Commissioner of Income-Tax, Punjab,
Jammu & Kashmir, Himac Vs. Raghbir Singh [1965] INSC 102 (9 April 1965)
09/04/1965 SHAH, J.C.
SHAH, J.C.
SUBBARAO, K.
SIKRI, S.M.
CITATION: 1966 AIR 18 1965 SCR (3) 684
CITATOR INFO :
R 1968 SC 189 (13) R 1991 SC 331 (3)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s. 16.(1)(c)--Deed
of trust--Trustees directed to pay debts of settlor and only thereafter to
apply trust income and property to the various purposes of the trust--Such
direction whether makes trust revocable--Whether property of trust indirectly
re-transferred to the settlor--Income from trust whether to be taxed in hands
of settlor.
HEADNOTE:
The respondent executed a deed of trust in
respect of certain shares owned by him in a company. The deed directed the
trustees to apply the income and property of the trust in the first instance
for paying off the settlor's debts, and thereafter for other purposes of the
trust. In proceedings under the Indian Income-tax Act, 1922 it was held by the
Income-tax Officer that the trust was a fictitious transaction. The Appellate
Assistant Commissioner held that the transfer of the shares for the purpose of
the trust was not irrevocable and therefore under the proviso to s. 16(1)(c)
the respondent could not escape liability. The Tribunal upheld the order of the
Assistant Commissioner but referred to the High Court, inter alia, the question
whether the income from the trust property could be taxed in the hands of the
assessee. The High Court answered the question in the negative. The
Commissioner of Incometax, appealed to this Court.
HELD: After the execution of the deed of
settlement the income from the shares arose to the trustees and was liable to
be applied for the purposes mentioned in the deed. The income had first to be
applied for satisfaction of debts which the settlor was under an obligation to
pay, but this did not amount to a re-transfer of the income or assets to the
settlor, nor did it invest the settlor with a power to re-assume the income or
assets. The assests and the income were unmistakably impressed with the
obligations arising out of the trust. The settlor certainly obtained a benefit
from the trust consequent upon the satisfaction of his liability but on that
account the first proviso to s. 16(1) was not attracted. [690D-F] The proviso
contemplates cases in which there is a provision for retransfer of the income
or assets and such provision is for retransfer directly or indirectly. It also
contemplates cases where there is a provision which confers a right upon the
settler to reassume power over the income or assets directly or indirectly. It
is the provision for retransfer directly or indirectly of income or assets or
for reassumption of power directly, or indirectly over income or assets which brings
the case within the proviso. Cases in which there is a settlement, but there is
no provision in the settlement for retransfer or right to reassume power do not
fall within the proviso, even if as a result of the settlement, the settler
obtains some benefit. 1[690G, H] Ramji, Keshavji v. C.I.T. Bombay, [1945] 13
I.T.R. 105 and D.R. Shahapura v. C.I.T., Bombay 14, I.T.R. 781 approved.
685
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 96 to 98 of 1964.
Appeals by special leave from the judgments
and orders dated September 22, 1960, and December 6, 1960 of the Punjab High
Court in Income-tax References Nos. 19 of 1958 and 6 of 1959 respectively.
S.V. Gupte, Solicitor-General, R. Ganapathy
Iyer and R.N. Sachthey, for the appellant.
Deva Singh Randhawa and Harbans Singh, for
the respondent.
The Judgment of the Court was delivered by
Shah, J. On April 10, 1953 the estate of the joint Hindu family of which the
respondent was a member was partitioned, and the respondent was allotted,
besides other properties, 400shares of the Simbhaoli Sugar Mills Private Ltd.,
and was made liable to pay a business debt amounting to Rs. 3,91,875/due by the
family to R.B. Seth Jessa Ram Fateh Chand of Delhi. On April 14, 1953 the
respondent executed a deed of trust in respect of 300 out of the shares of the
Simbhaoli Sugar Mills which fell of to his share. The following are the
material provisions of the deed of trust.
"AND WHEREAS on partition, the author
was allotted amongst other properties, four hundred shares of the Simbhaoli
Sugar Mills Ltd., and fixed with liability for discharge of certain debts of
the Joint Hindu Family AND WHEREAS for discharge of the debts detailed in the
schedule appearing hereafter, the author now as absolute owner of the said
shares has decided to settle on trust three hundred shares numbering 1 to 300
both inclusive, out of the said shares for the benefit of his creditors and
other beneficiaries named hereafter and for the objects mentioned hereafter.
2. The author as holder of 300 shares out of
the capital of Simbhaoli Sugar Mills Ltd. divesting himself of all proprietary
rights in the said shares. hereby declares that the said shares shall from this
day be irrevocably held on Trust by the Trustees to be used by them for all or
any of the purposes following, that is to say :-(a) To pay off the debts as
detailed in Schedule 'A' attached hereto: These debts were incurred for the
benefit of the Joint Hindu Family of the author and on disruption of the Joint
Hindu Family and partition of properties among its members, made payable by the
author.
686 And after his debts are paid off.
(b) To provide for the maintenance and
education of the children and grand children of the author.
(c) To open and run Hospitals and Nursing
Homes.
