(1)This is a consolidated reference under S. 66(1) of the Income-tax Act, the question referred for our opinion being common for the two years of assessment, 1957-58 and 1958-59. As formulated, the question is a rolled up one, the first part of it relating essentially to a finding of fact arrived at by the Tribunal, while the latter is a question of law. The substantial matter referred for our decision relates to the operative nature of two deeds of trust executed by the assessee on 1-4-1943 and 7-3-1956. The question, as referred, runs:
"Whether the inference of the Tribunal that the trust was genuine and not revocable within the meaning of S. 16(1)(c) is legal ?"
On behalf of the Department the case was presented to us on an alternative basis, viz., (1). There was no material for the Appellate Tribunal to come to the conclusion that he trusts established by the assessee on the two dates referred to above, were real or genuine ones; (2) Even if they were intended to be operative documents, they should be regarded as revocable instruments within the meaning of S. 16(1)(c) of the Income-tax Act and the assessee would, therefore, be liable to tax in respect of the income derived form the properties conveyed thereunder.
(2) To appreciate the contention, it will be necessary to set out a few facts. The assessee, E. M. Gopalakrishna Kone, is a well-known publisher of Tamil Books and school text-books, having his business place in Madurai town. He owns a printing press called "Excelsior press". He was childless and being charitably disposed, was rendering help to the poor and indigent, particularly to school children. But till the year 1943, on 1-4-1943, he purported to dedicate Ac. 36-82 cents in Sirudur village and his entire interest in his business printing press, publication, copyright etc., for the purpose of establishing and maintaining an educational institution for girls and another of imparting training in handicrafts to poor boys, who were also to be given free food. The trust further envisaged the granting of scholarships and the free supply of books to deserving students. Paragraphs 7 to 9 of the document which will be found relevant for the consideration of the latter part of the reference, stated:
"7. I, myself, am the trustee for the above trust. Till my life I shall be the trustee and manage the above trust business, I have no right or interest whatsoever in the above Trust or the above Trust business. As a return for my management in the capacity of a Trustee I can take up Rs. 4000 per year form the income of the Trust business.
8. I shall have to maintain in the capacity of a Trustee separate accounts for the properties and business that are settled in favour of the Trust. I shall have full powers, as a trustee, to develop and improve the publications, printing and binding business. After making the charities out of the profits form the aforesaid Trust business, if monies are left, they shall be accumulated as a fund for the above trust. As a trustee, I have the power to utilise the moneys which are accumulated in the Trust fund for purchasing properties, improving the publication business for lending the monies on interest and for increasing the income through other business.
9. If for any reason in the capacity of a Trustee I am unable to continue the above business, I will have the power as a Trustee to sell wholesale or, in retail the stock on hand, the copyright and the machinery and the items of the printing and binding businesses and hand over to the above Trust the monies that I receive by such sale or convert the monies into immovable properties, or trust securities and conduct the charities with the income form the said properties or securities. The above trust cannot be revoked at any time by anybody. As the author of the Trust, I have full power to determine who should be trustee after me, and how the trusteeship should devolve and in what manner the Trust should be conducted. I propose to determine these by another deed or will".
(3) The contemplated establishment of school did not materialise till the year 1957. But there is evidence to show that at least one part of the trust, namely, the granting of scholarships to poor students, was performed.
(4) Whether the document referred to above was a genuine transaction dedicating the properties to the charities specified therein, or whether it was a mere camouflage to evade tax, was raised and considered by the Income-tax Department, while they were dealing with the assessment of Gopalakrishna Kone for the year 1944-45. The Income-tax Officer, in the first instance, held that the trust deed was not one intended to be operative. This view was not accepted on appeal. The Appellate Assistant Commissioner found, on examination of the accounts and of counterfoil receipts, produced by the assessee, that consistently with the provided for the grant of scholarships to poor students. He, therefore, remitted the case back to the Income-tax Officer for a fuller consideration of the matter on evidence. By his order dated 15-2-1947, the Income-tax officer held that there was clear proof that the trust was a real charitable one. The result was that from the date of the document, namely, 1-4-1943, the income form the properties transferred to the Trust was excluded form the assessee's income While computing the same for the purpose of assessment to tax. This opinion was accepted by the department till the year 1956-57.
