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PETITIONER: HARISHIKESM GANGULI (DEAD)

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CALCUTTA

DATE OF JUDGMENT18/08/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S.

CITATION:  1971 AIR 2516            1972 SCR  (1) 310  CITATOR INFO :  R          1991 SC 331  (3)

ACT: Income-tax Act, 1922, s. 16(1) (c)-Settlor reserving benefit for  himself  under  trust  created  by  him--Trust  whether becomes  a revocable trust within meaning of  section-Effect of third proviso.

HEADNOTE: The  assessee derived income from house properties and  from the business of a registered partnership firm.  On March 19, 1953 the assessee created a trust in respect of two  houses. it  was provided in the trust ,deed that the trustees  shall pay  a sum of Rs. 200/- per month to the settlor,  for  life for  his own absolute use and benefit out of the  income  of the  trust  estate remaining after payment of  taxes,  rents etc.   The Income-tax Officer held that the income from  the aforesaid  two properties was assesses able in the hands  of the  assessee inasmuch as he had retained a portion  of  the income  from  the trust properties for himself  whereby  the trust  -became a revocable trust under the provisions of  s. 16(1)  (c)  of  the Income-tax  Act,  1922.   The  Appellate Assistant Commissioner upheld the view taken by the  Income- tax  Officer.  The Tribunal however held that -only the  sum of  Rs.  2400/- annually payable to the  assessee  could  be taxed  in  his hands.  In reference the High  Court  decided against  the assessee.  In appeal to this Court  by  special leave, HELD  : The effect of the third proviso to s. 16(1)  (c)  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 hand provided the other conditions contained in the  proviso are  satisfied.   In other words the proviso  comes  to  the rescue of the settlor in that the portion of the income from the trust properties which are settled on a third person  is to  be assessed in the hands of that person and not  in  the hand 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 done".  Thus the settlement as  a whole  will not come within the mischief of s. 16(1) (c)  if the revocability relates only to a part of the income.  [314 H-315 B]

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A significant change was made in the language with regard to revocable  transfers in the Income-tax Act, 19161.   Section 63(A) of that Act expressly refers to the whole or any  part of  the income or assets transferred.  It can well  be  said that  the  necessity for expressly mentioning  part  of  the income was felt because under the provisions of the 1922 Act part of the income was not covered. [315 C-F] There  was  no dispute in the present case  that  the  trust created   was  a  genuine  one.   Since  it  fulfilled   the conditions laid down in the third proviso only that part  of the  income  which accrued or was received  by  the  settlor could  be assessed as his income The income accruing to  the other  beneficiaries  could  not be included  in  the  total income of the assessee. [315 F] C.I.T. Patna v. Rani Bhuvaneshwari Kuer, [1964]7 S.C.R. 920, applied. Ramji  Keshavji  v. Commissioner of Income-tax,  Bombay,  13 I.T.R. 105, referred to. C.I.T.  Calcutta  v. Jitendranath Mallick,  50  I.T.R.  313, approved. 311

JUDGMENT: CIVIL APPELLATE JURISDICTION-: Civil Appeal No.1850 of 1967. Appeal from the judgment and order dated September 30,  1966 of the Calcutta High Court in.  Income-tax Reference No. 102 of 1962. M. N. Banerjee and P. K. Mukherjee, for the appellants. Jagdish  Sarup, Solicitor-General, R. N. Sachthey and B.  D. Sharma, for the respondent. The Judgement of the Court was delivered by Grover,  J.  This  is an appeal by  special.  leave  from  a judgment of the Calcutta High Court answering the  following question  of law referred to it against the assessee and  in favour of the Revenue               "Whether on the facts and in the circumstances               of  the  case, the entire or any part  of  the               income  from  the house  properties  concerned               could  be included in the total income of  the               assessee by virtue of the provisions of s.  16               (  1  ) (c) of the Income tax Act,  1922  read               with the first proviso thereto ?" The  assessee was assessed in the status of  an  individual. He  derived  income  from  house  properties  and  from  the business  of a registered partnership firm H. Ganguly &  Co. He  had  six houses one of which was  24,  Mohanlal  Street, Calcutta and the other at Janganbari in the city of Banaras. On  March  19, 1953 the see, created a trust in  respect  of these  two houses.  It was provided in the trust  deed  that the  trustees shall pay a sum of Rs. 200/- per month to  the settlor for life for his own absolute use and benefit out of the  income of the trust estate remaining after  payment  of taxes, rents etc.  In other words he himself was one of  the beneficiaries. The Income tax Officer held that the income from the  afore- said  two  properties  was assessable in the  hands  Of  the assessee inasmuch as he had retained a portion of the income from  the  trust  properties for himself.   The  trust  had, therefore,  become revocable under the provisions of  s.  16 (1)  (c) of the income tax Act 1922, hereinafter called  the ’Act’.   The  Appellate  Assistant  Commissioner  on  appeal affirmed the view taken by the Income tax Officer.  When the

