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Commissioner Of Income-Tax, Patna v. Rani Bhuwaneshwari Kuer Tekari Raj.
Judgment Summary — Ramaswami, C.J.
Factual and Procedural Background
The assessee (Rani Bhuwaneshwari Kuer) was the proprietress of the estate known as "7 annas Tekari Raj" by maternal inheritance and later purchased the major portion of a 9 annas share of Tekari Raj. On 20 January 1941 she executed an indenture of trust (subsequently rectified by a deed of rectification dated 23 December 1941) transferring the major portion of Tekari Raj and other Zamindari properties to trustees. The trustees included the settlor herself, her husband and other persons to be appointed later; the beneficiaries were the settlor, her husband and her five sons. The declared object of the trust was to liquidate debts of the Tekari Raj estate and to provide for the settlor, her husband and children.
By a deed of amendment dated 12 January 1942 the settlor cancelled and amended certain paragraphs and added paragraphs (including 42(a), 44 and 45). Paragraphs relevant to revocability and forfeiture were paragraphs 43 (original indenture) and 45 (amendment), with paragraph 42 also affecting termination conditions.
Procedurally, the Income-tax Officer held the trust to be revocable and assessed income under Section 16(1)(c) of the Income-tax Act against the assessee. The Appellate Assistant Commissioner upheld that order. On further appeal the Income-tax Appellate Tribunal took the view that Section 16(1)(c) did not apply and that the income should not be assessed in the hands of the assessee. The High Court directed the Tribunal to state a case on two questions of law; the court (Ramaswami, C.J.) reframed those questions into a single question focusing on whether the income from the trust property could be taxed in the hands of the settlor and, if so, to what extent.
Legal Issues Presented
- Whether the trust created by the assessee is a revocable trust within the meaning of Section 16(1)(c) of the Income-tax Act?
- Whether the income from the property which is the subject-matter of the settlement can be deemed to be the income of the assessee under Section 16(1)(c) of the Income-tax Act?
- As reframed by the Court: Whether the income from the property which is the subject matter of the settlement of the trusts in this case can be taxed in the hands of the assessee in the character of a settlor and, if so, to what extent?
Arguments of the Parties
Arguments for the Commissioner of Income-tax (Revenue)
- The learned standing counsel argued that the first proviso to Section 16(1)(c) applies to the case even if the deed of amendment dated 12 January 1942 made the trust irrevocable; i.e., the first proviso should cause the transfer to be deemed revocable.
- By implication the Revenue relied on the text of paragraphs (notably paragraph 43 and the amended paragraph 45) of the trust deeds to show there was power or provision for retransfer or reassumption of control within the meaning of the first proviso.
Arguments for the Assessee
- The assessee contended before the Income-tax Officer that the trust was irrevocable and therefore the income should be assessed in the hands of the trustees under section 41 of the Income-tax Act rather than in the hands of the settlor under Section 16(1)(c).
- The assessee argued that the forfeiture clause (paragraph 43) was illegal.
- Mr. Dutt (for the assessee) submitted that the third proviso to Section 16(1)(c) applies and that it controls not only the substantive provision of section 16(1)(c) but also the first proviso; because the trust was not revocable for a period exceeding six years (in view of paragraphs 42 and 45 and the lease dates), the third proviso takes the transaction out of the mischief of section 16(1)(c).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ramji Keshavji… Applicant; v. The Commissioner of Income-Tax, Bombay [1945] 13 I.T.R. 105 (Chagla J.) | Held that the words of the first proviso to Section 16(1)(c) are wide enough to cover a provision for retransfer which is contingent in its nature. | The Court relied on this decision to support the view that the first proviso applies when there is provision for retransfer or reassumption of power, even if contingent; it helped justify treating the deed as revocable for purposes of Section 16(1)(c). |
| Behramji Sorabji Lalkaka… Applicant; v. The Commissioner of Income-Tax, Bombay [1948] 16 I.T.R. 301 (Chagla C.J. & Tendolkar J.) | The expression "revocable" in Section 16(1)(c) is not qualified; a transfer is revocable even if it can be revoked only with the consent of some named person(s). | The Court cited this authority to reinforce the interpretation that the first proviso's concept of "revocable" is broad and includes transfers revocable only with certain contingencies or consents; this supported deeming the trust revocable under the first proviso. |
Court's Reasoning and Analysis
The Court proceeded in structured steps:
- Statutory framework: The Court set out Section 16(1)(c) of the Income-tax Act and its provisos (the first proviso defining when a settlement/transfer shall be deemed revocable; the third proviso excluding from the clause any income arising from a settlement which is not revocable for a period exceeding six years or during the lifetime of the person and from which the settlor derives no direct or indirect benefit, subject to assessment when power to revoke arises).
