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Commissioner Of Income-Tax v. M.K Chandrakanth
Factual and Procedural Background
The assessee (an individual) settled two sums of Rs. 15,000 each on trust on October 1, 1969, for the benefit of his prospective daughter-in-law and son-in-law. The trusts were formalised by settlement deeds dated December 6, 1971, and later by a supplementary deed dated October 26, 1979. The trust deeds directed investment by trustees, accumulation of income until marriage of the beneficiaries, and included clause 19 declaring the trusts "irrevocable." Clause 22 of the December 6, 1971 deed provided that if the intended marriage was not solemnised within 20 years the deed would become void and the trust fund would be reinvested in the settlor as beneficial owner. The supplementary deed of October 26, 1979 substituted 25 years and stated that, on failure, the corpus would vest in the University of Madras; it reiterated that the trusts were irrevocable.
For assessment years 1977-78 and 1978-79 the assessee did not include income from these trusts in his returns. The Commissioner of Income-tax, invoking section 263, held clause 22 meant the settlor would become entitled on failure and treated the trusts as revocable, directing the Income-tax Officer to include the trust income in the assessee's assessment. The assessee appealed to the Appellate Tribunal, which held that the Commissioner was not justified in directing inclusion. The Department sought the opinion of this Court under section 256(1) of the Income-tax Act on whether the Tribunal was right in holding the trusts irrevocable and that the income was not includible in the hands of the assessee.
Legal Issues Presented
- Whether, on the facts and circumstances and having regard to the provisions of section 63(a) of the Income-tax Act, 1961, and section 83 of the Indian Trusts Act, the Appellate Tribunal was right in holding that the irrevocability of trusts created by the assessee was not affected by clause 22 of the settlement deed and that the income of the trusts was not includible in the hands of the assessee?
Arguments of the Parties
Department (Revenue) — submissions
- The Tribunal was incorrect in treating the trusts as irrevocable because clause 22 (in the trust deed dated December 6, 1971) and clause 19 are contradictory; clause 22 contemplates retransfer of the corpus to the settlor if the marriage does not occur.
- Because clause 22 provides for retransfer to the settlor on failure, sections 61 read with section 63(a)(i) and (ii) apply and the trusts should be deemed revocable; therefore income from the trusts is assessable in the hands of the transferor (assessee).
- The supplementary deed of October 26, 1979 (vesting the corpus in the University of Madras on failure) cannot retrospectively affect the first deed and is not relevant for the assessment years in question; reliance was placed on Sahthi/Sakthi Charities v. CIT [1984] 149 ITR 624.
- Even if clause 22 was incorporated under section 83 of the Indian Trusts Act, a retransfer provision means section 63 would apply, making the trust revocable and income assessable to the assessee.
Assessee — submissions
- Clause 22 of the first deed would operate only after 20 years (and after 25 years if the supplementary deed were applicable), so it had no application during the assessment years 1977-78 and 1978-79.
- The supplementary deed dated October 26, 1979 could not be taken into account for the assessment years under consideration because it did not then exist; the marriages occurred within the stipulated period and the contingency in clause 22 did not arise.
- If clause 22 is treated as absent, section 83 of the Indian Trusts Act would govern application of income on failure; in any event, during the operative period of the settlement the settlor did not derive any income nor had any right to reassume control, so the trusts were not revocable and income could not be assessed to the settlor.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sakthi Charities v. Commissioner Of Income-Tax, Madras [1984] 149 ITR 624 | Authority relied on to show that a subsequent (supplementary) deed cannot be treated as applicable retrospectively to the period before its execution. | The Court relied on this decision to exclude the supplementary deed of October 26, 1979 from consideration for the assessment years 1977-78 and 1978-79, leaving only the December 6, 1971 deed to be construed for those years. |
Court's Reasoning and Analysis
The Court analysed the matter by reference to the relevant Income-tax provisions (sections 61 to 63) and to the content of the trust deed dated December 6, 1971 (the only deed applicable to the assessment years in question after excluding the 1979 supplementary deed pursuant to Sakthi Charities).
