Commissioner of Income-Tax, Patna Vs.
Rani Bhuwaneshwari Kuer [1964] INSC 140 (28 April 1964)
28/04/1964 SHAH, J.C.
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION: 1965 AIR 6 1964 SCR (7) 920
CITATOR INFO:
R 1966 SC 18 (5) F 1971 SC2516 (6,10)
ACT:
Indian Income-tax Act, 1922 (11 of 1922) s.
16(1)(c) and its proviso three-Deed of trust by assessee-Beneficiaries of the
Trust are assessees and other persons-Trust and revocable within six years-If
the income of the Trust can be included as part of the -income of the assessee.
HEADNOTE:
The assessee (respondent) owner of an estate
known as "Tekari Rai" executed an indenture of trust dated January
20, 1941 whereby the "Tekari Rai" and certain Zamindari properties
owned by her were conveyed to certain named trustees to be held in trust,
subject to conditions specified therein. This deed was created with a view to
liquidate the debts of the Tekari Raj. The beneficiaries under the deed were
the settlor, her husband and her five sons. This original deed was modified by
a deed of rectification dated December 22, 1941. It was provided in the
original cl. 43 of the deed of trust dated January 20, 1941, that the settlor
may at any time during her life revoke or vary either wholly or partly the
trust or any provisions of the deed but not before the payment and discharge of
certain debts and liabilities. Clause 43 of the original deed was subsequently
modified by the 45th clause which was added by the deed of amendment dated
January 12, 1942. By cl. 45 of the deed of amendment the right of revocation
was not exercisable till the Thica leases in favour of the Maharajadhiraj of
Darbhanga and Capt. Maharaj Kumar Gopal Saran Narain Singh remained good and
effective. It was the common ground 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.
In assessing the assessee to income-tax for
the year 194748, the Income-tax Officer included in her total income the income
of the trust. The matter went up to the High Court and the High Court set aside
the assessment order passed by the Income-tax Officer. The High Court held that
a,, 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 her favour. The
appellant obtained special leave against the order passed by the High Court.
Hence the appeal.
The principal question for consideration
before this Court was whether the income received by the beneficiaries other
than the assessee could be included in the total income of the assessee under
s. 16(l)(c) of the Act.
Held:(i) In terms the third proviso to s.
16-(l)(c) of the Income-tax Act excludes from the operation of the principal
clause that part of the income alone which arises to any person under a, deed
of settlement: it does not remove from its protection the entire deed of trust,
if part of the income is not covered by the conditions prescribed or if the settler
has in a part of the income interest direct or indirect. The third proviso does
not operate to exclude the income which the settlor receives as a beneficiary
from liability to tax.
921 (ii)The third proviso to s. 16-(l)(c) of
the Act does operate in respect of settlements, dispositions, or transfers
which are by the first proviso revocable for the purpose of that clause.
(iii) Two conditions are necessary for the
application of the 3rd proviso to s. 16-(l)(c) of the Income-tax Act: (i) that
the trust should not be revocable for a period exceeding 6 years or during the
life time of the beneficiary and (ii) the settlor or disponer should have no
direct or indirect benefit from the income given to the beneficiary.
The effect of the two conditions is that,
that part of the income which arises to any person by virtue of the settlement
which is not revocable for a period of six years or which is not revocable
during the life time of the beneficiary will not be included in the settlor's
income, provided that from the income of such person the settlor derives no
benefit direct or indirect.
On the construction of the deed of trust it
was held that the deed was not revocable within six years provided by s.
16 (1)(c) of the Act.
Ramji Keshavji v. Commissioner of Income-tax,
Bombay, 13 I.T.R. 105, relied on.
(iv)On the facts of this case it was held
that by virtue of the third proviso to s. 16-(l) (c) of the Act the income received
by the beneficiaries under the deed of trust other than the assessee could not
until the power of revocation arose to the assessee, be deemed to be the income
of the assessee for the purpose of assessment to income-tax.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 620 of 1963.
Appeal by special leave from the judgment and
decree dated 9, 1961 of the Patna High Court in M.J.C. No. 497 of 1957.
N. D. Karkhanis and R. N. Sachthey, for the
appellant.
Sarjoo Prasad, B. D. Singh and D.
Goburdhn", for the respondent.