- Examination of trust instruments: The Court examined paragraph 43 of the original indenture (20 January 1941) which contains a forfeiture clause and an express power for the settlor to revoke or vary the trust "at any time during her life by any deed revocable or irrevocable" subject to payment of debts. Paragraph 45 (deed of amendment dated 12 January 1942) declared the settlement "permanent, unalterable and irrevocable so far the interest created under these presents are concerned" but qualified the permanence by making the trust irrevocable "so long" debts and certain leases remain outstanding. Paragraph 42 provided the possible termination events and tied revocability/termination to the payment of debts and the extinguishment of named leases, the latest such event controlling.
- Legality of forfeiture clause: The Court rejected the assessee's contention that the forfeiture clause was illegal, holding that Section 31 of the Transfer of Property Act applies and permits such a clause as a valid condition subsequent which can terminate an interest and revest it in the grantor.
- Application of the first proviso: Reading paragraph 45 together with paragraph 43, the Court found there was provision for retransfer of income or assets to the settlor and a right for the settlor to reassume power, directly or indirectly, within the meaning of the first proviso. Reliance on Ramji (Chagla J.) and Behramji (Chagla C.J. & Tendolkar J.) reinforced the interpretation that "revocable" is broad and includes contingent provisions for retransfer or revocation requiring conditions/consents. Accordingly, the first proviso operates so that the transfer is to be deemed revocable for purposes of Section 16(1)(c).
- Consideration of the third proviso: The Court examined whether the third proviso applied and thereby removed the transaction from the mischief of Section 16(1)(c). The third proviso excludes the clause where the settlement is not revocable for a period exceeding six years or during the lifetime of the person and from which the settlor derives no benefit (subject to later assessment when power to revoke arises). The Court looked at paragraph 42 and paragraph 45 of the deed of amendment, and the relevant Thicca lease dates (lease in favour of the Maharaja of Darbhanga expiring in 1963; the lease in favour of Captain Maharaj Kumar Gopal Saran Narain Singh ending in 1955 as cited in the record). Reading these together, the Court held that the trust was not revocable for a period exceeding six years (because the latest of the events defining revocability could extend beyond six years), therefore the third proviso applied.
- Interaction of provisos: The Court concluded that the third proviso controls not merely the substantive provision of Section 16(1)(c) but also controls the first proviso. Consequently, even though the first proviso would prima facie make the transfer revocable, the third proviso takes the present settlement out of Section 16(1)(c)'s immediate operation.
- Outcome from reasoning: The Court determined that income arising from the subject-matter of the settlement could not be taxed in the hands of the settlor (as settlor) under Section 16(1)(c) at present. However, the assessee remains liable to be assessed on such income when and to the extent the power of revocation vests or is exercised under the deed. Moreover, the assessee remains taxable as a beneficiary for income she actually receives from the trust properties.
Holding and Implications
Holding: The Court answered the question of law in favour of the assessee and against the Income-tax Department: the income from the trust property cannot, at present, be taxed in the hands of the settlor under Section 16(1)(c) of the Income-tax Act because the third proviso operates to exclude the settlement from immediate taxation under that subsection.
