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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. 921 (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. 922 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