1. The Income-tax Tribunal, Bombay, Bench 'A', at the instance of the assessee has referred the following questions for our decision:
'(i) Whether on the facts and in the circumstances of the case, the trust created by Karelal Kundanlal by a deed dated 24-10-50 resulted in a revocable transfer of the assets within the meaning of Section 16(1) (c) read with the first proviso?
(ii) If the answer to the first question is in the affirmative, whether 3/4th of the income of the said trust be included in the total income of the assessee having regard to the third proviso to Section 16(1)(c)?'
2. This reference arises out of assessment proceedings for the year 1958-59 initiated against Karelal Kundanlal of Sagar. Karelal died during the pendency of his appeal before the Appellate Assistant Commissioner. The appeal and further proceedings thereafter were continued by his legal representative Smt. Gulabbai, who is shown as the applicant in these proceedings. Inthis judgment Karelal is referred to hereinafter as 'the assessee'.
3. The facts of the case are that the assessee created a trust of his properties by a deed dated 24th October 1950. Under this deed, the income of the property, after deducting certain expenses, was to be distributed thus:
(i) Four annas share of the income was to be given to the assessee and his wife for their lifetime.
(ii) Four annas share was to be given to each of the two daughters of the settlor, namely, Smt. Gulabbai and Smt. Tarabai.
(iii) The remaining four annas share was to be spent on charities
4. The Income Tax Officer held that the settlement of the property was revocable in view of the first proviso to Section 16(1)(c) of the Income-tax Act, 1922, and as such the whole of the income from the said property was assessable in the hands of the assessee. The Income Tax Officer, however, held that as one-fourth income was actually spent on charities, the assessee was entitled to deduction of the income and the three-fourth income was chargeable in the hands of the assessee.
5. In appeal before the Appellate Assistant Commissioner it was urged that inasmuch as the trust-deed did not provide for return of whole of the income to the settlor. the three-fourth income was outside the ambit of the first proviso and was governed by the third proviso to Section 16(1)(c) of the Income-tax Act. In support, reliance was placed on the decision of the Calcutta High Court in Commissioner of Income-Tax Calcutta v. Jitendra Nath Mallick : 50ITR313(Cal) . The Appellate Assistant Commissioner accepted the contention and allowed the inclusion of only one-fourth share of the income in the assessment of the assessee, as that income actually reverted to him.
6. In the appeal preferred by the Department the Income-tax Tribunal disagreed with the view of the Appellate Assistant Commissioner and restored the order of the Income Tax Officer. The Tribunal held:
'This is a case of a single transfer of assets ..... 1/4th share of the incometo which the assessee was entitled would, therefore, be a charge not on any specific part of the assets transferred but on all the assets transferred to the trustees. It is, therefore, not possible to divide into separate compartments the assets transferred by the assessee to the trustees and say that only one part is revocable and the other parts are not revocable. The whole scheme of Section 16 (1) (c) seems to be that in the scheme of transfer of assets, if there is any arrangement for the settlor to get any part of the income of those assets, the transfer becomes revocable and all income accruing to others from the assets covered by the transfer becomes includible in the income of the settlor.'
The Tribunal did not accept the view of the Calcutta High Court and observed:
'..... the scope of the third proviso is extremely limited. It covers only income from settlements which are not revocable for a period exceeding six years or during the lifetime of the beneficiary and such income as does not result in any benefit direct or indirect to the settlor.....Now the criterion of revocability is the same as is provided in the first proviso and according to that criterion a trust becomes revocable if any part of the income goes back to the settlor. On that basis, the trust in question is revocable within six years itself and the question of the third proviso saving the trust would not arise.'
7. The Tribunal, however, felt that questions of law arose out of the said decision and hence it referred the two questions, already adverted to.