Key steps in the Court's reasoning:
- Statutory framework: Section 61 makes income arising to any person by virtue of a revocable transfer chargeable to the transferor. Section 62 provides exceptions for transfers irrevocable for a specified period and contains a proviso about benefit to the transferor. Section 63 defines when a transfer is to be deemed revocable — specifically where the instrument contains any provision for retransfer of income or assets to the transferor or gives the transferor any right to reassume power over income or assets.
- Temporal scope of clause 22: Clause 22 in the December 6, 1971 deed was intended to cover the contingency of marriage not occurring within 20 years (and was a clause inserted to address application in case of failure in accordance with section 83 of the Indian Trusts Act). The Court held that clause 22 operates only on the failure of the settlement (i.e., after the contingency arises) and does not operate during the normal course of the settlement.
- Excluding clause 22 for the operative period: Because clause 22 would take effect only on failure (after 20 years), the Court read the December 6, 1971 deed "minus clause 22" for the assessment years. During the operation of the settlement (prior to any failure), the trustees had full control of the property and the settlor had neither direct nor indirect enjoyment of income nor any right to reassume power over income or assets.
- Application of section 63: For a transfer to be revocable under section 63, the instrument must contain a provision for retransfer or a provision giving the transferor a right to reassume control. The Court found that, for the period in question, there was no operative provision granting the settlor a right to retransfer or to reassume control; clause 22 did not operate in the assessment years and therefore did not render the transfers revocable under section 63.
- Conclusion from the combined reading: A combined reading of section 63 and the operative terms of the December 6, 1971 deed led the Court to conclude that the trusts were not revocable for the assessment years in question and that the Appellate Tribunal was therefore correct in holding that the Commissioner was not justified in directing inclusion of the trust income in the assessee's returns.
Holding and Implications
Holding: The Court answered the referred question in the affirmative and against the Department. The decisive holding is that the trusts in question were not revocable for the assessment years 1977-78 and 1978-79 and the income of the trusts was not includible in the hands of the assessee.
Core Ruling: The Appellate Tribunal was right in holding that the irrevocability of the trusts was not affected by clause 22 (as relevant for the assessment years), and the Commissioner of Income-tax was not justified in directing that the trust income be included in the assessee's assessment.
Implications
- Direct effect on the parties: The income from the two marriage benefit trusts (M.C. Shyamala Marriage Benefit Trust and M.S. Sowmiyaram Marriage Benefit Trust) is not includible in the assessee's total income for assessment years 1977-78 and 1978-79; the Commissioner’s directions to include that income were reversed by the Tribunal and upheld by this Court.
- On broader precedent: The opinion applied established statutory interpretation of sections 61–63 and relied on the cited authority (Sakthi Charities) to exclude the later supplementary deed from consideration for the relevant years. The Court did not purport to lay down a new broad principle beyond the application of those statutory provisions to the facts; the decision determines the legal effect of clause 22 in the facts and period before the Court.
No costs were awarded. The question referred under section 256(1) was answered in favour of the assessee and against the Department.
K.A Thanikkachalam, J.:— At the instance of the Department, the Tribunal referred the following question for the opinion of this court, for the assessment years 1977-78 and 1978-79 under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and circumstances of the case, and having regard to the provisions of section 63(a) of the Income-tax Act, 1961, and section 83 of the Indian Trusts Act, the Appellate Tribunal was right in holding that the irrevocability of trusts created by the assessee on October 1, 1969, for the benefit of his prospective son-in-law and daughter-in-law, respectively, was not affected by clause 22 of the settlement deed and that the income of the trusts was not includible in the hands of the assessee?”
