1. The common question referred to this court by the Tribunal in these nine references under s. 256(1) of the I.T. Act, 1961 (shortly called 'the Act'), reads :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the settlement made on August 12, 1960, by the applicant was revocable and, therefore, whole of the income of Messrs Cheluva & Co. was assessable in the hands of the applicant, for assessment year in question ?'
2. The facts necessary for answering the references are these :
The assessee is an individual by name Gadi Cheluvaraya Chetty. He was the proprietor of a business firm run under the name and style of Messrs Cheluva & Co., in Russel Market, Bangalore. On August 12, 1960, the assessee executed a settlement deed in favour of his wife, six daughters and his son-in-law called Chandra Mohan settling 1/9th undivided share in the business of 'Cheluva and Co., on each of them.'
3. On March 15, 1961, the assessee constituted a partnership firm comprising of himself, his wife and six daughters as partners. The last two partners being minor daughters were admitted to the benefits of partnership. The capital contribution by each one of the partners consisted of the undivided share in the business of Cheluva & Co., which they got under the settlement deed dated August 12, 1960.
4. Clause 6 of the settlement deed provides as follows :
'The settler hereby gives to the 8th donee one-ninth share in the schedule business in consideration of his undertaking to manage it. In the event of his ceasing to so manage the business, from that date, the settler and the other donees are to take his one-ninth share and make the necessary arrangements for the efficient management of the schedule business. If the 8th donee manages the business for a period of ten years from the date without interruption, he will be fully entitled to the one-ninth share and profits without any obligation thereafter to manage the business aforesaid.'
5. It will be seen from the above recitals that Chandra Mohan was given one-ninth share in the said business on the condition that he should manage the business. In the event of his ceasing to so manage the business, the other donees were to take his 1/9th share and make the necessary arrangement for carrying on the business. Chandra Mohan was not enamoured of the gift from his father-in-law. He did not accept the terms of the settlement, and so much so, his 1/9th share automatically reverted to the assessee and the other seven donees, in equal proportion and each of them became entitled to 1/8th share of 1/9th share. The income from the firm was assessed separately in the hands of the said partners as per their share of profits provided in the partnership deed for the accounting periods starting from March 31, 1963, and ending with March 31, 1969.
6. For the assessment year 1972-73, however, the ITO brought to tax the entire income of M/s. Cheluva & Co. in the hands of the assessee on the ground that the said settlement deed was revocable. After passing the said order for 1972-73, the ITO reopened the assessment for the assessment years 1963-64 to 1969-70 and assessed the entire income of M/s. Cheluva and Co. in the individual assessment of the assessee.
7. Appeals were preferred by the assessee against the said assessment orders before the Appellate Assistant Commissioner(the 'AAC'). The AAC allowed the appeals and directed deletion of the income from the firm from the assessment of the assessee for the relevant years.
8. Upon appeals preferred by the Department, the Tribunal reversed the order of the AAC and restored the orders of the ITO. The Tribunal by applying the provisions of s. 16(1)(c) of the 1922 Act held that the settlement deed was revocable.
9. We may state at the outset that the Tribunal was not right in applying the provisions of section 16(1)(c) of the 1922 Act. We are concerned with the assessment for the assessment years 1963-64 to 1973-74 which were completed after April 1, 1962, the date on which the 1961 Act was brought into force. The law that was in force during the relevant previous years during which the income from the firm was sought to be fixed should be the law that would be applicable to the case. That means we have to examine the settlement deed with reference to the provisions in the 1961 Act as was rightly applied by the ITO.
10. Section 60 provides :
'All income arising to any person by virtue of a transfer whether revocable or not and whether effected before or after the commencement of this Act shall, where there is no transfer of the assets from which the income arises, be chargeable to income-tax as the income of the transferor and shall be included in his total income.'
11. Section 61 makes all income arising to any person by virtue of a revocable transfer of assets chargeable to income-tax as the income of the transferor. Section 62 stipulates that the provisions of Section 61, that is to say, addition of income by virtue of a revocable transfer of assets to the income of the transferor, should not apply to income arising to any person by virtue of a transfer by way of, inter alia, a transfer which is not revocable during the life time of the beneficiary or made before April 1, 1961, which is not revocable for a period exceeding 6 years. But Sub-s. (1) of s. 62 is hedged by a proviso, which is applicable, provided that the transferor does not derive any direct or indirect benefit from such income in either case. If the transferor does derive, in fact, direct or indirect benefit from a transfer and even if the conditions of the sub-clause(i) or(ii) or sub-s. (1) of s. 62 are fulfilled, it would be treated as revocable trust.
12. Section 63 provides :
'For the purposes of sections 60, 61 and 62 and of this section, -
(a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets;
(b) 'transfer' includes any settlement, trust covenant, agreement or arrangement.'
13. The word 'transfer' used in s. 63(b) extends to every transaction bilateral or multilateral. It is wide enough to include settlement, trust, covenant, agreement or arrangement.
