled certain properties on trust and he had done nothing subsequently in order to get 50% of the income from the trust properties. relying upon this court's decision in the case of ramji keshavji vs . c.i.t., bombay, reported in : [1945]13itr105(bom) it was submitted that atleast 50% of the income from the trust properties should be excluded from the income of the assessee. on behalf.....
Judgment:

Tulzapurkar, J.

1. The question that has been referred to us for our opinion under section 66(1) of the Indian Income-tax Act, 1922 at the instance of the assessee runs as follows :-

'Whether on the facts and in the circumstances of the case, the entire income from property held under trust dated 3rd April, 1946, could be included in the total income of the assessee under section 16(1)(c) read with its first proviso ?'

2. The material facts giving rise to this question may briefly be stated. The question relates to the assessment year 1953-54 the corresponding previous year being the year ended 31st March 1953. The assessee R. B. Shah is an individual whose main 1946 the assessee settled certain properties worth Rs. 2 lakhs on certain trusts. The net income of the properties held under trust, after meeting the incidental expenses, was first to be paid fully to the assessee til his brother Virendra attained majority. After Virendra attained majority, 50% of the net income from the trust was to be paid to the assessee and 50% was to be utilised by the trustees for the maintenance, education, advancement and upbringing of Virendra and his sister Saroj until Saroj or got married, whichever was earlier, the balance of the income was to be paid to Virendra. There were further provisions about the disposal of the income and assets after the death of the assessee and Virendra, with which we rent concerned in this reference. Admittedly before the commencement of the year of account Virendra attained majority, with the result for the assessment year in question it was the second clause of the deed that was applicable, namely, 50% of the net income from the trust was to be paid to the assessee and 50% was to be utilised for the maintenance, education, advancement and upbringing of Virendra and his sister Saroj.

3. Before the Income-tax Officer the assessee contended that the income from the property held under trust was liable to be taxed in the hands of an association of persons and not in his own hands. The Income-tax Officer did not accept this contention and included the whole of the income from the properties settled upon trust in the total income of the assessee. The matter was carried in appeal to the Appellate Assistant Commissioner, who confirmed the inclusion of the full income from the trust properties in the assessee's total income. He did so on the ground that the settlement came within the extended meaning of 'revocable transfer' as specified in the first proviso to section 16(1)(c). He took the view that the provision in the trust deed whereby the assessee as the settlor had made himself eligible for atleast 50% of the income form the trust properties clearly brought the settlement within the scope of the first proviso as also the third proviso. The assessee carried the matter further in second appeal to the Appellate Tribunal. It was contended on behalf of the assessee before the Appellate Tribunal that the settlement did not come within the first proviso to section 16(1)(c), because the settlor had no right to reassume power directly or indirectly over the income or assets. It was contended that the proviso contemplated two stages, namely, creation of a settlement and subsequent commission of an act which would result in the reassumption of power over the income or assets of the trust and that in the instant case all that had happened was that the assessee had settled certain properties on trust and he had done nothing subsequently in order to get 50% of the income from the trust properties. Relying upon this Court's decision in the case of Ramji Keshavji vs . C.I.T., Bombay, reported in : [1945]13ITR105(Bom) it was submitted that atleast 50% of the income from the trust properties should be excluded from the income of the assessee. On behalf of the Department it was urged that the decision in : [1945]13ITR105(Bom) was not at all relevant to the point at issue it was clear from the provisions of the trust deed that immediately on attainment of majority by Virendra the assessee became entitled to half the income from the trust properties and as such the trust was deemed to be a revocable trust falling within the first proviso to section 16(1)(c). The Tribunal dismissed the appeal and while doing so took the view that the settlement dated 3rd April, 1946 must be deemed to be revocable because it contained a provision for the re-transfer of the income of the trust properties to the assessee or it gave him a right to reassume power over the income of the trust properties. IT further held that no doubt in the beginning the assessee could take over the whole income and subsequently he could take over half the income, but the extent of the income over which the assessee had a right was not material, the decisive thing being the provision in the settlement to transfer the assets which made it possible for the assessee to secure a part of the whole of the income from the properties transferred to the Trust. As is stated above it is at the instance of the assessee that the aforementioned question has been referred to us for our opinion.

