Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, PATNA
Vs.
RESPONDENT:
RANI BHUWANESHWARI KUER
DATE OF JUDGMENT:
28/04/1964
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION:
1965 AIR 6 1964 SCR (7) 920
CITATOR INFO :
R 1966 SC 18 (5)
F 1971 SC2516 (6,10)
ACT:
Indian Income-tax Act, 1922 (11 of 1922) s. 16(1)(c) and its
proviso three-Deed of trust by assessee-Beneficiaries of the
Trust are assessees and other persons-Trust and revocable
within six years-If the income of the Trust can be included
as part of the -income of the assessee.
HEADNOTE:
The assessee (respondent) owner of an estate known as
"Tekari Rai" executed an indenture of trust dated January
20, 1941 whereby the "Tekari Rai" and certain Zamindari
properties owned by her were conveyed to certain named
trustees to be held in trust, subject to conditions
specified therein. This deed was created with a view to
liquidate the debts of the Tekari Raj. The beneficiaries
under the deed were the settlor, her husband and her five
sons. This original deed was modified by a deed of
rectification dated December 22, 1941. It was provided in
the original cl. 43 of the deed of trust dated January 20,
1941, that the settlor may at any time during her life re-
voke or vary either wholly or partly the trust or any provi-
sions of the deed but not before the payment and discharge
of certain debts and liabilities. Clause 43 of the original
deed was subsequently modified by the 45th clause which was
added by the deed of amendment dated January 12, 1942. By
cl. 45 of the deed of amendment the right of revocation was
not exercisable till the Thica leases in favour of the
Maharajadhiraj of Darbhanga and Capt. Maharaj Kumar Gopal
Saran Narain Singh remained good and effective. It was the
common ground that the lease in favour of the Maharajadhiraj
of Darbhanga was to enure till 1965 and the lease in favour
of Capt. Maharaj Kumar Gopal Saran Narain Singh till 1954.
In assessing the assessee to income-tax for the year 1947-
48, the Income-tax Officer included in her total income the
income of the trust. The matter went up to the High Court
and the High Court set aside the assessment order passed by
the Income-tax Officer. The High Court held that a,, the
trust was not revocable for a period of six years, the
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income received by the beneficiaries (other than the
assessee) was not liable to be taxed as the assessee’s
income till the power to revoke arose in her favour. The
appellant obtained special leave against the order passed by
the High Court. Hence the appeal.
The principal question for consideration before this Court
was whether the income received by the beneficiaries other
than the assessee could be included in the total income of
the assessee under s. 16(l)(c) of the Act.
Held:(i) In terms the third proviso to s. 16-(l)(c) of
the Income-tax Act excludes from the operation of the
principal clause that part of the income alone which arises
to any person under a, deed of settlement: it does not
remove from its protection the entire deed of trust, if part
of the income is not covered by the conditions prescribed or
if the settlor has in a part of the income interest direct
or indirect. The third proviso does not operate to exclude
the income which the settlor receives as a beneficiary from
liability to tax.
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(ii)The third proviso to s. 16-(l)(c) of the Act does ope-
rate in respect of settlements, dispositions, or transfers
which are by the first proviso revocable for the purpose of
that clause.
(iii) Two conditions are necessary for the application of
the 3rd proviso to s. 16-(l)(c) of the Income-tax Act: (i)
that the trust should not be revocable for a period
exceeding 6 years or during the life time of the beneficiary
and (ii) the settlor or disponer should have no direct or
indirect benefit from the income given to the beneficiary.
The effect of the two conditions is that, that part of the
income which arises to any person by virtue of the
settlement which is not revocable for a period of six years
or which is not revocable during the life time of the
beneficiary will not be included in the settlor’s income,
provided that from the income of such person the settlor
derives no benefit direct or indirect.
On the construction of the deed of trust it was held that
the deed was not revocable within six years provided by s.
16 (1)(c) of the Act.
Ramji Keshavji v. Commissioner of Income-tax, Bombay, 13
I.T.R. 105, relied on.
(iv)On the facts of this case it was held that by virtue of
the third proviso to s. 16-(l) (c) of the Act the income re-
ceived by the beneficiaries under the deed of trust other
than the assessee could not until the power of revocation
arose to the assessee, be deemed to be the income of the
assessee for the purpose of assessment to income-tax.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 620 of 1963.