April 28, 1964. The judgment of the Court was
delivered by SHAH J.-Rani Bhuwaneshwari Kuer-hereinafter referred to as `the
assesses' was the proprietor of a seven-sixteenth share in an estate known as
'Tekari Raj', having inherited that estate from her parents. The assesses 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 assesses executed an indenture
of trust dated January 20, 1941, whereby the Tekari Raj and certain zamindari
properties owned by the assesses were conveyed to certain named trustees to be
field in trust, subject to conditions specified therein. The principal
beneficiaries under the deed after payment of the debts were the assesses, her
husband and her five sons.
922 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
Sch. '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
deed for the maintenance and up-keep of the Tekari Forts, observance of Durga
Puja and other purposes specified therein, and in the event of the settlor
dying before payment and discharge of the debts and liabilities set out in Sch.
'D', and without making any permanent trust for the purposes enumerated, the
settlor enjoined the trustees after discharge of the debts mentioned in Sch.
'D' to set apart property fetching a net income of Rs. 20,000/-to form the
corpus of the permanent trust to meet the expenses relating to the repair of
the Tekari Forts, celebration of Durga Puja and other purposes specified. By
the 42nd clause it was provided that the trust under the deed shall terminate
after payment of the debts and liabilities set out in Sch. 'D' or after the
death of the last amongst the sons, whichever event shall last occur, and by
the 43rd clause it was provided that if any of the beneficiaries under the deed
or their heirs in future shall challenge the Indenture of Release and Agreement
dated December 6, 1939, executed by the settlor in favour of her husband and
the action taken there under. the said beneficiary shall on making such
objection forfeit his right as a beneficiary under the deed.
It was also provided that if there shall be
any breach by any of the beneficiaries or of the covenants or conditions and
limitations imposed under the deed, he or she shall not be entitled to any
money or to any share in the rents, issues or usufruct of the trust property
and he or she shall be deemed to have been excluded from the categories of
beneficiaries and his or her share of the rents, issues and profits will be
dealt with or enjoyed by the settlor in her entire discretion. provided always
that the settlor may at any time during her life by any deed revocable or
irrevocable revoke or vary either wholly or partly the trust or any provisions
of the deed, but not before the payment and discharge of the debts and
liabilities as mentioned in Sch. 'D', and provided further that notwithstanding
such revocation of the trust the settlement made under the deed remained good
and effective subject to the forfeiture clause set out therein.
This deed was modified by a deed of
rectification dated December 22, 1941, reciting that with the consent of all
persons who were parties to the deed of trust, it was directed 923 that at any
time during the lifetime of 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 effect the payment and discharge of the debts and
liabilities as mentioned in Sch. 'D' thereto and the original deed of trust
shall be read and construed as if it contained a power vested in the settlor
(the assessees) 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 effect
the payment and discharge of the debts and liabilities as mentioned in Sch.
'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 cl. 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 become payable to his heir 'or heirs. By the modifications in
paragraph-42 it was provided that the trust under the deed may terminate after
payment of the debts and liabilities of the trust that would then be
outstanding or after extinguishment of the Thicca leases in favour of the
Maharajadhiraj of Darbhanga or in favour of Capt. Maharaj Kumar Gopal Saran
Narain Singh of Tekari, whichever event shall occur last. Paragraph 42(a)
provided that after the provisions as laid down in para 41 had been carried out
and when the last contingency set out in para 42 as modified had arisen, the
beneficiaries or the heirs or successors-ininterest or representatives-in-interest
of such of them as had acquired any right from any of the beneficiaries under
the deed shall be entitled .to partition the trust property according to their
shares. The material part of paragraph45 provided:
"That the settlement made under these
presents shall be permanent, unalterable and irrevocable so far the interest
created under these presents are concerned, but each beneficiary shall have
full right to make any sort of arrangement about devolution or succession or
make such alienation, as he may think fit, about his share, but the trust
created under these presents shall be irrevocable so long the debts mentioned
above including all the liabilities on the Trust property up to date are not
fully paid up or discharged or so long as the Thicca leases in favour of
Hon'ble Maharajadhiraj of Darbhanga or Capt. Maharaj Kumar Gopal 924 Saran
Narain Singh remain good and effective whichever event shall happen last".
Provided that always para 43 of the Indenture
of Trust dated 20th January, 1941, shall hence forth be read subject to this
para.