4. It would be necessary to consider the material portion of the trust deed dated 3rd April, 1946 as also relevant provision of the enactment which is to be found in section 16(1)(c) and the first proviso thereto. The material operative part of the trust deed is to be found in clause 2 of the deed which runs thus :

'2. The Trustees shall form time to time realise, collect, get in and recover the interest and income and other profits of the trust fund and out of the interest, income and other profits (hereinafter referred to as the income) to be realised etc., as aforesaid, the Trustees shall from time to time in the first instance pay and discharge all cost, charges and expenses incurred in or in relation to the recovery and realisation and (or execution management and administration of the trusts and then pay the balance of the said income (hereinafter for brevity's sake called the net income) to the Settlor until the attainment of the age of majority of the raid Virendra and on and after the attainment of the age of majority of the said Virendra shall pay 50 per cent of the said net income to the Settlor during his life time and the balance, namely 50 per cent of the said income shall be utilised by the Trustees for the maintenance, education, advancement and upbringing of the said Virendra and the said Saroj until the attainment of the age of majority of the said Saroj or until her marriage whichever event shall first happen and upon the happening of the said event, the Trustees shall pay the balance of 50 per cent of the said net income to the said Virendra during his life time .....'

The aforesaid provision which is to be found in the trust dated makes two things very clear. In the first place, the net income of the trust properties, after deducting the expenses of management etc., is to be paid fully to the settlor until the attainment of the age of majority by his brother Virendra. Secondly even after the attainments of the age of majority by his brother Virendra, the trustees are directed to pay 50% of the net income to the settlor during his life time and the balance of 50% is to be utilised for the maintenance, education advancement and upbringing of Virendra and his sister Saroj till the sister either attains the age of majority or gets married whichever event happens first and after the happening of that event the trustees are required to pay the balance of 50% of the net income to the said Virendra during of majority even before the commencement of the year of account, it would be the second part of the aforesaid disposition that would be applicable, namely, 50% of the income was payable to the settlor and the balance of 50% was to be spent on the maintenance, education, advancement and upbringing of Virendra and Saroj. The question is whether under the provisions of section 16(1)(c), 1st proviso, of the Income-tax Act, 1922 the aforesaid trust deed containing the aforesaid material provision amounts to a revocable trust or not.

5. Section 16 (1)(c) and the 1st proviso thereto are as follows :-

'16 (1) In computing the total income of an assessee -

x x x x x(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor :

Provided that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets.'

By reason of the particular provision which is to be found in clause 2 of the deed of trust dated 3rd April, 1946, namely, that on attainment of the age of majority by Virendra the trustees being directed to pay 50% of the net income to the settlor during his life time and the balance being directed to be spent by the trustees for the maintenance, education, advancement and upbringing of Virendra and his sister Saroj the taxing authorities as well as the Tribunal took the view that this trust deed will have to be regarded as a revocable trust within the first proviso to section 16(1)(c) of the Act and therefore the entire income from the trust properties has been directed to be assessed in the hands of the assessee.

6. Mr. Munim appearing for the assessee has contended before us that in a case where by reason of the provisions contained in the deed of settlement itself, any part of the income of the trust properties is made available to the settlor it would not be a case where the deed would be containing a provision for the transfer directly or indirectly of income to the settlor or a provision going the settlor a right to reassume power directly or indirectly over the income or assets. His contention has been that the re-transfer directly or indirectly of the income or assets to the settlor must be as a result of an over tact - over tact being the exercise of a power reserved to the settlor whereby a right to reassume power directly or indirectly over the income or assets is vested in the settlor. Secondly, he contended that unless the provisions of the deed conferred a right to reassume power directly or indirectly over the entire income or assets, the deed cannot be regarded as a revocable trust falling within the first proviso to section 16(1)(c) of the Act. In any event he urged that, if at all, the deed would be regarded as revocable only to the extent of 50% of the income and not a revocable deed to the extent of 505 of the income which was to be utilised by the trustees for the maintenance, education, advancement and upbringing of Virendra and his sister Saroj and as such the entire income from the trust properties could not be directed to be included in the assessee's income. In support of his contention he relied upon the two decisions of the Supreme Court, one in the case of Commissioner of Income-tax, Punjab vs . S. Raghbir Singh, reported in : [1965]57ITR408(SC) and the other in the case of Hrishikesh Ganguly vs . Commissioner of Income-tax, Calcutta, reported in : [1971]82ITR160(SC) .

