1967 (5) TMI 8 - SC - Income Tax

Tribunal was right in holding that the income of Jayantilal Amratlal Charitable Trust was not assessable in the hands of the settler under the first proviso to section 16(1)(c) - Tribunal was right in holding that the income of the trust should be considered in the assessment of the trustees and that they were entitled to the benefits of the refunds attached to the dividends from the trust properties - revenue appeal dismissed

Issues Involved:
1. Whether the income of Jayantilal Amratlal Charitable Trust was assessable in the hands of the settlor, Jayantilal Amratlal, under the first proviso to section 16(1)(c) of the Income-tax Act for the assessment years 1955-56 and 1956-57.
2. Whether the income of the trust should be considered in the assessment of the trustees and if they were entitled to the benefits of the refunds attached to the dividends from the trust properties for the assessment years 1958-59 and 1959-60.

Issue 1: Assessability of Trust Income in the Hands of the Settlor
The core question was whether the income of Jayantilal Amratlal Charitable Trust should be assessed in the hands of the settlor, Jayantilal Amratlal, under the first proviso to section 16(1)(c) of the Income-tax Act for the assessment years 1955-56 and 1956-57. The Income-tax Officer argued that the settlor retained significant control over the trust, which brought the income within the purview of section 16(1)(c). The officer emphasized the wide powers vested in the settlor under the trust deed, including the ability to direct investments and apply income for various purposes, which he believed constituted a re-transfer of assets or reassumption of power over the income or assets by the settlor.

The Tribunal, however, reversed the Income-tax Officer's decision, holding that the provisions of the trust deed did not confer a right on the settlor to reassume power over the income or assets. The Tribunal focused on the legality of the powers within the framework of the trust deed and the Bombay Public Trusts Act, 1950. The High Court upheld the Tribunal's view, stating that a lawful right to reassume power must be independently exercisable by the settlor without reliance on third parties such as the Charity Commissioner. The High Court further observed that the Charity Commissioner would not sanction any action resulting in a conflict of interest, thereby negating any substantial right to reassume power.

Issue 2: Assessment of Trust Income in the Hands of Trustees and Entitlement to Refunds
The second issue was whether the income of the trust should be assessed in the hands of the trustees for the assessment years 1958-59 and 1959-60, and if the trustees were entitled to the benefits of refunds attached to the dividends from the trust properties. The Income-tax Officer included the trust income in the hands of the settlor, arguing that the trust deed allowed the settlor to derive benefits indirectly. This decision was upheld by the Appellate Assistant Commissioner but was reversed by the Tribunal.

The Tribunal held that the trust income should be assessed in the hands of the trustees, as the trust deed did not confer any right on the settlor to reassume power over the income or assets. The High Court agreed with the Tribunal, emphasizing that the powers reserved to the settlor under the trust deed were to be exercised within the framework of the trust and did not amount to a reassumption of power as contemplated by section 16(1)(c).

Detailed Analysis:
The judgment hinges on the interpretation of section 16(1)(c) of the Indian Income-tax Act, 1922, and the trust deed. The first proviso to section 16(1)(c) deems a settlement revocable if it allows the settlor to reassume power over the income or assets. The court examined the trust deed, which vested significant powers in the settlor, including directing investments and applying income for charitable purposes. However, these powers were to be exercised within the trust's framework and subjected to the Bombay Public Trusts Act, which restricts trustees from making investments that could result in a conflict of interest.

The court concluded that the powers reserved to the settlor did not constitute a lawful right to reassume power over the income or assets. The court emphasized the need to interpret the proviso in a manner that considers the legality of the powers exercised under the trust deed and relevant statutory provisions. The court also noted that indirect benefits derived by the settlor did not bring the trust within the purview of the first proviso, as the proviso focuses on the ability to reassume power, not on the receipt of benefits.

In summary, the court upheld the Tribunal's decision that the income of the trust was not assessable in the hands of the settlor and should be assessed in the hands of the trustees. The court dismissed the appeals, affirming that the trustees were entitled to the benefits of refunds attached to the dividends from the trust properties.

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