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Chunilal Mulji Motani and ors. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 206 of 1977
Judge
Reported in[1983]139ITR166(Cal)
ActsIncome Tax Act, 1961 - Sections 61, 62, 62(1) and 63
AppellantChunilal Mulji Motani and ors.
RespondentCommissioner of Income-tax
Appellant AdvocateS.R. Banerjee, ;Soumen Mukherjee and ;D.C. Nandi, Advs.
Respondent AdvocateS. Sen, ;A. Sen Gupta and ;P. Majumdar, Advs.
Cases ReferredBehari Lal Mullick v. Commissioner of Income
Excerpt:
- sabyasachi mukharji, j. 1. in this reference, under section 256(1) of the i.t. act, 1961, the following two questions have been referred to this court:' i. whether, on the facts and in the circumstances of the case, the appellate tribunal was right in law in their conclusion that the indenture of settlement dated 21st may, 1960, was a revocable transfer within the meaning of section 61, section 62 and section 63 of the income-tax act, 1961 ?2, if the answer to the first question is in the negative and in favour of the assessee, whether the inclusion and assessment of the entire income from the trust property known as ' kamani mansion ' at no. 3, allenbery road, calcutta, in the hands of the settlor for the assessment years 1967-68, and 1968-69 is justified and right in law? '2. this.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference, under Section 256(1) of the I.T. Act, 1961, the following two questions have been referred to this court:

' I. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in their conclusion that the indenture of settlement dated 21st May, 1960, was a revocable transfer within the meaning of Section 61, Section 62 and Section 63 of the Income-tax Act, 1961 ?

2, If the answer to the first question is in the negative and in favour of the assessee, whether the inclusion and assessment of the entire income from the trust property known as ' Kamani Mansion ' at No. 3, Allenbery Road, Calcutta, in the hands of the settlor for the assessment years 1967-68, and 1968-69 is justified and right in law? '

2. This reference relates to the assessment years 1967-68 and 1968-69. It appears that one Shri Girdharilal Hansraj Kamani had executed a registered indenture of settlement on May 21, 1960, settling on trust for public, religious and/or charitable purposes the property known as ' Kamani Mansion ' bearing No. 3, Allenby Road, Calcutta, in favour of six trustees specified in the said deed. As mainly the construction of the said trust deed is relevant for our purpose it would be instructive to refer to the relevant provisions. After the recital the trust deed declared in the habendum clause as follows :

' Now this declaration and indenture made in Calcutta on this the 21st day of May, 1960, hereby witnesseth that in pursuance of the said desire and in consideration of the premises mentioned above the settlor doth hereby grant, assign and transfer and convey absolutely and irrevocably for ever unto the trustees the said immovable property made up of lands and buildings comprising the property, ' Kamani Mansion ' at premises No. 3, Alien-bery Road, in the city of Calcutta, more fully described in the said schedule already referred to above marked ' A ' appended here totogether with all the rights, title and interest of the settlor. To have and to sold the said property unto the trustees upon the trust and uses hereinafter appearing subject to the provisions and conditions hereinafter specifically declared and expressed. '

3. Then after specifying the duties of the trustees, the trust deed provided, inter alia, as follows :

' 9. The trustees shall out of the trust fund or the income thereof first pay out discharge or meet, settle or compound such expenses or charges or taxes, cesses levies as may be lawfully payable in respect of the property hereby conveyed and/or of the income yield or return produced by that and/ or any undertaking trade commerce or industry and make payment of any other incidental outgoings and/or obligations in the shape of any remuneration if the trustees, in their discretion, decide upon granting any remuneration either to the managing trustee if they appoint or to any other person serving the trust in any legal accountancy, technical or professional capacity or as an agent or employee and/or of stamps, stationary, travelling conveyance which might, in accordance with the law, in force have to be incurred by the trustees for the purposes of administration of the affairs of and/or protecting the interest of the trust.

