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TMI Blog1964 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 Schedule " 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 upkeep 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 Schedule " D " and without making any permanent trust for the purposes enumerated, the settlor enjoined the trustees after discharge of the debts mentioned in Schedule " 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 clause 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 modification 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 paragraph 41 had been carried out and when the last contingency set out in paragraph 42 as modified had arisen, the beneficiaries or the heirs or successors-in-interest or representatives-in-interest or su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the settlement mentioned in question (1) can be deemed to be the income of the assessee-under section 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 section 16(1)(c) of the Income-tax Act a revocable trust, but not being revocable for six years from the date of its creation, by virtue of the third proviso to section 16(1)(c) which controlled not merely the substantive provisions of section 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 section 16(1)(c), but only so long as the power of revocation granted by the deed was not exercised by the assessee under the terms of the deed or trust. The High Court also declared that the assessee was liable to pay tax on the income received by her in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust 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 his favour. The point in dispute in this appeal is about the applicability of the third proviso to section 16(1)(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 section 16(1)(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 interpretat ion 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin six years as provided by section 16(1)(c) of the Act. It was urged on behalf of the Commissioner in the alternative that the third proviso to section 16(1)(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 section 16(1)(c) does not operate to exclude the income, which the settlor receives as a beneficiary, from liability to income-tax it merely excludes that part of the income which is under the deed of settlement given to another person from liability to tax in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so revocable for the purpose of that clause. In a case decided by the Bombay High Court in Ramji Keshavji v. Commissioner of Income-tax Kania J., in considering the scheme of section 16(1)(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 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 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 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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