9911796707
TMI Blog1980 (8) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mr. Mahendra Nath, resident of 2, Robinson Street, Calcutta (hereinafter referred to as the founder), of the one part and (1) Mr. Wazir Chand, son of Mr. Dalpat Raj Bajaj residing at Qr. No. 5, Block 13, Govindnagar, Kanpur, (2) Mr. Mahendra Nath, son of Dr. Kedar Nath, resident of 2, Robinson Street, Calcutta of the other part. Whereas the founder, above named, is desirous of creating a trust for the object set out hereinafter and has requested the persons above named to act along with herself as trustees for the purpose. And Whereas the above named persons, namely, Mr. Wazir Chand and Mr. Mahendra Nath have agreed to serve as trustee. And Whereas the founder has three minor children as described below : (a) Daughter named Nita Nath, aged 12 years. (b) Son named Kamal Nath, aged 11 years. (c) Daughter named Rita Nath, aged 5 years. And Whereas the founder is desirous of making an adequate provision for the education, marriage, setting up in life and other benefits of her minor children named above. And Whereas for the above named purposes she has decided to set apart the movable property described more fully in Schedule as mentioned below for the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being may at their absolute discretion, sell, exchange, dispose of or otherwise deal with any part of the trust property and invest the said property and/or the sale proceeds thereof in any other securities, shares, debentures, bank deposits, loans to companies, private parties or firms or in acquiring any movable or immovable properties or in mortgage or pledge or hypothecation of property and goods or in any business venture or otherwise. The trustees for the time being shall also be entitled to invest and utilise the property of the trust or any part thereof in any business or undertaking carried on by themselves in the name of the trust alone or in partnership with any other person, firm or company or in any other business, in spite of the fact that any one or more of the trustees are interested directly or indirectly in such business. The trustees for the time being may spend the income of the trust or any part thereof or a part of the accumulations on such income for the maintenance, education, marriage or set up in life of the aforesaid beneficiaries or any of them. 10. The trustees for the time being shall be at liberty to give to any beneficiary any part or whole of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of construction of a house, free of interest. The ITO observed in the assessment order for the assessment year 1970-71 that had the money been invested in some other manner, the trust could have derived substantial income. But the assessee did not pay any interest and derived indirect benefit. He, accordingly, held that the provisions of s. 62(1), proviso, would apply to the facts of this case and, therefore, he included the income of the trust in the hands of the assessee for the year 1970-71. The assessee being aggrieved by the same, appealed to the AAC. It was submitted on behalf of the assessee that the trust was not revocable as contemplated under s. 61 and the provisions of ss. 62 and 63 of the I.T. Act, 1961, were not applicable. It was farther urged that the assessee had no power to reassume the property or the income of the trust and nothing was taken by the assessee out of the income of the trust. The AAC considering the terms of the clauses of the trust came to the conclusion that the said deed provided the power to reassume the property or the income or assets of the trust property by the trustees and it made no difference if that power was to be exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to be revocable. What is to be seen is whether under section 63 the trust in question was revocable or not. Clause 8 of the trust deed gives an uncontrolled power to the trustees to invest the trust property in such manner as they like. Clause 19 further provides for the investment of the trust property in such manner as they like. Clause 19 further provides for the investment of the trust funds in any concern in which the trustees are directly or indirectly interested. The contention of the learned counsel for the assessee is that these powers are to be exercised not by the settlor alone as a trustee but by all the trustees and according to him in such circumstances it cannot be said that any power is reserved to the settlor for deriving any direct or indirect benefit out of the trust property. The facts in the case of CIT v. Ragbhir Singh [1965] 57 ITR 408 (SC) were that the settlor was allotted 400 shares in a company along with other properties on the partition of joint Hindu family of which he was a member and was also made liable to pay a business debt. He created an irrevocable trust in respect of 100 shares and the income of the trust after the discharge of the debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where there was no transfer of the asset from which arose income chargeable to income-tax, such income of the transferor should be included in his total income. We are not concerned in this reference with s. 60, as such. Section 61 deals with the revocable transfer of assets and provides that all income arising to any person by virtue of a revocable transfer of assets would be chargeable to income-tax as the income of the transferor and should be included in his total income. Section 62 provides for a transfer irrevocable for a specified period and it is necessary to set out the provisions of the said section which reads as follows: " 62. Transfer irrevocable for a specified Period.