1973 (1) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of the income from 'H.E.H. the Nizam's Pilgrimage Money Trust' in the hands of the assessee under the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922.
2. Taxability of the sum of Rs. 1,00,000 received from the trustees of Princess Niloufer Trust under the Income-tax Act and the applicability of the exemption under the agreement with the Government of India dated October 8, 1949.

Detailed Analysis:

Issue 1: Taxability of the Income from 'H.E.H. the Nizam's Pilgrimage Money Trust'

The primary question was whether the income of Rs. 82,853 from 'H.E.H. the Nizam's Pilgrimage Money Trust' was taxable in the hands of the assessee under the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922.

The trust was settled by H.E.H. the Nizam on November 2, 1950, with the settlor himself as one of the trustees. Clause 3(c) of the trust deed allowed the settlor to use the income for pilgrimage and religious offerings. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that the income was assessable in the hands of the settlor due to his unfettered power to appropriate the trust income. However, the Tribunal held that the settlor's discretion was confined to charitable or religious purposes within Hedjaz and Iraq, and thus, the first proviso to section 16(1)(c) was inapplicable.

The court examined the clause in light of Supreme Court precedents, including CIT v. Raghbir Singh, CIT v. Jayantilal Amratlal, and Hrishikesh Ganguli v. CIT. These cases clarified that a trust is deemed revocable if it allows the settlor to reassume power over the income or assets. However, if the settlor's discretion is limited to purposes within the trust deed, it does not make the trust revocable.

The court concluded that the discretion given to the Nizam under clause 3(c) did not make the trust revocable because the income was to be used exclusively for the purposes specified in the trust deed. Therefore, the income of Rs. 82,853 was not assessable in the hands of the assessee. The first question was answered in favor of the assessee and against the Department.

Issue 2: Taxability of the Sum of Rs. 1,00,000 from Princess Niloufer Trust

The second question was whether the sum of Rs. 1,00,000 received by the assessee from the trustees of Princess Niloufer Trust was taxable and if the assessee was entitled to exemption under the agreement with the Government of India dated October 8, 1949.

The trust was created for the benefit of Princess Niloufer, with the Government of India agreeing to pay interest free of all taxes. After the dissolution of her marriage, the Princess assigned her beneficial rights to the assessee in lieu of a lump sum payment. The Tribunal held that the tax exemption was confined to the Princess and did not extend to her assignee, the assessee.

The court examined the terms of the agreement and the position of law. Clause (2) of the Niloufer Trust stated that the interest would be free of all taxes. Clause (4) further declared that the Government of India would not levy any tax on the settlor, trustees, or any beneficiaries under the trust deed. The court noted that the Nizam, as an assignee, was included within the term "beneficiary."

The Nizam's Trust Deed (Validation) Act, 1950, validated all provisions of the trust deed, giving it an overriding effect over the Income-tax Act. Therefore, the income from the deposit could not be assessed to tax. The court disagreed with the Tribunal and held that the amount of Rs. 1 lakh was not assessable to tax in the hands of the assessee. The second question was answered in favor of the assessee and against the Department.

Conclusion:
Both issues were resolved in favor of the assessee, with the court ruling that the income from 'H.E.H. the Nizam's Pilgrimage Money Trust' and the sum of Rs. 1,00,000 from Princess Niloufer Trust were not taxable in the hands of the assessee. The assessee was awarded costs with an advocate's fee of Rs. 250.