1944 (9) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 16(1)(c) of the Indian Income-tax Act to the trust deed.
2. Interpretation of Proviso 1 to Section 16(1)(c) concerning the retransfer of income or assets.
3. Interpretation of Proviso 3 to Section 16(1)(c) concerning the irrevocability of the trust for a specified period.
4. Determination of whether the settlor retains any direct or indirect benefit from the trust income.

Detailed Analysis:

1. Applicability of Section 16(1)(c) of the Indian Income-tax Act to the Trust Deed:
The primary issue is whether the income from the Ulster Road property should be included in the assessee's total income under Section 16(1)(c) of the Indian Income-tax Act. The section deals with transfers effected by the settlor and includes income arising from a revocable transfer of assets as the income of the transferor. It was not disputed that there is no power of revocation reserved to the settlor under this trust deed.

2. Interpretation of Proviso 1 to Section 16(1)(c) Concerning the Retransfer of Income or Assets:
Proviso 1 to Section 16(1)(c) deems a settlement to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor or a right to reassume power directly or indirectly over the income or assets. The Commissioner argued that because the trust deed had provisions that gave the settlor direct or indirect benefit, it should be considered a revocable transfer. However, it was contended on behalf of the assessee that no such provisions existed in the settlement.

The court examined various grounds urged by the Commissioner:
- Retention of Property Use: The settlor retained the use of a portion of the property and the garage. The court found this did not constitute a retransfer or reassumption of power as it did not involve a second transaction altering the parties' positions.
- Maintenance of Wife and Children: The settlor provided for the maintenance of his wife and children from the property income. The court held this did not amount to a retransfer or reassumption of power over the income, as the settlor was merely fulfilling a legal obligation without retaining control over the income.

3. Interpretation of Proviso 3 to Section 16(1)(c) Concerning the Irrevocability of the Trust for a Specified Period:
Proviso 3 to Section 16(1)(c) states that if a settlement is not revocable for a period exceeding six years or during the lifetime of the person for whose benefit the income is settled, and the settlor derives no direct or indirect benefit from the income, it will not be considered the settlor's income. The Commissioner argued that Proviso 3 only applies to the substantive provisions of Section 16(1)(c) and not to settlements deemed revocable under Proviso 1.

The court rejected this argument, stating that the scheme of Section 16(1)(c) considers a transfer revocable if it meets the conditions of Proviso 1, and then applies Proviso 3 to determine if the income should still be considered the settlor's. The court concluded that Proviso 3 applies to both the substantive provisions and Proviso 1, ensuring that a settlement not revocable for a specified period or during the beneficiary's lifetime, and from which the settlor derives no benefit, is not included in the settlor's income.

4. Determination of Whether the Settlor Retains Any Direct or Indirect Benefit from the Trust Income:
The court found that the settlor did not retain any direct or indirect benefit from the income during Kamalabai's lifetime. The grounds for claiming such benefits, including the maintenance provisions and the contingent retransfer of income after Kamalabai's death, were not sufficient to deem the income as the settlor's. The court emphasized that the settlor had no control over the income or its disposal, and thus, the income settled for Kamalabai's benefit was not the assessee's income under Section 16(1)(c).

Conclusion:
The court answered the question submitted by the Income-tax Appellate Tribunal in the negative, concluding that the income payable to Kamalabai and settled for her benefit during her natural life is not the income of the assessee under Section 16(1)(c). The Commissioner was ordered to pay the costs of the reference.