In proceedings for assessment for the
assessment year 194748 the Income-tax Officer, Gaya-Palamau Circle, Gaya,
rejected the contention raised by the assessee that the income under thetrust
was taxable in the hands of the trustees under the deed of settlement and
applying the provision of s. 16(1)(c)of the Indian Income-tax Act, 1922,
brought the income ofthe trust to tax as part of the assessee's income. The
order passed by the Income-tax Officer was confirmed in appeal to the Appellate
Assistant Commissioner, but the Income-tax Appellate Tribunal reversed that
order. The Tribunal observed that "revocation involved 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 s. 16 (1) (c) of the Income-tax Act.
The High Court of Judicature at Patna
directed the Income tax Appellate Tribunal under s. 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 s. 16(l)(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 s. 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 s. 16 (1) (c) of the Incometax
Act a revocable trust, but not being revocable for six years from the date of
its creation, by Virtue of the third proviso to s. 16 (1) (c) which controlled
not merely the substantive provisions of s. 16 (1) (c) but the first proviso to
that section as well. the income received by the beneficiaries, (other than the
settlor) under the deed of trust was not liable to be included in the income of
the assessee. The High Court accordingly directed that the income of the trust
property which is the subject-matter of the settlement of the trust was, not
liable to be assessed to tax under the third proviso to s. 925 16(1)(c), but
only so long as the power of revocation -ranted by the deed was not exercised
by the assessee under the terms ,of the deed of trust. The High Court also
declared that the assessee was liable to pay tax on the income received by her
in the character of a beneficiary out of the trust properties.
Against the order passed by the High Court,
with special leave, the Commissioner of Income-tax, Patna, has appealed to this
Court.
The principal question which falls to be
determined in this appeal is whether by the third proviso to cl. (c) of s.
16(1), income received by the beneficiaries
other than the assessee is income arising to them by virtue of a settlement
which is not revocable for a period exceeding six years, and from which income
the assessee derives no benefit direct or indirect. Section 16(1)(c) provides:
"(1) In computing the total income of an
assessee(a) (b) (c)all income arising to any person by virtue of a settlement
or disposition whether revocable or not, and whether effected before or after
the commencement of the Indian Income-tax (Amendment) Act, 1939, (VII of 1939),
from assets remaining the property of the settlor or disponer, shall be deemed
to be income of the settlor or disponer, and all income arising to any person
by virtue of a revocable transfer of assets shall be deemed to be income of the
transferor:
Provided that for the purposes of this clause
a settlement, disposition or transfer shall be deemed to be revocable if it
contains any provisions for the retransfer directly or indirectly of the income
or assets to the settlor, "disponer or transferor. or in any way gives the
settlor, disponer or transferor a right to reassume power directly or
indirectly over the income or assets:
Provided further that the expression
"settlement or disposition" shall for the purpose of this clause
include any disposition, trust, covenant, agreement, or arrangement, and the
expression "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 926 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 revokearose in his favour.
The point in dispute in this appeal is about
the applicability of the third proviso to s. 16(l)(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
necessary for the application of the third proviso-(i) that the trust should
not be revocable for a period exceeding six years or during the lifetime of the
beneficiary and (ii) the settlor or disponer should have no direct or indirect
benefit from the income given to the beneficiary.
Counsel for the Commissioner contended in the
first instance that the third proviso to s. 16(l)(c) applied to the trust
created by the assessee because in fact within six years of the date of its execution
the deed was revoked, and that in any event on a true interpretation of the
covenants of the, deed of trust it was revocable within six years. The plea
that the trust was in fact revoked within six years was never raised before the
Revenue authorities, the Tribunal or even the High Court, and is plainly
unsustainable. There are, it is true, certain recitals made in the deed dated
September 18, 1946, executed by the assessee, which is styled "Deed for
further alteration of terms & constitution of trust" by the assessee,
that the liabilities referred to in Sch. 'D' to the deed of trust dated January
20, 1941 had been fully discharged and the beneficiaries had been, receiving
the surplus rents, issues and profits according to their respective shares in
the same and the settlor had by a deed of trust dated May 28, 1946 conveyed and
settled a portion of her seventh share in the rents, issues and profits of the
trust properties, as well as in the corpus of Shri Bhubneshwari Hari Haresh
Private Trust for meeting certain expenses. But those recitals do not even
prima facie indicate that the trust was revoked at any time. We cannot
therefore entertain this new ground raised for the.
first time in this Court.
