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A.J. Kohiyar and ors. Vs. Commissioner of Income-tax, Bombay City I - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 6 of 1961
Judge
Reported in[1964]51ITR221(Bom)
ActsIncome Tax Act, 1922 - Sections 16(1)
AppellantA.J. Kohiyar and ors.
RespondentCommissioner of Income-tax, Bombay City I
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
.....direct taxation - trust - section 16 (1) of income tax act, 1922 - whether on true construction of trust deed only one trust was created there by - facts revealed money forming trust fund was owned by two settlers in their individual capacity and did not constitute joint fund - on true construction there were two separate trusts created one by each of settlers. (ii) assessment - whether income of trust should be deemed to be income of settler - contention that third proviso to section 16 (1) (c) had no application to settlements which were irrevocable but were rendered revocable by first and second proviso to section 16 (1) (c) not sustainable - assessee entitled to benefit of third proviso to section 16 (1) (c) - held, income arising from settlement made out of settlers share of income..........the trust with and subject to the powers, provisions, agreements and declarations contained in the trust deed. the trustees were directed to collect rents, profits, interest and income of the trust property, and after paying out the expenses and after setting apart 5 per cent. of the total accumulations as reserve fund to carry out ordinary repairs, divide the net income remaining thereafter into two equal shares. these two shares were to be called : (1) dr. kohiyar's share in the net income of the trust property and (2) mrs. amy kohiyar's share in the net of the trust property. directions given to the trustees for dealing with these two shares were different and distinct. so far as dr. kohiyar's share of the net income of the trust property was concerned, during the lifetime of dr......
Judgment:

V.S. Desai, J.

1. This is a reference under section 66 (1) of the Indian Income-tax Act, at the instance of the assessee, who are the trustees of the Kohiyar family trust, and arises out of their assessments for the years 1954-55, 1955-56 and 1956-57.

2. On the 16th March, 1953, Dr. A. J. Kohiyar and his wife, Mrs. Amy Kohiyar, as settlers of the one and second part, respectively, executed an indenture of trust, transferring a total sum of Rs. 6,30,000 in cash in equal shares to the trustees for settling that amount upon trust subject to certain powers mentioned in the deed. Under the said deed, they appointed themselves and one Mr. Burjor A. Guzdar as trustees. The amount of Rs. 6,30,000 transferred to the trustees was to be utilised by them to purchase an immovable property known as 'Sealand' situated at Colaba Reclamation, Bombay, and the said immovable property was to be held by the trustees for the trust with and subject to the powers, provisions, agreements and declarations contained in the trust deed. The trustees were directed to collect rents, profits, interest and income of the trust property, and after paying out the expenses and after setting apart 5 per cent. of the total accumulations as reserve fund to carry out ordinary repairs, divide the net income remaining thereafter into two equal shares. These two shares were to be called : (1) Dr. Kohiyar's share in the net income of the trust property and (2) Mrs. Amy Kohiyar's share in the net of the trust property. Directions given to the trustees for dealing with these two shares were different and distinct. So far as Dr. Kohiyar's share of the net income of the trust property was concerned, during the lifetime of Dr. Kohiyar, it was to be divided into seven equal parts, and two of such parts were to be given to each of the two sons of Dr. Kohiyar, and the remaining three parts were to go to the three daughters of Dr. Kohiyar, one to each. After the death of Dr. Kohiyar, the said share of Dr. Kohiyar in the net income of the trust property was to go to his wife, Mrs. Amy Kohiyar, for and during her lifetime if she survived him. As to the other half of the net income, which was called Mrs. Amy Kohiyar's share in the net income of the trust property, the directions were that the trustees were to pay that share to Mrs. Amy Kohiyar for and during her lifetime and on and after her death, to her husband, Dr. Kohiyar, for and during his lifetime, if he survived her. It was provided in the trust deed, by clauses 27 and 28 thereof, that the trusts and powers created and declared by Dr. Kohiyar, the settler of the one part, concerning the trust property settled by him by the deed of trust were irrevocable, and that the settler of the second part, i.e., Mrs. Amy Kohiyar, reserved to herself full power and authority at her pleasure at any time to revoke all or any of the trusts created and declared by her concerning the trust property settled by her. In the assessee's assessments for the assessment years 1954-55, 1955-56 and 1956-57, the Income-tax Officer held that the provisions of section 16 (1) (c) applied to the trust assessable in the hands of the settlers. In the appeals which the assessee filed against the order of the Income-tax Officer, the Appellate Assistant Commissioner took the view that the trust was revocable so far as the settlements made by the settler of the one part, Dr. Kohiyar, were concerned. He took the view that the moneys, which formed the trust fund, were owned by the two settlers in their individual capacities and did not constitute a joint fund belonging to them. The trust contained directions given by the two settlers regarding trust funds, which each of them had brought in, and as a matter of fact, although there was a single trust deed, it was an amalgamated deed dealing with two separate and trusts. He accordingly set aside the orders of assessment passed by the Income-tax Officer and directed the Income-tax Officer to make fresh assessments in the light of his decision. Against the order of the Appellate Assistant Commissioner, the department took a second appeal to the Tribunal. The Tribunal took the view that the tenor and contents of the indenture showed that there was one consolidated trust with two settlers contributing in equal halves to the initial funds, and not two trusts as held by the Appellate Assistant Commissioner. According to the Tribunal, although the trust was described as irrevocable as regards the assets falling to the lot of Dr. Kohiyar, since the income of that half after his death was to pass to Mrs. Kohiyar, who was herself a co-settler, and since the other half of the assets falling to the lot of Mrs. Kohiyar was made expressly revocable under the trust deed, the entire trust was rendered revocable by reason of the first and second proviso to section 16 (1) (c). In view that the Tribunal took, it allowed the appeals and restored the orders passed by the Income-tax Officer. On an application of the assessee under section 66 (1), the Tribunal drew up the statement of the case and referred to this court the following three questions :

