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PETITIONER: COMMISSIONER OF INCOME-TAX, PUNJAB,  JAMMU &KASHMIR, HIMACHA

       Vs.

RESPONDENT: RAGHBIR SINGH

DATE OF JUDGMENT: 09/04/1965

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M.

CITATION:  1966 AIR   18            1965 SCR  (3) 684  CITATOR INFO :  R          1968 SC 189  (13)  R          1991 SC 331  (3)

ACT:     Indian   Income-tax   Act,  1922  (11   of   1922),   s. 16.(1)(c)--Deed of trust--Trustees directed to pay debts  of settlor  and  only  thereafter to  apply  trust  income  and property   to  the  various  purposes  of  the   trust--Such direction whether makes trust revocable--Whether property of trust indirectly re-transferred to the settlor--Income  from trust whether to be taxed in hands of settlor.

HEADNOTE:    The  respondent  executed a deed of trust in  respect  of certain shares owned by him in a company. The deed  directed the  trustees to apply the income and property of the  trust in the first instance    for paying off the settlor’s debts, and  thereafter  for  other  purposes  of  the  trust.    In proceedings  under  the Indian Income-tax Act, 1922  it  was held  by  the  Income-tax  Officer  that  the  trust  was  a fictitious    transaction.     The    Appellate    Assistant Commissioner  held that the transfer of the shares  for  the purpose of the trust was not irrevocable and therefore under the  proviso to s. 16(1)(c) the respondent could not  escape liability.  The Tribunal upheld the order of  the  Assistant Commissioner but referred to the High Court, inter alia, the question whether the income from the trust property could be taxed in the hands of the assessee.  The High Court answered the  question in the negative. The Commissioner  of  Income- tax, appealed to this Court. HELD:  After  the  execution  of  the  deed  of   settlement the  income  from the shares arose to the trustees  and  was liable  to  be  applied for the purposes  mentioned  in  the de.ed.  The income had first to be applied for  satisfaction of  debts which the settlor was under an obligation to  pay, but  this did not amount to a re-transfer of the  income  or assets to the settlor, nor did it invest the settlor with  a power  to re-assume the income or assets.  The  assests  and the income were unmistakably impressed with the  obligations arising  out of the trust. The settlor certainly obtained  a benefit  from the trust consequent upon the satisfaction  of

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his  liability  but on that account the first proviso to  s. 16(1) was not attracted. [690D-F]    The  proviso  contemplates  cases in  which  there  is  a provision  for retransfer of the income or assets  and  such provision is for retransfer directly or indirectly.  It also contemplates cases where there is a provision which  confers a  right upon the settler to reassume power over the  income or  assets directly or indirectly.  It is the provision  for retransfer directly or indirectly of income or assets or for reassumption of power directly, or indirectly over income or assets  which brings the case within the proviso.  Cases  in which  there is a settlement, but there is no  provision  in the settlement for retransfer or right to reassume power  do not  fall  within the proviso, even if as a  result  of  the settlement, the settler obtains some benefit. 1[690G, H]     Ramji,  Keshavji v. C.I.T. Bombay, [1945] 13 I.T.R.  105 and  D.R.  Shahapura  v.  C.I.T.,  Bombay  14,  I.T.R.   781 approved.          685

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos. 96  to 98 of 1964.     Appeals  by special leave from the judgments and  orders dated  September  22,   1960, and December 6,  1960  of  the Punjab  High Court in Income-tax References Nos. 19 of  1958 and 6 of 1959 respectively.     S.V.  Gupte,  Solicitor-General, R. Ganapathy  Iyer  and R.N. Sachthey, for the appellant.     Deva   Singh  Randhawa  and  Harbans  Singh,   for   the respondent. The Judgment of the Court was delivered by    Shah, J. On April 10,  1953 the estate of the joint Hindu family of which the respondent was a member was partitioned, and the respondent was allotted,  besides other  properties, 400shares of the Simbhaoli Sugar Mills Private Ltd., and was made liable  to pay a business debt amounting to  Rs.  3,91,875/- due  by  the family to R.B. Seth Jessa Ram  Fateh  Chand  of Delhi.  On April  14, 1953 the respondent executed a deed of  trust  in respect of 300 out of the shares of the Simbhaoli Sugar Mills  which fell of  to his share. The following are the material  provisions of the deed of trust.                  "AND  WHEREAS on partition, the author  was               allotted   amongst  other   properties,   four               hundred  shares of the Simbhaoli  Sugar  Mills               Ltd.,  and fixed with liability for  discharge               of certain debts of the Joint Hindu Family AND               WHEREAS for discharge of the debts detailed in               the  schedule appearing hereafter, the  author               now  as absolute owner of the said shares  has               decided  to  settle  on  trust  three  hundred               shares numbering 1 to 300 both inclusive,  out               of  the  said shares for the  benefit  of  his               creditors   and  other   beneficiaries   named               hereafter   and  for  the  objects   mentioned               hereafter.               2. The author as holder of 300 shares               out  of the  capital of Simbhaoli Sugar  Mills               Ltd.  divesting  himself  of  all  proprietary