10. The net income of trust and/or the trust fund that shall remain after so discharging meeting or settling and/or compounding the expenses outgoings, charges, liabilities, etc., referred to in the immediately preceding paragraph shall be applied and/or appropriated and/or disposed of by the trustees in their absolute and unfettered discretion subject however to the restrictions and conditions only about the amount so to be paid applied or appropriated hereinafter appearing, namely, on the trustees, shall always permit the settlor to reside in and exclusively occupy the two flats at the 2nd floor of the immovable property known as Kamani Mansion identified today as bearing the Calcutta Municipal premises No. 3, Allenbery Road in the Bhowanipur area in the city of Calcutta in the State of West Bengal during the natural life of the settlor and/or of his wife and in the event of the settlor's death, his wife Smt. Naval Kusam Girdharilal Kamani and in the event of the latter predeceasing the settlor, for period of the natural life of the settlor, free from any obligation and/or liabilities to pay any rent provided however that the proportion of the owner and occupier's taxes and/or any other cesses or levies which might be imposed in accordance with the law on the said property by the Calcutta Corporation and/or any other authorities under the law attributable to the said two flats in comparison with the accommodation offered by the said entire property shall always be borne and/or paid personally by the settlor throughout his life and inthe event of his death and his wife surviving him, by his said wife out of his or her respective personal resources, (b) In addition, the trustees shall pay an amount of Rs. 9,000 (rupees nine thousand only) per every calendar year of 12 months to the said settlor throughout his natural life or in the event of his predeceasing the said wife at the rate of Rs. 9,000 (rupees nine thousand only) per annum throughout her natural life, (c) The surplus left over after payment of these amounts to the settlor and/or his wife as the case may be shall be appropriated at an amount equal to or not less than 50% of such surplus to public religious and/or public charitable purposes for example (i) advancement of learning and/or the grant of continuous subscription to endowments, scholarships, stipends to meritorious students enabling them to pursue their studies; (ii) assisting the establishment and/or the maintenance of scientific technological art institutions, imparting cultural scientific technological learning or education or training; (iii) assisting establishment or maintenance of hospitals, dharamshalas, rest or recreative homes for the infirm, disabled, ailing or sick persons or pilgrims and assisting for religious purposes: (iv) rendering assistance to the persons affected by any natural calamity by flood, fire, earthquake and/or civil commotion, these objectives are only illustrative and not exhaustive ; the predominant intention of the settlor is that such net surplus and latter as hereinafter further provided the entire income produced by the trust fund or trust every year shall be appropriated subject to that minimum percentage for objects or purposes of public religious or charitable nature.

11. On the demise of the settlor and/or his wife the accommodation offered by the said two flats shall be at the disposal of the trustees specifically only for the following purposes :

(i) For housing or offering residential accommodation to my two brothers, Shri Ramjibhai Hansraj Kamani and/or Shri Narbharam Hansraj Kamani, and/or their respective sons and daughters while in Calcutta throughout their respective lives ;

(ii) To house and/or to offer residential accommodation to our said daughter, Smt. Lalita Nawalchand Modi, while in or compulsorily residing in Calcutta throughout her life;

(iii) Subject to (i) and (ii) above, to realise reasonable rent or income therefrom at convenient and particular times in between the said residential accommodation or use of the said flats.

12. In addition, the said amount of Rs. 9,000 (rupees nine thousand only) per year shall be payable to the settlor throughout his life in the event of the settlor predeceasing her shall not be payable to any person or on account of any other private purpose or purposes whatsoever. The entire net income profits or gains produced by the said trust fund and/orthe assets or properties of the trust shall be appropriated subject to the minimum percentage or amount as indicated above every year in their entire unfettered discretion of the trustees for the said public religious and/or public charitable purposes. It shall be competent for the trustees to build up a reserve fund every year or from time to time of the income, profits or gains produced by the said trust fund at a rate or not exceeding 50% of the net surplus of the income profits or gains over the expenditure, outgoings and liabilities incurred by the trustees shall always be ascertained on completion of the accounts as well as on completion of the check of these accounts by an independent accountant or auditor maintained for and at the end of every accounting year observed by the trust, such accounting year may consist of a period of less than 12 months for the first accounting year and shall always consist of 12 months for other subsequent accounting years.'