8. Shri Dharmadhikari, learned counsel for the assessee, relied on certain decisions in support of the contention of the assessee. The decisions are: Ramji Keshavji v. Commissioner of Income-Tax, Bombay, : 13ITR105(Bom) Dr. A. J. Kohiyar v. Commissioner of Income-Tax, Bombay : 51ITR221(Bom) ; Commissioner of Income-Tax. Patna v. Rani Bhuwaneshwari Kuer, Tekari Raj : 45ITR357(Patna) and Commissioner of Income-Tax, B & O v. Rani Bhuwaneshwari Kuer : 53ITR195(SC) .
9. Shri Adhikari, learned Counsel for the Commissioner, on the other hand, urged that on a true interpretation of Section 16 (1) (c) and the first and the third provisos the income from the trust in question was rightly assessed in the hands of the settlor. He distinguished the decisions relied on by Shri Dharmadhikari.
10. Before we discuss the cases cited at the Bar, we propose to analyse for ourselves the provisions of Section 16 (1) (c) with the provisos. The relevant provisions are extracted below:
'(16) (1) In computing the total income of an assessee-
(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether affected 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 orindirectly of the Income of 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:
Provided further that the expression 'settlement or disposition' shall for the purposes of this clause include any disposition, trust, covenant, agreement, or arrangement, and the expression 'settlor or disponer' in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made:
Provided further that this clause shall not apply to any 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 settlor or disponer 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. * * * * *'
The substantive provision in Clause (c) of Section 16 deals with two types of settlements, namely, (1) where assets, the income of which is settled on others, remain the property of the settlor, and (ii) where the assets are transferred but the transfer is revocable. In both these cases the income settled on any person is to be treated as the income of the settlor. Then conies the first proviso. It says that if a deed of transfer contains any provision for transfer directly or indirectly of the assets or the income to the settlor, the settlement shall be deemed to be revocable. Similarly, it says that if the deed of settlement gives power over the assets or the income to the settlor directly or indirectly, in that case also the settlement shall be deemed to be revocable. This proviso obviously relates to the latter part of the substantive provision in Clause (c).
Upto this stage there is no difficulty. Then comes the third proviso. It starts with the direction that 'this clause 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'. The purpose of this proviso is obvious enough: it is to take out from the ambit of the provisions of Clause (c) any income arising to any person by virtue of a settlement which is not revocable for the stated period. This is, of course, subject to a further condition that the settlor does not derive any direct or indirect benefit from the property settled.
The question that arises for consideration is: what is the meaning of the expression 'which is not revocable'? Does this expression refer to settlements, which are not rendered revocable under the first proviso? or, does it refer to settlements, which on their own terms, are not revocable but are rendered revocable?
We have pointed out that the first proviso consists of two parts, namely, (i) where the deed of settlement contains a provision for return of assets or income to the settlor, and (ii) where the settlor is given a right to reassume power over the income or assets. The first part covers a case where benefit arises to the settlor immediately on the execution of the deed of settlement while the second part covers a case where benefit is to accrue to the settlor on a future date when he reassumes the power over the income or assets. This power may be exercisable unconditionally or may be contingent on the happening of a future event. In either case, the settlement will be revocable. Now, a settlement, which is revocable after six years or after the lifetime of the beneficiary is certainly rendered revocable within the first proviso (latter part). Yet the third proviso refers to such a settlement as not revocable.' To us it appears that what the third proviso aims at is that a settlement, which is on its own terms not revocable for a certain period, that is to say, which is subject to conditional revocation, though such a settlement is deemed to be revocable under the first proviso, shall be out of the mischief of Clause (c) so long as the settlor does not actually revoke it and receives the income from the assets.
11. This position becomes further clear from the provision of the third proviso which speaks of a settlement 'not revocable' and from which income the settlor derives no direct or indirect benefit. If the settlor derives any direct or indirect benefit from the assets, it amounts to a retransfer of the income to the settlor and is covered by the first part of the first proviso rendering the settlement revocable. It is thus clear that the purpose of the third proviso is to take away from the operation of Clause (c) those settlements, which are rendered revocable by operation of the first proviso but which come only under the latter part of the first proviso. If we are right in our interpretation of the first and third provisos, it is apparent that the conclusions of the Tribunal are not open to any challenge.