-(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer (i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee; or (ii) made before the first day of April, 1961, which is not revocable for a period exceeding six years: Provided that the transferor derives no direct or indirect benefit from such income in either case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her that the expression 'settlement or disposition' shall, for the purposes of this clause, include any disposition, trust, covenant, agreement or arrangement, and the expression 'settlor or disponer' in relation to a settlement or a disposition shall include any person by whom the settlement or disposition was made: Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him." We may incidentally point out that this reference is not concerned with the question whether any benefit was derived in view of a revocable transfer because of s. 62 of the 1961 Act. The question with which we are really concerned is the construction and the effect of s. 62 in the amplitude of the question before us. Now, the question before us is, whether on proper interpretation of the trust deed, it could be said to be a revocable trust. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of s. 16 and dealt with the observations of Lord Macmillan in the case of Chamberlain v. IRC [1943] 25 TC 317 (HL), at p. 329, where Lord Macmillan had observed as follows: " This legislation ............ (is) designed to overtake and circumvent growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly." Thereafter, Hidayatullah J., observed, inter alia, as follows: " These observations apply also to the section under consideration and the Indian provision is enacted with the same intent and for the same purpose. Section 16 thus lays down certain exemptions and exclusions in determining the total income of an assessee Some of the provisions lay down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trustees or otherwise. Now, there are two aspects of the question and the first is, whether, at all, there was any power to give an interest-free loan on the part of the trustees to the settlor by virtue of any clause. Now, the power given to the trustees was to invest the property. Keeping any money or giving money for the purpose of custody without any return cannot properly and strictly be called an investment. An investment involves a laying out of the property with certain object of a return. Therefore, strictly speaking, this act of the trustees, of giving an interest-free loan, was not investing the money and, to that extent the trustees might be said to have acted not in compliance with the trust deed. Apart from this, there is no such power as such in the deed and our attention was not drawn to any such clause. Learned advocate for the revenue, however, sought to urge that this argument was not urged before the Tribunal and both sides proceeded on the basis that the power of giving a loan or making an investment included the power of giving an interest-free loan, But, it appears to us, really what we have to consider is whether on the construction the trust deed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Indeed, an argument might have been possible that having used an interest-free loan out of the transferred asset the assessee had, in fact, in the background of the case, derived director indirect benefit. Whether such an argument would have been sound or not, it is not necessary for us to decide or discuss because that is not within the ambit of the question posed before us. As we have mentioned before, in order to be a revocable transfer under s. 63 of the Act, the transfer deed must contain a provision for retransfer directly or indirectly of the whole or any part of the income which must go to the transferor or the right to reassume power directly or indirectly over the whole or any part of the income or assets. This aspect, in our opinion, in view of the clauses mentioned in the deed, on principle, cannot be said to be a revocable trust under s. 63 of the Act (sic). We have set out the relevant clauses. If, as we have indicated, cl. 8 of the deed of transfer is construed to mean that the power for the discretion to invest the money of the trust did not include the power to give an interest-free loan, the trustees acted in breach of the terms of the deed, for a bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [1952] 21 ITR 135. There, the court was concerned with the first proviso to s. 16(1)(c) of the Indian I.T. Act, which we have set out herein before, and which corresponds to s. 63(a), cls. (i) and (ii). But what was one in proviso to cl. (c) of sub-s. (1) of s. 16 of the Indian I.T. Act, 1922, has now been placed in two sub-clauses being sub-cls. (i) and (ii) of cl. (a) of s. 63 of the Act of 1961. The Division Bench of this court held that the first proviso to s. 16(1)(c) of the Indian I.T. Act, 1922, only contemplated cases where the settlor could lawfully reassume power over the income or the assets. There, what happened was that the assessee had settled certain property on himself as a trustee to hold it in trust for his daughter. The deed, which was in the ordinary form, an out and out trust on the English model, provided that the trustee was to take possession and after paying the outgoings the income of the trust estate was to be paid to his daughter during the term of her natural life for her sole and separate use. The deed also made provisions as to how the income was to be dealt with on the death of the daughter. But the settlor retained