Implications and direct effects:
- The direct effect is that the income from the trust properties shall not be assessed in the hands of the settlor under Section 16(1)(c) at present.
- The assessee remains liable to be assessed on such income as and when the power to revoke arises or is exercised under the terms of the deed of trust.
- The assessee is also liable to be taxed in the capacity of a beneficiary in respect of income she actually derives from the trust properties.
- The Court awarded costs of the reference to the assessee and a hearing fee of Rs. 250.
- This opinion applied and relied upon previously decided authorities (as cited) to reach its conclusions; the judgment does not state that it establishes a novel general rule beyond its application to the facts and statutory provisions before the Court.
Question answered accordingly. (Costs and hearing fee recorded in favour of the assessee.)
Ramaswami, C.J:— In this case the assessee was the proprietress of an estate known as 7 annas Tekari Raj, having inherited it from the maternal side. Later on she acquired the major portion of the 9 annas share of Tekari Raj by purchase. On the 20th January, 1941, the assessee made an indenture of the trusts which was subsequently rectified by a deed of rectification dated the 23rd December, 1941, the trustees being the settlor herself, her husband and certain other persons to be appointed later. By these two trust deeds the major portion of the Tekari Raj and other Zamindari properties was transferred by the assessee to the trustees to be held upon certain trusts subject to the conditions specified in the two trust deeds. The beneficiaries were the settlor, her husband and her five sons. The object of the trust was to liquidate the debts of the Tekari Raj estate and to make provision for the assessee, her husband and the children. By a deed of amendment dated the 12th January, 1942, the assessee cancelled some of the paragraphs of the original deed and amended certain other paragraphs and also added paragraphs 42(a), 44 and 45. It was contended on behalf of the assessee before the Income-tax Officer that the trust was an irrevocable one and that the income of the property transferred by the, assessee should not be assessed in the hands of the assessee but it should be assessed in the hands of the trustees under section 41 of the Income-tax Act. This objection was rejected by the Income-tax Officer, who held that the trust was a revocable one and so the income of the trust property should be assessed in the hands of the assessee under the provisions of Section 16(I)(C) of the Income-tax Act. The order of the Income-tax Officer was upheld by the Appellate Assistant Commissioner on appeal. The assessee took the matter on further appeal before the Income-tax Appellate Tribunal, which took the view that the provisions of section 16(1)(c) of the Income-tax Act did not apply to the case and the income of the trust properties should not be assessed in the hands of the assessee.
2. As directed by the High Court, the Income-tax Appellate Tribunal has stated a case on the following questions of law:
“(1) Whether the trust created by the assessee is revocable trust within the meaning of Section 16(I)(C) of the Income-tax Act?
(2) Whether the income from the property which is the subject-matter of 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?”
3. After hearing learned counsel for the parties we considered that the two questions should be reframed and converted into one question as noted below in order to bring out the real point in controversy between the parties:
“Whether the income from the property which is the subject matter of settlement of the trusts in this case can be taxed in the hands of the assessee in the character of a settlor and, if so, to what extent?”
4. On behalf of the Commissioner of Income-tax the learned standing counsel put forward the argument that the first proviso to section 16(1)(c) of the Income-tax Act applies to this case even on the assumption that by the deed of amendment dated the 12th January, the settlor. Rani Bhuwaneshwari Kuer, made the trust irrevocable. It is necessary at this stage to set out the relevant statutory provisions. Section 16(I)(C) is in the following terms:
“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 Indian 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.”
5. The first proviso to this sub-section reads as follows:
“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 reassume power directly or indirectly over the income or assets.”