'(1) Whether on a true construction of the indenture of trust dated March 16, 1953, there was only one trust created there

(2) If the answer to question No. (1) is in affirmative, whether the trust so created is revocable within the meaning of section 16 (1) (c)

3) Whether on the facts and circumstances of the case and on a true construction of the indenture of trust dated March 16, 1953, read with section 16 (1) of the Indian Income-tax Act the income of the trust created by Dr. Kohiyar, so far as the property settled by him was concerned, should be deemed to be his income ?'

3. Mr. Kolah, learned counsel for the assessee, has contended that on a true construction of the indenture of trust dated 16th March, 1953, it comprises two separate trusts one of which is created by Dr. Kohiyar, the settler of the one part, and the other by Mrs. Amy Kohiyar, the settler of the second part. The trust created by Dr. Kohiyar is in terms irrevocable. It is also not such as can be deemed to be revocable under the first proviso to section 16 (1) (c), and, therefore, section 16 (1) (c) has no application to the income of the said trust. So far as the other trust is concerned, it is created by the settler of the second part, Mrs. Amy Kohiyar, the said trust is clearly a revocable trust, and there is no quarrel about its income being taxable in the hands of the settler, Mrs. Kohiyar. We are, however, not concerned with that income in the present case. Mr. Kolah's further argument is that even if we were to hold against him that the trust is a single consolidated trust of the two settlers and that the trust is rendered revocable even as regards the half of the assets of the share of Dr. Kohiyar by reason of the first and the second provisos to section 16 (1) (c), it is still saved from the operation of section 16 (1) (c) by reason of the third proviso.

4. Mr. Joshi, learned counsel for the revenue, on the other hand, has argued that the Tribunal was right in taking the view that there is a single trust property of the single trust in respect thereof, and not two trusts as held by the Appellate Assistant Commissioner. According to him, a declaration of the irrevocability contained in clause 27 of the trust deed will not avail the assessee for taking the income of the trust out of the provisions of section 16 (1) (c), firstly, because the trust being a single trust, so far as Mrs. Amy Kohiyar, one of the settlers, is concerned, she has reserved to herself the power of revocation, and secondly, because even with regard to the settlements relating to the share of Dr. Kohiyar, which are declared to be irrevocable, there are directions for retransfer of the income thereof to one of the settlers, namely, Mrs. Amy Kohiyar, after the death of Dr. Kohiyar, and, therefore, the trust must be deemed to be revocable under the first and the second provisos to section 16 (1) (c). According to Mr. Joshi, the third proviso cannot be availed of by the assessee altogether, because that is a provision which applies only to trust which are revocable and not to trusts which are irrevocable but only deemed to be revocable under the first and the first and the second provisos to section 16 (1) (c).

