Gopal Rao Ekbote, C.J.
1. At the instance of the Commissioner of Income-tax, Andhra Pradesh, the following two questions have been referred to us under Section 66 of the I.T. Act :
'(1) Whether, on the facts and in the circumstances of the case, the income of Rs. 82,853 relating to 'H.E.H. the Nizam's Pilgrimage Money Trust' was taxable in the assessee's hands in terms of the first proviso to Section 16(i)(c) of the Indian Income-tax Act, 1922 and
(2) Whether, on the facts of the case, the sum of Rs. 1,00,000 received by the assessee from the trustees of Princess Niloufer Trust was liable as income under the Income-tax Act and if so, whether the assessee was entitled to exemption from tax of the income under the terms of the agreement entered into with the Government of India on 8-10-1949 ?'
2. On November 2, 1950, H.E.H. the Nizam settled on trust 3% Government of India Conversion Loan, 1946, of the face value of Rs. 22,20,000. The settlor constituted himself as one of the trustees and was to remain, during his life, the President of the Board of trustees. The trust has been described as 'H.E.H. the Nizam's Pilgrimage Money Trust'. Clause 3(c) of the trust, which is relevant, reads as under :
'During the lifetime of the settlor, to defray the expenses of Haj of the settlor and of such of the members of his family as he may take with him and of their visit and pilgrimage to various Mahomedan shrines and holy places in Hedjaz and Iraq and making religious offerings and expending monies for charitable purposes as the settlor in his absolute discretion may from time to time think fit and require out of the income as well as the corpus of the trust fund in such manner and to such extent as the settlor may from time to time direct and for all or any of such purposes as aforesaid to pay such monies out of the income of the corpus of the trust fund as the settlor may from time to time require.'
3. The total income of interest on securities earned for the assessment year 1958-59 was Rs. 82,853.
4. The ITO held that tax was assessable in the hands of the settlor. The reason culled out was that in terms of Clause 3(c) of the trust deed, the settlor reserved to himself the power to appropriate the entire income of the trust for defraying expenses incurred on pilgrimage of himself or the members of his family whom he took along with himself. The AAC agreed with the view taken by the ITO. He held firstly that the Nizam had unfettered powers to expend the trust income on any religious and charitable purposes of his choice, meaning thereby, not necessarily on the objects laid down in the trust. Secondly, he found that in the previous years, the trust was held to be revocable and the income from the trust was assessed in the hands of the assessee.
5. On further appeal to the Tribunal, it was held that merely because in the previous years, the assessee was taxed on such income, it does not operate as estoppel. The Tribunal also held that the settlor's absolute discretion was confined within the limits of the expenses for charitable or religious purposes at Hedjaz and Iraq: only. The Tribunal on an interpretation of the first proviso to Section 16(1)(c) of the Act held that it was inapplicable to the case. Consequently, it was found that the income of Rs. 82,853 was not assessable in the hands of the assessee.
6. Now Section 16(1)(c) in so far as it is relevant reads :
'(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, dispositionor transfer shall be deemed to be revocable if it contains any provision forthe 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 orassets.'
7. The said provision Of law has been the subject of interpretation by the Supreme Court in at least three cases cited to us.
8. In CIT v. Raghbir Singh : 57ITR408(SC) , it is held (at p. 412) :
'Clause (c) was intended, while seeking to protect a genuine settlement by which the taxpayer intends to part with control over property and its income, to circumvent attempts made by him to reduce his liability to pay income-tax by the expedient of so arranging a settlement or disposition, of property that the income does not accrue to him, but he reserves a power over or interest in the property, settled or disposed of, or in the income thereof. By Clause (c), income arising to any person by virtue of a settlement or disposition whether revocable or not is deemed to be income of the settlor or disponer if the assets remain the property of the latter. Again income arisinig to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor The firstproviso then deems a settlement statutorily revocable, if it contains anyprovision for retransfer directly or indirectly of the income or. assets settled, to the settlor, or where it gives to the settlor a right to reassumepower directly or indirectly over the income or assets. By the second proviso, the expression 'settlement or disposition' includes a disposition,trust, covenant, agreement or 'arrangement.'
