1962 (3) TMI 106 - HC - Income Tax

Summary

Issues Involved:
1. Whether the trust deed executed by the assessee contains provisions for the retransfer of income or assets to the settlor.
2. Whether the trust deed gives the settlor a right to reassume power over the income or assets of the trust.
3. Applicability of section 16(1)(c) of the Indian Income-tax Act to the trust deed.
4. Interpretation of various clauses in the trust deed and their impact on the revocability of the trust.

Detailed Analysis:

1. Provision for Retransfer of Income or Assets:
The primary issue was whether the trust deed executed by the assessee contained provisions for the retransfer of income or assets to him, making it revocable under section 16(1)(c) of the Indian Income-tax Act. The revenue argued that multiple clauses in the trust deed provided for such retransfer, thereby rendering the trust revocable.

2. Right to Reassume Power Over Income or Assets:
The court examined whether the trust deed allowed the settlor to reassume power over the income or assets directly or indirectly. The revenue contended that several clauses, specifically clauses 1, 5, 10, 12, and 15, fell within the mischief of the first proviso to section 16(1)(c), making the entire income of the trust properties taxable in the hands of the settlor.

3. Applicability of Section 16(1)(c) of the Indian Income-tax Act:
Section 16(1)(c) aims to charge the income of a revocable transfer in the hands of the transferor. The first proviso to this section deems a settlement revocable if it contains any provision for the retransfer of income or assets to the settlor or gives the settlor a right to reassume power over them. The third proviso provides relief if the settlement is not revocable for a period exceeding six years or during the lifetime of the beneficiary, provided the settlor derives no direct or indirect benefit from the income.

4. Interpretation of Various Clauses in the Trust Deed:

Clause 1:
The clause directed the trustees to pay the settlor Rs. 400 per month out of the income, which was argued to be a provision for retransfer of part of the income. The court concluded that this clause made Rs. 400 per month assessable in the hands of the settlor but did not render the entire trust income taxable.

Clause 5:
This clause allowed the settlor to sell properties if Rs. 60,000 was not paid within 12 months, with a charge on the trust properties for any deficit. The court held that this gave the settlor a right to reassume power over the assets, making the trust revocable.

Clause 10:
The trustees could mortgage properties to raise Rs. 50,000 for construction. The court found that this could lead to the settlor reassuming power over the assets, contributing to the trust's revocability.

Clause 12:
The trustees could invest Rs. 25,000 in a mortgage or business, with the income divided among the trustees, including the settlor. This was seen as a provision for retransfer of part of the income, making it assessable in the settlor's hands but not affecting the entire settlement.

Clause 13:
This clause involved an agreement with Rash Behari Banerji, where the trust estate could benefit from litigation profits. The court did not find any provision for retransfer of income or assets to the settlor in this clause.

Conclusion:
The court concluded that the trust deed contained provisions that allowed the settlor to reassume power over the assets and income, making the entire trust revocable under section 16(1)(c) of the Indian Income-tax Act. The question referred was answered in the affirmative, and the assessee was held liable for the costs of the reference.