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             rights  in  the said shares.  hereby  declares               that  the said shares shall from this  day  be               irrevocably  held on Trust by the Trustees  to               be used by them for all or any of the purposes               following, that is to say :--                     (a) To pay off the debts as detailed  in               Schedule ’A’ attached hereto: These debts were               incurred  for the benefit of the  Joint  Hindu               Family of the author and on disruption of  the               Joint Hindu Family and partition of properties               among its members, made payable by the author.               686               And after his debts are paid off.                     (b)  To provide for the maintenance  and               education  of the children and grand  children               of the author.               (c)  To  open and run  Hospitals  and  Nursing               Homes.                     (d)  To open and run School  or  SchooLs               for   the  education  of  boys  or  girls   in               scientific and technical subjects.               To  open  and maintain a reading  room  and  a               lending library.                     (f)  To provide for the maintenance  and               education  of orphans, widows and poor  people               and  for that to give scholarships for  inland               and overseas studies to found orphanage. widow               houses  and  poor houses and to do  all  other               things  that  the trustees may  deem  fit  for               carrying out the objects of the Trust." By  el.  3  four  persons  including  the  respondent   were appointed  trustees,  and  the respondent was  to  hold  the office  of Chairman of the Trust during his  lifetime.   The trust deed then provided:                  "In  the books of the Company,  the  shares               will stand in the name of the Chairman for the               time being, who will have the power to operate               the Bank accounts of the Trust, to preside  at                             the meetings, exercise the right of th e vote in               respect of the shares of the Trust."               Clause 5 provided:                  "It  is hereby declared that  the  trustees               shall have the following powers in addition to               the  powers  and  the  authorities  hereinfore               contained:--                    (i) The trustees shall not be entitled to               sell  the shares except as provided  hereafter               but  they can mortgage or pledge the same  for               raising  funds as they may feel necessary  for               paying off the debts of the author, provided               (ii)  ............               (iii)  ..............               (iv) ..........               Clause 6 provided:                  "That  in carrying out the objects  of  the               trust  the  trustees shall keep  in  mind  and               abide by the following directions:-                     (i)  The  payment of the  debts  of  the               author as detailed in Schedule ’A’ referred to               above  shall receive the topmost priority  and               the trustees shall not spend any money out  of               the trust property or its income               687               in  any direction till they have paid off  all

