TMI Blog1968 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to the third proviso to section 16(1)(c)?" This reference arises out of assessment proceedings for the year 1958-59 initiated against Karelal Kundanlal of Sagar. Karelal died during the pendency of his appeal before the Appellate Assistant Commissioner. The appeal and further proceedings thereafter were continued by his legal representative, Smt. Gulabbai, who is shown as the applicant in these proceedings. In this judgment Karelal is referred to hereinafter as "the assessee." The facts of the case are that the assessee created a trust of his properties by a deed dated 24th October, 1950. Under this deed, the income of the property, after deducting certain expenses, was to be distributed thus : (i) Four annas share of the income was to be given to the assessee and his wife for their lifetime. (ii) Four annas share was to be given to each of the two daughters of the settlor, namely, Smt. Gulabbai and Smt. Tarabai. (iii) The remaining four annas share was to be spent on charities. The Income-tax Officer held that the settlement of the property was revocable in view of the first proviso to section 16(1)(c) of the Income-tax Act, 1922, and as such the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and according to that criterion a trust becomes revocable if any part of the income goes back to the settlor. On that basis, the trust in question is revocable within six years itself and the question of the third proviso saving the trust would not arise." The Tribunal, however, felt that questions of law arose out of the said decision and hence it referred the two questions, already adverted to. Shri Dharmadhikari, learned counsel for the assessee, relied on certain decisions in support of the contention of the assessee. The decisions are : Ramji Keshavji v. Commissioner of Income-tax , Commissioner of Income-tax v. Jitendra Nath Mallick, Dr. A. J. Kohiar v. Commissioner of Income-tax Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tekari Raj and Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer. Shri Adhikari, learned counsel for the Commissioner, on the other hand, urged that on a true interpretation of section 16(1)(c) and the first and the third provisos the income from the trust in question was rightly assessed in the bands of the settlor. He distinguished the decisions relied on by Shri Dharmadhikari. Before we discuss the cases cited at the Bar, we propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly, it says that if the deed of settlement gives power over the assets or the income to the settlor directly or indirectly, in that case also the settlement shall be deemed to be revocable. This proviso obviously relates to the later part of the substantive provision in clause (c). Up to this stage there is no difficulty. Then comes the third proviso. It starts with the direction that "this clause shall not apply to any income arising to any person by virtue of a settlement ..... which is not revocable for a period exceeding six years or during the lifetime of the person". The purpose of this proviso is obvious enough : it is to take out from the ambit of the provisions of clause (c) any income arising to any person by virtue of a settlement which is not revocable for the stated period. This is, of course, subject to a further condition that the settlor does not derive any direct or indirect benefit from the property settled. The question that arises for consideration is : what is the meaning of the expression "which is not revocable "? Does this expression refer to settlements, which are not rendered revocable under the first proviso? or does it refer to settlements, which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocable. It is also clear that it does not come within the ambit of the third proviso, and thus the whole of the income becomes taxable in the hands of the settlor. The submission that only one-fourth income that is retransferred, alone should be taken for assessment is without substance. What clause (c) provides is that "all income arising to any person" under a revocable settlement should be included in the assessment of the settlor. Once the deed of settlement is held to be revocable and is held to be one not covered by the third proviso, the conclusion is that " all income" of "any person" under the dead of settlement must be assessed in the hands of the settlor. We shall now refer, in brief, to the various decisions cited at the Bar. In Ramji Keshavji v. Commissioner of Income-tax the contention of the department was that the income from the properties paid to the wife of the settlor during her lifetime could be deemed to be the assessee's income by operation of the first proviso, while the contention of the other side was that the third proviso came into operation and that such an income was not assessable in the hands of the settlor. On behalf of the department it was urged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income from the property settled was sought to be assessed in the hands of the settlor on two grounds, namely, (i) that out of the income of the property, Rs. 400 per month were to be paid by the trustees to the settlor himself ; and (ii) that in certain circumstances the settlor could reassume power over a portion of the assets. The Calcutta High Court came to the conclusion that the power to reassume the assets rendered the whole settlement revocable and that the whole of the income became assessable in the hands of the settlor. On the first question, namely, whether the clause reserving payment of certain amount to the settlor rendered the whole of the income assessable in the hands of the settlor, it was held by the High Court as under : "It was argued that even if the court comes to the conclusion that there was a provision for retransfer of a part of the income, viz., Rs. 400 per month to the settlor, this should only make the said monthly payment of Rs. 400 as assessable in the hands of the assessee and not the entire income of the trust property. The reference was made to the third proviso to section 16(1)(c) and it was argued that this went to show that portions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mji Keshavji v. Commissioner of Income-tax and D. R. Shahapure v. Commissioner of Income-tax. In the case of Commissioner of Income-tax v. Rani Bhuwaneshwari Kuer Tekari Raj the deed of settlement provided that in case the beneficiaries acted in a certain manner or committed any breach of any of the conditions and limitations imposed under the deed, the beneficiaries were to be deemed to have been excluded from the categories of beneficiaries and their share was to be dealt with by the settlor or enjoyed by her in her entire discretion. The question was whether the settlement was revocable within the meaning of section 16(1)(c) . It was held in that case that the settlement was expressly stated to be revocable under section 16(1)(c). The third proviso to section 16(1)(c) was, however, applicable to the case and the income was not assessable in the hands of the settlor so long as the beneficiaries did not lose their right in terms of the deed of settlement over the assets and the deed was not revoked. This, again, is a case where the settlor had not reserved any interest in herself in praesenti. This case, therefore, does not take the matter any further. In Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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