Appeal by special leave from the judgment and decree dated
9, 1961 of the Patna High Court in M.J.C. No. 497 of 1957.
N. D. Karkhanis and R. N. Sachthey, for the appellant.
Sarjoo Prasad, B. D. Singh and D. Goburdhn", for the
respondent.
April 28, 1964. The judgment of the Court was delivered by
SHAH J.-Rani Bhuwaneshwari Kuer-hereinafter referred to as
‘the assesses’ was the proprietor of a seven-sixteenth share
in an estate known as ’Tekari Raj’, having inherited that
estate from her parents. The assesses later acquired by
purchase a major portion of the remaining ninesixteenth
share in the Raj. The estate held by the assessee was
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heavily encumbered, and with a view to arrange for
liquidation of the debts the assesses executed an indenture
of trust dated January 20, 1941, whereby the Tekari Raj and
certain zamindari properties owned by the assesses were
conveyed to certain named trustees to be field in trust,
subject to conditions specified therein. The principal
beneficiaries under the deed after payment of the debts were
the assesses, her husband and her five sons.
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By the 23rd clause of the deed it was directed that after
making certain payments, the trustees shall divide the sur-
plus of the net rents, issues and profits thereof in the
proportions set out in the clause. The 24th and the 25th
clauses dealt with the devolution of the beneficial interest
in the event of death of any of the beneficiaries. By the
41st clause it was provided that after the debts and
liabilities set out in Sch. ’D’ to the deed were paid off
and discharged, the settlor shall be entitled to make a
permanent trust of some of the villages demised under the
deed for the maintenance and up-keep of the Tekari Forts,
observance of Durga Puja and other purposes specified
therein, and in the event of the settlor dying before
payment and discharge of the debts and liabilities set out
in Sch. ’D’, and without making any permanent trust for the
purposes enumerated, the settlor enjoined the trustees after
discharge of the debts mentioned in Sch. ’D’ to set apart
property fetching a net income of Rs. 20,000/-to form the
corpus of the permanent trust to meet the expenses relating
to the repair of the Tekari Forts, celebration of Durga Puja
and other purposes specified. By the 42nd clause it was
provided that the trust under the deed shall terminate after
payment of the debts and liabilities set out in Sch. ’D’ or
after the death of the last amongst the sons, whichever
event shall last occur, and by the 43rd clause it was
provided that if any of the beneficiaries under the deed or
their heirs in future shall challenge the Indenture of Re-
lease and Agreement dated December 6, 1939, executed by the
settlor in favour of her husband and the action taken
thereunder. the said beneficiary shall on making such
objection forfeit his right as a beneficiary under the deed.
It was also provided that if there shall be any breach by
any of the beneficiaries or of the covenants or conditions
and limitations imposed under the deed, he or she shall not
be entitled to any money or to any share in the rents,
issues or usufruct of the trust property and he or she shall
be deemed to have been excluded from the categories of
beneficiaries and his or her share of the rents, issues and
profits will be dealt with or enjoyed by the settlor in her
entire discretion. provided always that the settlor may at
any time during her life by any deed revocable or
irrevocable revoke or vary either wholly or partly the trust
or any provisions of the deed, but not before the payment
and discharge of the debts and liabilities as mentioned in
Sch. ’D’, and provided further that notwithstanding such
revocation of the trust the settlement made under the deed
remained good and effective subject to the forfeiture clause
set out therein.
This deed was modified by a deed of rectification dated
December 22, 1941, reciting that with the consent of all
persons who were parties to the deed of trust, it was
directed
923
that at any time during the lifetime of the assessee the
assessee had the power to revoke or vary, either wholly or
partly, the trust or any provisions of the deed of trust,
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but not so as to effect the payment and discharge of the
debts and liabilities as mentioned in Sch. ’D’ thereto and
the original deed of trust shall be read and construed as if
it contained a power vested in the settlor (the assessees)
during her life by deed to revoke or vary, either wholly or
partly, the trust or any provisions of the said trust, but
not so as to effect the payment and discharge of the debts
and liabilities as mentioned in Sch. ’D’.