4. Essentially, therefore, it appears that under Clause 10 of the deed, the trustees were enjoined to permit the settlor and his wife to occupy and reside free of rent in two flats on the second floor of the trust property for their lives and to pay an amount of Rs. 9,000 for every calendar year for the settlor and his wife and after the settlor's life, to his wife. The surplus left over after the payment of this amount to the settlor or his wife was to be applied in the manner specified in the said clause to the public, religious and charitable purposes as specified in the deed. It appears that up to and inclusive of the assessment year 1966-67, the trust had been assessed separately and those separate assessments were made on the settlor by the ITO including the sum of Rs. 9,000 which the settlor received from the trustees as well as the value of the dwelling house on account of the use by the settlor of the two flats as aforesaid in the computation of the settlor's income. The settlor died on April 28, 1967. For the assessment year 1967-68, for which the previous year was 2022 C.D., corresponding to the year ending November 12, 1966, the ITO held on a scrutiny of the clauses of the deed of trust dated May 21, 1960, that the settlor had the benefit of Rs. 9,000 per annum from the income of the trust property for his exclusive use. He, therefore, held that the trust was revocable within the meaning of Section 62 and Section 63 and that income from the trust was, therefore, chargeable in the hands of the assessee under Section 61, though the trust was created before April 1, 1961. The ITO, accordingly, included the entire income from the property, ' Kamani Mansion ', in the computation of the settlor's total income. For the next assessment year, viz., 1968-69, for which the previous year ended on April 28, 1967, the ITO included the net property rental from the trust property for a period of six months only as computed in the earlier year, since the settlor passed away in the middle of the previous year on April 28, 1967.

5. The assessee, aggrieved by the aforesaid orders of the ITO, went up in appeal before the AAC, who after considering the rival contentions, was of the opinion that there was nothing in the trust deed by virtue of which the settlor could be said to have transferred to himself any part or whole of the assets or income transferred to the trust for which he had not originally made any express reservation as detailed above. The words, ' re-transfer ' and ' reassumption ', indicated a second transaction at a later time. Unless the trust deed contained a provision for such a second transaction, whether directly or indirectly, the mere reservation by the settlor of an interest to himself at the time of the original transfer could not make the trust revocable within the meaning of Section 63 of the I.T. Act, 1961. In this connection, reliance was placed on the decision in the case of Ramji Keshavji v. CIT : [1945]13ITR105(Bom) , a decision in which an observation of Kania J., which was not agreed to by Chagla J., and was later on dissented to by a Division Bench judgment of the Calcutta High Court, would require consideration later. In that case, the settlor retransferred a house property to a trust but he reserved the right to occupy a portion of the property during his lifetime. It was held, in that case, that there was no provision for retransfer. The only difference, according to the AAC, as between the said case and the instant case before us, was that in the instant case the assessee had reserved to himself not only the right to occupy a part of the premises transferred to his trustees but also stipulated that an annual payment of Rs. 9,000 should be made to him by the trustees. The AAC was of the view that this difference was only quantitative and did not have any qualitative significance. Therefore, according to the AAC, the instant case was covered by the ratio of the decision of the Bombay High Court. The AAC, therefore, held that there was no provision in the trust deed for ' re-transfer ', directly or indirectly, of any part of the income or assets originally transferred to the trustees. Similarly, the AAC was of the view that there was no provision in the trust deed for ' reassumption ', directly or indirectly, of power over the whole or any part of the income or assets which were originally transferred to the trustees. It was, therefore, held that the ITO was not justified in including the entire income from the trust property in the total income of the assessee. In the assessment year 1967-68, the ITO had taken the income from this property at Rs, 17,256, excluding the dwelling house. The AAC felt that instead of this figure, the ITO should have considered the assessee's right to receive Rs. 9,000 and there would, therefore, be a relief of Rs. 8,256 on this account. In the assessment year 1968-69, the assessee died in the middle of the year. Excluding the dwelling house, the ITO had included a sum of Rs. 8,628 in the total income of the assessee for that year treating the trust as revocable. It was directed by the AAC that inplace of this amount the ITO should have considered the assessee's right to receive Rs. 4,500 during these six months. Therefore, there would be a reduction of Rs. 4,128 in the total income of the assessee in this year on this account.

6. Being aggrieved by the aforesaid decision of the AAC, the Revenue as well as the assessee preferred appeals to the Appellate Tribunal. The Appellate Tribunal, after referring to the relevant decisions, which we shall refer to, and the rival contentions before the Tribunal, observed that in view of the ratio of the decision of the Supreme Court in the case of Hrishikesh Ganguly v. CIT : [1971]82ITR160(SC) , a decision which we shall presently note, the trust was revocable and the entire income or benefit of the trust should be assessed in the hands of the settlor and, therefore, set aside the decision of the AAC. Upon this finding, the two questions mentioned hereinbefore have been referred to us.