It is clear from the trust-deed that one-fourth income was to be given to the settlor. The case is thus covered by the first part of the first proviso and the settlement is rendered revocable. It is also clear that it does not come within the ambit of the third proviso, and thus the whole of the income becomes taxable in the hands of the settlor. The submission that only one-fourth income, that is retransferred, alone should be taken for assessment is without substance. What Clause (c) provides is that 'all income arising to any person' under a revocable settlement should be included in the assessment of the settlor. Once the deed of settlement is held to be revocable and is held to be one not covered by the third proviso, the conclusion is that 'all income' of 'any person' under the deed of settlement must be assessed in the hands of the settlor.
12. We shall now refer, in brief, to the various decisions cited at the Bar. In 1945-13 ITR 105 : AIR 1945 Bom 254 the contention of the Department was that the income from the properties paid to the wife of the settlor during her lifetime could be deemed to be the assessee's income by operation of the first proviso, while the contention or the other side was that the third proviso came into operation and that such an income was not assessable in the hands of the settlor. On behalf of the Department it was urged that the settlor had reserved certain rights in himself and that the trust was also revocable. Justice Kania on discussing the evidence on record, came to the conclusion that no interest was reserved by the settlor for himself; nor did any income return to the settlor. It was further held that the deed of settlement could not be rendered revocable only because after the death of the wife of the settlor the income was to return to the settlor. In this view of the matter, it was held that the first proviso to Section 16(1) (c) was not attracted at all and the case was covered by the third proviso. Justice Chagla, however, did not agree with Justice Kania in holding that the third proviso did not apply to the deemed revocable deeds under the first proviso. This is what his Lordship held:
'What proviso 3 lays down is that when you have a deed which is not revocable for a period exceeding six years or during the lifetime of the person who is the beneficiary and for whose benelt the property is settled, then such a deed does not come within the operation of Sub-clause (c) of Section 16(1) provided the other conditions, with which I need not deal at present, are also satisfied. Therefore, if you take a deed which is revocable in fact which contains a power of revocation, then if under that deed the power of revocation is postponed for a period exceeding six years or beyond the lifetime of the person benefited, then proviso 3 applies. If you take a deed which is deemed to be revocable within the meaning of proviso 1, then if the provision for retransfer or the right to re-assume power does not come into operation till after the period which exceeds six years or beyond the lifetime of the person benefited, then also proviso 3 applies'
This decision is, in no way, contrary to the view taken by us. What this case lays down is that in all those cases where no interest is reserved by the settlor for himself under the deed of settlement but which is revocable after a certain period on the terms of the deed itself but is deemed to be revocable by operation of the first proviso, the Income from such a settlement shall not be assessed in the hands of the settlor so long as the income does not actually revert to the settlor. This is what we have also held. This case does not support the assessee at all.
13. In : 50ITR313(Cal) the whole of the income from the property settled was sought to be assessed in the hands of the settlor on two grounds, namely, (i) that out of the income of the property, Rs. 400 per month were to be paid by the trustees to the settlor himself; and (ii) that in certain circumstances the settlor could re-assume power over a portion of the assets. The Calcutta High Court came to the conclusion that the power to reassume the assets rendered the whole settlement revocable and that the whole of the income became assessable in the hands of the settlor. On the first question, namely, whether the clause reserving payment of certain amount to the settlor rendered the whole of the income assessable in hands of the settlor. It was held by the High Court as under:
'It was argued that even if the court comes to the conclusion that there was a provision for retransfer of a part of the income, viz., Rs. 400 per month to the settlor, this should only make the said monthly payment of Rs. 400 as assessable in the hands of the assessee and not the entire income of the trust property. Reference was made to the third proviso to Section 16(1)(c) and it was argued that this went to show that portions of the income might be settled on different persons and the settlor might have a direct or indirect interest in some of them, but not in others and the assessability of the settlor 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.