no right whatsoever over the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. of the income for the maintenance of his children and grandchildren and the balance at the discretion of the trustees on any of the other objects specified in the trust deed. It was held by the Supreme Court that the provision for the application of the income for the satisfaction of the debts which the respondent was under an obligation to discharge did not amount to a provision for a retransfer of the income or the assets to the assessee or to his being invested with a power to reassume the income or the assets. The income or the assets were unmistakably impressed with the obligations arising out of the trust deed. The assessee-settlor did not obtain any benefit from the trust but on that account the first proviso to s. 16(1)(c) of the Indian I.T. Act, 1922, was not attracted, and the income from the shares could not be deemed to be the assessee's income or included in his total income. The case in which there was a settlement, but there was no provision in the settlement for a retransfer or right to reassume power, did not fall within the first proviso to s. 16(1)(c) even if as a result of the settlement the settlor obtained a benefit. At p. 413 of the report, the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the trust or any part thereof to any institution, association or society to be applied for all or any of the charitable purposes without being bound to see to the application thereof. Under cl. 10 the settlor had power to direct the trustees to invest the trust fund in shares of companies or any debentures or in giving loans to any public company or firm of good standing and reputation. Under cl. 1 the settlor could direct the trustees to vary the investment. Clause 21 provided that " all questions arising in the management and administration of the trusts or powers hereof and all differences of opinion among the trustees shall be disposed of in accordance with the opinion of the settlor during his lifetime..." The question was whether the income of the trust could be assessed in the hands of the settlor on the ground that he had right to reassume power over the trust funds or the income thereof as contemplated by the first proviso to s. 16(1)(c) of the Indian I.T. Act, 1922. It was held that none of the clauses of the trust deed came within the purview of the first proviso to s. 16(1)(c) and that the income of the trust could not, therefore, be assessed in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prohibition against investment to the settlor of the loan to the settlor of the funds belonging to the settlor. According to the learned advocate for the revenue, if this aspect is not borne in mind then the true ratio of the decision could not be appreciated. Learned advocate for the revenue also drew our attention to the observation of the Supreme Court at pp. 8 and 9 of the report where the Supreme Court reiterated the importance of the prohibition by the Bombay Public Trusts Act. But at p. 10 of the report, the Supreme Court observed that if the court did not ignore the relationship of the Bombay Public Trusts Act and the general principles of the Public Trusts Act then two interpretations of the first proviso of the Act would arise : whether the powers were reserved by the settlor or the trust deed came within the mischief of the Act. But the Supreme Court after expressing the view, at p. 10 of the report, observed as follows: " What then is the fair meaning of section 16(1)(c), proviso (i) ? It seems to us that the words 'reassume power' give indication to the correct meaning of the proviso. The latter part of the proviso contemplates that the settlor should be able, by v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first place, the registered deed of trust in this case, which is said to create a revocable trust, does not itself contain any provision for 'retransfer' or for 'reassuming' within the meaning of the first proviso to section 16(1)(c). We emphasize the language in the first proviso, if it contains any provision. That means that the settlement, disposition or transfer itself must contain such provision. We hold there is none in this case. The second point which we emphasize is about the two words of significant importance : 'retransfer' and 'reassume'. The prefix 're' plainly indicates that it must be a 'transfer' to himself as himself and not in any different capacity or it must have to 'reassume', which means to assume for himself as himself and not in a different capacity. Looking at the relevant clause of the trust deed quoted, on which reliance was placed for the revenue, there is no provision which can be treated or construed even remotely as a case of 'retransfer' or giving a right to 'reassume'. A refinement of this branch of the argument was made by Mr. Sen for the revenue by saying that, although there is no clause for retransfer or reassuming within the meaning of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervations of Sikri J., as the learned Chief justice then was, in the decision of the Supreme Court, which we have set out hereinbefore, at p. 669 of the report. This question was again considered by this court in the case of CIT v. Brojendra Nath Kundu [1977] 110 ITR 326, and also in the decision in the case of CIT v. Shyamlal Bhuwalka [1978] 113 ITR 127 (Cal). Learned advocate for the revenue sought to urge that this decision was rendered on a misreading of the decision of the Supreme Court referred to hereinbefore. According to the learned advocate for the revenue, this court in the last-mentioned decision