7. The first question to which we must direct our attention is whether the provisions of this trust deed in deciding the controversy before us should be considered in the light of Section 16(1)(c) along with its proviso of the Indian I.T. Act, 1922, or should be examined in the light of Sections 60, 61, 62 and 63 of the I.T. Act, 1961. It appears to us that this controversy was not quite exhaustively mooted before any of the authorities below. It is true that the ITO had noted that the trust was created before April 1, 1961, but it does not appear from the orders of the ITO or the order of the AAC or the order of the Appellate Tribunal that the question as to whether the provisions of this trust deed should be considered in the light of 1922 Act or 1961 Act was agitated. Furthermore, we must observe that the question posed before us assumes that the controversy between the parties has to be resolved in the light of the provisions of the 1961 Act. Therefore, strictly perhaps it would not be right to embark upon the question as to whether the 1961 Act applied or the 1922 Act applied. But since this point was touched in the order of the ITO and since in resolving the contentions of the parties, reference had to be made to certain changes, which the Supreme Court has described as significant changes in the 1961 Act, it would be relevant to refer to the relevant provisions of both the 1922 Act and the 1961 Act.

8. The relevant provision, as we have mentioned, of 1922 Act is the provision of Section 16(1)(c) of the Indian I.T. Act, 1922. Section 16 deals with the question how the total income of an assessee is to be computed and Section 16(1)(c), with its provisos, reads as follows :

' (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, 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 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 a 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.'

9. Now, basically, the said section remains the same, except some changes, which we shall presently note, in the provisions of Sections 61, 62 and 63 of the I.T. Act, 1961, which are relevant for our present purposes. Now, Section 61 of the I.T. Act, 1961, stipulates that all income arising to a 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. Section 62 and Section 63 are material for our present purpose and it is necessary to set out the provisions of these two sections hereunder :

' 62. Transfer irrevocable for a specified period.--(1) The provisions of Section 61 shall not apply to any income arising to any person by virtue of a transfer--

(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee ; or

(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding six years :

Provided that the transferor derives no direct or indirect benefit from such income in either case.

(2) Notwithstanding anything contained in Sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.'

'63. ' Transfer' and ' revocable transfer ' defined.--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;

(b) ' transfer ' includes any settlement, trust, covenant, agreement or arrangement.'

10. The learned advocate for the assessee urged before us that inasmuch as the trust deed with which we are concerned was admittedly executed prior to April, 1961, the controversy between the parties should be decided in the light of the provisions prevailing prior to the introduction of 1961 Act. In aid of his submission, he relied on certain observations of the Division Bench of the Punjab and Haryana High Court in the case of CIT v. Rattan Trust and he drew our attention to the observations of the court appearing at p. 566 of the report. But before we deal with the said observations of the Division Bench, it appears to us that this contention urged on behalf of the assessee cannot be sustained. It is clear that the Finance Act of each year introduces the rate applicable for the previous year and Section 4 of the I.T. Act, 1961, has a similar provision which stipulates that, where the Central Act enacts that income-tax shall be charged for an assessment year at the rate or rates specified, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, the Act in respect of the total income of the previous year or previous years, as the case may be, of every person : provided that, where by virtue of the provisions of the Act income-tax was to be charged in respect of the: income for a period other than the previous year, income-tax shall be charged accordingly. This point is concluded by the decision of the Judicial Committee in the case of Maharaja of Pithapuram v. CIT [1945] 13 ITR 221. There, the Judicial Committee observed that under the express terms of Section 3 of the Indian I.T; Act, 1922, (which was in similar terms as Section 4 of the I.T. Act, 1961), the subject of charge was not the income of the year of assessment, but the income of the previous year; The Indian I.T. Act, 1922, the Judicial Committee observed, as amended from time to time, formed a code which had no operative effect except so far as it was rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act. Similar is the position with the present Finance Act, with which we are concerned, and similar is the scheme of the Income-tax Act now. In that light, the Judicial Committeeobserved that Section 16(1)(c) of the Indian I.T. Act, 1922 would apply to revocable transfers of assets whether these were effected before or after the commencement of the Amendment Act of 1939. There, by certain deeds of trust and settlement dated 5th April, 1933, the assessee had settled the properties on each of his daughters with a provision reserving to himself powers to revoke the settlements or to make fresh dispositions as he deemed fit. For the assessment year 1939-40, the I.T. authorities had held that the income of the year 1938-39, derived from the assets comprised in the deeds, should be deemed to be the income of the assessee under Section 16(1)(c) of the Act, as amended by the Amendment Act of 1939 and this view was upheld by the High Court. It was held by the Judicial Committee that the income from the properties were rightly deemed to be the income of the assessee under Section 16(1)(c) of the Act. There, delivering the opinion, Lord Thankerton observed at p. 223 of the report as follows :

