TMI Blog1955 (7) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... appended to the statement of the case and marked as annexures A, A-1 and A-2. Under annexure A, the assessee settled in favour of his wife, Srimathi Vedam Ammal, a one-fourth share of the profits in the firm (but not the losses) payable to him during a period of 8 years commencing from the date of the document. This was expressed to be out of natural love and affection, and clause 2 of this settlement deed provided that the settlor shall not have any manner of right or interest in the said one-fourth share hereby settled and the right to receive from the firm one-fourth of the settlor's share during the said period of 8 years shall exclusively vest in the beneficiary. Clause 3 empowered the beneficiary directly to receive and collect from the firm the share of profits hereby transferred for the said period of 8 years. Clause 4 made provision for the settlor having the right to the profits from the firm on the expiry of the 8 years period. Clause 5 stated that the settlement deed was not to absolve the settlor from his obligation to maintain the beneficiary. Clause 6 provided that the settlement was not to be construed as conferring upon the beneficiary any right or inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, and they satisfied all the requirements of the 3rd proviso to clause (c) and that the result of this was that there was no basis for treating the income of the settlees as that of the assessee. The relevant portion of section 16(1)(c) is in these terms:- Section 16(1):- In computing the total income of an 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 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. The provisos to section 16(1)(c ) run thus :- 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 settlor, disponer or transferor a right to reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Section 16(1)(c) together with the provisos thereto should therefore be deemed as a comprehensive legislative statement regarding the entire law on the subject of dispositions of income or transfer of assets. Whenever there is an income accruing from a settlement, the first question to be answered is whether the settlement falls within the language of the first paragraph of that clause. This deals with two somewhat dissimilar types of transactions. First, cases where there is no transfer of an asset but only a disposition of income. In this category of cases it is immaterial whether the disposition is revocable or not, and regardless of revocability or otherwise the income so disposed of is treated statutorily notwithstanding the disposition, as the income of the settlor. The second type comprehends cases where there is a transfer of an asset and only if such transfer is revocable, is the income which the asset produces in the hands of the transferee treated as the income of the transferor. But both the sets of transfers are subject to the conditions of the third proviso which, so to speak, enacts an escape from the operation of the main clause. In cases where the conditions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative that even if the deeds constituted a settlement involving no transfer of assets but only a disposition of income, the asset, viz., the interest in the partnership, remaining the property of the settlor, as the disposition of income was for a term longer than six years, and no beneficial interest was reserved to the settlor, the conditions of the third proviso were satisfied. Since this argument proceeds upon there being no transfer of an asset, section 16(3) does not, of course, apply. On this basis also it was contended that the income disposed of under each of these three deeds should be deemed to be the income of the settlee or beneficiary and not that of the settlor. Before dealing with the construction and scope of section 16(1)( c) of the Act it would be necessary to refer to the law that existed prior to 1939 when this section was introduced by the amending Act VII of 1939, in order to determine the change effected by it. Under section 3 of the Act which is the charging section, an assessee was bound to pay tax on all income, profits and gains from all sources. Where the source of income consisted of income from some property or asset the assessee might get ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fastened on the estate which the assessee had inherited from his father, it was not a deductible expenditure under any of the provisions of the Income-tax Act, and so disallowed the assessee's claim. The assessee took the matter on appeal to the Privy Council and Lord Macmillan delivering the judgment of the Board, while agreeing with the High Court that the payment of this maintenance was not a permissible deduction, allowed the assessee's appeal on the ground that the sum paid to the step-mother was not the income of the assessee at all. The reasoning upon which this decision was rested is to be found in the following passage in the judgment of the learned Lord : When the Act by section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not the case of application by appellant of part of his income in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax v. Katras Estate [1934] 2 ITR 100 . The assessee was the proprietor of certain coal producing mines. He was heavily indebted to a limited liability company and in order to secure the repayment of the debt, the assessee leased the mines to the creditor and also executed a mortgage in its favour. Under the lease there was a considerable amount of royalty due to the lessor but the terms of the mortgage were that the mortgagee-lessee was bound to pay to the assessee only a sum of ₹ 8,000 by way of dead rent per year, the mortgagee being permitted to adjust the balance of the royalties towards the discharge of the debt due to it. The argument raised on behalf of the lessor-assessee was that the entire balance in excess of the dead rent of ₹ 8,000 per year became by reason of the mortgage document the income of the mortgagee and could not be treated as the income of the assessee. This contention however was negatived by the learned Judges who held that there was no difference between the case before them and one where the assessee executed a lease in favour