Another deed called a deed of amendment was executed by the
assessee on January 12, 1942. By this deed paragraphs 22,
32, 33, 35., 36 and 37 of the original deed were cancelled
and other paragraphs including paragraphs 23, 24 and 42 were
amended and modified and paragraphs 42(a), 44 and 45 were
added. By the amendment of paragraph-23 the surplus rents,
issues and profits of the trust property were to be divided
in seven equal shares and by the amendment made in cl. 24 it
was provided that in the event of the death of any of the
sons, his share of the rents, issues and profits shall
become payable to his heir ’or heirs. By the modifications
in paragraph-42 it was provided that the trust under the
deed may terminate after payment of the debts and
liabilities of the trust that would then be outstanding or
after extinguishment of the Thicca leases in favour of the
Maharajadhiraj of Darbhanga or in favour of Capt. Maharaj
Kumar Gopal Saran Narain Singh of Tekari, whichever event
shall occur last. Paragraph 42(a) provided that after the
provisions as laid down in para 41 had been carried out and
when the last contingency set out in para 42 as modified had
arisen, the beneficiaries or the heirs or successors-in-
interest or representatives-in-interest of such of them as
had acquired any right from any of the beneficiaries under
the deed shall be entitled .to partition the trust property
according to their shares. The material part of paragraph-
45 provided:
"That the settlement made under these presents
shall be permanent, unalterable and
irrevocable so far the interest created under
these presents are concerned, but each
beneficiary shall have full right to make any
sort of arrangement about devolution or
succession or make such alienation, as he may
think fit, about his share, but the trust
created under these presents shall be
irrevocable so long the debts mentioned above
including all the liabilities on the Trust
property up to date are not fully paid up or
discharged or so long as the Thicca leases in
favour of Hon’ble Maharajadhiraj of Darbhanga
or Capt. Maharaj Kumar Gopal
924
Saran Narain Singh remain good and effective
whichever event shall happen last".
Provided that always para 43 of the Indenture
of Trust dated 20th January, 1941, shall hence
forth be read subject to this para.
In proceedings for assessment for the assessment year 1947-
48 the Income-tax Officer, Gaya-Palamau Circle, Gaya,
rejected the contention raised by the assessee that the
income under thetrust was taxable in the hands of the
trustees under thedeed of settlement and applying the
provision of s. 16(1)(c)of the Indian Income-tax Act, 1922,
brought the income ofthe trust to tax as part of the
assessee’s income. The order passed by the Income-tax
Officer was confirmed in appeal to the Appellate Assistant
Commissioner, but the Income-tax Appellate Tribunal reversed
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that order. The Tribunal observed that "revocation involved
taking back that which was given once, but in the present
case there was nothing done by the assessee by which it
could be said that she had taken back what she had given by
the original deed of trust", and the trust was therefore not
a revocable trust as contemplated by s. 16 (1) (c) of the
Income-tax Act.
The High Court of Judicature at Patna directed the Income-
tax Appellate Tribunal under s. 66(2) of the Act to state a
case and to refer the following questions:
(1)Whether the trust created by the
assessee is a revocable trust within the
meaning of s. 16(l)(c) of the Income-tax Act?
(2)Whether the income from the property
which is the subject-matter of the settlement
mentioned in question (1) can be deemed to be
the income of the assessee under s. 16 (1) (c)
of the Income-tax Act?
The High Court held that the deed of trust dated January 20,
1941 (as modified by the subsequent deed dated January 12,
1942) was within the meaning of s. 16 (1) (c) of the Income-
tax Act a revocable trust, but not being revocable for six
years from the date of its creation, by Virtue of the third
proviso to s. 16 (1) (c) which controlled not merely the
substantive provisions of s. 16 (1) (c) but the first
proviso to that section as well. the income received by the
beneficiaries, (other than the settlor) under the deed of
trust was not liable to be included in the income of the
assessee. The High Court accordingly directed that the
income of the trust property which is the subject-matter of
the settlement of the trust was, not liable to be assessed
to tax under the third proviso to s.