(d) To open and run School or Schools for the
education of boys or girls in scientific and technical subjects.
To open and maintain a reading room and a
lending library.
(f) To provide for the maintenance and
education of orphans, widows and poor people and for that to give scholarships
for inland and overseas studies to found orphanage. widow houses and poor
houses and to do all other things that the trustees may deem fit for carrying
out the objects of the Trust." By el. 3 four persons including the
respondent were appointed trustees, and the respondent was to hold the office
of Chairman of the Trust during his lifetime. The trust deed then provided:
"In the books of the Company, the shares
will stand in the name of the Chairman for the time being, who will have the
power to operate the Bank accounts of the Trust, to preside at the meetings,
exercise the right of the vote in respect of the shares of the Trust."
Clause 5 provided:
"It is hereby declared that the trustees
shall have the following powers in addition to the powers and the authorities
here in fore contained:-(i) The trustees shall not be entitled to sell the
shares except as provided hereafter but they can mortgage or pledge the same
for raising funds as they may feel necessary for paying off the debts of the
author, provided (ii) ............
(iii) ..............
(iv) ..........
Clause 6 provided:
"That in carrying out the objects of the
trust the trustees shall keep in mind and abide by the following directions:(i)
The payment of the debts of the author as detailed in Schedule 'A' referred to
above shall receive the topmost priority and the trustees shall not spend any
money out of the trust property or its income 687 in any direction till they
have paid off all the debts of the author, provided always if the trustees are
unable to pay off the debts, out of the income i.e. dividends, bonuses etc. of
the shares within a period of ten years they shall be entitled to sell the same
or part of it and thus pay off the debts that may be due at that time.
(ii) After debts are discharged the trustees
shall spend the income of the trust property.
remaining in their hands after full discharge
of the debts, on the maintenance of the children and grand children of the
author and the remaining 20% on all or any of the other objects of the trust as
the Trustees may think best.
(iii) ............
The respondent claimed before the Income-tax
Officer, Eward. Amritsar that the dividend received by the trustees in respect
of 300 shares of the Simbhaoli Sugar Mills was the income of the Trust and that
he had no concern with that income as he had "divested himself irrevocably
of the ownership of the shares" and that in any event Rs. 19,856/being the
amount due as interest to R. B. Seth Jessa Ram Fateh Chand should be allowed as
a permissible deduction in computing the net income from dividend of the
shares. The Income-tax Officer rejected the contentions of the respondent,
holding that the Trust was a "fictitious transaction". The Appellate
Assistant Commissioner held that the respondent had not "irrevocably
transferred the 300 shares of the Simbhaoli Sugar Mills" and therefore by
virtue of s. 16(1)(c) proviso one the respondent could not escape liability to
pay tax on the dividend from the share.
The respondent appealed to the Income-tax
Appellate Tribunal. but without success. At the instance of the respondent the
Tribunal drew up a statement of the case and referred the following questions
to the High Court at Chandigarh:
"(1) Whether the dividend income of 300
shares of the Simbhaoli Sugar Mills, Private Ltd. transferred by the assessee
to S. Raghbir Singh Trust was the income of the assessee liable to tax?
(2)Whether the assessee was entitled to claim deduction of Rs. 19,856/paid as
interest to R.B. Seth Jessa Ram Fateh Chand against the dividend income of the
aforesaid 300 shares?" The High Court answered the first question in the
negative and declined to answer the second question. With special leave. the
Commissioner of Income-tax has appealed to this Court.
Section 2 sub-s. (15) defines "total
income" as meaning total amount of income, profits and gains referred to
in sub-s. (1) of s. 4 688 computed in the manner laid down in the Act. Section
16 of the Income-tax Act enumerates the exemptions and exclusions admissible in
the computation of total income in certain specified cases. The material part
of cl. (c) of sub-s. (1) of s. 16 is as follows:
"In computing the total income of the
assessee-(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 provision for the retransfer directly or indirectly of the income
or assets to the settlor, disponer or transferor, or in any way gives the
settler, 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 purposes 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 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."
Clause (c) was intended, while seeking to protect a genuine settlement by which
the tax-payer intends to part with control over property and its income. to
circumvent attempts made by him to reduce his liability to pay income-tax by
the expedient of so arranging a settlement or disposition of property that the
income does not accrue to him, but he reserves a power over or interest in the
property settled or disposed of, or in the income thereof. By cl.
689 c) income arising to any person by virtue
of a settlement or disposition whether revocable or not is deemed to be income
of the settlor or disponer if the assets remain the property of the latter.
Again income arising to any person by virtue of a revocable transfer of assets
is deemed to be the income of the transferor. The first proviso then deems a
settlement statutorily revocable, if it contains any provision for retransfer
directly or indirectly of the income or assets settled, to the settlor, or
where it gives to the settlor a right to reassume power directly or indirectly
over the income or assets. By the second proviso the expression
"settlement or disposition" includes a disposition, trust, covenant,
agreement or arrangement the Legislature has thereby sought to bring within the
net, transactions similar to though not strictly within the description of
settlements and dispositions. The third proviso carves out from the amplitude
of cl. (c) as expounded by the first and the second provisos income arising to
any person from a settlement which is not revocable for a period exceeding six
years or during the lifetime of the person and from which income the settlor
derives no benefit direct or indirect.