It may be noticed that whereas under the
original cl. 43 of the deed of trust dated January 20, 1941 even though the 927
trust was expressly made revocable, it could not be revoked before payment of
the debts and discharge of the liabilities mentioned in Sch. 'D'. By the 45th
clause which was added by the deed of amendment dated January 12, 1942, the
settlement made under the deed was declared permanent, unalterable and
irrevocable so far as the interest created under the deed of amendment was
concerned, and was also to stand irrevocable so long as the debts mentioned in
Sch. 'D' and other liabilities of the trust including all the liabilities on
the trust properties 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 ensure till 1965 and the lease in favour of Capt. Maharaj
Kumar Gopal Saran Narain Singh till 1954. By cl. 45 of the deed of amendment
the right of revocation was not exercisable till the Thicca leases in favour of
the Maharajadhiraj of Darbhanga and Capt. Mabaraj KumarGopal 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 s. 16(l)(c) of the Act.
It was urged on behalf of the Commissioner in
the alternative that the third proviso to s. 16(l)(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 settlement included in the assessee's income. The effect of' the two
conditions is that, that part of the income which arises to any person by
virtue of the settlement which is not revocable for a period of six years or
which is not revocable, during the lifetime of the beneficiary will not be
included in the settlor's income, provided that from the income of such person
the settlor derives no benefit direct or indirect. The third proviso to s.
16(l)(c) does not operate to exclude the income which the settlor receives as a
beneficiary, from liability to incometax: it merely excludes that part of the
income which is under the deed of settlement given to another person from
liability to tax in the hands of the settlor, if the conditions prescribed by
the third proviso are fulfilled. The contention raised by the Commissioner that
if under the deed of trust the settlor has reserved to himself as a beneficiary
any part of the income of the property settled, the third proviso will not
apply to the deed of trust runs contrary to the plain words of the statute. In
terms the third proviso excludes from the operation of the principle clause
that part of the income alone which arises to any person under a deed of 928
settlement:it does not remove from its protection the entire deed of trust, if
part of the income is not covered by the conditions prescribed or if the
settlor has in a part of the income interest direct or indirect.
Finally, it was contended that the third
proviso only operates in respect of deeds of settlement or disposition which
are referred to in cl. (c), but not to deeds of settlement or disposition which
by the first proviso are deemed to be revocable in the conditions mentioned by
the first proviso. In other words, it is submitted the benefit of the proviso
is not available in those cases where the settlement or disposition is deemed
by the proviso to be revocable, because it contains a provision for the
retransfer directly or indirectly of the income or assets to the settlor, or in
any way it gives the settlor, disponer or transferor a right to reassume power
directly or indirectly over the income or assets. We are unable to agree with
this contention also. By the first proviso, settlements, dispositions or
transfers of the character described therein, are deemed revocable for the
purpose of the principal clause. The function of proviso I and proviso 11 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
Ramji Keshavji v. Commissioner of Income-tax, Bombay(1) Kania, J., in
considering the scheme of s. 16(l)(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 I
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 fulfills 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 negative, no further discussion can arise (1) 13 I.T.R. 105.
929 because, on the face of it, the deed is
not revocable and, therefore, it does not come under Section 16(1)(c). If,
however, the answer to the question is in the affirmative, the deed although
ostensibly irrevocable. is deemed to be revocable. and thus becomes a revocable
transfer of assets, within the meaning of the substantive provision of Section
16(1)(c). Having reached that stage, the law proceeds to consider further what
is found in proviso 3. The scheme appears to be that although in fact, after
reading the provisions of Section 16(1)(c) with proviso 1, the transfer is
revocable, the law will not still consider the income derived from such a
settlement the income of the settlor, provided the settlement is not revocable
for a period exceeding six years or during the lifetime of the person for whom
the income is settled, and further, from, which income the settlor derives no
direct or indirect benefit." In our view that passage correctly summarises
the effect of the third proviso to s. 16(1)(c).
The High Court was therefore right in holding
that by virtue of the third proviso to s. 16(1)(c) of the Indian Incometax Act.
1922, the income received by the beneficiaries under the deed of trust other
than the assessee could not until the power of revocation arose to the
assesssee, be deemed to be the income of the assessee for the purpose of
assessment to, income-tax.
The appeal fails and is dismissed with costs.
Appeal dismissed.
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