Revocation and Irrevocability of Trusts in Indian Law

Revocation and Irrevocability of Trusts: A Legal Analysis under Indian Law

Introduction

The concept of a trust, an equitable obligation binding a person (trustee) to deal with property over which he has control (trust property) for the benefit of persons (beneficiaries) or for a charitable purpose, is a cornerstone of property law and estate planning in India. A critical aspect of trust law revolves around the power to revoke a trust. Whether a trust is revocable or irrevocable has profound implications for the settlor, trustees, beneficiaries, and for taxation purposes. This article analyzes the principles governing the revocation of trusts and the nature of irrevocable trusts under Indian law, drawing significantly from statutory provisions and judicial pronouncements.

The General Principles of Trust Revocation in India

The primary legislation governing non-charitable trusts in India is the Indian Trusts Act, 1882. Section 78 of this Act lays down the conditions under which a trust can be revoked.

Statutory Framework for Revocation

As elucidated in Sikha Das & Anr. v. Jitendra Kumar Boral & Ors. (Calcutta High Court, 2009), Section 78 of the Indian Trusts Act, 1882, stipulates:

“A trust created by will may be revoked at the pleasure of the testator. A trust otherwise created can be revoked only— (a) where all the beneficiaries are competent to contract—by their consent; (b) where the trust has been declared by a non-testamentary instrument or by word of mouth—in exercise of a power of revocation expressly reserved to the author of the trust; or (c) where the trust is for the payment of the debts of the author of the trust, and has not been communicated to the creditors—at the pleasure of the author of the trust.”

This statutory provision clearly distinguishes between testamentary trusts and inter vivos trusts regarding revocability. A trust created by a will remains revocable during the testator's lifetime, as a will itself is inherently ambulatory and revocable until the testator's death (Ramaswami Naidu And Another. v. Gopalakrishna Naidu And Others., Madras High Court, 1977; Shiva Nath Prasad v. State Of West Bengal & Ors., Calcutta High Court, 2005). The Madras High Court in Ramaswami Naidu observed that "A will is of its own nature revocable, and therefore though a man should make his testament and last will irrevocable in the strongest and most express terms, yet he may revoke it..."

For trusts created otherwise than by will (inter vivos trusts), the power to revoke is significantly restricted. Unless a power of revocation is expressly reserved in the trust deed, the trust is generally considered irrevocable (Shiva Nath Prasad v. State Of West Bengal & Ors., Calcutta High Court, 2005). The Supreme Court in Sri Augusthayar Trust v. C.I.T (1998 SCC 5 588), as cited in Sikha Das & Anr., affirmed that the terms or purpose of a trust deed, once executed, cannot be changed by the trustee or settlor in the absence of an express power of revocation.

Consent of Beneficiaries

Even if a trust deed does not contain an express power of revocation, Section 78(a) of the Indian Trusts Act allows for revocation if all beneficiaries are competent to contract and give their consent. This principle has been reiterated in cases like K.K.Sharma v. Union Of India & Ors. (Delhi High Court, 2015) and B.S.Talwar & Ors. v. Union Of India & Ors. (Delhi High Court, 2015), which emphasized that the termination of an irrevocable trust deed generally requires the concurrence of the beneficiaries.

Irrevocable Trusts: Nature and Characteristics

An irrevocable trust, by definition, is one that cannot be altered, amended, or terminated by the settlor once it has been established, except under specific conditions outlined by law or the trust instrument itself. The creation of a valid trust requires three certainties: intention, subject-matter (trust property), and objects (beneficiaries/purpose), as codified in Section 6 of the Indian Trusts Act, 1882 (Controller Of Estate Duty, Bombay City-Iii v. Bhagwandas Velji Joshi And Others., Bombay High Court, 1980). The reservation of a power of revocation by the settlor does not, in itself, negate the certainty of intention to create a trust (Controller Of Estate Duty, Bombay City-Iii v. Bhagwandas Velji Joshi And Others., Bombay High Court, 1980).

Once a trust is deemed irrevocable, the settlor typically relinquishes control over the assets. However, the term "irrevocable" can sometimes be nuanced, especially when considering tax implications or specific clauses within the trust deed itself, as seen in Commissioner of Income-tax, Chennai v. Tamilnadu Urban Development Fund (Income Tax Appellate Tribunal, 2019), where a trust deed stated it was irrevocable under one clause (Clause 29) but also provided that it would end when all contributors decided to put an end to it. The Tribunal had to determine if it was a revocable trust for the purposes of Section 61 of the Income Tax Act, 1961.

Revocability and its Impact under the Income Tax Act, 1961

The Income Tax Act, 1961, contains specific provisions (Sections 60 to 63) that address the taxation of income from assets transferred under revocable arrangements or where income is transferred without transferring the assets. These provisions are designed to prevent tax avoidance by ensuring that income from such arrangements is taxed in the hands of the transferor (settlor).

Defining "Revocable Transfer" for Tax Purposes

Section 63 of the Income Tax Act, 1961, defines a "transfer" as including any settlement, trust, covenant, agreement, or arrangement. It further defines a transfer as "revocable" if it:

  • contains any provision for the re-transfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
  • in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets.

The Supreme Court in Jyotendrasinhji v. S.I Tripathi And Others (1993 SUPP SCC 3 389) held that trusts were revocable under Section 63 where a clause granted the settlor and the trustee the power to direct distributions, thereby making the income taxable in the hands of the settlor (or his successor). This case underscored that even a shared power of control could trigger the revocability provisions for tax purposes.