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             the  debts of the author, provided  always  if               the trustees are unable to pay off the  debts,               out  of  the income i.e.  dividends,   bonuses               etc.  of  the shares within a  period  of  ten               years they shall be entitled to sell the  same               or part of it and thus pay off the debts  that               may be due at that time.               (ii)  After debts are discharged the  trustees               shall spend                           the income of the trust  property.               remaining in their hands after full  discharge               of  the  debts,  on  the  maintenance  of  the               children and grand children of the author  and               the  remaining 20% on all or any of the  other               objects of the trust as the               Trustees may think best.               (iii)  ............     The  respondent claimed before the  Income-tax  Officer, Eward.  Amritsar that the dividend received by the  trustees in  respect of 300 shares of the Simbhaoli Sugar  Mills  was the income of the Trust and that he had no concern with that income  as  he  had "divested  himself  irrevocably  of  the ownership of the shares" and that in any event Rs.  19,856/- being  the  amount due as interest to R. B. Seth  Jessa  Ram Fateh Chand should be allowed as a permissible deduction  in computing  the net income from dividend of the shares.   The Income-tax   Officer   rejected  the  contentions   of   the respondent,  holding  that  the  Trust  was  a   "fictitious transaction".   The  Appellate Assistant  Commissioner  held that the respondent had not "irrevocably transferred the 300 shares of the Simbhaoli Sugar Mills" and therefore by virtue of  s. 16(1)(c) proviso one the respondent could not  escape liability to pay tax on the dividend from the share.     The  respondent  appealed to  the  Income-tax  Appellate Tribunal.  but  without  success.  At the  instance  of  the respondent the Tribunal drew up a statement of the case  and referred  the  following  questions to  the  High  Court  at Chandigarh:                  "(1)  Whether the dividend  income  of  300               shares  of the Simbhaoli Sugar Mills,  Private               Ltd. transferred by the assessee to S. Raghbir               Singh  Trust  was the income of  the  assessee               liable to tax?               (2)Whether the assessee was entitled to  claim               deduction of Rs. 19,856/- paid as interest  to               R.B. Seth Jessa Ram Fateh Chand against the               dividend income of the aforesaid 300 shares?" The  High Court answered the first question in the  negative and  declined to answer the second question.   With  special leave.  the Commissioner of Income-tax has appealed to  this Court.     Section 2 sub-s. (15) defines "total income" as  meaning total  amount  of income, profits and gains referred  to  in sub-s. (1) of s. 4 688 computed in the manner laid down in the Act.  Section 16  of the Income-tax Act enumerates the exemptions and  exclusions admissible  in  the computation of total income  in  certain specified cases. The material part of cl. (c) of sub-s.  (1) of s. 16 is as follows:               "In   computing  the  total  income   of   the               assessee--                     (c) all income arising to any person  by               virtue of a settlement or disposition  whether               revocable or not, and whether effected  before

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             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 settler, 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               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." Clause (c) was intended, while seeking to protect a  genuine settlement  by  which  the tax-payer intends  to  part  with control over property and its income. to circumvent attempts made by him to reduce his liability to pay income-tax by the expedient  of  so arranging a settlement or  disposition  of property  that  the income does not accrue to  him,  but  he reserves a power over or interest in the property settled or disposed of, or in the income thereof. By cl. 689 c)   income arising to any person by virtue of a  settlement or  disposition  whether revocable or not is  deemed  to  be income  of the settlor or disponer if the assets remain  the property of the latter.  Again income arising to any  person by virtue of a revocable transfer of assets is deemed to  be the income of the transferor.  The first proviso then  deems a  settlement  statutorily  revocable, if  it  contains  any provision  for  retransfer  directly or  indirectly  of  the income or assets settled, to the settlor, or where it  gives to  the  settlor  a  right to  reassume  power  directly  or indirectly over the income or assets.  By the second proviso the  expression  "settlement  or  disposition"  includes   a disposition,  trust, covenant, agreement or arrangement  the Legislature  has  thereby sought to bring  within  the  net, transactions  similar  to  though not  strictly  within  the description  of  settlements and  dispositions.   The  third proviso  carves  out  from  the  amplitude  of  cl.  (c)  as expounded  by  the  first and  the  second  provisos  income arising  to  any  person  from a  settlement  which  is  not revocable  for  a period exceeding six years or  during  the lifetime  of  the person and from which income  the  settlor

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derives no benefit direct or indirect. It was observed in a recent judgment of this Court:  Commis- sioner   of   Income-tax,   Bihar   and   Orissa   v.   Rani Bhuwanesliwari Kuer(1) that: "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 2 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." The terms of s. 16(1)(c) first proviso are reasonably plain. A  settlement  or disposition is deemed  to  be  statutorily revocable if there is a provision therein for retransfer  of the  income or assets or which confers a right  to  reassume power over the income or assets.  The provision may even  be for  retransfer  indirectly  or  for  conferring  power   to reassume indirectly over the income or the assets.  But  the actual retransfer or exercise of the power to reasume is not necessary;  if  there  be a provision  of  the  nature  con- templated, the proviso operates. The terms of the deed may now be examined.  The shares  were settled  upon trust, and four trustees one of whom  was  the respondent  were appointed.  Genuineness of the trust is  no longer (1) 53 I.T.R. 195,202. 690 in  dispute.  The direction that the shares are  to stand  in  the name of the Chairman  for  the  time being appears to have been necessitated by s. 33 of the  Indian  Companies Act,  1913  which  prevented notice   of  any  trust,  expressed,   implied   or constructive  to be entered on the  register.   The deed  recites  that the shares are to  be  held  on trust irrevocably by the trustees for all or any of the  purposes mentioned therein.  The  purpose  for which  the  shares  are to be  held  in  the  first instance  is to pay off the debt due to  R.B.  Seth Jessa  Ram  Fatch Chand, and it is only  after  the debt is paid off that the directions in cls. (b) to (f)  of cl. 2 come into operation. The deed  is  in terms  expressly irrevocable, but on  that  account the operation of the first proviso is not excluded. If  by the direction for application of the  income for   satisfaction   of  the  debts  due   by   the respondent, it could be said in law that there is a provision for retransfer directly or indirectly  of the  income  or  a right to  reassume  directly  or indirectly  power over the income,  the  settlement would  be  deemed  revocable, recital  that  it  is irrevocable notwithstanding.     But  the  income  from  the  shares  since  the execution  of the deed of settlement arises to  the trustees  and  it is liable to be applied  for  the purposes mentioned in the deed.  The income has  to be  applied  for satisfaction of  debts  which  the settlor  was under a obligation to  discharge.  but that  is not to say that there is a  provision  for retransfer of the income or assets to the  settlor, or  that  the  settlor is invested  with  power  to