' In the first place, it is clear to their Lordships that under the express terms of Section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast to the English Income-tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by a yardstick based on previous years. The difference is well illustrated by the distinction that in England the source of income must still be extant in the year of assessment but that is not of relevance in India. Their Lordships may refer to the able judgment of Rankin C. J. in Behari Lal Mullick v. Commissioner of Income-tax [1927] 2 ITC 328 (Cal) with which they agree.

In the second place, it should be remembered that the Indian Income-tax Act, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of the tax imposed for a particular fiscal year by a Finance Act. This may be illustrated by pointing out that there was no charge on the 1 938-39 income either of the appellant or his daughters, nor assessment of such income, until the passing of the Indian Finance Act of 1939, which imposed the tax for 1939-40 on the 1938-39 income and authorised the present assessment. By Sub-section (1) of Section 6 of the Indian Finance Act of 1939, the income-tax for the year beginning on the 1st April, 1939, is directed to be charged at the rates specified in Part I of Schedule II, and rates of super-tax are also provided for, and by sub-seetion (3) it is provided that ' for the purpose of this section and of Schedule II, the expresion 'total income' means total income as determined for the purposes of income-tax or super-tax, as the case may be, in accordance with the provisions of the Indian Income-tax Act, 1922. This can only refer to the Indian Income-tax Act, 1922, as it stood amended on the date of the IndianFinance Act, 1939, and necessarily includes the alterations made by the Amending Act, which had already come into force on the 1st April, 1939. '

11. In our opinion, the ratio of the said decision would be applicable to the facts of this case and it is also indisputable that the 1961 Act would guide the controversy before us. The passage upon which the learned advocate for the assessee relied on in the decision of the Punjab and Harayana High Court in CIT v. Rattan Trust , read in the proper light, in our opinion, supports this conclusion and is contrary to the submissions urged on behalf of the assessee. There, Mr. Justice Dhillon had observed at p. 566 of the report, first, that the provision was amended from 1st April, 1971, and his Lordship set out the amended proviso to Section 13(1)(c) of the Act and thereafter his Lordship went on to say that the answer to the question referred to their Lordships would depend on the interpretation of the first proviso to Section 13(1)(c), as amended. Therefore, his Lordship was reiterating the proposition that the amended provision, viz., the provision which was applicable at the time of determination of the question, would be applicable, irrespective of the fact when the trust was created. His Lordship further went on to observe that the trust deed fell within the ambit of the controversy, if so, no fault could be found with the conclusion arrived at by the Tribunal. His Lordship further held that it was not disputed that the assessee-trust was created before the commencement of the 1961 Act. Then the contention that Clause 39 of the said trust deed could be seen as it existed before 1961 Act, was rejected as being without merit at p. 567 of the report. Therefore, in our opinion, read in the proper context, the observation of the Punjab and Haryana High Court, upon which learned a'dvocate for the assessee relied on, is in consonance with the ratio of the decision of the Judicial Committee. It was, however, urged by learned advocate for the assessee that in this case there was a certain distinction made in respect of the trust deed made before April 1, 1961, as would be apparent from Clause (ii) of Sub-section (1) of Section 62 of the Act. It is true that certain trusts created before April 1, 1961, had been treated slightly differently in Clause (ii) of Sub-section (1) of Section 62 of the Act. But if this be any pointer, in our opinion, it is a pointer that except for a limited purpose and for other purpose, the trust, though created before April, 1, 1961, would be guided by the 1961 Act, if the question arose after coming into operation of the 1961 Act. It is indisputable in this case that the controversy in this case arose, for the relevant assessment year, after coming into operation of the 1961 Act. Therefore, we must proceed on the basis that the provisions of the 1961 Act would apply.