In my view the substance of the contention of Dr Pal with regard to the effect of Clause (1) must be accepted and it must be held that under this clause only Rs. 400 payable to the settlor per month became assessable in his hands '.
It is difficult to follow the reasoning on which the conclusion is based. When a settlement of the property and a trust is created, the transfer is of the entire property to the trustees and only a certain income is earmarked for the benefit of the various beneficiaries. If the case does not come within the purview of the third proviso, then the whole of the settlement would be rendered revocable and the whole of the income must necessarily be assessable in the hands of the settlor It may be pointed out that in the first part of the judgment in this case the learned Judges of the Calcutta High Court entirely agreed with the decision of Chagla J in Ramji Keshavji's case. : 13ITR105(Bom) , and it is difficult to see how they reached the conclusion that the settlement was rendered revocable only with respect to the part of it. We are,therefore, unable to agree with the observations of the Calcutta High Court referred to above. It may also be mentioned that the observations are obiter inasmuch as on other grounds it was held that the whole of the income was assessable in the hands of the assessee.
14. The case of : 51ITR221(Bom) is, again, a case where the settlor had not reserved any interest in the property for himself. That was a case where the settlement was rendered revocable because of the condition that after the lifetime of the wife the income was to revert to the settlor. In those circumstances, it was held that the matter was covered by the third proviso and such an income, so long as it did not actually accrue to the assessee, was not assessable in his hands. This decision, therefore, does not, in any way, help the assessee. In this decision the Bombay High Court has followed its previous decisions in : 13ITR105(Bom) and D.R. Shahapure v. Commissioner of Income-Tax : 14ITR781(Bom) .
14A. In the case of : 45ITR357(Patna) the deed of settlement provided that in case the beneficiaries acted in a certain manner or committed any breach of any of the conditions and limitations imposed under the deed, the beneficiaries were to be deemed to have been excluded from the categories of beneficiaries and their share was to be dealt with by the settlor or enjoyed by her in her entire discretion. The question was whether the settlement was revocable within the meaning of Section 16 (1)(c). It was held in that case that the settlement was expressly stated to be revocable under Section 16(1) (c). The third proviso to Section 16(1)(c) was, however, applicable to the case and the income was not assessable in the hands of the settlor so long as the beneficiaries did not lose their right in terms of the deed of settlement over the assets and the deed was not revoked. This, again, is a case where the settlor had not reserved any interest in herself in presente. This case, therefore, does not take the matter any further.
14B. In : 45ITR357(Patna) their Lordships of the Supreme Court held that the scheme of Section 16 (1) (c) was that although in fact a transfer was revocable under Section 16 (1) (c) read with the first proviso thereto, the income derived from such a settlement would still not be considered to be the income of the settlor if the settlement was not revocable for a period exceeding six years or during the lifetime of the person for whom the income was settled and the settlor derived no direct or indirect benefit from the income From this decision it is clear that the case that was being considered by their Lordships was the case where the settlor had not reserved any interest for himself in the income of the property and the settlement was to be deemed to be revocable by operation of the first provision inasmuch as the power to revoke was reserved in the settlor. In such a case it was held that the income could not be assessed in the hands of the settlor so long as the income did not actually come in the hands of the settlor, that is to say, till the time the settlement was not actually revoked. In this case, their Lordships referred to the decision in : 13ITR105(Bom) and held that it was correctly decided. This case is not. in any way contrary to the view we have expressed.
15. For the abovesaid reasons, we are of the view that the decision of the Tribunal is correct, and our answer to both the questions is in the affirmative, namely, that the trust created by Karelal Kundanlal was rendered revocable within the meaning of Section 16(1)(c) read with the first proviso and that the three-fourths of the income of the said trust could be included in the total income of the assessee, as the third proviso to Section 16(1)(c) did not come into operation in the circumstances of the ease. The reference is answered accordingly. The assessee shall pay the costs of the reference to the Commissioner of Income-Tax. M.P. Hearing fee Rs. 200.