Chagla, C.J:—
The question that we have to answer on this reference turns upon the construction of a deed of settlement executed by Sir Kikabhoy Premchand on February 9, 1940. The trust deed was executed mainly for the purpose of establishing, equipping, and maintaining a sanatorium called Lady Lily Kikabhoy Premchand Sanatorium, Poona, for the benefit of the deserving and needy persons and their families and belonging to specified Hindu communities. The question that we have to answer is, whether on the facts of this case the two sums of Rs. 4,259 and Rs. 4,741, representing the income of this trust, were rightly held to be saved from the application of the provisions of s. 16(1)(c) of the Indian Income-tax Act as amended by the Act of 1939.
In looking to the trust deed as a whole it seems fairly clear that the settlor while having a genuine intention to make a charitable trust was as genuinely anxious to retain to himself as much power as possible. Although he has appointed trustees other than himself, the various provisions clearly show that practically all the power is retained in his own hands and the trustees during his lifetime are associated with him merely in name. But that by itself very likely would not be a very relevant factor in order to determine whether the income of this trust is saved under s. 16(1)(c) of the Act.
Now the scheme of s. 16(1)(c) and the various provisos have been considered in various decisions, and there is no difficulty or dispute whatsoever as to what the Legislature intended when they enacted s. 16(1)(c) and the provisos. Section 16(1)(c) provides that all income arising to any person by virtue of a recovable transfer of assets shall be deemed to be income of the transferor, and the first proviso indicates what according to the Legislature are revocable trusts although in form they may be irrevocable. Then we come to the third proviso with which we are concerned which lays down that cl. (c) of sub-s. (1) of s. 16 shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disposer derives no direct or indirect benefit. Therefore, when you have a trust which is made irrevocable for a period exceeding six years, and where the settlor derives no benefit direct or indirect in the income of that trust, for the purposes of this section that trust is deemed to be an irrevocable trust. Although it is revocable, the fact that the revocation is postponed beyond six years brings the third proviso into operation and saves the income from being liable to tax. A further condition and a very important condition that is necessary is that the settlor should derive no benefit directly or indirectly from the income of the trust.
Now looking to the various provisions of the trust deed from this point of view, we find that in cl. 5 there is provision for setting up a suspense account to which amounts of surplus income have to be credited and this income has to be utilised either as capital or as income as the settlor shall during such period as he continues to be a trustee in his sole and absolute discretion determine. We are inclined to agree with the contention of Sir Jamshedji that as far as this clause is concerned, it would not be open to the settlor to utilise the amount in the suspense account for his own personal needs. True, it is left to him whether it should be treated as capital or as income, but it can only be treated so for the purposes of the trust and not for his private purposes.
Clause 7 lays down the various powers which are given to the trustees in relation to the trust estate, and sub-cl. (n) of this clause gives power to the settlor to purchase the trust property himself whether the property is moveable or immoveable property notwithstanding that he is a trustee and notwithstanding any rule of law or equity to the contrary. Sir Jamshedji has contended that s. 53 of the Indian Trusts Act prohibits the trustee from purchasing the trust property in spite of this power. But, whatever the legal consequences of the act of the trustee may be, the fact remains that the settlor has taken to himself this power under the trust deed.
Then we come to cl. 8 which is the clause dealing with investment, and this clause gives power to the settlor to make a loan to any person including himself with or without security or howsoever as the settlor shall determine as if he were absolutely entitled to such moneys. Therefore, under this clause it would be competent to the settlor to make a loan of a part of the income of the trust estate to himself without security, and I should think even without interest. Now, Sir Jamshedji says that the interest which the settlor has to derive whether direct or indirect under the third proviso to s. 16(1)(c) must be an actual interest, because, according to Sir Jamshedji, the language used by the Legislature is “derives” and not “may derive” or “can derive,” and according to Sir Jamshedji this clause only empowers the settlor to make a loan to himself. Till such a loan is made, there is not in fact any benefit direct or indirect derived by the settlor. We are unable to accept that contention. The whole object of the third proviso is to consider a revocable trust irrevocable provided that the settlor enjoys no benefit whatever in the income of the trust for a period exceeding six years. During these six years when he cannot revoke the trust benefit is to be enjoyed solely by the beneficiaries. If, on the other hand, he does retain any benefit in the enjoyment of the income, then even during these six years the trust does not become irrevocable and the third proviso does not apply. Now, in this case the very fact that the settlor is to be at liberty to loan a part of the income to himself without security and without interest undoubtedly leads one to the conclusion that he does derive at least an indirect benefit. It would be an absurd construction to put upon this clause to wait till the benefit is actually derived before the Court would say that the trust so made is not irrevocable for a period of six years. According to Sir Jamshedji, so long as the settlor does not lend to himself, he does not derive any benefit, but as soon as he does so, then the Court must hold that the third proviso does not apply and, therefore, the income is liable to tax. But the proper construction of the trust deed cannot depend upon what the settlor actually does or what he refrains from doing. It can only depend upon the Court coming to the conclusion that as the trust deed stands lie is entitled to certain benefits whether they are direct or indirect in nature, and there can be no doubt looking at this clause that the settlor is entitled to a benefit under the provisions of the trust deed and that thereby he does derive an indirect benefit in the income of the trust.
I may point out certain further provisions of this trust deed. Under cl. 9 the settlor constitutes himself a trustee not accountable either to the Advocate-General or the Collector, and not liable for any act or omission on his part in the course of management or for the consequences as if he was the sole owner of the trust estate and entitled to all the income thereof. The revocation clause itself is contained in cl. 24 which clearly provides that the trusts declared shall remain in force and irrevocable for a period of six years and three months; although the settlor is given a right to exercise the power of revocation at any time the revocation can only take effect after a period of six years and three months from the date of the execution of the trust deed.
Taking the trust deed as a whole, and particularly the provisions contained in cl. 8(n), I am of the opinion that under this trust deed the settlor does derive an indirect benefit in the income of the trust deed, and, therefore, the third proviso does not apply and the income of this trust is subject to tax in the hands of the settlor.
We, therefore, answer the question raised by the Tribunal in the negative. The assessee must pay the costs of the reference.
Attorney for Commissioner: D.H Nanavati.
Attorney for assessee: Kanga & Co.
Answer accordingly.
A.J.P