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matter came before the Appellate Tribunal it found that  the assessee  had  irrevocably  parted with  the  aforesaid  two properties and the same had got vested in the trust.  It was held  that s. 16(1) (c) would become applicable only if  the setdor  preserved to himself the entire income arising  from the settled properties; if only a portion had been  reserved by the 312 settlor  it would not make the settlement revocable.  It  is not  disputed  that  the  total  annual  income  from  these properties  came  to  over Rs. 19,000.   Out  of  -this  the assessee, who was the settlor, was entitled to Rs.  2,400,/- annually.  According to the Tribunal only the amount of  Rs. 2,400/-  which  had actually been received by  the  assessee under  the terms of the trust deed could be included in  his income. The view of the High Court was that in order to be revocable under the first proviso to s. 16 (1) (c) it is sufficient if the,   settlement,  disposition  or  transfer   contains   a provision  for  retransfer of a part of the  income  to  the settlor,. disposer or transferor.  It is not necessary  that there  must be a provision for the retransfer of the  entire income.   The word "income" includes any part of the  income unless there is anything repugnant in the context.  The High Court  considered, that the third proviso to S. 1 6 (1)  (c) did not explain the first proviso but was a kind of rider or exception  to  it.  Bearing in mind the  object  behind  the enactment  of s. 16 and on a consideration of the  terms  of the section the true meaning and scope of the, first proviso seemed  to  be that the settlement in the present  case  was revocable  in its entirety thus attracting  the  substantive clause of s. 16 (1) (c). Clause (c) was introduced in s. 16(1) in the year 1939.   At the material time s. 16(1) stood thus :- "S. 16(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   from   asserts               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 of 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 set-               tlor,  disponer or transferor, or in  any  way               gives  the settlor, disponer or  transferor  a               right to reassume power directly or indirectly               over income or assets;               313               Provided    further   that   the    expression               ’settlement  or  disposition’  shall  for  the               purposes    of   this   clause   include    an               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

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             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 life time 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." It  is apparent that the above clause of s. 16(1)  with  its provisos   is  unhappily  worded.   In  Ramji  Keshavji   v. Commissioner  of  ,Income tax ’Bombay(1),  the  Bombay  High Court  considered the scheme of s. 16(1)(c).   According  to that  decision  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 first proviso specifies what would be deemed a revocable transfer in spite of the deed being apparently  irrevocable. The  relevant  question for the first proviso  is  "is  this transfer   revocable  because  it  fulfils  the   conditions contained in the proviso ?" The answer to that question  can be in the positive or in the negative.  If the answer is  in the negative no further discussion can arise and s. 16 ( 1 ) (c)  will  not  be  applicable.  If the  answer  be  in  the affirmative  the deed, although ostensibly  irrevocable,  is deemed  to  be  revocable.  It will  thus  become  revocable within  the  meaning  of the substantive  provisions  of  S. 16(1)(c)having  reached  that stage proviso (3)  has  to  be considered.  In tile words of Kania J., as he then was  "the scheme  appears to be that, although in fact, after  reading the provision of s. 16(1) (c) with proviso (1), the transfer is  revocable,  the law will not still consider  the  income derived  from  such settlement, the income  of  the  setlor, provided  the  settlement  is not  revocable  for  a  period exceeding,  six years or during the lifetime of  the  person for  whom  the incomes is settled, and, further  from  which income  the settlor derives no direct or indirect  benefit." Chagla  J.,  as he then was. delivered a  separate  judgment although he agreed with the answer given to the reference by Kania  J.  In  his opinion the only  way  to  reconcile  the substantive  provision of sub-cl. (c), Provisos (1) and  (3) was  to hold that proviso (3) contained a  limitation  which applied as much to the substantive provisions of  sub-clause (c) as to proviso (1)  13 I.T.R. 105. 314 The  view  expressed  in  the  Ramji  Keshavji  case(1)  was approved   by   this  court  in  C.I.T.   Patna   v.    Rani Bhuvaneshwari Kuer(2).  In that case the assessee, who owned an estate known as ’Tekari Raj’, created a trust with a view to  liquidate  the debts of Tekari 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 devolvement  or succession  or  make such alienation as was  considered  fit about  his share.  It was observed that two conditions  were necessary  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 life-time 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

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page 927 are noteworthy :               "The  third proviso to s. 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  of  -the 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 a’ settlement or disposition which by  the  first proviso were deem,,,= to be revocable was rejected by saying that  the  function  of provisos (1)  and  (2)  was  plainly explanatory  and  it was importable to hold that  the  third proviso   did   not  operate  in  respect   of   settlement, 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 (1)  13 I.T.R. 105 (2) (1964) 7 SCR 920  315 settlement  chargeable  in  his  hand  provided  the   other conditions.  contained  in the proviso  are  satisfied.   In other  words the proviso comes to the rescue of the  settlor in that the portion of the income from the trust  properties which are settled on a third person is to be assessed in the hands of that person and not in the hand 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 win  not  come within  the mischief of s. 1 6 (1) (c) if  the  revocability relates  only to a part of the income. [See C.I.T.  Calcutta v. Jitendranath Mallick(1) We  are in entire agreement with the above view of the  Cal- cutta High Court and consider that the same is supported  by the  decision  of this court in  Rani  Bhuvaneshwari  Kuer’s case(1).   We may also refer to the significant change  made in  the language with regard to revocable transfers  in  the Income tax Act 1961.  Section, 63 of that Act provides :               "For the purposes of section 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

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             right to reassume power directly or indirectly               over  the whole or any part of the  income  or               assets:               (b)  ........................" It  can  well  be  said that  the  necessity  for  expressly mentioning,  part of the income was felt because  under  the provisions of the.  Act part of the income was not  covered. There  is  no  dispute in the present case  that  the  trust created   was  a  genuine  one.   Since  it  fulfilled   the conditions laid down in the third proviso only that part. of the  income  which accrued or was received  by  the  settlor could  be  assessed as his income.  The income  accruing  to the. other beneficiaries could not be included in the  total income. of the assessee. The  appeal is consequently allowed and the judgment of  the High  Court is set aside.  The question which  was  referred shall  stand answered in favour of the assessee and  against the  Revenue.  In view of the nature of the points  involved the parties shall bear their own costs. G.C.                   Appeal allowed., (1) 50 ITR 313 (2) [1964]7 S.C.R. 920 316