2. For the assessment years 1977-78 and 1978-79 the relevant previous years ended on April 12, 1978, respectively. The assessee is an individual deriving income from property, business and share income from a firm called M.K Krishna Chetty. On October 1, 1969, the assessee settled upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law a sum of Rs. 15,000 each. In the deeds of settlement executed for this purpose, there was a direction that the amount has to be invested in the discretion of the trustees so as to produce good income and that the income so earned should be accumulated till such time as the daughter and son got married. At that time the daughter was a minor ‘aged about six years. In clause 19 of the trust deed, it was declared that the trust is “irrevocable”. Clause 22 of the trust deed provided that “if the said intended marriage is not solemnised for any unforeseen reason within a period of 20 years from the date of the trust deed, the deed of trust would become void and the trust fund shall become reinvested in the settlor as a beneficial owner thereof, subject as aforesaid, the settlor shall have no manner of right, title or interest in the said money or its accumulations or accretions thereof”. By a supplementary deed executed on October 26, 1979, the said clause 22 had been amended to read:
“If the said intended marriage were not to be solemnised for any unforeseen reason or reasons within a period of 25 (twenty-five) years from the date of this deed, this deed of trust shall become invested with ‘University of Madras’ which is an educational institution. The settlor or his legal heirs shall have no right, title or interest whatsoever in the said trust property or its accumulations or accretions thereof.”
3. Thus in the supplementary deed also it was reiterated that the trust is an irrevocable trust.
4. For the assessment year 1977-78, the assessee filed a return admitting the total income of Rs. 1,52,580 in which neither the income from these trusts were shown nor included. The Commissioner of Income-tax, under section 263 of the Income-tax Act, 1961, held that since clause 22 of the trust deed indicated that the settlor would become entitled to the trust property along with the accumulated income in the event of the intended marriage not coming off, the trust had conferred a benefit on the settlor, consequently, the income arising out of the trust should have been held as income arising under a revocable trust and should have been assessed in the hands of the assessee under the provisions of section 61 read with section 63(a)(ii) of the Income-tax Act. Therefore, the Commissioner of Income-tax was of the opinion that the action of the Income-tax Officer in not including the income of the trust was erroneous and prejudicial to the interests of the Revenue. After hearing the objections raised by the assessee, the Commissioner of Income-tax directed the Income-tax Officer to include in the assessment of the assessee the income from the said trusts, viz., M.C Shyamala Marriage Benefit Trust and M.S Sowmiyaram Marriage Benefit Trust. Similarly, for the assessment year 1978-79 also the Commissioner of Income-tax exercised his jurisdiction under section 263 of the Income-tax Act and after hearing the assessee, he directed the Income-tax Officer to include in the assessment of the assessee the income from the said two trusts.
5. Aggrieved by the order passed by the Commissioner of Income-tax in both the assessment years under consideration, the assessee filed appeals before the Appellate Tribunal. The Appellate Tribunal, after hearing learned counsel appearing for the assessee as well as learned Departmental representative, ultimately held that the Commissioner of Income-tax was not justified in directing the Income-tax Officer to include in the assessment of the assessee the income arising out of the trusts referred to above.
6. Before us, learned senior standing counsel appearing for the Department submitted that the Tribunal was not correct in holding that both the abovesaid trusts are irrevocable trusts. It was further submitted that clause 19 and clause 22 in the trust deed dated December 6, 1971, are contradictory and in view of clause 22’ since there is retransfer of the corpus of the trusts in favour of the donor or transferor, the trusts should be considered as revocable trusts. Learned senior standing counsel further submitted that the second deed executed on October 26, 1979, stating that the corpus is on the interest of the trusts, if the trusts fail, would go to the University of Madras would virtually amount to application of income. Further according to learned senior standing counsel, the second deed executed on October 26, 1979, would not be capable of giving retrospective effect to what is stated in the second deed from the execution of the first deed. According to learned senior standing counsel, what we are concerned in the assessment years under consideration is the first trust deed executed on December 6, 1971, and the second deed executed on October 26, 1979, has no relevance for this period. In support of his contention, reliance was placed upon a decision of this court in the case of Sahthi Chanties v. CIT [1984] 149 ITR 624. Learned senior standing counsel further submitted that even if clause 22 was incorporated in accordance with section 83 of the Indian Trusts Act, still the fact remains that when the trusts fail, the corpus on the interest of the trust would go back to the donor or the transferor. In such case also section 63 would apply and the trusts would become revocable trusts and in such a case the income of the trusts is assessable in the hands of the assessee. It was further submitted that the Tribunal was not correct in holding that the trusts are revocable trusts and, therefore, income from the trusts cannot be assessed in the hands of the assessee.