6. The standing counsel referred in this connection to paragraph 43 of the indenture of trust made on 20th January, 1941, which is to the following effect:
“43. That if any of the beneficiaries under these presents or their heirs in future shall challenge the Indenture of Release and Agreement dated the 6th December, 1939, executed by the settlor in favour of the said Raja Bahadur and vice versa and the action taken thereon namely the Release of the Amawan Zarpeshgi lease properties dated the 15th June, 1931, and the petition of satisfaction filed on the 4th January, 1941, in the court of Subordinate Judge, 1st court, Patna, in Execution Case No. 42 of 1938–39 then the said beneficiaries shall on making such objection forfeit their right as beneficiaries under these presents and also if there, shall be a breach by any of the beneficiaries of the covenants and/or conditions and limitations imposed under these presents he or she will not be entitled to any money or to any share in the rents, issues or usufruct of the trust property, and he or she will be deemed to have been excluded from the categories of beneficiaries and his or her share of the rents, issues and profits will be dealt with or enjoyed by the settlor in her entire discretion provided always that the settlor may at any time during her life by any deed revocable or irrevocable revoke or vary either wholly or partly the trust or any provision of this indenture but not before the payment of and discharge of the debts and liabilities as mentioned in Schedule D hereto provided that notwithstanding such revocation of the trust the settlement made under these presents shall so far as the same is not revoked remain good and effective subject to the forfeiture clause set out above.”
7. There was some modification of this clause made by the settlor in the subsequent deed of amendment dated 12th January, 1942. The amendment is contained in paragraph 45 of that document and reads as follows:
“45. That the settlement made under these presents shall be permanent, unalterable and irrevocable so far the interest created under these presents are concerned, but each beneficiary shall have full right to make any sort of arrangement about devolution or succession or make such alienation, as he may think fit, about his share, but the trust created under these presents shall be irrevocable so long the debts mentioned above including all the liabilities on the trust property up to date are not fully paid up or discharged or so long as the Thicca lease in favour of Hon'ble Maharajadhiraj of Darbhanga or Capt. Maharaj Kumar Gopal Saran Narain Singh remain good and effective whichever event shall happen last.
Provided always that paragraph 43 of the indenture of trust dated 20th January, 1941, shall henceforth be read subject to this paragraph.
Provided further that the forfeiture clause given in the said indenture of trust dated the 20th January, 1941, shall not apply to anything that has been done here to before including the allegation in the plaint of the partition suit, No. 23 of 1941, Sub-Judge, 3rd Court, Gaya, but the said clause shall remain good and effective for every act of commission and omission done after the date of compromise in the said suit which may directly or indirectly affect any of the provisions laid down in paragraph 43 of the said indenture of trust dated 20th January, 1941, or which may in any way affect the Shri Bhuwaneshwari trust, executed on the 6th day of December, one thousand nine hundred and thirty-nine. In either case the beneficiaries other than the settlor by such acts of commission or omission, shall at once forfeit and lose all rights, titles and benefits, created in their favour or any of them, by the said indenture of trust dated the 20th January, 1941, and further created under the Amended Indenture of Trust.”
8. It was argued on behalf of the assessee that the clause of forfeiture is illegal. We are unable to accept this argument as correct. In our opinion section 31 of the Transfer of Property Act applies to this case, and in view of the provisions of that section the clause of forfeiture is legally valid as a condition subsequent which terminates an interest and revests it in the grantor. We are of opinion that in view of the language of paragraph 45 of the amended deed of trust, read with paragraph 43 of the original deed of trust, dated the 20th January, 1941, there is provision for retransfer directly or indirectly of the income or assets to the settlors, within the meaning of the first proviso to section 16(1)(c) of the Income-tax Act. It is also clear that there is a right to the settlor to reassume power directly or indirectly over the income or assets in this case within the meaning of the first proviso. It follows, therefore, that though the deed of amendment dated the 12th January, 1942, makes the trust irrevocable the first proviso to section 16(1)(c) of the Income-tax Act operates, and in view of the provisions of that proviso the transfer made by the settlor by the two documents shall be deemed to be revocable. This view is borne out by the decision of Chagla J. in Ramji Keshavji…Applicant; v. The Commissioner Of Income-Tax, Bombay….* [1945] 13 I.T.R 105., where it was held by the learned judge that the words of the first proviso are wide enough to cover even a provision for retransfer which is contingent in its nature. It was pointed out by learned counsel for the assessee that Kania J. had taken a different view in that case. But the view of Chagla J. has been reaffirmed by a division bench of the Bombay High Court in a subsequent case in Behramji Sorabji Lalkaka…Applicant; v. The Commissioner Of Income-Tax, Bombay….* [1948] 16 I.T.R 301., in which the judgment was pronounced by Chagla C.J and Tendolkar J. In this case both the learned judges took the view that the expression “revocable” in section 16(1)(c) of the Income-tax Act was not qualified in any manner, and a transfer was none the less revocable even if it can be revoked only with the consent of any named person or persons. In our opinion, the first proviso to section 16(1)(c) of the Income-tax Act applies to this case, and in view of the fiction created by the first proviso it must be deemed that the deed of trust dated the 20th January, 1941, as modified by the subsequent amendment dated the 12th January, 1942, is revocable within the meaning of that subsection.