925
16(1)(c), but only so long as the power of revocation
-ranted by the deed was not exercised by the assessee under
the terms ,of the deed of trust. The High Court also
declared that the assessee was liable to pay tax on the
income received by her in the character of a beneficiary out
of the trust properties.
Against the order passed by the High Court, with special
leave, the Commissioner of Income-tax, Patna, has appealed
to this Court.
The principal question which falls to be determined in this
appeal is whether by the third proviso to cl. (c) of s.
16(1), income received by the beneficiaries other than the
assessee is income arising to them by virtue of a settlement
which is not revocable for a period exceeding six years, and
from which income the assessee derives no benefit direct or
indirect. Section 16(1)(c) provides:
"(1) In computing the total income of an
assessee(a)
(b)
(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
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deemed to be revocable if it contains any
provisions 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
purpose 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
926
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 High Court held that the deed of trust was one in which
the assets remained the property of the settlor, but as the
trust was not revocable for a period of six years the income
received by the beneficiaries (other than the assessee) was
not liable to be taxed as the assessee’s income till the
power to revokearose in his favour.
The point in dispute in this appeal is about the applica-
bility of the third proviso to s. 16(l)(c), which seeks to
exempt from the operation of the principal clause income
which arises to any person under the deed of settlement
executed by the assessee. Two conditions are necessary for
the application of the third proviso-(i) that the trust
should not be revocable for a period exceeding six years or
during the lifetime of the beneficiary and (ii) the settlor
or disponer should have no direct or indirect benefit from
the income given to the beneficiary.
Counsel for the Commissioner contended in the first instance
that the third proviso to s. 16(l)(c) applied to the trust
created by the assessee because in fact within six years of
the date of its execution the deed was revoked, and that in
any event on a true interpretation of the covenants of the,
deed of trust it was revocable within six years. The plea
that the trust was in fact revoked within six years was
never raised before the Revenue authorities, the Tribunal or
even the High Court, and is plainly unsustainable. There
are, it is true, certain recitals made in the deed dated
September 18, 1946, executed by the assessee, which is
styled "Deed for further alteration of terms & constitution
of trust" by the assessee, that the liabilities referred to
in Sch. ’D’ to the deed of trust dated January 20, 1941 had
been fully discharged and the beneficiaries had been,
receiving the surplus rents, issues and profits according to
their respective shares in the same and the settlor had by a
deed of trust dated May 28, 1946 conveyed and settled a
portion of her seventh share in the rents, issues and
profits of the trust properties, as well as in the corpus of
Shri Bhubneshwari Hari Haresh Private Trust for meeting
certain expenses. But those recitals do not even prima
facie indicate that the trust was revoked at any time. We
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cannot therefore entertain this new ground raised for the.
first time in this Court.
It may be noticed that whereas under the original cl. 43 of
the deed of trust dated January 20, 1941 even though the
927
trust was expressly made revocable, it could not be revoked
before payment of the debts and discharge of the liabilities
mentioned in Sch. ’D’. By the 45th clause which was added
by the deed of amendment dated January 12, 1942, the settle-
ment made under the deed was declared permanent, unalterable
and irrevocable so far as the interest created under the
deed of amendment was concerned, and was also to stand
irrevocable so long as the debts mentioned in Sch. ’D’ and
other liabilities of the trust including all the liabilities
on the trust properties were not fully paid up and
discharged and so long as the leases in favour of the
Maharajadhiraj of Darbhanga or Capt. Maharaj Kumar Gopal
Saran Narain Singh remained good and effective, whichever
event last happened. It is conceded that the lease in
favour of the Maharajadhiraj of Darbhanga was to ensure till
1965 and the lease in favour of Capt. Maharaj Kumar Gopal
Saran Narain Singh till 1954. By cl. 45 of the deed of
amendment the right of revocation was not exercisable till
the Thicca leases in favour of the Maharajadhiraj of
Darbhanga and Capt. Mabaraj KumarGopal Saran Narain Singh
remained good and effective, and we are unable to hold that
the deed of trust was revocable, within six years as
provided by s. 16(l)(c) of the Act.