7. On the other hand, learned counsel appearing for the assessee while supporting the order passed by the Tribunal submitted that clause 22 of the trust deed dated December 6, 1971, would come into operation only after 20 years as per the first deed and after 25 years as per the second deed dated October 26, 1979. Therefore, during the assessment years under consideration, only the first deed dated December 6, 1971, was in force and clause 22 would not be applicable for the period relating to the assessment years under consideration. Learned counsel appearing for the assessee also submitted that the marriage of both the minors takes place within the period stipulated in the trust deeds and, therefore, there is no question of the trusts being incapable of execution without exhausting trust property. Therefore, learned counsel appearing for the assessee submitted that inasmuch as clause 22 in the trust deed dated October 26, 1979, was introduced in compliance with section 83 of the Indian Trusts Act and which would come into force only after 20 years according to the first trust deed and after 25 years according to the second trust deed, during the assessment years under consideration, clause 22 has got no relevance and, therefore, it need not be looked into. According to learned counsel, even if clause 22 is not incorporated by act of law, section 83 of the Indian Trusts Act would come into operation. For these reasons, according to learned counsel for the assessee, inasmuch as no income was transferred to the donor from the trust during the assessment years under consideration, no assessment can be made in his hands inasmuch as the abovesaid trusts are not revocable trusts.
8. We have heard learned senior standing counsel for the Department as well as learned counsel appearing for the assessee. We have already set out the facts in detail. We have also incorporated the relevant clauses in both the trust deeds for the sake of convenience in the foregoing paragraphs. Sections 61 to 63 of the Income-tax Act, 1961, state as under:
“61. Revocable transfer of assets.— All income arising to any person by virtue of a revocable transfer of assets shall be chargeable to income-tax as the income of the transferor and shall be included in his total income.
62. Transfer irrevocable for a specified period.— (1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer—
(1) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee; or
(ii) made before the 1st day of April, 1961, which is not revocable for a period exceeding six years:
Provided that the transferor derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything contained in sub-section (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.
63. ‘Transfer’ and ‘revocable transfer’ defined.—
For the purposes of sections 60, 61 and 62 and of this section,—
(a) a transfer shall be deemed to be revocable if—
(i) it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets;
(b) ‘transfer’ includes any settlement, trust, covenant, agreement or arrangement.”
9. The fact remains that the assessee created two trusts known as M.C Shyamala Marriage Benefit Trust and M.S Sowmiyaram Marriage Benefit Trust. The trusts were created under the two settlement deeds dated December 6, 1971, and October 26, 1979. On October 1, 1969, the assessee settled upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law a sum of Rs. 15,000 each. At the time of settlement, the daughter was a minor aged about six years and the son was aged about three years. There was a direction in the trust deeds that the amounts have to be invested in the discretion of the trustees so as to produce good income and that the income so earned should be accumulated till such time as the daughter and son got married. Clause 19 of the trust deeds states that the trusts are irrevocable. Clause 22 of the trust deeds states that if the said intended marriage is not solemnised for any unforeseen reasons within a period of 20 years from the date of the trust deed, the deed of trust would become void and the trust's funds shall become reinvested in the settlor as a beneficial owner thereof, subject as aforesaid, the settlor shall have no manner of right, title or interest in the said money or its accumulations or accretions thereof. The second deed was executed on October 26, 1979. This second deed, which is a supplementary deed was executed for clarifying what is stated in clause 22 of the first deed dated December 6, 1971. In the supplementary deed it was stated that the period of 20 years as stated in clause 22 of the first deed would be substituted by 25 years. So also in the first deed what is stated is that if the trust fails, the trust fund shall become reinvested in the settlor as the beneficial owner thereof, and was changed into in case the trust fails, the trust fund shall come to the University of Madras. For the assessment years under consideration, the assessee filed a return not showing the income from these trusts.