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reassume  the income or assets. The assets and  the income   are   unmistakably  impressed   with   the obligations  arising out of the deed of trust.  The settlor  it  is true     obtains benefit  from  the trust   consequent   upon   satisfaction   of   his liability, but on that account the first proviso is not attracted.     We  are  unable  to  accept  the   argument  of counsel  for  the revenue that by the  use  of  the expression  "indirectly" in the first  proviso  the Legislature  sought to bring within the purview  of el. (c) cases where the settler was under the guise of a trust seeking to discharge his own  liability. The proviso contemplates cases in which there is  a provision  for retransfer of the income  or  assets and  such provision is for retransfer  directly  or indirectly.  It also contemplates cases where there is  a  provision  which confers a  right  upon  the settlor to reassume power over the income or assets directly  or indirectly.  It is the  provision  for retransfer  directly  or indirectly  of  income  or assets  or  for reassumption of power  directly  or indirectly  over income or assets which brings  the case  within  the first proviso.   Cases  in  which there is a settlement, but there is no provision in the settlement for retransfer or right to  reassume power do not fail within the  proviso, even if as a result  of  the settlement, the settler  obtains  a benefit.     It  has been held in two cases decided  by  the High  Court  of  Bombay  that  a  person  under  an obligation arising out of his status 691 may execute a trust to discharge his own obligation without  attracting the operation of  s.  15(1)(c). In  Ramji Keshavji v. Commissioner  of  Income-tax, Bombay(1)  under  a consent  decree.  the  assessee executed   a  deed  of  trust   conveying   certain properties  for  the benefit of his  wife.  to  the trustees.   The deed provided that the  net  income from the properties shall be paid to the assessee’s wife  during  her  lifetime  and  that  she   shall maintain  her minor children by the  assessee  anal "run the household".  It was held by the High Court that the income derived from the trust property and payable     to  the  assessee’s wife  during  her  lifetime could  not be deemed to be the  assessee’s  income, for  the direction in the deed did not amount to  a provision for retransfer of the income or assets or for  reassumption of power directly  or  indirectly over  income  or assets within the meaning  of  the first proviso to s. 16(1)(c). In D.R. Shahapure  v. Commissioner of Income-tax, Bombay(2) the  assessee with the object of making a provision for his  wife made  an  entry in his business  books  of  account crediting  Rs. 20,000/-, and endorsed  against  the entry.  "The  capital supplied to you  will  remain entirely  mine but you will get the income over  it up to the end of your life. This capital I will not take back up to the end of your life but I will  do business  for you on this capital and see that  you get Rs. 600 per annum for you".  No specific assets were set apart to. meet the sum of Rs. 20,000/- and there  were  no  other entries in  the  books  with

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regard  to it.  The High Court held that the  entry was  an  irrevocable  covenant to  pay  the  income accruing  on Rs. 20,000/- with a guarantee that  it shall be Rs. 600 a year, and therefore the case was covered by the third proviso to s. 16(1) (c) of the Act and the income which was paid to the wife under the  covenant could not be deemed to be the  income of  the  assessee  under  the  first  part  of   s. 16(1)(c).   In our view these cases were  correctly decided. The appeals fail and are dismissed with costs.  One hearing fee. Appeals dismissed. (1)  (1945)13  I.T.R.105.                  (2)   14 I.T.R. 781 692