7. On the other hand, Mr. Joshi appearing for the Revenue has contended before us that the first proviso to section 16 (1)(c) contains two clauses which are disjunctive and so far as the first clause is concerned there is no question of retransfer of the income or assets to the settlor taking place by virtue of a right to re-assume the power directly or indirectly over the income or assets being reserved to the settlor under the deed. According to him under the first proviso to section 16(1)(c) a settlement is deemed to be revocable if (i) it contained any provision for the retransfer directly or indirectly of the income or assets to the settlor or (ii) in any way it gives the settlor a right to reassume power directly or indirectly over the income or assets. He urged that the two clauses being disjunctive there was no question of any over tact being required to be performed by the settlor such as exercise of right to reassume power directly or indirectly over the income or assets reserved to him if the case could squarely fall under the first clause and he urged that since in the instant case the relevant provision contained in clause 2 of the deed itself provided for retransfer of 50% of the net income to the settlor after attainment of the age of majority by Virendra, the case was covered by the first clause in the first proviso and the deed must be regarded as a revocable settlement or a revocable trust. He derived support to his said contention by referring to the third proviso under which it has been provided that clause (c) shall not apply to any income arising to any person by virtue of a settlement which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him. He pointed out that the third proviso uses the expression 'this clause shall not apply to any income arising to any person by virtue of a settlement and according to him this shows that the first clause in the first proviso would be applicable whereby reason of certain provisions contained in the deed itself the settlor derives some income from the trust properties for himself. In support of his contention he relied upon a decision of the Madhya Pradesh High Court in the case of Smt. Gulabbai vs . Commissioner of Income-tax, M.P. reported in : [1968]69ITR238(MP) .

8. On the plain language of clause (c) of section 16(1) and the first proviso thereof we do find considerable force in the contention urged by Mr. Joshi before us and the decision in : [1968]69ITR238(MP) undoubtedly support him. In that case the assessee created a trust of his properties under which the income of the properties, after deducting certain expenses, was to be distributed in a certain manner, namely, four annas share of the income was to be given to the assessee (the settlor) and his wife for their lifetime, four annas share was to be given to each of his two daughters and the remaining four annas share was to be spent on charities. The Income-tax Officer held that the settlement was a 'revocable' one in view of the first proviso to section 16(1)(c) of the Act and as such the whole of the income from the said property, except that devoted to charity, was assessable in the hands of the assessee. The A.A.C. held that as the trust deed did not provide for the return of the whole of the income to the settlor, the three-fourths income was outside the first proviso to section 16(1)(c) and was not assessable as the settlor's income. The Tribunal held that under section 16(1)(c) if in a settlement there was an arrangement for the settlor to get any part of the income for those assets, the transfer becomes revocable and all income (even income accruing to others) from the assets covered by the settlement became includible in the income of the settlor. On a reference to the High Court the Madhya Pradesh High Court agreed with the view of the Tribunal that the trust was a 'revocable' one within the meaning of section 16(1)(c) read with the first proviso thereto and as the third proviso thereto did not come into operation the three fourths of the income of the said trust (i.e., the whole income minus that devoted to charity) could be included int eh total income of the assessee.

9. However, there are two decisions of the Supreme Court to which our attention was invited by Mr. Munim which on interpretation of the language of clause (c) of section 16(1) and the first proviso thereto have taken a different view. The first decision is S. Raghbir Singh's case reported in : [1965]57ITR408(SC) . The facts as they appear from the head-note were these : The respondent was allotted, besides other properties, 400 shares in a company in the partition of the joint Hindu Family of which he was a member, and was also made liable to pay a business debt of the family amounting to Rs. 3,19,875/-. Shortly thereafter, he created an irrevocable trust in respect of 300 of those shares to pay off the debt out of the income of the trust, and after the discharge of the debt, to apply 80 per cent of the income for the maintenance of his children and grand-children and the balance at the discretion of the trustees on any of the other objects specified in the trust deed. The Supreme Court took the view that the provision for the application of the time for the satisfaction of debts which the respondent was under an obligation to discharge, did into amount to provision for re-transfer of the income or assets to the respondent, or to this being invested with power to reassume the income or assets; that the assets and the income were unmistakably impressed with the obligations arising out of the trust deed. The Court further held that the settlor, the respondent, did obtain a benefit from the trust but on that account the first proviso to section 16(1)(c) of the Act was not attracted and the income from the shares could not be deemed to be the respondent's income or included in his total income. At p. 413 the Supreme Court was observed thus :

The terms of section 16(1)(c), first proviso, are reasonably plain. A settlement or disposition is deemed to be statutory revocable if there is a provision therein for retransfer of the income or assets or which confers a right to reassume power over the income or assets. The provision may even be for retransfer indirectly or for conferring power to reassume indirectly over the income or the assets. But the actual transfer or exercise of the power to reassume is not necessary; if there be a provision of the nature contemplated, the proviso operates.'