9. In CIT v. Jayantilal Amratlal : 67ITR1(SC) , the provision was interpreted on similar lines. It was held (at p. 10) :
'It seems to us that the words 'reassume power' give indication as to the correct meaning of the proviso. The latter part of the proviso contemplates that the settlor should be able, by virtue of something contained in the trust deed, to take back the power he had over the assets or income previous to the execution of the trust deed.'
10. The following observation merits particular attention (p. 10) :
'A provision enabling the settlor to give directions to trustees toemploy the assets or funds of the trust in a particular manner or for aparticular charitable object contemplated by the trust cannot be said toconfer a right to reassume power within the first proviso. Otherwise asettlor could never name himself a sole trustee. It seems to us that thelatter part of the proviso contemplates a provision which would enablethe settlor to take the income or assets outside the provisions of the trustdeed.'
11. The Supreme Court rejected, the contention that 'If a settlor canderive some direct or indirect benefit under a trust deed, the trust deedwould fall within the first proviso', by observing that 'the first provisodoes not use these words'.
12. In Hrishikesh Ganguli v. CIT : 82ITR160(SC) , the same question again fell for consideration before the Supreme Court, After observing that Section 16(1) is unhappily worded, Grover J., ,who spoke for the Bench, said (p. 163):
'The first proviso specifies what would be deemed a revocable transfer in spite of the deed being apparently, irrevocable. The relevant question for the first proviso is 'is this transfer revocable because it fulfils the conditions contained in the proviso ?' The answer to that question can be in the positive or in the negative. If the answer is in the negative, no further discussion can arise and Section 16(1)(c) will not be applicable. If the answer be in the affirmative, the deed, although ostensibly irrevocable, is deemed to be revocable.'
13. The learned judge at page 165 observed :
'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 person and not in the hands of the settlor, if the latter does not retain any power to 'deflect the same for a period exceeding six years or during the lifetime of the donee'.'
14. It is in the light of the principles laid down by the Supreme Court that we have to examine the position. It is seen that in the first proviso, the two crucial words are 'retransfer' and 'reassume power'. In either case, however, the income and the assets must go to the settlor leaving it to his discretion as to in what manner and for what purpose the income or the asset should be utilised. Such discretion of the settlor can be exercised for purposes outside the trust deed. In other words, if the settlor was placed in the position which prevailed prior to the creation of the trust when he was absolutely free to deal with his property in any manner he liked, then the trust would be deemed to be revocable although ostensibly it is irrevocable. On the other hand, if the income or the assets are retransferred or power over which is reassumed but only for the purpose of discharging the obligations imposed by the trust, or to put it in another way, if the settlor is bound to deal with the income or the asset within the four corners of the trust deed, such a case would not fall within the purview of the first proviso. Merely because the settlor is entitled to give some directions to the trustees and the trustees are obliged to carry out those directions although such direction relates to handing over of the income of the trust to the settlor, the trust would not be revocable as long as the money so transferred to the settlor is meant for the purpose for which the trust is created.
15. If we examine Clause 3(c) of the trust deed in the light of what is stated above, it would be plain that though the settlor has been conferred with an absolute discretion to, firstly, determine as to which holy place he would go and what religious offerings he would make and, secondly, in regard to the amount which he would require for the same without being called upon to account to the trustees, the clause would not bring the case within the mischief of the first proviso and make the apparently irrevocable trust a revocable one. The reason is clear. The clause itself makes it manifestly plain that the amount is to be expended 'for all or any of such purposes as aforesaid'.
16. If one bears in mind the position the Nizam had at the time of making the trust, no one would be surprised to find such provisions in the trust deed. In the circumstances, no one could have asked accounts from the Nizam. In any case, as long as the income transferred to the Nizam is intended to be used by him exclusively for the pilgrimage mentioned in the trust deed, merely because some discretion is left with the Nizam, the trust deed, in our view, would not become revocable; We, therefore, agree with the view taken by the Tribunal and, accordingly, answer the first question in favour of the assessee and against the Department.