5. In our opinion, on a true construction of the trust deed, there are two separate and distinct trust, and not a single consolidated trust as contended by Mr. Joshi. Dr. Kohiyar and his wife, Mrs. Amy Kohiyar, each one of whom was possessed of his or her own fund, desired out of natural love and affection for each other and for their children and for certain other good causes and considerations, to settle on trust an amount of Rs. 3,15,000 each, totaling to an amount of Rs. 6,30,000. This fund they wanted to be utilised in purchasing an immovable property which was to be held as the corpus of the trust settlements contemplated by them. They directed the trustees accordingly to purchase the property known as 'Sealand', and collect the net income of the property after paying out the expenses for collection, etc., and after keeping a small reserve for repairs. The net income was then divided into two parts, one part to be regarded as income arising from the fund settled in trust by Dr. Kohiyar, and, therefore, called Dr. Kohiyar's share of net income of the trust property, and the other part was to be regarded similarly as that arising out of the fund settled in trust by Mrs. Amy Kohiyar. Each of the settlers gave his or her own directions for dealing with his or her part of the income from the trust fund brought in by him or her. Dr. Kohiyar, so far as his share was concerned, further directed that he wanted the settlements, which he was making, to be irrevocable. Mrs. Kohiyar, on the other hand, desired that the declarations and dispositions which she was making should be revocable. She accordingly reserved the power of revocation to herself. It seems to us in the circumstances and particularly in view of the language used in clauses 27 and 28 of the trust deed, that by the indenture of trust dated 16th March, 1953, what was intended was a creation of two separate trusts and not one trust as held by the Tribunal. If our construction of the trust deed is correct, the trust of Dr. Kohiyar being irrevocable will go out of section 16 (1) (c). Under the said trust, there is no provision of the transfer directly or indirectly of the income or assets to the settler, nor is there any direction which gives the settler a right to resume power directly or indirectly over the income or assets. The direction given by Dr. Kohiyar for the income to go to Mrs. Kohiyar after his death will also not amount to a direction for retransfer of the income or assets to the settler within the meaning of the second proviso if the trust of Dr. Kohiyar is a separate trust of which he alone is the settler. The first and the second provisos thereof, will not apply, and the trust will not be rendered revocable by reason of the provisions of the said provisos. The question, therefore, whether the assessee could avail of the provisions of the third proviso, in that event, will not arise. On the other hand, if the indenture of trust is taken to comprise only a single consolidated trust settled by the two settlers, Dr. Kohiyar and Mrs. Kohiyar, the questions will have to be considered whether by reason of the provisions of the first and the second provisos, the trust, even so far as the settlements which are declared to be irrevocable are concerned, is rendered revocable and whether, if such is the position, the assessee is entitled to avail of the provisions of the third proviso to section 16 (1) (c).

