1965 (4) TMI 17 - SC - Income Tax

Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills Private Ltd. transferred by the assessee to S. Raghbir Singh Trust was the income of the assessee liable to tax ? Whether the assessee was entitled to claim deduction of ₹ 19,856 paid as interest to R. B. Seth Jessa Ram Fatch Chand against the dividend income of the aforesaid 300 shares ? Held that - Unable to accept the argument of counsel for the revenue that by the use of the expression indirectly in the first proviso the legislature sought to bring within the purview of clause (c) cases where the settlor was under the guise of a trust seeking to discharge his own liability. The proviso contemplates cases in which there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly. It also contemplates cases where there is a provision which confers a right upon the settlor to reassume power over the income or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within the first proviso. Cases in which there is a settlement, but there is no provision in the settlement for retransfer or right to reassume power do not fall within the proviso, even if as a result of the settlement, the settlor obtains a benefit. Appeal dismissed.

Issues Involved:
1. Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills Private Ltd. transferred by the assessee to the trust was the income of the assessee liable to tax.
2. Whether the assessee was entitled to claim deduction of Rs. 19,856 paid as interest against the dividend income of the aforesaid 300 shares.

Detailed Analysis:

Issue 1: Dividend Income Liability
The respondent, a member of a joint Hindu family, was allotted 400 shares of Simbhaoli Sugar Mills and a business debt of Rs. 3,91,875 during the partition of the family estate. On April 14, 1953, the respondent executed a deed of trust for 300 shares to settle debts and other specified purposes.

The Income-tax Officer and the Appellate Assistant Commissioner held that the trust was a "fictitious transaction" and that the respondent had not "irrevocably transferred the 300 shares," invoking section 16(1)(c) of the Income-tax Act. The Tribunal upheld this view, but the High Court at Chandigarh answered in the negative, stating that the dividend income was not liable to tax as the respondent's income.

Section 16(1)(c) states that all income arising from a settlement or disposition, whether revocable or not, from assets remaining the property of the settlor, shall be deemed to be the income of the settlor. However, the proviso deems a settlement revocable if it contains any provision for retransfer of the income or assets to the settlor or gives the settlor a right to reassume power over the income or assets.

The court examined the terms of the trust deed, which directed that the shares be held irrevocably by the trustees primarily to pay off the respondent's debts. The deed did not contain any provision for retransfer of the income or assets to the settlor, nor did it allow the settlor to reassume power over them. The court concluded that the income from the shares, since the execution of the deed, arose to the trustees and was applied for the purposes mentioned in the deed, thus not attracting the first proviso of section 16(1)(c).

The court rejected the argument that the expression "indirectly" in the proviso aimed to include cases where the settlor sought to discharge his liability under the guise of a trust. The proviso applies only if there is a provision for retransfer or reassumption of power over the income or assets, directly or indirectly.

Issue 2: Deduction of Interest Paid
The High Court declined to answer the second question regarding the deduction of Rs. 19,856 paid as interest against the dividend income. The court's decision focused primarily on the applicability of section 16(1)(c) and the irrevocability of the trust deed.

Conclusion
The Supreme Court upheld the High Court's decision, stating that the dividend income from the 300 shares transferred to the trust was not the respondent's income liable to tax. The court emphasized that the trust deed did not contain provisions for retransfer or reassumption of power over the income or assets, thus not attracting the first proviso of section 16(1)(c). The appeals were dismissed with costs.

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