of a third party, obtained the royalties himself and then retaining ₹ 8,000 to himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the words of Lord Macmillan, designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over, or interests in, the property or its income. The Legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should, notwithstanding, be treated as still his income and taxed in his hands accordingly. [1943] 25 T.C. 317 at 329. These observations, it will be noted, dealt with a case where there is a transfer of an asset and that is the means adopted by an assessee for divesting himself of an income which was his before the transaction. We shall now consider the language of section 16(1)( c) to determine the exact change that was introduced by this amendment. This clause as stated before deals with two dissimilar types of transfers : (1) revocable transfer of assets and (2) dispositions of income revocable or irrevocabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as the income of the transferee and not that of the transferor. The amendment has effected a change in the law and unless the duration of the transfer or the period when the power of revocation could arise were beyond the limits specified in the third proviso the income from the transferred asset was treated as continuing to be that of the transferor liable to be aggregated with his other income for the purpose of computing his total income. The change is thus a tightening in the law in favour of the Revenue and eliminates certain transfers from being operative to effect a diversion of income from the transferred asset. So far there is no controversy or dispute regarding the effect of the amendment. It is only in cases where there is no transfer of an asset but merely a disposition of income that the position becomes a little ambiguous. The question is whether the distinction which formerly obtained between an application of income and its diversion, as we have endeavoured to state a little earlier, continues still to be crucial. On the one hand the contention urged on behalf of the assessee is that such a distinction is out of place in the scheme of the provisions embodie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership, apart from a special contract or stipulation, may not be given or sold by him to another of the co partners?...............The share of an individual partner is his own property, not the property of the firm.... We do not, however, see any relevance of the observations quoted to' the point now in issue. The asset in the present case which is the source of the income now in controversy is undoubtedly the business of which the assessee was a part owner. When section 16(1)(c ) Speaks of an asset, it obviously means a source of income and when this is transferred, it means that the transferor is no longer the owner of that asset or there is at least a diminution in the quantum of his ownership in that income-producing source, be it movable or immovable property or an intangible asset as a business. In the present case however, the assessee continues to be the owner of the business with the same quantum of interest in it even after the execution of the deed. There can be no doubts that on the plain terms of the settlement deeds, the only subject of transfer is the right of the assessee to receive the profits, the assessee continuing to remain a partner with interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16(1)(c ) read with the third proviso. In this connection we do not feel inclined to follow the decision in Commissioner of Income-tax v. Bosotto Brothers, Limited [1940] 8 ITR 41, but, as this question does not really arise for consideration in view of our conclusion as to the nature of the interest transferred, we do not propose to examine in detail this and the other decisions referred to us in this context. It will now be convenient to deal with the decisions, on which Mr. Jagadeesa Aiyar sought support for his argument regarding the construction and legal effect of section 16(1)(c ). In Ramji Keshavji v. Commissioner of Income-tax, Bombay [1945] 13 ITR 105, the Bombay High Court had to consider whether the third proviso to section 16(1)(c) applied only to the transactions set out in the main part of section 16(1)(c), or whether same would not govern the type of settlements deemed revocable by reason of the definition of the term in the first proviso to the section. There was a litigation in the family of the assessee, by reason of a suit filed by some of the sons of the assessee claiming a share in certain properties as ancestral, the assessee contending that they were h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to such a settlement at all. In my opinion this contention is unsound. The scheme of section 16(1)( c) appears to be this. 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 irrevocable. The relevant question for that proviso is this : Is this transfer revocable because it fulfils the conditions contained in this 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 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, af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt he is ordered to settle separate property for the maintenance and residence of his wife and children, and although in those circumstances the settlor has got no control over the income or the disposal because he is by this arrangement absolved from the legal obligation of maintaining his wife and children, he derives benefit from that and is thus directly or indirectly retransf erring the income to himself. The next decision referred to was also that of the Bombay High Court in D.R. Shahapure v. Commissioner of Income-tax, Bombay [1946] 14 ITR 781 . There the assessee made an entry in his books embodying a family arrangement, whereby he set apart a sum of ₹ 20,000, stipulating that the income from the investment of the said sum should belong to his wife, who was, however, to have no right to or interest in the capital itself. During the relevant accounting period the investment of this sum in the money-lending business of the assessee resulted in an income of ₹ 280 on this account. It was the inclusion of this sum in the total income of the assessee, that was the subject-matter of debate before the Court. The Income-tax