1970 (3) TMI 26 - HC - Income Tax

Validity of a trust and its claim to exemption from tax u/s 4(3)(i) of Indian Income Tax Act 1922

Summary

Issues Involved:
1. Validity of the trust under the trust deed dated October 11, 1939.
2. Whether the trust was revocable under section 16(1)(c) of the Income-tax Act, 1922, and thus its income exempt from tax under section 4(3)(i) of the Act.

Detailed Analysis:

1. Validity of the Trust:
Facts and Background:
- The assessee is a charitable and religious trust represented by the trustees of Sreeram Surajmull Charity Trust, established by a deed dated October 11, 1939.
- The Income-tax Officer concluded the trust came into existence only on the execution of the trust deed and found against the assessee on several points.
- The Appellate Assistant Commissioner and the Tribunal upheld the trust's validity and its claim to tax exemption.

Trust Deed Analysis:
- The trust deed transfers properties to three trustees, including the settlor, and specifies the trust properties and their management.
- The deed was duly attested, registered, and openly executed, indicating no secrecy or fraud.

Income-tax Officer's Findings:
- The Officer argued there was no proper divestment of Rs. 47,336-1-0 as the cash book showed only Rs. 11,267-15-3.
- He also found no divestment of 20 preference shares and the house property at Benares.

Appellate Assistant Commissioner's Findings:
- The Commissioner found the trust was valid and genuine, with proper divestment of properties.
- The trust had been recognized as valid for about 20 years, and the exemption was consistently granted by income-tax authorities.

Tribunal's Findings:
- The Tribunal endorsed the findings of the Appellate Assistant Commissioner, confirming the trust's validity and entitlement to exemption under section 4(3)(i) of the Income-tax Act.

Legal Principles:
- A credit entry in the books of account can constitute property for creating a trust if followed by a formal registered trust deed.
- The trust deed's recitals and operative clauses clearly indicate the transfer of properties to the trustees and the establishment of a valid trust.

Conclusion:
- The High Court held that a valid trust was created under the trust deed dated October 11, 1939, as it met all legal requirements and had been consistently recognized by tax authorities.

2. Revocability of the Trust:
Income-tax Officer's Argument:
- The Officer contended the trust was revocable under section 16(1)(c) due to the settlor's control over the corpus and the appointment of trustees.

Appellate Assistant Commissioner's Rebuttal:
- The Commissioner dismissed these objections, stating the powers of the trustees were normal and the settlor could legally appoint himself as a trustee.

Tribunal's Findings:
- The Tribunal upheld the Appellate Assistant Commissioner's reasoning, confirming the trust was not revocable.

Legal Interpretation:
- Section 16(1)(c) deems a trust revocable if it contains provisions for retransfer or reassumption of power over the income or assets by the settlor.
- The trust deed in question did not contain any such provisions, either directly or indirectly.

Relevant Case Law:
- The Supreme Court in Commissioner of Income-tax v. Jayantilal Amratlal emphasized that the right to reassume power must be dependent on the settlor's volition alone.
- The High Court distinguished the present case from Commissioner of Income-tax v. Kikabhai Premchand, noting the absence of any provision for loans or revocation in the trust deed.

Conclusion:
- The High Court held that the trust was not revocable under section 16(1)(c) and its income was exempt from tax under section 4(3)(i) of the Income-tax Act, 1922.

Final Judgment:
- Both questions were answered in favor of the assessee.
- The Commissioner was ordered to pay the costs of the reference.