9. The next question presented for determination in this case is whether the third proviso to section 16(1)(c) operates in this case and whether in view of that proviso the transaction of trust in this case has taken out the mischief of section 16(1)(c) of the Income-tax Act. The third proviso to section 16(1)(c) is in the following terms:
“Provided further that this clause 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 disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him.”
10. On behalf of the assessee, it was submitted by Mr. Dutt that the provisions of the third proviso to section 16(1)(c) of the Income-tax Act apply not only to the substantive provisions of section 16(1)(c) but also to the first proviso to section 16(1)(c). It was argued on behalf of the assessee that all the provisos to section 16(1)(c) are inter dependent and must be construed together. It was pointed out that in the present case the deed of trust is not revocable for a period exceeding six years. In this connection, reference was made by learned counsel for the assessee to paragraphs 42 and 45 of the deed of amendment, We have already quoted paragraph 45 in the earlier portion of the judgment. Paragraph 42 of the deed of amendment is to the following effect:
“42. That the trustees under these presents may terminate (1) after payment of the debts and liabilities as set out in Schedule D and all other liabilities of the trust that would be then outstanding or (2) after extinguishment of the Thicca leases in favour of the Hon'ble Maharajadhiraj of Darbhanga or (3) that in favour of Capt. Maharaj Kumar Gopal Saran Narain Singh of Tikari whichever event shall occur last.”
11. Reference was also made in this connection to the Thicca lease in favour of the Maharaja of Darbhanga. It was pointed out that the lease will expire in 1963. The deed of lease in favour of Captain Maharaj Kumar Gopal Saran Narain Singh of Tekari is also contained on page 37 of the paper book and it was pointed out on behalf of the assessee that this lease will end in 1955. If these documents are read in the context of paragraphs 42 and 45 of the deed of amendment dated the 12th January, 1942, it is manifest that the trust of the property is not revocable for a period of six years and the third proviso to Section 16(I)(C) operates in this case. In our opinion, the language of the third proviso to section 16(1)(c) controls not merely the substantive provision of section 16(1)(c) but also controls the first proviso to that section. If that is the correct view of the law, it follows that the present case falls also within the third proviso to section 16(1)(c) of the Income-tax Act. The view we have expressed is borne out by the decision of the Bombay High Court in Ramji Keshavji…Applicant; v. The Commissioner Of Income-Tax, Bombay….*, to which we have already made reference. We hold, therefore, that the income from the property which is the subject matter of settlement of the trusts in this case cannot be taxed in the hands of the assessee in the character of the settlor. It should, however, be added that under the third proviso to section 16(1)(c) of the Act the assessee is liable to be taxed so far as the income accruing to her as and when the power of revocation is exercised under the terms of the deed of trust. It is also manifest that the assessee is liable to be taxed in the character of the beneficiary of the income arising to her out of the trust properties. We accordingly answer the question of law referred to the High Court and as amended by us in favour of the assessee and against the income-tax department. The assessee is entitled to the costs of this reference. Hearing fee Rs. 250.
12. Question answered accordingly.
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