It was observed in a recent judgment of this
Court: Commissioner of Income-tax, Bihar and Orissa v. Rani Bhuwanesliwari
Kuer(1) that:
"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 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." The terms of s. 16(1)(c) first
proviso are reasonably plain.
A settlement or disposition is deemed to be
statutorily revocable if there is a provision therein for retransfer of the
income or assets or which confers a right to reassume power over the income or
assets. The provision may even be for retransfer indirectly or for conferring
power to reassume indirectly over the income or the assets. But the actual
retransfer or exercise of the power to reasume is not necessary; if there be a
provision of the nature contemplated, the proviso operates.
The terms of the deed may now be examined.
The shares were settled upon trust, and four trustees one of whom was the
respondent were appointed. Genuineness of the trust is no longer (1) 53 I.T.R.
195,202.
690 in dispute. The direction that the shares
are to stand in the name of the Chairman for the time being appears to have
been necessitated by s. 33 of the Indian Companies Act, 1913 which prevented
notice of any trust, expressed, implied or constructive to be entered on the
register. The deed recites that the shares are to be held on trust irrevocably
by the trustees for all or any of the purposes mentioned therein. The purpose
for which the shares are to be held in the first instance is to pay off the
debt due to R.B. Seth Jessa Ram Fatch Chand, and it is only after the debt is
paid off that the directions in cls. (b) to (f) of cl. 2 come into operation.
The deed is in terms expressly irrevocable, but on that account the operation
of the first proviso is not excluded.
If by the direction for application of the
income for satisfaction of the debts due by the respondent, it could be said in
law that there is a provision for retransfer directly or indirectly of the
income or a right to reassume directly or indirectly power over the income, the
settlement would be deemed revocable, recital that it is irrevocable
notwithstanding.
But the income from the shares since the
execution of the deed of settlement arises to the trustees and it is liable to
be applied for the purposes mentioned in the deed. The income has to be applied
for satisfaction of debts which the settlor was under a obligation to
discharge. but that is not to say that there is a provision for retransfer of
the income or assets to the settlor, or that the settlor is invested with power
to reassume the income or assets. The assets and the income are unmistakably
impressed with the obligations arising out of the deed of trust. The settlor it
is true obtains benefit from the trust consequent upon satisfaction of his
liability, but on that account the first proviso is not attracted.
We are unable to accept the argument of
counsel for the revenue that by the use of the expression
"indirectly" in the first proviso the Legislature sought to bring
within the purview of el. (c) cases where the settler was under the guise of a
trust seeking to discharge his own liability.
The proviso contemplates cases in which there
is a provision for retransfer of the income or assets and such provision is for
retransfer directly or indirectly. It also contemplates cases where there is a
provision which confers a right upon the settlor to reassume power over the
income or assets directly or indirectly. It is the provision for retransfer
directly or indirectly of income or assets or for reassumption of power
directly or indirectly over income or assets which brings the case within the
first proviso. Cases in which there is a settlement, but there is no provision
in the settlement for retransfer or right to reassume power do not fail within
the proviso, even if as a result of the settlement, the settler obtains a
benefit.
It has been held in two cases decided by the
High Court of Bombay that a person under an obligation arising out of his
status 691 may execute a trust to discharge his own obligation without
attracting the operation of s. 15(1)(c).
In Ramji Keshavji v. Commissioner of
Income-tax, Bombay(1) under a consent decree. the assessee executed a deed of
trust conveying certain properties for the benefit of his wife. to the
trustees. The deed provided that the net income from the properties shall be
paid to the assessee's wife during her lifetime and that she shall maintain her
minor children by the assessee anal "run the household". It was held
by the High Court that the income derived from the trust property and payable to
the assessee's wife during her lifetime could not be deemed to be the
assessee's income, for the direction in the deed did not amount to a provision
for retransfer of the income or assets or for reassumption of power directly or
indirectly over income or assets within the meaning of the first proviso to s.
16(1)(c). In D.R. Shahapure v. Commissioner of Income-tax, Bombay(2) the
assessee with the object of making a provision for his wife made an entry in
his business books of account crediting Rs. 20,000/-, and endorsed against the
entry. "The capital supplied to you will remain entirely mine but you will
get the income over it up to the end of your life. This capital I will not take
back up to the end of your life but I will do business for you on this capital
and see that you get Rs. 600 per annum for you". No specific assets were
set apart to. meet the sum of Rs. 20,000/and there were no other entries in the
books with regard to it. The High Court held that the entry was an irrevocable
covenant to pay the income accruing on Rs. 20,000/with a guarantee that it
shall be Rs. 600 a year, and therefore the case was covered by the third
proviso to s. 16(1) (c) of the Act and the income which was paid to the wife
under the covenant could not be deemed to be the income of the assessee under
the first part of s. 16(1)(c). In our view these cases were correctly decided.
The appeals fail and are dismissed with
costs. One hearing fee.
Appeals dismissed.
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