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TMI Blog1944 (9) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... r declared that in respect of the Ulster Road House in Bombay a trust deed should be executed in accordance with the draft which was annexed as schedule G to the consent decree. By the consent decree it was further provided that defendant No. 6 (i.e., the wife of the assessee) should be paid the net income of the said Ulster Road property from and after January 1, 1939. In pursuance of the said consent decree the assesses, who was defendant No. 1 in that litigation, executed a trust deed in respect of Ulster Road property. The relevent portions of the deed can be briefly summarized as follows. By the trust deed the assessee transferred the Ulster Road property to the trustees. In doing that he used the following words:- And all the estate right title interest property claim and demand whatsoever of him the settlor of in and to the said premises and every part thereof except and reserving unto the settlor the right to occupy during his lifetime the portion of the said premises and also the garage on the said premises occupied by him.. . In respect of the income it was provided that the trustees should collect the rents and after paying the necessary charges of collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ulster Board property should not be included in his income. He sought the protection of proviso 3 to Section 16(1)(c) of the Indian Income-tax Act. On behalf of the Commissioner it is contended that proviso 3 is inapplicable and the case is covered by proviso 1 to Section 16(1)(c). The question, therefore, is what is the exact effect of Section 16(1)(c) in respect of the trust deed in question,? It is not disputed that there is no power of revocation reserved to the settlor under this trust deed. Section 16 deals with the question of what should be included in computing the total income of an assessee. Section 16(1)(c) deals with transfers effected by the settlor. The first part of Section 16(1)(c) is not applicable. The second part is in these terms : all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor . Therefore the substantive portion of Section 16(1)(c) provides that the income derived from a revocable transfer of assets is deemed to be the income of the transferor. That is followed by the 1st proviso which enacts that for the purposes of that clause a settlement shall be deemed to be revoca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... although in those circumstances the settlor has got no control over the income or the disposal because he is by this arrangement absolved from the legal obligation of maintaining his wife and children, he derives benefit from that and is thus directly or indirectly retransferring the income to himself. In my opinion, this contention is quite unsound. He may be free from a legal obligation, but he is re-transferring nothing to himself. I do not think that the Indian Income-tax Act ever contemplated that the income which is so settled and which has so gone completely out of the control of the settlor, is still to be computed in the total income of the assessee. Under clause 4 of the deed of trust the income during the lifetime of the wife is settled on her. It is provided that after her death, if the settlor is alive, the same shall be paid to him for and during his lifetime. On behalf of the Commissioner it was contended that this amounted to a retransfer directly or indirectly of the income of the property or in any event a reassumption of the power over the income or assets. The question is whether a contingent claim which may arise under a settlement, is covered by the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the settlor derives no direct or indirect benefit, the income is not to be considered the income of the settlor. On behalf of the Commissioner it is urged that in the present case this is not a revocable transfer of assets on the face of the settlement itself, and therefore the case is not covered by the substantive provision of Section 16(1)(c). This particular settlement is 'deemed' a revocable settlement by reason of proviso 1 to that sub-section. It was, therefore, argued that on the true construction of proviso 3 it does not apply to such a settlement at all. In my opinion this contention is unsound. The scheme of Section 16(1)(c) appears to be this. The first stage is that when there is a revocable transfer of assets, the income derived from such assets is still to be considered the income of the settlor. The law next specifies by proviso 1 what would be deemed a revocable transfer, in spite of the deed being apparently irrevocable. The relevant question for that proviso is this: Is this transfer revocable because it fulfils the conditions contained in the proviso ? The answer to that question can be only, it is revocable, or it is not. If the answer is in the neg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust that we have in this reference is an irrevocable deed of trust inasmuch as the settlor has not reserved to himself any power of revocation under the deed. But one of the provisions of the trust deed is that on the death of Kamalabai, the wife of the settlor, and in the event of the settlor surviving his wife, the income is to be paid to him by the trustees. To that extent there is a provision for retransfer of the income to the settlor. It is true that the prevision for retransfer is contingent in its nature. But with respect to my learned brother, in my opinion, on a plain reading of the section, the words of the section are wide enough to cover even a provision for retransfer which is contingent in its nature. Proviso 1 to the section, when it refers to any provision, does not in any way qualify the nature or the character of the provision. If we find in the trust deed that there is a provision for retransfer, to my mind the proviso would apply whether the nature of the provision is that it postpones the retransfer on a contingency happening or it provides for the retransfer on a certain event happening. Therefore the question that we have got to determine is, as under the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply to proviso 1. If that argument were to be accepted, it would result in this glaring inconsistency. If you have a deed which contains a provision for revocation which can only come into effect after a period of six years, other conditions being satisfied, then such a deed would fall under proviso 3 and would be saved from the operation of sub-section (c) although after six years the settlor could revoke the trust and would have complete power of disposal over the income and the corpus of the trust estate. But if you have a trust deed which contains a provision for retransfer to the settlor after a period of six years, that deed would not fall under proviso 3 and would come within the ambit of sub-clause (c) of Section 16(1). I do not think that it would be right or proper to give a construction to this sub-clause and to the two provisos which would lead to such glaring results. In my opinion, agreeing with my learned brother, the only way to reconcile the substantive provisions of sub-clause (c), proviso 1 and proviso 3, is to hold that proviso 3 contains a limitation which applies as much to the substantive provisions of sub-clause (c) as to proviso 1. With regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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