1975 (11) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Construction of the trust deed dated 7th August 1950 and the rectified deed dated 11th February 1960.
2. Inclusion of income from the trust property in the assessee's total income under section 16(1)(c) of the Indian Income-tax Act, 1922.
3. Validity and impact of the rectified deed on the assessment year in question.

Detailed Analysis:

1. Construction of the Trust Deed:

The primary issue was the interpretation of the trust deed executed on 7th August 1950 and its rectification on 11th February 1960. The trust deed involved the conveyance of property at 10A, Chandni Chawk Street, Calcutta, to the settlor (the assessee) and his third wife, Umasashi Dassi, with various stipulations for the use and management of the property. The deed included provisions for the maintenance and remuneration of the trustees, with specific clauses outlining the powers and limitations of the trustees, including the settlor.

Relevant Clauses:
- Clause 1: Specifies the use of the property for the settlor and his wife during their lifetimes.
- Clause 2: States that the settlor is not accountable to anyone for his dealings with the property or its income, except for keeping accounts of receipts and expenses.
- Clause 5: Grants the settlor full power to lease, mortgage, sell, or encumber the property, while the co-trustee (his wife) has no such powers.

2. Inclusion of Income under Section 16(1)(c):

The Income-tax Officer and the Appellate Assistant Commissioner initially included the entire income from the trust property in the assessee's total income, arguing that the trust was revocable and fell within the scope of section 16(1)(c) of the Indian Income-tax Act, 1922. The Tribunal, however, held that the rectified deed was valid for the assessment year in question and that the trust was not hit by section 16(1)(c).

Arguments by Revenue:
- The trust was essentially in favor of the assessee and his wife, with no provision for the sons during the accounting year.
- The settlor retained significant control over the property, including the power to lease, mortgage, sell, or otherwise encumber it.
- The settlor was not accountable for his dealings with the property, indicating a reassumption of power over the trust's income and assets.

Arguments by Assessee:
- The trust provided specific benefits to the settlor and his wife, with no retransfer of income or assets to the settlor.
- The deed did not allow the settlor to reassume power over the trust's assets or income directly or indirectly.

3. Validity and Impact of the Rectified Deed:

The Tribunal found that the rectified deed was made prior to the year of account and was valid for the assessment year in question. The Tribunal concluded that the rectified deed did not fall within the mischief of section 16(1)(c), and thus, the income from the trust property should not be included in the assessee's income.

Court's Analysis:
- The court examined the relevant clauses and found no provision for the retransfer of income or assets to the settlor.
- The court referred to the Supreme Court's interpretation of "reassumption of power" in Commissioner of Income-tax v. Jayantilal Amratlal [1968] 67 ITR 1 (SC), which clarified that the settlor should not be able to take back the power over the assets or income that existed before the trust deed's execution.
- The court concluded that none of the clauses in the deed, including clause 2, provided the settlor with a right to reassume power over the trust's income or assets.

Conclusion:

The court held that the trust deed, as rectified, did not fall within the scope of section 16(1)(c) of the Indian Income-tax Act, 1922. The income from the portion of the house property at 10A, Chandni Chawk Street, Calcutta, should not be included in the assessee's income. The question referred to the court was answered in the affirmative and in favor of the assessee, with no order as to costs.