(5) Early in the year 1958, the Income-tax Officer thought he had reason to suspect the reality of the trust and, accordingly, he issued a notice under S. 34 of the Act for the reopening of the assessment of the year 1949-50. Holding that the trust was a bogus and sham one, he re-assessed the assessee by including the income from the trust properties in the assessee's personal income. This change of opinion on the part of the Department arose by reason of the assessee executing another trust deed on 7-3-1956 dedicating fresh properties to the trust already founded. The latter document purported to be a comprehensive one, by including in it not merely the new properties but also the old ones which were covered by the document dated 1-4-1943. Under the earlier document, the trustee was allowed a sum of Rs. 4000 per year as remuneration. This was increased in the later document to Rs. 5000.
(6) Before dealing with the question whether the execution of the second document would be sufficient material for holding the earlier dedication a sham one, we will have to refer to certain matters relating to the administration of the trust by the assessee. As we pointed out earlier, the assessee had been spending certain monies for educational charities. On 30-5-1947, he was able to purchase form Government a sizable extent of land Ac. 241-21 cents in two villages for the purpose of the trust already founded by him. But at the same time, he did certain things which could not be regarded as wholly consistent with his position as a trustee. Although the entire business had been transferred to the trust, the assessee retained the selling agency of the concern. This, by itself might not amount to much, inasmuch as the selling agency had not been expressly included in the trust. But the assessee opened for himself a current account with the trust and was drawing large sums of money from time to time, for his own purposes, and debiting himself with interest at 3 per cent, per annum on such drawings. During the account year 1944-45, he had drawn a sum of Rs. 39,838. This practice steadily developed from year to year till the drawings amounted to Rs. 4,63, 344 du ring the year 1955-56. In one of the intervening years, the drawings amounted to as much as 80 per cent, of the total assets of the trust. But all these drawings were made in his capacity as a debtor to the trust. The sums were utilised for the construction of a cinema theatre, named Meenakshi Talkies. There can be little doubt on the materials now available that the assessee must have originally intended to keep the theatre for himself, not as the property of the trust, out of the monies of which in a sense it had been built. There was, however, some justification for this for he had borrowed the monies required for the construction of the theatre form the trust funds; however objectionable such borrowings might be, the monies were technically his.
(7) The amount spent for the construction of the theatre during the years 1950 to 1956 was Rs. 3,50,000. The theatre did not bring much money to the assessee. The loss in the venture was treated as his loss during the assessment year 1956-57.
(8) There was yet another instance of objectionable dealing with the trust funds. The assessee contributed a sum of Rs. 20,000 out of the trust funds, to a local municipal hospital.
(9) If the trust deed were to be regarded as a genuine one, these acts can only be regarded as breaches of trust.
(10) On 7-3-1956 the assessee executed a further deed of trust, dedicating the properties covered by the document dated 1-4-1943, as well as the cinema theatre to the trust. In so doing the assessee did not take credit for the value of the cinema theatre and thereby wipe out of his liability to the trust incurred by reason of his drawings. He continued to treat himself as indebted to the trust for the sums drawn by him.
(11) That the first as well as the second trust deeds were real ones is shown by the fact that on 1-11-1957 the assessee, while adopting a son, executed a document appointing the adopted son as his successor trustee and enjoining upon him the obligation of performing the trust specified in the two documents.
(12) We have earlier referred to the proceedings under S. 34 of the Act in regard to the assessment year 1949-50 the present reference not being concerned with that order, which was subsequently vacated on appeal that the trust was illusory.
(13) That view was adopted by the Income-tax Officer while dealing with the assessment of the assessee, in his individual capacity, for the years 1957-58 and 1958-59. The substantial ground for the conclusion was that the assessee had dealt with the funds of the trust as if they were his own by making large drawings by way of loans. This view was not shared by the Appellate Assistant Commissioner, who found that the claim of the department that the trust was sham, was not reasonable one and could not be helpful he observed:
"If the trust was valid, as it was held to be once when the reassessment was made for the assessment year 1944-45, it cannot cease to be so merely because, assuming this for argument, the appellant as a trustee subsequently infringed the terms of the trust."
But, at the same time, the Appellate Assistant Commissioner sustained the assessment on the ground that the trust would be a recoverable one, within the mischief of S. 16(1)(c) of the Act. The assessee then appealed to the Appellate Tribunal. The Tribunal found that the assessee had fully and completely divested himself, by the two deeds of trust, of his interests in the properties conveyed thereunder and that the mere fact that the monies were utilised or that additional remuneration was provided for in the second document would not take away their essential character. The Tribunal also found, though without much of a discussion, that the trust was not a revocable one, within the meaning of S. 16(1)(c) of the Act.