12. As we have set out the provisions of the 1961 Act, it appears to us that Sections 62 and 63 amply cover a situation of this nature. In order to come out of the purview of Section 61 of the Act, it is necessary that the trustwould not be revocable and in what circumstances a trust could be considered to be revocable was not mentioned in Section 61 but in Section 63 of the Act. The essential requirements are, as we have been able to gather from the decisious, that there must be in the trust deed certain provisions reserving a power for retransferring either directly or indirectly, wholly or in part, of the income or the assets to the transferor. Similarly, there must be, in the alternative, a right to reassume power, directly or indirectly, in whole or in part, over the assets. Therefore, if there is any reservation in the trust deed the power to. reassume, directly or indirectly, over the whole or part of the income or assets or even to retransfer the whole or part of the income or assets, then the trust would be deemed to be revocable. Now, in this respect, there is a change between the 1961 Act and the provisions of Section 16(1)(c) of the 1922 Act. Previously in the 1922 Act, there was no specific mention that the right to retransfer directly or indirectly a part of the income or to reassume power over the assets or income directly or indirectly other whole or in part of the income would make the trust come within the mischief of Section 16. But that had been brought out by the 1961 Act. It appears that in the case of Hrishikesh Ganguly v. CIT : [1971]82ITR160(SC) , the Supreme Court made the following observations at pp. 164 and 165:

'The view expressed in the Ramji Kesavji's case : [1945]13ITR105(Bom) was approved by this court in CIT v. Rani Bhuvaneshwari Kuer : [1964]53ITR195(SC) . In that case, the assessee, who owned an estate known as ' Takari Raj', created a trust with a view to liquidate the debts of Takari Raj. The beneficiaries under the deed were the settlor, her husband and her sons. It was declared that the settlement made was to be permanent and irrevocable but each beneficiary had full right to make any sort of arrangement about devolution or succession or make such alienation as was considered fit about his share. It was observed that two conditions were necesary for the application of the third proviso to Section 16(1)(c): (1) that the trust should not be revocable for a period exceeding six years or during the lifetime of the beneficiary, and (2) the settlor or disponer should have no direct or indirect benefit from the income given to the beneficiary. The following observations at p. 201 are noteworthy:

'The third proviso to Section 16(1)(c) does not operate to exclude the income which the settlor receives as a beneficiary, from liability to income-tax : it merely excludes that part of the income which is under the deed of settlement given to another person from liability to tax in the hands of the settlor, if the conditions prescribed by the third proviso are fulfilled. The contention raised by the Commissioner that, if under the deed of trust the settlor has reserved to himself as a beneficiary any part of the income ofthe property settled, the third proviso will not apply to the deed of trust, runs contrary to the plain words of the statute.'

The further contention of the Commissioner that the third proviso only operated in respect of deeds of settlement or dispositions which were referred to in Clause (c) but not the deeds of settlement or disposition which by the first proviso were deemed to be revocable was rejected by saying that the function of provisos (1) and (2) was plainly explanatory and it was impossible to hold that the third proviso did not operate in respect of settlements, dispositions or transfers which were by the first proviso revocable for the purposes of that clause.

We have referred to the above case in extenso, because, in our opinion, it fully covers the point which has arisen in the present case.

In the light of the above principles it would not be wrong to say that the effect of the third proviso is that a settlement or disposition containing a provision for retransfer of a part of the income to the settlor would not render the whole income of the settlement chargeable in his hands provided the other conditions contained in the proviso are satisfied. In other words, the proviso cornes 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'. 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.'