14. Under s. 63(a)(i), a transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor. This is the clause with which we are primarily concerned in this case. It is a significant addition which was not found in s. 16(1)(c) of the Indian I.T. Act, 1922. The impact of this change could be realised by reference to the following two decisions :
15. In CIT v. Jitendranath Mallick : 50ITR313(Cal) , the Calcutta High Court had examined the scope of a revocability clause in a settlement deed with reference to s. 16(1)(c) of the Indian I.T. Act, 1922. In the deed there was a clause reserving payment of a portion of the trust amount to the transferor. The question was whether that term rendered the whole of the trust income assessable in the hands of the transferor. The High Court held in the negative. It was observed that the assessability of the settler could only arise with respect to the portion of the income in which he was found to have a direct or indirect interest without affecting chargeability of the other portions of the income to others where no question of revocability arose and only Rs. 400 payable to the settler per month became assessable in his hands.
16. The above reasoning of the Calcutta High Court has been approved by the Supreme Court in Hrishikesh Ganguly v. CIT : 82ITR160(SC) . The Supreme Court observed at page 165 :
'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 (see Commissioner of Income-tax v. Jitendranath Mallick : 50ITR313(Cal) .
We are in entire agreement with the above view of the Calcutta High Court and consider that the same is supported by the decision of this court in Rani Bhuwaneshwari Kuer's case : 53ITR195(SC) . We may also refer to the significant change made in the language with regard to revocable transfers in the Income-tax Act, 1961. Section 63 of that Act provides : 'For the purposes of sections 60, 61 and 62 and of this section -
(a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or (ii) it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets;.....'
It can well be said that the necessity for expressly mentioning /part of the income' was felt because, under the provisions of the Act, part of the income was not covered.'
17. It is clear from the above observations of the Supreme Court that in view of the significant change made in the language of s. 63(a)(i) there is no escape from the conclusion that if a transfer contains any provisions the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, the transfer shall be deemed to be revocable. The case on hand falls squarely and fairly within s. 63(a)(i) of the Act.
18. Our view also receives support from the decision of the Madras High Court in K. Subramania Pillai v. Agrl. ITO : 53ITR764(Mad) . Therein, the Madras High Court was considering a settlement deed containing a revocable clause with reference to s. 9(1) of the Travancore Cochin Agricultural Income-tax Act, 1950, which corresponds to s. 16(1)(c) of the Indian I.T. Act, 1922.
19. Under clause (6) of the settlement deed dated August 12, 1960, the transferor gave to Chandra Mohan 1/9th share in the business of Cheluva & Co., in consideration of this undertaking to manage it. The clause also stipulated that in the event of his ceasing to so manage the business from that date, the transferor and the other donees are to take his 1/9th share and make the necessary arrangements for the efficient management of the said business. In other words, it was provided in the settlement deed that in the event of Chandra Mohan not assuming control of the management of the business of Cheluva & Co., then his share will revert back to the other donees and the transferor. The transferor along with his wife and six daughters took in equal shares out of the share which stood retransferred from Chandra Mohan. There cannot be any doubt or dispute in regard to this aspect of the matter as the terms of the settlement deed are so obvious. Then s. 61 says that all income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income. Therefore, the entire income of Cheluva & Co., is liable to be included and fixed in his total income and not in the hands of the other sharers as per the settlement deed or the partnership deed. It is really unnecessary to look into the partnership deed in the instant case because the deed of partnership refers to the deed of settlement dated August 12, 1960, and the profits of the business under the deed of partnership are required to be vided according to the share to which the partners are entitled to under the deed of settlement. The partnership deed is, therefore, not a relevant document for the purpose of determining whether the deed of settlement is a revocable one or not.
20. Mr. Sarangan, counsel for the assessee, however, urged that the revocable transfer is confined only to the share of Chandra Mohan and, therefore, his share amount alone shall be included in the total income of the assessee and not the income to which the other sharers are entitled to. We do not think that this convention could be accepted unless we agree with the learned counsel that the deed of settlement contained nine independent transfers. If we peruse the deed, it is impossible to subscribe to the contention of the learned counsel that the deed contains nine independent transfers. The settler decided to settle on each of the donees an undivided 1/9th share in the schedule business retaining for himself and undivided 1/9th share therein. The transfer, therefore, was one and indivisible and it shall be regarded as a revocable transfer.
21. Mr. Sarangan next contended that the term as to revocability in the deed of settlement has worked itself out before the partnership was formed and, therefore, the revocability clause should not be applied for the purpose of assessing the firm's income in the hands of the assessee. We have dealt with without reference to the settlement deed. The donees became partners in the firm by investing the undivided share given to them under the settlement deed. The deed of partnership, therefore, cannot be independently considered without reference to the settlement deed.
22. It was next contended that the events for each year have to be seen and considered for invoking ss. 60 to 63 of the Act and for all the years subsequent to the formation of the partnership firms there was nothing in the deed of settlement to be revoked and, therefore, ss. 60 to 63 would not operate in regard to the assessment of the partnership business since the revocation has taken effect immediately after one month of the date of settlement. There is no substance in this contention also. Suffice it to state that when the transfer became revocable, then the income from Cheluva & Co., shall be chargeable to income-tax as the income of the transferor not withstanding the deed of settlement or the partnership formed thereafter.
23. After a careful analysis of the clauses of the settlement deed executed by the assessee on August 12, 1960, in the light of the provisions of ss. 60 to 63 of the Act, we are firmly of the opinion that the deed of settlement is revocable and we answer the question in the affirmative and against the assessee in each of the references.
24. In the circumstances of the case, we make no order as to costs.