6. Now, the provision in the first deed which, it is contended, renders the trust revocable within the meaning of the first proviso, is the provision which directs the income of the share Dr. Kohiyar to go to his wife after his death. It is contended that Mrs. Kohiyar, being one of the persons by whom the settlement or disposition was made, was by reason of the second proviso included within the expression 'settler or disponer' occurring in section 16 (1) (c), and in the first proviso, and, therefore, the direction in the trust deed, directing the income to go to her, although in the event of a certain contingency occurring, was still a direct on for the retransfer of the income to the settler within the meaning of the first proviso, and the trust therefore must be deemed to be revocable. Mr. Kolah has argued that the expression 'any person by whom the settlement or disposition is made' occurring in the second proviso would only mean a person who has made the settlement or disposition, and not someone who is not concerned with the settlement or disposition, although that person may be a co-settler with the person making the settlement or dispositions, but concerned with entirely different and separate dispositions. According to Mr. Kolah, therefore, the direction in the trust deed for the income to go to Mrs. Kohiyar after the death of Dr. Kohiyar will not amount to a direction for retransfer of the income to the settler within the meaning of the first proviso. His further argument is that the direction contained in the trust deed, directing the income to go to Mrs. Kohiyar, a contingency, namely, the survival of Mrs. Kohiyar after the death of Dr. Kohiyar, a contingency which may either occur or may not occur, and, therefore, does not amount to a direction for retransfer within the meaning of the first proviso. According to Mr. Kolah, therefore, the first and the second provisions, do not apply to the present case so as to make the settlements and dispositions made in respect of Dr. Kohiyar's share of the income of the trust property a revocable transfer within the meaning of the said proviso. Now so far as the first of these contentions of Mr. Kolah is concerned, it appears to us that the expression 'any person by whom the settlement or disposition was made' would include all the settlers where the trust is a single consolidated trust. Under the second proviso a trust is a settlement or disposition and 'settler or disponer' in relation thereto includes any person by whom the trust is made. We agree with Mr. Joshi that a singular would include plural and the expression 'settler' will mean all the persons who have joined in making the trust. The first contention of Mr. Kolah therefore does not appeal to us. As to the second contention, namely, that a direction that the income should go to Mrs. Kohiyar is not a direction of a retransfer within the meaning of the proviso itself, but a direction subject to a contingency, which may or may not occur. It appears that a divergence of view has been expressed in Ramji Keshavji v. Commissioner of Income-tax, which is a decision of this court. In that case, Kania J., as he then was, inclined to take the view that a contingent claim which may arise in a settlement is not covered by the proviso, although he did not express any definite view thereon. Mr. Justice Chagla (as he then was), on the other hand, expressed the opinion that on a plain reading of the section, the words of the section were wide enough to cover even provision for retransfer which is contingent in its nature. In a recent decision of the Patna High Court in Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tikari Raj, the view has been expressed that the words of the first proviso are wide enough to cover even a provision for retransfer which is contingent in its nature. We are ourselves inclined to agree with the view taken by Chagla J. in the Bombay case, and Ramaswami C.J. of the Patna High Court in the latter case referred to by us, and if we had taken the view that this was a case of a single consolidated trust settled by the two settlers together, we would have been inclined to hold that the trust, so far as the settlements and dispositions relating to Dr. Kohiyar's share of the income of the trust property were concerned, was deemed to be a revocable transfer by reason of the first and the second provisos to section 16 (1) (c). We do not however propose to express a definite opinion since in our view it is unnecessary to do so, because, even proceeding on the basis that by reason of the provisions of the first and the second provisions to section 16 (1) (c), the said dispositions and settlements are rendered revocable transfers, in our opinion, the assessee is still entitled to get the benefit of the third proviso to section 16 (1) (c). Under the third proviso to section 16 (1) (c), the income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person, and from which income the settler derives no direct or indirect benefit, is excluded from the operation of section 16 (1) (c) until such time that the power to revoke arises to the settler. In the present case, the settlement made with regard to Dr. Kohiyar's share of the income is not revocable during the lifetime of the persons intended to be benefited there by. Dr. Kohiyar again does not derive any direct or indirect benefit from the said share. Although, therefore, the settlements, so far as Dr. Kohiyar's share of the income of the trust property are concerned, may be deemed to be revocable by reason of the first and the second provisos to section 16 (1) (c), income from the settlement will be excluded by reason of the third proviso. Mr. Joshi has argued that the third proviso only applies to trusts which are revocable on the terms of the trust deed and not to revocable transfers which are deemed to be revocable by reason of the first and the second provisos to section 16 (1) (c). According to him, the settlements relating to Dr. Kohiyar's share of the income of the trust property are irrevocable transfers rendered revocable by the provisions of the first two provisos to section 16 (1) (c), and such settlements do not fall within the third proviso. His argument is that the third proviso only applies to the main provisions of section 16 (1) (c), and the expression 'revocable' contained in the said provision does not include a transfer which is deemed to be revocable by reason of the said two provisos. Now, the scope of the third proviso to section 16 (1) (c) has been considered by this court in Ramji Keshavji's case and the view has been taken that the third proviso applies not only to the substantive provisions of section 16 (1) (c), but also to the first proviso of the said section. Dealing with the question, Kania J. observed as follows at pages 109-110 :

'The scheme of section 16 (1) (c) appears to be this. The first stage is that when there is a revocable transfer of assets, the income derived from such assets is still to be considered the income of the settler. The law next specifies by proviso (1) what would be deemed a revocable transfer, in spite of the deed being apparently irrevocable. The relevant question for that proviso is this : Is this transfer revocable because it fulfills the conditions contained in the proviso The answer to that question can be only, it is revocable, or it is not. If the answer is in the negative, no further discussion can arise because, on the face of it, the deed is not revocable and, therefore, it does not come under section 16 (1) (c). If, however, the answer to the question is in the affirmative, the deed although ostensibly irrevocable, is deemed to be revocable, and thus becomes a revocable transfer of assets, within the meaning of the substantive provisions of section 16 (1) (c). Having reached that stage, the law proceeds to consider further what is found in proviso (3). The scheme appears to be that although in fact, after reading the provisions of section 16 (1) (c) with proviso (1), the transfer is revocable, the law will not still consider the income derived from such a settlement the income of the settler, provided the settlement is not revocable for a period exceeding six years or during the lifetime of the person for whom the income is settled, and, further, from which income the settler derives no direct or indirect benefit.'