The Andhra Pradesh High Court in Commissioner Of Income-Tax v. Nawab Sir Mir Osman Ali Bahadur, H.E.H The Nizam Of Hyderabad (1973) provided a crucial interpretation: "if the settlor was placed in the position which prevailed prior to the creation of the trust when he was absolutely free to deal with his property in any manner he liked, then the trust would be deemed to be revocable although ostensibly it is irrevocable." Conversely, if the power retained is merely for discharging obligations imposed by the trust, it would not fall within the purview of a revocable transfer for tax purposes.

Transfers Irrevocable for a Specified Period

Section 62(1) of the Income Tax Act, 1961, provides an exception: if a transfer is not revocable during the lifetime of the beneficiary or transferee, or for a period exceeding six years (in certain older contexts), the income is not automatically clubbed with the transferor's income, provided the transferor derives no direct or indirect benefit from such income or assets. This was discussed in Commissioner Of Income-Tax, Bombay City I v. Kikabhoy Premchand (Bombay High Court, 1948) concerning the third proviso to the erstwhile Section 16(1)(c) of the 1922 Act, which deemed a trust irrevocable for tax purposes if it was not revocable for over six years and the settlor derived no benefit. Once such a period expires, the trust may become revocable, altering its tax treatment (Commissioner Of Income-Tax, Bombay City I v. Malegaon Electricity Co. Private Ltd. And Others., Bombay High Court, 1966; Dr. M.R Dalal (By His Legal Representative) v. Commissioner Of Income-Tax, Bombay City Ii., Bombay High Court, 1962).

In Commissioner of Income-tax, Chennai v. Tamilnadu Urban Development Fund (Income Tax Appellate Tribunal, 2019), the Tribunal invoked Section 62(2) read with Section 61(1) of the Act, noting that these would apply to revocable transfers of funds for an unspecified period, making the income taxable in the hands of the transferor/beneficiaries, not the trust, especially when the trust could be revoked after three years by the contributors.

Taxation of Income from Revocable v. Irrevocable Trusts

If a trust is deemed revocable under Sections 61 or 63, the income arising from the trust assets is clubbed with the income of the settlor. If a trust is genuinely irrevocable and does not fall under the deeming provisions, the income is generally taxed in the hands of the trustees or the beneficiaries, depending on the nature of the trust (specific or discretionary) and its terms.

In the context of discretionary trusts (where beneficiaries and/or their shares are not fixed), Section 164 of the Income Tax Act provides for taxation in the hands of the trustees at the maximum marginal rate. However, Section 166 preserves the Revenue's right to assess either the trustees or the beneficiaries directly. The Supreme Court in Commissioner Of Income Tax, Gujarat, Ahmedabad v. Kamalini Khatau (Smt) (1994 SCC 4 308) and Jyotendrasinhji v. S.I Tripathi And Others (1993 SUPP SCC 3 389) affirmed this option, stating that Section 164 must be read with Section 161 (liability of representative assessee) and Section 166, allowing the Revenue flexibility.

The distinction between an irrevocable trust under general law and one deemed revocable for tax purposes was highlighted in Abbay L. Khatau (Legal Representative Of L.M Khatau) v. Commissioner Of Income-Tax, Bombay City Ii (Bombay High Court, 1957). The court noted that for an ostensibly irrevocable trust to be treated as revocable under Section 16(1)(c) of the 1922 Act, the conditions of the first proviso (creating a legal fiction of revocability) must be met.

Challenges in Determining Revocability

The determination of whether a trust is revocable or irrevocable can present several challenges:

  • Ambiguity in Trust Deeds: Poorly drafted trust deeds can lead to disputes regarding the settlor's intent and the powers reserved. The case of Commissioner of Income-tax, Chennai v. Tamilnadu Urban Development Fund (Income Tax Appellate Tribunal, 2019 / Madras High Court, 2019) illustrates this, where a trust deed contained seemingly contradictory clauses regarding its irrevocability.
  • Substance over Form: Courts often look beyond the mere wording of the trust deed to ascertain the true nature of the powers retained by the settlor (Commissioner Of Income-Tax v. Nawab Sir Mir Osman Ali Bahadur, Andhra Pradesh High Court, 1973).
  • Exercise of Power of Revocation: Even if a power to revoke exists, whether such power was validly exercised according to the provisions of the grant of that power can be a contentious issue of fact, potentially requiring trial (Shiva Nath Prasad v. State Of West Bengal & Ors., Calcutta High Court, 2005).
  • Distinction from other legal instruments: It is crucial to distinguish trusts from other instruments like wills, which have different rules for revocation (Ramaswami Naidu And Another. v. Gopalakrishna Naidu And Others., Madras High Court, 1977).

Conclusion

The law surrounding the revocation and irrevocability of trusts in India is a complex interplay between the Indian Trusts Act, 1882, and the specific provisions of the Income Tax Act, 1961. While the Trusts Act provides the foundational rules for when a trust can be revoked, primarily centering on express reservation of such power or consent of all competent beneficiaries, the Income Tax Act introduces deeming fictions that can treat an otherwise irrevocable trust as revocable for taxation purposes if certain conditions related to control or re-transfer are met.

Judicial precedents have consistently emphasized the importance of clear drafting in trust deeds and have sought to look at the substance of the transaction to determine true revocability. Settlors, trustees, and beneficiaries must carefully consider the implications of revocation clauses, or their absence, as it significantly impacts control over trust assets, the rights of beneficiaries, and the incidence of taxation. The evolving jurisprudence continues to refine the boundaries of these concepts, striving for a balance between facilitating legitimate estate planning and preventing the misuse of trust structures for tax evasion.