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TMI Blog1964 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... that estate from her parents. The assessee later acquired by purchase a major portion of the remaining nine-sixteenth share in the Raj. The estate held by the assessee was heavily encumbered, and with a view to arrange for liquidation of the debts the assessee executed an indenture of trust dated January 20, 1941, whereby the Tekari Raj and certain zamindari properties owned by the assessee were conveyed to certain named trustees to be held in trust, subject to conditions specified therein. The principal beneficiaries under the deed after payment of the debts were the assessee, her husband and her five sons. By the 23rd clause of the deed it was directed that after making certain payments, the trustees shall divide the surplus of the net rents, issues and profits thereof in the proportions set out in the clause. The 24th and the 25th clauses dealt with the devolution of the beneficial interest in the event of death of any of the beneficiaries. By the 41st clause it was provided that after the debts and liabilities set out in Schedule " D " to the deed were paid off and discharged the settlor shall be entitled to make a permanent trust of some of the villages demised under the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the assessee had the power to revoke or vary, either wholly or partly, the trust or any provisions of the deed of trust, but not so as to affect the payment and discharge of the debts and liabilities as mentioned in Schedule " D " thereto and the original deed of trust shall be read and construed as if it contained a power vested in the settlor (the assessee) during her life by deed to revoke or vary, either wholly or partly, the trust or any provisions of the said trust, but not so as to affect the payment and discharge of the debts and liabilities as mentioned in Schedule " D ". Another deed called a deed of amendment was executed by the assessee on January 12, 1942. By this deed paragraphs 22, 32, 33, 35, 36 and 37 of the original deed were cancelled and other paragraphs including paragraphs 23, 24 and 42 were amended and modified and paragraphs 42(a), 44 and 45 were added. By the amendment of paragraph 23 the surplus rents, issues and profits of the trust property were to be divided in seven equal shares and by the amendment made in clause 24 it was provided that in the event of the death of any of the sons, his share of the rents, issues and profits shall bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking back that which was given once, but in the present case there was nothing done by the assessee by which it could be said that she had taken back what she had given by the original deed of trust ", and the trust was therefore not a revocable trust as contemplated by section 16(1)(c) of the Income-tax Act. The High Court of judicature at Patna directed the Income-tax Appellate Tribunal under section 66(2) of the Act to state a case and to refer the following questions: " (1) Whether the trust created by the assessee is a revocable trust within the meaning of section 16(1)(c) of the Income-tax Act? (2) Whether the income from the property which is the subject-matter of the settlement mentioned in question (1) can be deemed to be the income of the assessee-under section 16(1)(c) of the Income-tax Act ? " The High Court held that the deed of trust dated January 20, 1941 (as modified by the subsequent deed dated January 12, 1942), was within the meaning of section 16(1)(c) of the Income-tax Act a revocable trust, but not being revocable for six years from the date of its creation, by virtue of the third proviso to section 16(1)(c) which controlled not merely the substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession ' settlor or disponer ' in relation to a settlement or 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. " The High Court held that the deed of trust was one in which the assets remained the property of the settlor, but as the trust was not revocable for a period of six years, the income received by the beneficiaries (other than the assessee) was not liable to be taxed as the assessee's income till the power to revoke arose in his favour. The point in dispute in this appeal is about the applicability of the third proviso to section 16(1)(c), which seeks to exempt from the operation of the principal clause income which arises to any person under the deed of settlement executed by the assessee. Two conditions are neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperties were not fully paid up and discharged and so long as the leases in favour of the Maharajadhiraj of Darbhanga or Capt. Maharaj Kumar Gopal Saran Narain Singh remained good and effective, whichever event last happened. It is conceded that the lease in favour of the Maharajadhiraj of Darbhanga was to enure till 1965 and the lease in favour of Capt. Maharaj Kumar Gopal Saran Narain Singh till 1954. By clause 45 of the deed of amendment the right of revocation was not exercisable till the thicca leases in favour of the Maharajadhiraj of Dharbhanga and Capt. Maharaj Kumar Gopal Saran Narain Singh remained good and effective, and we are unable to hold that the deed of trust was revocable within six years as provided by section 16(1)(c) of the Act. It was urged on behalf of the Commissioner in the alternative that the third proviso to section 16(1)(c) did not protect the assessee against the application of the substantive part of that clause, because the assessee was deriving under the terms of the deed of trust a direct benefit. There are in the third proviso two cumulative conditions on the existence of which the exemption from liability to have the income arising from a set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso 2 is plainly explanatory. The second proviso in terms says that the expression "settlement or disposition" is to include any disposition, trust, covenant, agreement or arrangement, and the expression " settlor or disponer " is to include any person by whom the settlement or disposition was made. Similarly, the first proviso states that settlements, dispositions or transfers, if they are of the character described, shall for the purpose of the principal clause be revocable transfers. If that be the true interpretation, and we think it is, it would be impossible to hold that the third proviso does not operate in respect of settlements, dispositions or transfers which are by the first proviso revocable for the purpose of that clause. In a case decided by the Bombay High Court in Ramji Keshavji v. Commissioner of Income-tax Kania J., in considering the scheme of section 16(1)(c), observed : " 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 irrevoc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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