The effect of the relevant provision contained in the deed was expressed by the Court thus at p. 414 :

'But the income from the shares since the execution of the deed of settlement arises' 'to the trustees and it is liable to be applied for the purposes mentioned in the deed. The income has to be applied for satisfaction of debts which the settle was under an obligation to discharge, but that it not to say that there is a provision for retransfer of the income or assets to the settlor, or that the settlor is invested with power to reassume the income or assets. The assets and the income are unmistakably impressed with the obligations arising out of the deed or trust. The settlor, it is true, obtains a benefit from the trust consequent upon satisfaction of his liability, but on that account the first proviso is not attracted.

We are unable to accept the arguments of counsel for the revenue that by the use of the expression 'indirectly' in the first proviso the legislature sought to bring within the purview of clause (c) cases where the settlor was under the guise of a trust seeking to discharge his own liability. The proviso contemplates cases in which there is provision for retransfer of the income or assets and such provision is for 'retransfer' directly or indirectly. It also contemplates cases where there is a provision which confers a right upon the settlor to reassume power over the income or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within the first proviso. Cases in which there is a settlement, but there is no provision in the settlement for retransfer to right to reassume power do not fall within the proviso, even if as a result of the settlement, The settlor a benefit.'

It will thus appear clear from the aforesaid decision and the relevant observations which we have quoted above that in cases where even if as a result of the provision contained in the settlement the settlor obtains a benefit but where there is no provision for retransfer or a right to reassume power, these do not fall within the first proviso to section 16(1)(c) of the Act. We do not think that having regard to the ratio so laid down by the Supreme Court in the above decision distinction could be made between a case where by reason of the provision contained in the settlement the settlor obtains a benefit by way of getting his indebtedness liquidated and the case where the settlor by reason of the provision of the settlement obtains a benefit by way of payment of income of the trust property to himself and if no such distinction is possible, the present case would be covered by the ratio of the Supreme Court.

10. The second decision in the case of Hrishikesh Ganguly vs . commissioner of Income-tax, Calcutta, reported in : [1971]82ITR160(SC) , on which, Mr. Munim, Counsel for assessee, has relied, in our view, goes a step further, in that the concept of revocability of settlement or a trust in regard only to a part of the income has been considered by the Court. In that case the assessee created a trust in respect of two houses belonging to him and provided in the trust deed that the trustees shall pay a sum of Rs. 200/- per month to him for life for his own absolute use and benefit out of the income of the trust estate remaining after payment of taxes. The total annual income of the trust properties came to over Rs. 19,000/-. The question was whether the entire income from the two houses was assessable in the hands of the assessee on the ground that the trust was revocable within the meaning of section 16(1)(c) of the Act, and Court held that the trust as a whole did not come within the mischief of s. 16(1)(c); revocability related only to a part of the income and only that part of the income which accrued to or was received by the assessee under the trust could be assessed as his income and the income accruing to the other beneficiaries could not be included in the total income. The Court has further held that where a settlement or disposition contains a provision for the retransfer of only a part of the settlement or disposition, to the settlor, the effect of the third proviso to section 16(1)(c) of the Act is not to render the whole of the income from the settlement chargeable in his hands provided the other provisions contained in the proviso are satisfied. In other words, the proviso comes to the rescue of the settlor in that the portion of the income from the trust properties which are settled on a third person is to be assessed in the hands of that third person and not in the hands of the settlor if the latter does not retain any power to deflect that sum for a period exceeding six years or during the lifetime of the donee. Thus the settlement as a whole will not come within the mischief of section 16(1)(c) if the revocability relates only to a part of the income. It must, however, be observed that on the facts of the case which obtained there the provision in the deed, which enabled the settlor to get a sum of Rs. 200/- per month for life for his absolute use and benefit out of the income of the trust estate was regarded is a provision amounting to a provision for re-transfer of the income to the settlor. Since the question raised before us is not res integra and is covered by the two decisions of the Supreme Court on which reliance has been placed by Mr. Munim and since the two decisions on which he has relied do support his contention, we are of the view that those decisions being binding on us the question will have to be answered in favour of the assessee. The question is, therefore, answered thus :

On the facts and in the circumstances of the case, the entire income of the property held under trust dated 3rd April, 1946 cannot be included in the total income of the assessee under section 16(1)(c), read with its first proviso, but 50% of the net income from the trust property during the relevant accounting year is liable to be included in the total income of the assessee under the said provision.

11. There will be no order as to costs.


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