(14) Learned counsel for the department first urged that, on the facts and circumstances referred to above the only conclusion possible would be, that the two trust deeds were nothing more than a device to evade taxation, title to the properties conveyed thereunder having remained with the assessee all along. We find no warrant for this extreme contention. There is nothing in the terms of the documents to show that the assessee intended to reserve any benefit to himself. Both the documents clearly stipulate that the trusts were irrevocable. As pointed out earlier, the trust was confirmed by the adoption deed and there could scarcely be any doubt that the adopted son who got his rights to the self-acquired properties of the assessee by the adoption, would be bound by the two trust deeds. Secondly, charities were performed in accordance with the terms of the trust ever since its inception. It may be that the school which had to be established for a period of nearly 14 years. But that may be for reasons beyond the control of the assessee, or it may be that the assessee wanted to place the trust on a sound footing before starting the school. The books maintained by the assessee do show that form the beginning the properties of the trust were kept apart and never mingled with those of the assessee. Whenever the trustee lent monies of the trust to himself, for his personal ventures, he treated himself as a debtor to the trust, charging himself with interest, albeit of a concessional rate.
It is true that while considering the genuineness of a document the circumstance surrounding its execution and the subsequent conduct of the executant furnish evidence of intent with which the said document was executed, namely, whether it was intended to be operative or whether it was merely sham. The main circumstances relied on by the Income-tax officer; as well as the learned counsel for the department, is the systematic drawings of money out of the trust funds for the personal use of the assessee. But that circumstance is, at best, an equivocal one. In certain cases, it may indicate that the assessee had no intention of parting with the property; it may equally be that it only shows that It was nothing more than an abuse of power by the trustee. The other facts to which we have made reference earlier, namely, the method of keeping accounts, purchase of 241 acres of land, on behalf of the trust, the terms and conditions of the adoption deed and the granting of scholarships, do point to the fact that the assessee must have intended the trust to be a real one.
(15) We have earlier referred to the order of the Appellate Assistant Commissioner in respect of the assessment year 1944-45 and of the Income-tax Officer, on remand, holding that the trust was a genuine one. No fresh circumstance, other than the execution of a supplemental deed of trust, has been placed before the authorities to come to a different conclusion. The execution of the second deed of trust dedicating additional properties can hardly negative the intent with which the original one was executed. There are, therefore, no new materials for the Income-tax department while dealing with the assessment for the years 1957-58 and 1958-59, to come to a conclusion different form the one arrived at the earlier stage. There was, in our opinion, sufficient material for the Appellate Tribunal to come to the conclusion that the two trust deeds were genuine ones intended to be acted upon.
(16) We now come to the next part of the question, namely, whether the deed of trust in a revocable one coming within S. 16(1)(c) of the Act.
(17) Section 16 enumerates the amounts which are to be included or excluded in the computation of the total income of an assessee Sub-clause (c) of clause (1) of that section states:
"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 revocable transfer of assets shall be deemed to be income of the transferor".
That provisions subject to three provisos the first of which alone will be relevant for our present case. Proviso one says:
"Provided that, for the purposes of this clause settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the 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 resume power directly or indirectly over the income or assets".
Section 16(1)(c) deals with income form properties which had been conveyed by the assessee by means of a settlement or disposition. In certain circumstances such income not withstanding the transfer is treated as that of the settlor, though it was the beneficiary that has title to receive it. We may point out now that while considering the applicability of that provision one has to exclude considerations which show that the trust or settlement was not intended to be a real one, inasmuch as that provision deals only with real transfers. If the transfer under the trust deed or settlement is transfer under the trust deed or settlement is not a real r valid one the property will continue to remain that of the settlor, who would for that reason be liable to tax on its income. When, however, a real transfer by way of trust or settlement is made, the settlor would have no further interest in the property and there is no reason why he should be charged to tax in respect of the income, which should properly go to the beneficiary under the trust. Therefore under the law, as it stood prior to 1939, when the present provision was introduced when there was an effective transfer of an asset, the assessee divesting himself of the income form that asset, such income could not be treated as the income of the assessee. But this principle was taken advantage of by assessees with a view to evade tax:
In Chamberlain v. Inland Revenue Commissioners, (1961) 25 Tax Cas 317 at p. 329. Lord Macmillan, dealing with a provision corresponding to S. 16 of Indian Income-tax Act observed:
"This legislation....................is designed to overtake and circumvent a growing tendency on the part of the tax payers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the tax payer of part of his property in such a way that the income should no longer be received by him, while at he same time he retained certain powers over, or interesting, the property or its income. The legislature's counter was to declare that the income of which the tax payer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly".
