1963 (9) TMI 78 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the trust as a charitable trust.
2. Application of Section 16(1)(c), proviso 1, of the Income-tax Act.
3. Control over the trust's income and corpus by the settlor.
4. Investment of trust properties and the powers of the settlor.
5. Legal implications of the trust deed's provisions.

Detailed Analysis:

1. Validity of the Trust as a Charitable Trust:
The trust deed dated June 19, 1947, established by the assessee, Jayantilal Amratlal, settled 80 ordinary shares in Messrs. Jayantilal Amratlal and Co. Ltd. for charitable purposes including relief of the poor, education, medical relief, and other objects beneficial to mankind. The trust was registered with the Charity Commissioner under the Bombay Trust Act, 1950. Initially, the income-tax department recognized the trust as a valid charitable trust and provided necessary exemptions. However, for the assessment year 1958-59, the Income-tax Officer concluded that the income of the trust should be assessed in the hands of the settlor, Jayantilal Amratlal, under Section 16(1)(c), proviso 1, of the Income-tax Act.

2. Application of Section 16(1)(c), Proviso 1, of the Income-tax Act:
The Income-tax Officer argued that the settlor had de facto control over the trust's income and corpus, and the charities benefiting from the trust were chosen by him. This led to the conclusion that the income should be assessed in the hands of the settlor. The Tribunal, however, held that the trust deed did not contain any provision for the retransfer of income or assets to the settlor or a right for the settlor to reassume power over them, directly or indirectly. Therefore, proviso 1 to Section 16(1)(c) did not apply.

3. Control Over the Trust's Income and Corpus by the Settlor:
The Tribunal analyzed clauses (4), (10), and (21) of the trust deed and concluded that these clauses did not confer any right on the settlor to retransfer or reassume power over the trust's income or assets. Clause (4) allowed the settlor to direct the application of the trust's income during his lifetime, and clause (21) provided that all management decisions during the settlor's lifetime would be made according to his opinion. However, these provisions did not amount to a right to reassume control over the trust's assets or income.

4. Investment of Trust Properties and the Powers of the Settlor:
Clause (10) of the trust deed allowed the settlor to invest the trust properties or their income, including in his own companies. The Tribunal held that this power was overridden by Section 36 of the Bombay Trust Act, which restricted such investments. The Tribunal also noted that the potential for the settlor to violate these provisions without significant penalty was irrelevant to the application of Section 16(1)(c), proviso 1.

5. Legal Implications of the Trust Deed's Provisions:
The Tribunal and the High Court examined various legal precedents and concluded that the provisions of the trust deed did not give the settlor a lawful right to reassume power over the trust's income or assets. The High Court emphasized that any right to reassume power must be lawful and not in violation of trust laws. The court also noted that a loan given by the trust to the settlor or his firms would still be considered an asset of the trust and subject to its provisions.

Conclusion:
The High Court affirmed the Tribunal's decision that the income of the trust should not be assessed in the hands of the settlor and that the trust was entitled to exemption under Section 4(3)(i) of the Income-tax Act. The questions referred to the court were answered in the affirmative, and the Commissioner was ordered to pay the costs of the reference to the opponent.