1. This is one of those rare cases where the Taxing Department has misfired, and the facts are very simple. Laxmidas Khatau, who is being assessed to tax through his legal representative, made a trust deed on the 18th January, 1948, and briefly the provisions of the trust deed are that he settled a sum of about Rs. 6 lakhs in trust for his wife and his son. The income was to go to both the wife and the son, after his wife to the son, and after the son to his wife and children, and if he did nor leave any wife or issue then it was to go to charity. There is a provision in this trust deed that the trustees are authorised to lend moneys to any of the trustees and the settlor was one of the trustees - and the trust deed also provides that the settlor would have an overriding vote in case of difference of opinion between the trustees, and therefore it seems to be the position that it would be open to the settlor by his overriding vote to get the trustees to lend trust moneys to him; and the Tribunal as a matter of fact finds that this did happen after the trust was executed. But the Tribunal took the view that this particular provision constituted as direct or indirect benefit to the settlor and their case was that the case fell under the third proviso to section 16 (1) (c) and therefore the income from this trust was liable to tax in the hands of the settlor.
2. Now, before the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal, emphasis was placed by the Department upon the third proviso and the Tribunal's finding also is that the case falls under the third proviso of section 16 (1) (c). What was completely overlooked was the proper interpretation of clause (c) of section 16 (1). The first part of clause (c) deals with a trust which is either revocable or not revocable, and the second part deals with a revocable trust, and the first proviso introduces a legal fiction and constitutes what is an irrevocable trust in fact into a revocable trust for the purpose of this clause. The third proviso deals with revocable trusts and it is in favour of the assessee that although the trust is revocable and although it falls in the second part of clause (c), if it is not revocable for a period exceeding six years then clause (c) would not apply to such a trust. But the assessee would be prevented from taking advantage of the third proviso if it is shown that the settlor derives any direct of indirect benefit. Therefore, it is clear that it is for the assessee to claim protection of the third proviso it would be for the Department to satisfy the Tribunal that he is not entitle to that protection because he derives direct or indirect benefit. But as far as the Department is concerned, it must bring the case within clause (c) itself. Here we have a trust which is on the fact of it irrevocable, no power or revocation is reserved to the settlor, and it is conceded that the case of the Department does not fall under the first part of clause (c) but it falls under the second part of clause (c). Now, the second part of clause (c) only applies to revocable trusts, it does not apply to irrevocable trusts, and therefore in order to succeed the Department must bring the case within the first proviso of clause (c) so as to convert an irrevocable trust into a revocable trust by a legal fiction. In order to convert what in fact is an irrevocable trust into revocable trust it must satisfy the condition laid down in the first proviso, but strangely enough no attempt whatsoever has been made by the Department to bring the case within the first proviso of section 16 (1) (c). At no stage has the Department contended that what is in fact an irrevocable trust has became revocable by the legal fiction introduced by the first proviso. Through some in misunderstanding, which it is difficulty to understand, the Department has all the time urged that the case fell under the third proviso. As we have already pointed our, the third proviso would only apply if we were dealing with a revocable trust and where the assessee contended that the revocation being beyond six years he came within the exemption. But how the Department can claim to come under the third proviso it is difficult to understand. Whatever the position might be as the Department had not tried to bring this case under the first proviso as the matter stands we cannot decide this reference on the presumption that the first proviso applies. If the first proviso does not apply, then it is clear that this being an irrevocable trust it does not fall under the second part of section 16 (1) (c).
3. We must, therefore, answer the question submitted to us in the negative. Commissioner to pay the costs.
4. Question answered in the negative.