(18) The Supreme Court in its judgment in Tulsidas Kilachand v. Commissioner of Income-tax, Bombay City , accepted
that the principle stated by Lord Macmillan underlay S. 16(1) of the Indian Income-tax Act.
(19) Under sub-clause (c) to S. 16(1), income forming the subject matter of the settlement form property, which has not itself been disposed of but continues to remain with the settlor, is treated as that of the settlor. The section further provides that even in respect of property itself being transferred under a settlement, the income should be deemed to be the income of the settlor, if the transfer is a revocable one. This provision is subject to an exception contained in the third proviso with respect to a document which is not revocable for a period exceeding six years.
(20) The first proviso to the section statutory provides for two cases where a settlement is to be deemed to be revocable, namely, (1) where it contains a provision for retransfer of the income or assets to the settlor either directly or indirectly and (2) if it gives the settlor a right to reassume power, directly or indirectly, over the income of the assets.
(21) The two trust deeds in the case before us expressly provide that they are not revocable. There is no provision in them which can be construed as authorising a retransfer of either the income or the assets to the settlor.
(22) What we have, therefore, to consider is:
"whether there is any provision in the documents giving the settlor a right to reassume power, either directly or indirectly over the income or the assets."
The power, the existence of which will attract the fiction created by the second proviso, is one by which the income or the assets could be diverted, under the authority of the document itself, to purposes other than those specified therein. If, for example, a document sets apart certain properties for certain well-defined objects of trust, but contains a clause which confers a power on the settlor to use the property or the income for his own benefit, the case will clearly be hit at by the proviso and the trust deed should be deemed to be a revocable one. If, on the contrary, the power that is conferred under the document is only to effectuate or administer the trust such a provision can in no way be regarded as authorising a resumption or power by the trustee.
(23) In the instant case, paragraphs 8 and 9 of the first of the two trust deeds confer a power on the trustee qua trustee to develop and improve the trust property or to sell the stock on hand, copyright, machinery, etc. But those powers are for the benefit of the trust, and can in no sense be regarded as a power to reassume control by the settlor over the income of the assets.
(24) The Appellate Assistant Commissioner however held that inasmuch as the assessee had treated the assets of the trust, on occasions, as if they were his personal property, drawing large sums of money as loans, the document should be treated as one conferring a power of reassuming control. We have already pointed out that the acts of management complained of against the assessee can, at best, amount only to breaches of trust. The second part of the first proviso to S. 16(1)(c) is concerned as we said only with a power or resumption conferred by the document and cannot appeal to cases where there is no such power under the document.
(25) This interpretation was accepted in Commissioner of Income-tax v. Jivanlal Amritlal 1964-1 ITJ 414 (Guj), where a Bench of the Gujarat High Court held that a right to resume power, within the meaning of the proviso 1 to S. 16(1)(c), must mean that there was such a power lawfully given under the deed of trust. In that case, the assessee effected a settlement of certain assets, held by him upon trust for charitable objects, constituting himself as one of the trustees. The relevant provisions of the trust deed conferred on the assessee an absolute discretion during his lifetime, to invest the income of the trust fund and the other trustees who were appointed under the document had no power to override his wishes. It was held that the income form the trust would be exempt form taxation and could not be included in the income of the settlor under the first proviso to S. 16(1)(c).
(26) We have already referred to the objects of the provisions contained in S. 16(1)(c), namely, that is only in a case where a settlor retains powers over or interest in property settled or in its income, he should be treated as the receiver of the income for the purpose of taxation. The effect of the section in such a case will be to shift the liability to tax form the beneficiary to the settlor. It is not necessary, for achieving the object of the section, that the trustees should be left with no power for exercising his function as a trustee consistently with the terms and subserving to the objects of the trust. In such a case, the trustee will be doing his duties as a trustee and he would indeed have no power to personally enjoy the benefit of what had been dedicated already. The present case is one where there is no power in the assessee to reassume the enjoyment of the property on receive its income for his own benefit; the document nowhere authorised him to do so. If however, he did so, it would only be a case of breach of trust and not one authorised by the deed. Such cases, in our view, cannot come under the provisions of S. 16(1)(c).
(27) We, therefore, answer the question referred to us in the affirmative and against the department. The assessee will be entitled to his costs. Advocate's fee Rs. 250.
(28) Reference answered in the affirmative.