17. We then turn to the second question. The facts in regard to this question may be briefly stated. A settlement was effected on October 8, 1949, by the assessee for the benefit of his daughter-in-law, Princess Niloufer. Broadly speaking, the scheme was that the trustees should deposit Rs. 30 lakhs given to them by the settlors with the Government of India. The Government agreed to,pay on this deposit interest at 1% per annum. Such interest, it was agreed, would be free of all taxes.
18. On September 18, 1952, the marriage of the Princess with Prince Mozamah was dissolved. According to an arrangement among the Nizam, the trustees and the Princess, the Princess and the trustees executed on September 18, 1952, a deed of release and assignment by which her beneficial rights were assigned to the assessee in lieu of a lump sum payment of Rs. 10 lakhs by the assessee to her.
19. By virtue of Clauses (1) and (2) of the deed, a sum of Rs. 1 lakh which was paid to the trustees for and on behalf of the Princess came to be held by the latter on behalf of the assessee. It was duly paid to the assessee. For the years 1953-54 and 1954-55, this sum of Rs. 1 lakh was assessed to tax in the hands of the assessee. For the relevant taxing year, however, the assessee again disputed the taxability of this sum. Before the Tribunal, it was contended that the amount does not represent income and in the alternative it was contended that in view of the agreement dated October 8, 1949, the said amount is free of tax. The Tribunal held that the exemption from tax was confined to the Princess and the privilege cannot be extended to her assignee, the assessee.
20. The answer to this question depends upon the terms of the agreement and the position of law as urged before us.
21. Clause (2) of the Niloufer Trust categorically states that the interest will be free of income-tax, supers-tax and all other taxes, dues and duties, etc. Clause (4) then states that 'the Government of India hereby declares and agrees that the interest payable on the security of these presents shall be free from income-tax, super-tax and all other taxes, dues and duties and assessments and that accordingly the Government of India shall not at any time assess or levy on the settlor or the trustees or any of them or any of the beneficiaries under the said deed of trust any income-tax, super-tax or other taxes, dues, duties or assessments in respect of any income or corpus of the said sum of Rs. 30 lakhs so deposited or any part or parts thereof shall not at any time be included in the income of the settlor or of the trustees or any of them or of any of the beneficiaries under the provisions of the Indian Income-tax Act or any other Act relating to taxation......'
22. The same clause further declares that the Government of India shall reimburse the amount of tax levied in spite of the agreement.
23. It thus becomes plain that the Government of India expressly agreed not to assess the income from the said deposit to any tax including income-tax. It was not doubted before us that the Nizam as an assignee of the Princes and the trustees is included within the term 'beneficiary'.
24. The Nizam's Trust Deed (Validation) Act, 19-50, came into force in that year. According to Section 3 of that Act, all the provisions of the scheduled trust deed shall, notwithstanding anything contained in any other law for the time being in force, be valid and effectual for all purposes and shall have the force of law.
25. The trust deed dated October 8, 1949, for Rs. 30 lakhs for the benefit of Princess Niloufer, wife of the said Valashan Prince Muazzam Jah Bahadur, is item 2 in the Schedule. What is plain is that all the provisions of this trust deed are valid and effectual for all purposes notwithstanding anything contained in any other law. The trust deed under the Act, therefore, shall have an overriding effect on the I.T. Act. The contention, therefore, that under Section 60(1) of the I.T. Act, the Central Government can give an exemption in respect of income-tax only in favour of any class of income or in regard to the whole or any part of the income of any class of persons is not substantial in view of Section 3 of the Nizam's Trust Deed (Validation) Act. Since one of the provisions of the trust deed is that the income from the said deposit shall be tax-free and shall not be assessed to any tax, the amount of Rs. 1 lakh representing interest on deposit in the hands of the assessee, therefore, cannot be assessed to tax. We are, therefore, unable to agree with the Tribunal that the said amount is assessable to tax in the hands of the assessee. We, accordingly, answer the second question in favour of the assessee and against the Department.
26. The assessee will get his costs. Advocate's fee Rs. 250.