Officer and the Appellate Assistant Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird proviso applies, the reference was answered in favour of the assessee. The question that is now raised before us, whether the settlements constitute a diversion under a paramount or overriding title or whether it was not a mere application of income, which had accrued to the assessee, was not raised before the learned Judges ; nor was is considered by them. The decision of the Bombay High Court in Ratilal Nathalal v. Commissioner of Income-tax [1951] 20 ITR 307 which has been affirmed by the Supreme Court in Commissioner of Income-tax, Bombay v. Ratilal Nathalal [1954] 25 ITR 436was the next decision to which our attention was invited. In this case also as in Ramji Keshavji v. Commissioner of Income-tax, Bombay [1945] 13 ITR 105 there was a transfer of property. The transferor was an undivided Hindu family, and by reason of the execution of the trust deed, the properties ceased to belong to the family and with it necessarily the income. Long after the creation of this document, one of the beneficiaries under the trust happened to be the manager of the undivided family. The question was as to whether this circumstance could enable aggregation to be made. The High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct as trustees, they shall not be accountable to any of the beneficiaries under these presents relating to his or their dealings as to the income of the trust estate. The learned Judges held that this provision did not detract from the absolute nature of the trust created nor did it constitute a reservation of a power over the income directly or indirectly. As in this case also there was a transfer of an asset, which under the law would prevent the income therefrom from being aggregated with that of the settlor it does not furnish any analogy for the decision of the present case. Learned counsel for the Commissioner on the other hand invited our attention to the decision of the Patna High Court in Jagadish Chandra v. Dhanpathi Singh [1944] 12 ITR 64where the precise scope of the decision in Bejoy Singh Dudhuria v. Commissioner of Income-tax, Bengal [1933] 1 ITR 135, had to be considered. Under the will of the proprietor of an estate, an estate devolved on the defendant, with an obligation to pay to the plaintiff an annuity, which was made a charge on the estate. The plaintiff filed a suit for the annuity, and the question before the Court was whether the defendant's cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenance allowances in lieu of a share in the family property, this payment being made a charge on the property of the assessee. The question raised before the Court was the deductibility of the sum paid as maintenance allowances in computing the income of the assessee. The learned Judges held that as these payments were obligatory subject to an overriding charge, and were in discharge of that obligation, they could not be taxed as the income of the assessee, but must be excluded. There was really no distinction between this and Shankar Shah's case which they followed. The net result of this examination is that, except the one decision in D.R. Shahapure v. Commissioner of Income-tax, Bombay [1946] 14 ITR 781 in every other case where, without a transfer of an asset the income alone is the subject-matter of the disposition, the distinction has been drawn between those cases where the obligation was imposed adversely to the assessee and arose by a title superior to his own, and those where the obligation owed its origin to a voluntary act on the part of the assessee himself. These decisions have held that in the latter case there is only an application of the income and not a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is that the effect is wider than a mere negative and that when the conditions of this proviso are satisfied not merely is it taken out of section 16(1)(c ) but also out of sections 3 and 4 and that when a disposition satisfies the third proviso, the income disposed of or accruing from the asset is positively deemed not to be the income of the settlor: but neither the language of the proviso nor the principle underlying it can justify this construction. The only authority appearing to favour such a view is the decision of the Bombay High Court in D.R. Shahapure v. Commissioner of Income-tax, Bombay [1946] 14 ITR 781. But as stated already, the point in this form was not argued on behalf of the Revenue and it cannot therefore be treated as any direct authority. On the other hand the decisions of the Patna and Lahore High Courts to which we have referred are against any such construction. In our view the question whether the income of the disponee which is thus not statutorily deemed to be the income of the disponer could be treated as part of the total income of the disponer or not, it is not the function of section 16(1)(c) to resolve, and that would depend upon whether und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties or the Tribunal. As there had been an assignment of the right to the profits accruing to the settlor under this partnership for a period of 8 years, we desired to know whether under the deed of partnership, the firm would last with reasonable certainty for the period of 8 years mentioned in the settlement deed. We therefore called upon the learned counsel for the assessee, to produce before us the deed of partnership, which was referred to in these settlement deeds. When this was produced we found that under clause 6 of the said deed, the partnership was stated to have come into force on 13th April, 1946, and to continue until 13th April, 1947. It will be noticed that the deeds of settlement are dated 22nd September, 1947, and by that date, the partnership, which has been referred to and the profits of which venture were assigned to the wife and daughters, had ceased to be operative. Learned counsel for the assessee also filed before us a copy of a partnership deed executed on 19th November, 1947, which was to have retrospective effect from 14th April, 1947. There was no term fixed for the duration of this firm but under clause 12 of this deed the partnership could be determin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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