It was urged on behalf of the Commissioner in the alter-
native that the third proviso to s. 16(l)(c) did not protect
the assessee against the application of the substantive part
of that clause, because the assessee was deriving under the
terms of the deed of trust a direct benefit. There are in
the third proviso, two cumulative conditions on the
existence of which the exemption from liability to have the
income arising from a settlement included in the assessee’s
income. The effect of’ the two conditions is that, that
part of the income which arises to any person by virtue of
the settlement which is not revocable for a period of six
years or which is not revocable, during the lifetime of the
beneficiary will not be included in the settlor’s income,
provided that from the income of such person the settlor
derives no benefit direct or indirect. The third proviso to
s. 16(l)(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 condi-
tions 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 of the property settled,
the third proviso will not apply to the deed of trust runs
contrary to the plain words of the statute. In terms the
third proviso excludes from the operation of the principle
clause that part of the income alone which arises to any
person under a deed of
928
settlement:it does not remove from its protection the entire
deed of trust, if part of the income is not covered by the
conditions prescribed or if the settlor has in a part of the
income interest direct or indirect.
Finally, it was contended that the third proviso only
operates in respect of deeds of settlement or disposition
which are referred to in cl. (c), but not to deeds of
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settlement or disposition which by the first proviso are
deemed to be revocable in the conditions mentioned by the
first proviso. In other words, it is submitted the benefit
of the proviso is not available in those cases where the
settlement or disposition is deemed by the proviso to be
revocable, because it contains a provision for the
retransfer directly or indirectly of the income or assets to
the settlor, or in any way it gives the settlor, disponer or
transferor a right to reassume power directly or indirectly
over the income or assets. We are unable to agree with this
contention also. By the first proviso, settlements,
dispositions or transfers of the character described
therein, are deemed revocable for the purpose of the
principal clause. The function of proviso I and proviso 11
is plainly explanatory. The second proviso in terms says
that the expression "settlement or disposition" is to
include any disposition, trust, covenant, agreement, or
arrangement, and the expression "settlor or disponer" is to
include any person by whom the settlement or disposition was
made. Similarly the first proviso states that settlements,
dispositions or transfers, if they are of the character
described, shall for the purpose of the principal clause be
revocable transfers. If that be the true interpretation,
and we think it is, it would be impossible to hold that the
third proviso does not operate in respect of settlements,
dispositions or transfers which are by the first proviso
revocable for the purpose of that clause.
In a case decided by the Bombay High Court Ramji Keshavji v.
Commissioner of Income-tax, Bombay(1) Kania, J., in
considering the scheme of s. 16(l)(c) observed:
"The first stage is that when there is a
revocable transfer of assets, the income
derived from such assets is still to be
considered the income of the settlor. The law
next specifies by proviso I what would be
deemed a revocable transfer, in spite of the
deed being apparently irrevocable. The
relevant question for that proviso is this: Is
this transfer revocable because it fulfils the
conditions contained in the proviso? The
answer to that question can be only, it is
revocable, or it is not. If the answer is in
the negative, no further discussion can arise
(1) 13 I.T.R. 105.
929
because, on the face of it, the deed is not
revocable and, therefore, it does not come
under Section 16(1)(c). If, however, the
answer to the question is in the affirmative,
the deed although ostensibly irrevocable. is
deemed to be revocable. and thus becomes a
revocable transfer of assets, within the
meaning of the substantive provision of
Section 16(1)(c). Having reached that stage,
the law proceeds to consider further what is
found in proviso 3. The scheme appears to be
that although in fact, after reading the
provisions of Section 16(1)(c) with proviso 1,
the transfer is revocable, the law will not
still consider the income derived from such a
settlement the income of the settlor, provided
the settlement is not revocable for a period
exceeding six years or during the lifetime of
the person for whom the income is settled, and
further, from, which income the settlor
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derives no direct or indirect benefit."
In our view that passage correctly summarises the effect of
the third proviso to s. 16(1)(c).
The High Court was therefore right in holding that by virtue
of the third proviso to s. 16(1)(c) of the Indian Incometax
Act. 1922, the income received by the beneficiaries under
the deed of trust other than the assessee could not until
the power of revocation arose to the assesssee, be deemed to
be the income of the assessee for the purpose of assessment
to, income-tax.
The appeal fails and is dismissed with costs.
Appeal dismissed.
L/P(D)ISCI-2504-5-10-65 GIPS