1993 (4) TMI 1 - SC - Income Tax

Appeal pursuant to offers of settlement made by the appellant - assessability of income from five foreign trusts created by the appellant s father - commission directed ITO to compute the total income and raise demand for the tax due - So far as the plea of double taxation is concerned the observation made by the Commission is quite adequate - in case the appellant proves that any income has been taxed in the U. S. or the U. K. the same income shall not be taxable over again in India.

Summary

Issues Involved:
1. Assessability of income from five foreign trusts created by the appellant's father.
2. Interpretation of the U.S. and U.K. trust deeds.
3. Applicability of Section 63 of the Income-tax Act to the U.S. trusts.
4. Taxability of income from discretionary trusts in the hands of trustees vs. beneficiaries.
5. Double taxation of income from foreign trusts.

Detailed Analysis:

1. Assessability of Income from Foreign Trusts:
The primary issue in these appeals is the assessability of income from five foreign trusts created by the appellant's father, Sri Vikramsinhji. The Settlement Commission computed the taxable income of the appellant's father and the appellant for the relevant assessment years and directed the Income-tax Officer to compute the total income and raise demand for the tax due.

2. Interpretation of the U.S. and U.K. Trust Deeds:
The U.S. trusts were created for the benefit of the settlor, his wife, children, and their descendants. The trustee, National City Bank, New York, had the discretion to distribute the income among the family members. The relevant clause (paragraph 1(2)) empowered the trustee and the Maharaja to transfer any portion of the income or principal to the family members. The U.K. trusts had similar provisions, with Mr. Robert Hampton Robertson McGill as the trustee. The income from these trusts was to be paid to the settlor during his lifetime and to his elder son thereafter.

3. Applicability of Section 63 of the Income-tax Act to the U.S. Trusts:
The Settlement Commission held that the U.S. trusts fell within the mischief of sub-clause (ii) of clause (a) of Section 63 of the Act, making the entire income arising from the trust properties includible in the income of the settlor. Section 63 defines a transfer as revocable if it gives the transferor a right to reassume power over the income or assets. The court agreed with the Commission's interpretation that the power given to the settlor and the trustee jointly to transfer the income or principal made the trust revocable. Thus, the income was rightly included in the settlor's income during his lifetime.

4. Taxability of Income from Discretionary Trusts:
The appellant contended that the U.S. trusts, being discretionary, should have their income taxed in the hands of the trustees, not the beneficiaries. However, Section 166 of the Income-tax Act provides the Revenue with the option to tax either the trustees or the beneficiaries. The court upheld that the assessments made by the Commission on the settlor and the appellant were valid, as the Revenue could choose to tax the beneficiaries directly.

5. Double Taxation of Income from Foreign Trusts:
The appellant argued that taxing the trust income in India amounted to double taxation, as taxes were already paid in the U.S. and the U.K. The Commission observed that if the appellant proved that any income was taxed in the U.S. or the U.K., the same income would not be taxed again in India. The court found this observation adequate and dismissed the plea of double taxation.

Conclusion:
The court dismissed the appeals, upholding the Settlement Commission's orders. It affirmed that the U.S. trusts were revocable under Section 63, and the income from both the U.S. and U.K. trusts was rightly included in the income of the settlor and the appellant. The Revenue's option to tax either the trustees or the beneficiaries was valid, and the plea of double taxation was adequately addressed by the Commission. The appeals were dismissed with no costs.