failed to appreciate that the decision in Jayantilal Amratlal's case [1968] 67 ITR 1 (SC), was rendered in view of the express provisions of the Bombay Public Trusts Act. We are unable to accept this contention. The Division Bench of this court in the case of CIT v. Shyamlal Bhuwalka [1978] 113 ITR 127 (Cal) had set out the observations of the Supreme Court as to what is the fair meaning of s. 16(1)(c) and the first proviso and, relying on the said observations, the Division Bench of this court came to the conclusion in that case. Learned advocate for the revenue strongly r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sub-cl. (ii) of cl. (a) of s. 63. But what the Division Bench, in our opinion, meant was that if by the operation of the settlement the transferor got back the property in the same capacity as he had before is the transfer, the same would come within the mischief. That made clear where the court observed that the second part of the proviso was aimed at preventing a transferor from being able to exercise a right over the income or the assets " which he would have had but for the transfer ". A right which a transferor has or had but for the transfer would be only a right which the transferor had as an owner before he effected the transfer. It was, in this light, that the Division Bench observed (pp. 319, 320): " In substance the effect of the whole proviso is that to be out of the mischief of the section the settlor must divest himself from the income of the subject-matter of the trust or the beneficial enjoyment of the ownership thereof unreservedly." The Division Bench was emphasizing the importance of having the property taken back as an owner. In that view of the matter, we are of the opinion that this decision does not, in any way, militate against the view which was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved of. Reliance was further placed by the learned advocate for the revenue on a decision of the Madras High Court in the case of CIT v. E. M Gopalakrishna Kone [1965] 57 ITR 569, where the, Division Bench of the Madras High Court reiterated that a right to reassume power within the meaning of prov. 1 to s. 16(1)(c) should mean that there was such a power lawfully given under the deed of trust. It was not necessary for achieving the object of s. 16(1)(c) that the trustee should be left with no power for exercising his function as a trustee consistently with the terms of the trust. There, the trust deeds were entirely different. In that context, the observation of the Division Bench at p. 577 should be understood and, understanding in that context, in our opinion, the said observation cannot be of much assistance in support of its contention to the revenue. Reliance was also placed in another decision of the Madras High Court in the case of Manickavasagam Chettiar v. CIT [1964] 53 ITR 292, where in the context of s. 16(1)(c) of the Indian I.T. Act, 1922, the Madras High Court observed that the characteristic of a benefit, was that it was real and not notional, concrete a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved a revocable transfer of assets. There, the deed itself contained cl. 4, which was in the following terms: "By clause 10 of the Harshadrai Trust, and clause 12 of the Kantagauri Trust, the settlor-assessee expressly reserved to himself the power of revocation of the trusts, wholly or partially, and to declare new trusts for the benefit of himself and his heirs, executors, administrators or any other person or persons as he may think fit." This was a clear deed for power of revocation. In the present case, learned advocate for the revenue sought to rely mainly, as we have said, on cl. 13 and cl. 23. So far as cl. 13 of the present trust deed is concerned, it provided that after at least two beneficiaries had attained the age of eighteen years, the trustees might extend the scope of objects of the trust and add to the number of beneficiaries in such manner as they thought fit, provided, however, that alterations in that behalf should be made on a unanimous decision of the trustees and with the consent in writing of all the major beneficiaries and of the guardian of the minor beneficiaries, if any. It is well known that under s. 77, read with s. 78 of the Trusts Act, trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two separate deeds were necessary to be executed by the settlor again retransferring the property to the settlor. On this aspect concurrence was expressed by the Division Bench of the Patna High Court in the case of CIT v, Rani Bhuwaneshwari Kuer [1962] 45 ITR 357, at p. 362, and an aspect with which concurrence was also expressed by the Division Bench of this court in the case of CIT v. Jitendra Nath Mallick [1963] 50 ITR 313, the decision which we have already referred to, where at pp. 321 and 322, G. K. Mitter J. expressed his preference for the views expressed by Chagla J. Learned advocate for the revenue also sought to rely before us on the decision of the King's Bench Division of England in the case Glyn v. IRC [1948] 30 TC 321 (KB), where at p. 329 of the report, Singleton J. had observed that a power given to the settlor to be used in conjunction with others made the confirment of the power a revocable power. But we must, in this context, forewarn ourselves that relying on, as was observed by G. K. Mitter J., in the case of CIT v. Jitendra Nath Mallick [1963] 50 ITR 313, the relevant provisions of the English statutes were not in pari materia with our provisions and conse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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