7. In dealing with the argument that the third proviso deals with such revocable trusts as satisfy the conditions laid down in the said proviso and not irrevocable trusts which are deemed to be revocable by reason of the first proviso, Chagla J. observed as follows at page III :

8. I do not think there is any warrant for the contention put forward by Mr. Setalvad that proviso (3) only applies to the substantive provisions of sub-clause (c) and does not apply to proviso (1). If that argument were to be accepted, it would result in this glaring inconsistency. If you have a deed which contains a provision for revocation which can only come into effect after a period of six years, other conditions being satisfied, then such a deed would fall under proviso (3) and would be saved from the operation of sub-section (c) although after six years the settler could revoke the trust and would have complete power of disposal over the income and the corpus of the trust estate. But if you have a trust deed contains a provision for retransfer to the settler after a period of six years, that deed would not fall under proviso (3) and would come within the ambit of sub-clause (c) of section 16 (1). I do not think that it would be right or proper to give a construction to this sub-clause and to the two provisos which would lead to such glaring results. In my opinion, agreeing with my learned brother, the only way to reconcile the substantive provisions of sub-clause (c), proviso (1) and proviso (3) is to hold that proviso (3) contains a limitation which applies as much to the substantive provisions of sub-clause (c) as to proviso (1).'

9. Mr. Joshi argued that the view expressed in the said decision does not take into account the material part of the third proviso which indicates unmistakably that the said proviso deals only with trusts which are revocable in terms and not irrevocable trusts deemed to be revocable within the first proviso. The part of the proviso on which Mr. Joshi relies is the last part. It states : 'But the settler shall be liable to be assessed on the said income as and when the power to revoke to him'. According to him, where a trust is irrevocable there is no question of the power to revoke arising to the settler. This part of the proviso, therefore, clearly indicates that the revocable trusts dealt with by the proviso are those trusts in which power to revoke has been reserved by the settler, and cannot, therefore, apply to an irrevocable trust. It is true that the decision in Ramji Keshavji v. Commissioner of Income-tax does not refer to the last part of the proviso and does not discuss its effect on the construction of the said proviso. This last part, however, has been considered subsequently in another decision of this court in D. R. Shahapure v. Commissioner of Income-tax, where one of the learned judges constituting the Bench was Kania J., who was also associated with the earlier decision in Ramji Keshavji v. Commissioner of Income-tax. Dealing with the argument, the learned judge observed :

'On behalf of the Commissioner it was urged that the third proviso is not applicable unless there was a transfer of assets. In support of that contention reliance was placed in particular on the last words of the proviso viz., 'the settler shall be liable to be assessed on the said income as and when the power to revoke arises to him.' From these words it was sought to be argued that the power to revoke must be a revocation of the transfer of assets. In my opinion this argument is unsound. The proviso opens with the words 'provided further that this clause shall not apply....' There is no warrant for reading the word 'clause' as applicable only to the second half of clause (c), and not the first half also. In my opinion, the last words of the proviso quoted above also do not help the Commissioner, because the power to revoke may be equally applicable to the income, which is payable, as to the assets which are transferred. In proviso (1) the transfer of income and assets are treated, so far as this section is concerned, on the same footing. It appears therefore that the third proviso, as worded, can equally well apply to the first part of section 16 (1) (c).'

10. The argument, therefor, that the last part of the proviso was lost sight of in arriving at the decision in Ramji Keshavji v. Commissioner of Income-tax cannot be very readily sustained. The decision in Ramji Keshavji v. Commissioner of Income-tax, has been followed in Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tekari Raj by the Patna High Court. In view of the decision of this court Ramji Keshavji v. Commissioner of Income-tax and of the Patna High Court in Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tekari Raj, Mr. Joshi's contention that the third proviso can have no application to settlements which are irrevocable but are rendered revocable by reason of the first and the second provisos cannot be sustained. The assessee, therefore, in our opinion, was entitled to the benefit of the third proviso to section 16 (1) (c), and the income arising from the settlements made out of Dr. Kohiyar's share of the income of the trust property was not assessable in the hands of the settler.

11. In the view that we are taking, our answer to the first question is that on a true construction of the indenture of trust dated 16th March, 1953, there were two separate trusts created one by each of the settlers. Since we are not expressing a definite opinion on the second question, as we do not consider it necessary, we do not propose to answer the second question. Our answer to the third question is in the negative. The assessee will get its costs from the department.

12. Questions answered accordingly.


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