10. According to the Department, in view of the provisions contained in section 61 read with section 63(a)(i) and (ii) of the Income-tax Act, 1961, read with clause 22 of the trust deed dated December 6, 1971, which alone is applicable for the assessment years under consideration, since the supplementary deed executed on October 26, 1979, would not be applicable during the assessment years under consideration, inasmuch as the trust fund was to be retransferred for the benefit of the settlor in case the trust fails, the trust would become a revocable trust. In such a case, the income from the trusts would be assessable in the hands of the assessee.
11. According to the assessee, the result of the trusts would be mentioned in the trust deeds. If the result is not mentioned, the provisions of section 83 of the Indian Trusts Act would come into operation. Therefore, in order to comply with the provisions of section 83 of the Indian Trusts Act, clause 22 was incorporated. It was further submitted that clause 22 in the first deed would take into effect only after 20 years as per the first deed and 25 years after the supplementary deed, provided no marriage took place to the minors. Therefore, according to the assessee, during the assessment years under consideration, this clause 22 would not have any application at all. According to the assessee, the marriages of the minors took place within the period stipulated in the first deed dated December 6, 1971. Hence, the contingency as provided under clause 22 of the first deed has not taken place in the present case. Even according to the assessee, the supplementary deed executed on October 26, 1979, which states that the clarification contained therein would take effect from the date of the execution of the first trust deed, cannot be taken into consideration in the assessment years under consideration, because during that time the supplementary deed was not in existence, inasmuch as it was written on October 26, 1979.
12. Therefore, the point for consideration is, whether in the assessment years 1977-78 and 1978-79, the income arising out of the trust can be included in the hands of the assessee, who is the donor/transferor in view of what is contained in clause 22 of the trust deed dated December 6, 1971. As already stated the supplementary deed dated October 26, 1979, would not be applicable for the assessment years under consideration in view of the decision of this court rendered in Sakthi Charities v. Commissioner Of Income-Tax, Madras. [1984] 149 ITR 624. Now we are left with only one trust deed that is the first deed executed on December 6, 1971.
13. Section 63 of the Income-tax Act, 1961, lays down that a transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor or it, in any way, gives the transferor a right to reassume power directly or indirectly over the whole or any part of the income or assets. For the transfer to be deemed revocable, the trust deed must contain a provision for retransfer directly or indirectly of the whole or any part of the income or assets to the transferor. According to the Department, clause 22 contemplates retransfer of the income of the trust to the transferor when the trust fails. Therefore, a combined reading of section 63 with clause 22 would postulate that the trusts in question are revocable trusts. We have already seen that clause 22 was incorporated for the purpose of application of income of the trust in case the object of the trust fails. This clause 22 was incorporated in accordance with the provisions contained in section 83 of the Indian Trusts Act. Clause 22 would take effect after 20 years, if the marriages of the minors did not take place. But during the assessment years 1977-78 and 1978-79, clause 22 would have no application. Therefore, in order to understand whether the trusts in question are revocable or not, we have to read the trust deed dated December 6, 1971, minus clause 22. Thus, the provisions of clause 22 would operate only on the failure of the operation of the settlement and not till then. During the operation of the settlement that clause will not come into force and during the operation of the settlement, the properties stand completely in the hands of the trustees and during that period the settlor, the assessee, cannot either directly or indirectly enjoy either the whole or any part of the income or exercise any right of reassumption of power over the income or assets. Therefore, a plain reading of section 63 along with the trust deed dated December 6, 1971, would go to show that the trusts in question are not revocable trusts. Therefore, the Tribunal was correct in holding that the Commissioner of Income-tax was not justified in directing the Income-tax Officer to include in the assessment of the assessee the income arising to the trusts of M.C Shyamala Marriage Benefit Trust and M.S Sowmiyaram Marriage Benefit Trust. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.
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