1961 (5) TMI 65 - HC - Income Tax

Summary

Issues Involved:
1. Whether the trust created by the assessee is revocable within the meaning of section 16(1)(c) of the Income-tax Act.
2. Whether the income from the property, which is the subject matter of the settlement, can be deemed to be the income of the assessee under section 16(1)(c) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Revocability of the Trust:
The primary issue was whether the trust created by the assessee is revocable under section 16(1)(c) of the Income-tax Act. The assessee contended that the trust was irrevocable, and thus the income should be assessed in the hands of the trustees. The Income-tax Officer, however, held that the trust was revocable and assessed the income in the hands of the assessee. This decision was upheld by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal, on appeal, ruled that section 16(1)(c) did not apply and that the income should not be assessed in the hands of the assessee. The High Court reframed the question to determine whether the income from the trust properties could be taxed in the hands of the assessee as the settlor.

2. Applicability of Section 16(1)(c) and its Provisos:
The Commissioner of Income-tax argued that even if the trust was made irrevocable by the deed of amendment dated January 12, 1942, the first proviso to section 16(1)(c) still applied. This proviso deems a settlement revocable if it contains any provision for retransfer of income or assets to the settlor or gives the settlor a right to reassume power over the income or assets. Paragraph 43 of the original trust deed and paragraph 45 of the amended deed were crucial. Paragraph 43 allowed the settlor to revoke or vary the trust provisions, while paragraph 45 stated the trust was irrevocable until certain debts were paid. The court concluded that these provisions allowed for retransfer of income or assets to the settlor, making the trust revocable under the first proviso to section 16(1)(c).

3. Operation of the Third Proviso to Section 16(1)(c):
The third proviso to section 16(1)(c) exempts income from being taxed in the hands of the settlor if the settlement is not revocable for a period exceeding six years or during the lifetime of the person, and the settlor derives no direct or indirect benefit from the income. The assessee argued that this proviso should apply to the substantive provisions and the first proviso of section 16(1)(c). Paragraphs 42 and 45 of the amended deed indicated that the trust was not revocable for a period exceeding six years. The court agreed, stating that the third proviso controls both the substantive provision and the first proviso of section 16(1)(c). Therefore, the income from the trust properties could not be taxed in the hands of the assessee as the settlor.

Conclusion:
The High Court held that the income from the property settled in the trust could not be taxed in the hands of the assessee as the settlor. However, the assessee could be taxed on the income accruing to her when the power of revocation is exercised and as a beneficiary of the trust income. The court answered the reframed question in favor of the assessee and against the income-tax department, awarding costs to the assessee.