1968 (1) TMI 6 - HC - Income Tax

Assessee created a trust of his properties by a deed - under this deed, the income of the property, after deducting certain expenses, was to be distributed - Whether, the trust created by Karelal Kundanlal by a deed dated resulted in a revocable transfer of the assets within the meaning of section 16(1)(c) read with the first proviso

Issues Involved:
1. Whether the trust created by Karelal Kundanlal by a deed dated October 10, 1950, resulted in a revocable transfer of the assets within the meaning of section 16(1)(c) read with the first proviso.
2. If the answer to the first question is in the affirmative, whether 3/4th of the income of the said trust could be included in the total income of the assessee having regard to the third proviso to section 16(1)(c).

Detailed Analysis:

Issue 1: Revocability of the Trust under Section 16(1)(c)
The trust deed dated October 10, 1950, created by the assessee, Karelal Kundanlal, allocated the income of the property in specific shares: four annas each to the assessee and his wife, and to each of his two daughters, with the remaining four annas for charities. The Income-tax Officer assessed the entire income from the property in the hands of the assessee, invoking the first proviso to section 16(1)(c) of the Income-tax Act, 1922, which deems a settlement revocable if it contains any provision for the retransfer of income or assets to the settlor.

The Tribunal upheld the Income-tax Officer's decision, stating that the entire transfer of assets was revocable because the settlor retained a right to a portion of the income. The Tribunal emphasized that section 16(1)(c) is designed to include all income under a revocable transfer in the total income of the settlor, making it impossible to compartmentalize the assets into revocable and irrevocable parts.

Issue 2: Inclusion of 3/4th Income in the Assessee's Total Income
The Appellate Assistant Commissioner initially allowed only one-fourth of the income to be included in the assessee's total income, arguing that the remaining three-fourths were governed by the third proviso to section 16(1)(c). However, the Tribunal disagreed, asserting that the third proviso, which excludes settlements not revocable for a period exceeding six years or during the lifetime of the beneficiary from the ambit of section 16(1)(c), did not apply here. The Tribunal held that any arrangement for the settlor to receive any part of the income renders the entire transfer revocable.

Relevant Case Law:
- Ramji Keshavji v. Commissioner of Income-tax: This case established that if no interest is reserved by the settlor and the settlement is revocable after a certain period, the third proviso applies, and the income is not assessable in the hands of the settlor until it actually reverts to him.
- Commissioner of Income-tax v. Jitendra Nath Mallick: The Calcutta High Court initially held that only the income directly reverting to the settlor should be assessed in his hands. However, the Tribunal disagreed with this view, emphasizing that the entire income under a revocable settlement should be included in the settlor's total income.
- Dr. A. J. Kohiar v. Commissioner of Income-tax: This decision supported the view that if the settlor does not reserve any interest for himself, the third proviso applies, and the income is not assessable in the hands of the settlor until it actually accrues to him.
- Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tekari Raj: This case confirmed that a settlement is revocable if the settlor retains any interest or power over the assets, but the third proviso applies if the settlor does not derive any direct or indirect benefit from the income.
- Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer: The Supreme Court held that even if a settlement is deemed revocable under the first proviso, the third proviso excludes such settlements from section 16(1)(c) if they are not revocable for a period exceeding six years or during the lifetime of the beneficiary, and the settlor derives no benefit.

Conclusion:
The court concluded that the trust created by Karelal Kundanlal was revocable under section 16(1)(c) read with the first proviso, as the settlor retained a right to a portion of the income. Consequently, the third proviso did not apply, and the entire income from the trust was assessable in the hands of the settlor. The reference was answered in the affirmative for both questions, and the assessee was ordered to pay the costs of the reference to the Commissioner of Income-tax, M.P.

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