13. This was an appeal from the decision of the Calcutta High Court, where the Calcutta High Court had considered the trust to be revocable and that the whole of the income was to be added to the income of the settlor because there was a reservation of a part of the income. The controversy arose in the context of the 1922 Act. The Calcutta High Court proceeded on the basis that in order to be revocable under the first proviso to Section 16(1)(c) of the 1922 Act, it was sufficient if the settlement, disposition or transfer contained a provision for the retransfer of a part of the income to the settlor, disponer or transferor and it was not necessary that there must be a provision for a retransfer of the entire income. The word ' income' included, according to the Calcutta High Court, any part of the income unless there was anything repugnant in the context. The Calcutta High Court considered that the third proviso to Section 16(1)(c) did not explain the first proviso but it was a kind of a rider to an exception. Though, with very great respect, it appears to us that this was the correct view, yet this view was not upheld by the Supreme Court and the Supreme Court was of the view that the power to retransfer or reassume control over a part of the income or assets would not make the trust revocable. But theSupreme Court noted that there had been a significant change in the 1961 Act and after setting out the different provisions it was observed that it could well be said that the necessity for expressly mentioning ' part of the income.' was felt because under the provisions of the said Act, part of the income was not covered. In view of the ratio of the said decision of the Supreme Court in the case of Hrishikesh Ganguly v. CIT : [1971]82ITR160(SC) , we are of the opinion that in this case the right to retransfer or re-assume control either in part or whole of the income or assets to the transferor, being a clause of the trust deed, would be coming within the mischief of the provisions of Section 63 of the 1961 Act, because that contains a provision for retransfer of the part of the income or assets indirectly to the transferor. We need not detain ourselves with the question whether the retransfer or power to retransfer must be exercised by a second or a later deed. Indeed, that was the view of Mr. Justice Kania in the case of Ramji Reshavji v. CIT : [1945]13ITR105(Bom) . But this view was not concurred with by Mr. Justice Chagla in the said decision and this view was also not concurred with by the Calcutta High Court in the case of CIT v. Jitendra Nath Mullick : [1963]50ITR313(Cal) , to which our attention was drawn. The Supreme Court also, in the, case of CIT v. Rani Bhuvaneshwari Kuer : [1964]53ITR195(SC) , though it concurred with the Bombay High Court's decision in the case of Ramji Keshavji v. CIT : [1945]13ITR105(Bom) , did not express any view whether a second deed was necessary or not. But this is a controversy with which we are not concerned. We must, however, observe that our attention was drawn to the observations of the Supreme Court in the case of CIT v. Jayantilal Amratlal : [1968]67ITR1(SC) where at p. 10 of the report, explaining the meaning of the proviso (1) to Section 16(1)(c), the Supreme Court observed as follows:

' What then is the fair meaning of Section 16(1)(c), proviso (1)? It seems to us that the words ' reassume power ' give indication 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. A provision enabling the settlor to give directions to trustees to employ the assets or funds of the trust in a particular manner or for a particular charitable object contemplated by the trust cannot be said to confer a right to reassume power within the first proviso. Otherwise, a settlor could never name himself as sole trustee. It seems to us that the latter part of the proviso contemplates a provision which would enable the settlor to take the income or assets outside the provisions of the trust deed. Mr. Desai says that if a settlor can derive some direct or indirect benefit under a trust deed, the trust deed would fall within the first proviso. But the first proviso does not use these words. Thewords ' direct or indirect benefit' occur only in the third proviso. This court held in Commissioner of Income-tax v. Raghbir Singh : [1965]57ITR408(SC) that although the settlor in that case obtained a benefit from the trust--payment of these debts--the first proviso was not attracted.'

14. Relying on the aforesaid paragraph, learned advocate for the assessee, contended that in order to come within the mischief of prov. (1) to Section 16(1)(c) what was necessary was that there should be a provision to enable the settlor to take the income or assets outside the provisions of the trust deed. It was urged that if certain rights were reserved by the settlor under the trust deed, then it could not be said that the enjoyment of that right was as a result of the power to take certain property outside the trust deed. It was, therefore, urged that in this case the initial reservation can never amount to reassumption or retransfer. On this point reliance was also placed on the observations of the Actg. C.J., P. B. Mukharji, as his Lordship then was, in the case of CIT v. Trustees of Sreeram Surajmull Charity Trust : [1971]79ITR649(Cal) . There, the learned judge made the following observations at pp. 666-667 of the report:

' Without first looking at the authorities and on the basis of the interpretation of Section 16(1)(c) and its first proviso just stated, it is essential to correlate the following facts. In the first place, the registered deed of trust in this case, which is said to create a revocable trust, does not itself contain any provision for ' retransfer' or for ' reassuming ' within the meaning of the first proviso to Section 16(1)(c). We emphasise the language in the first proviso ' if it contains any provision '. That means that the settlement, disposition or transfer itself must contain such provision. We hold there is none in this case. The second point which we emphasize is about the two words of significant importance : ' retransfer' and ' reassume '. The prefix ' re ' plainly indicates that it must be a ' transfer ' to himself as himself and not in any different capacity or it must have to ' reassume', which means to assume for himself as himself and not in a different capacity. Looking at the relevant clause of the trust deed quoted, on which reliance was placed for the Revenue, there is no provision which can be treated or construed even remotely as a case of ' retransfer ' or giving a right to ' reassume'. A refinement of this branch of the argument was made by Mr. Sen for the Revenue by saying that, although there is no clause for retransfer or reassuming within the meaning of the first proviso of Section 16(1)(c) directly, these clauses may be interpreted as creating a right to ' retransfer ' or a right to ' reassume ', indirectly. In other words, he tried to shift the emphasis from the words ' retransfer ' and ' reassume ' to the word ' indirectly'. But the fact remains that the words ' directly or indirectly' appearing in the first proviso to Section 16(1)(c) must necessarily mean and qualify the words ' retransfer ' or' reassume'. Even if it is to be indirectly, then it has got to indirectly retransfer or reassume. Reading the above clauses of the trust deed set out above, it is impossible in our view to read them as a provision which 'retransfers ' the legal title from the settlor to himself as owner or which gives him a right to ' reassume ' as owner. These clauses, in our view, are clauses of control and regulation of the administration of trust by the trustees. They appear under ' powers of the board of trustees ', ' the number of trustees ' and ' appointment, retirement and removal of trustees'. The language of these clauses and the context in which they appear do not give any right to the settlor to 'retransfer' the trust properties to himself as owner or to ' reassume ' these trust properties for himself either directly or indirectly. Clause 12 quoted above is a clause relating to investment and the power of investment by the trustees. It is not a power to retransfer the trust properties or to reassume the trust properties for the settlor himself personally. Clause 12(e) relates to framing of schemes, rules and regulations for managing the affairs of the trust and for giving effect to the objects of the trust as that clause expressly says. The concluding words in Clause 12(e) ' to vary the same' is not varying the trust but varying the schemes, rules and regulations which may have to be made from time to time. Clause 20 does not mean any right to retransfer the property or to reassume the property directly or indirectly for the settlor himself. That clause only deals with the compensation money when the trust properties are acquired by statutory bodies under statutory authorities and expressly says that the ' compensation money will be invested in such manner as the trustees will tlunk fit'. The language is ' invested ' and not ' retransfer ' or ' reassume ' the money by the settlor personally.'

15. In our opinion, the court, in the aforesaid observations, was dealing with the effect of prov. (1) to Section 16 and was not dealing with the main part of Section 16(1)(c). If that is the position and if the question comes within the main part of Section 16(1)(c) then, in our opinion, it could not be resorted to. Reliance was placed on the observation in the Calcutta High Court's decision relating to the meaning of the expression ' re ', that is to say, to take back the property in the same capacity, that is to say, as an owner in the capacity in which it was enjoyed before the settlement. But, in the instant case, precisely that right had been given and it was the power given to the settlor to be enjoyed by him as the owner ; that is his own money, not as a borrower or in any other capacity but as the owner of the money. Therefore, in our opinion, there was indeed a reservation in favour of the settlor. Therefore, in our opinion, the Tribunal was right in the decision at which it had arrived.

16. Our attention was drawn to several other decisions, viz., observations in the case of CIT v. Ratilal Nathalal : [1954]25ITR426(SC) , in the case ofCIT v. Jitendra Nath Mullick : [1963]50ITR313(Cal) , in the case of CIT v. Raghbir Singh : [1965]57ITR408(SC) , in the case of CIT v. Rani Bhuvaneshwari Kuer : [1964]53ITR195(SC) , in the case of CIT v. Brojendra Nath Kundu : [1977]110ITR326(Cal) and in the case of CIT v. Shyamlal Bhuwalka : [1978]113ITR127(Cal) , as well as the observations of the Allahabad High Court in the case of CIT v. Raja Jagdish Pratap Sahi : [1971]79ITR235(All) . In view of the ratio of the Supreme Court decision, as we have noted in the case of Hrishikesk Ganguly v. CIT : [1971]82ITR160(SC) referred to hereinbefore, it is not necessary, in our opinion, to discuss the aforesaid decisions in greater detail. In that view of the matter, question No. 1 is answered in the affirmative and in favour of the Revenue and in the view we have taken on the first question, the second question does not arise.

17. In the facts and circumstances of this case, the parties will pay and bear their own costs.

Sudhindra Mohan Guha , J.

18. I agree.


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