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C. T. Sienthilnathan Chettiar v. State Of Madras .
Factual and Procedural Background
The appellant, C. T. Senthilnathan Chettiar (“the assessee”), executed a settlement deed on 19 November 1959 in favour of his concubine, Vatsala. The deed granted her a life interest—without any power of alienation—in specified agricultural lands. It also provided that on her death the property would pass absolutely to any children born to her by the settlor, with reversion to the settlor or his heirs if no such children existed. Crucially, the deed expressly reserved to the settlor an unfettered right “to cancel or revoke or alter” the settlement should Vatsala cease to live with him or for other stated reasons.
The Agricultural Income-Tax Officer treated the income from these lands as the assessee’s own agricultural income. On revision, the Commissioner of Agricultural Income-Tax affirmed this view, holding that the deed was a “revocable transfer” within Section 9(1) of the Madras Agricultural Income-Tax Act, 1955 (“the Act”). The Madras High Court, in a revision under Section 54(1), agreed and upheld the assessment. The present appeal reached the Supreme Court by special leave under Article 136 of the Constitution.
Legal Issues Presented
- Whether the settlement deed constituted a “revocable transfer of assets” under Section 9(1) of the Madras Agricultural Income-Tax Act, thereby requiring inclusion of the agricultural income in the settlor’s assessable income.
- Whether Section 9(1) of the Act is ultra vires the State Legislature and violative of Article 14 of the Constitution, such that the taxing authorities could not rely on it.
Arguments of the Parties
Appellant’s Arguments
- The deed fell within the third proviso to Section 9(1) because the power of revocation had not been exercised; hence the income should not yet be assessed in the settlor’s hands.
- The instrument created two successive interests: (a) a life interest in Vatsala and (b) a vested absolute interest in any children of the settlor and Vatsala. Even if the life interest were revoked, the children’s absolute estate would “accelerate,” preventing reassumption of the property by the settlor.
- Section 126 of the Transfer of Property Act supported the validity of the conditional settlement and insulated the income from assessment in the settlor’s hands.
- Section 9(1) is unconstitutional—akin to issues left open regarding Section 16(1)(c) of the Indian Income-Tax Act, 1922 in Sardar Ranldev Singh and Balaji.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sardar Ranldev Singh v. CIT | The Supreme Court had left open the constitutional validity of Section 16(1)(c) of the 1922 Income-Tax Act. | Cited by the appellant to argue that the validity question regarding Section 9(1) remains open; the Court noted but did not rely on it. |
| Balaji v. Income-Tax Officer, Special Investigation Circle, Akola | Similarly left the constitutional issue open. | Relied on by the appellant for the same purpose; Court did not consider it decisive. |
| Venkataraman & Co. v. State of Madras | Tax authorities cannot examine the constitutional validity of taxing provisions; such questions are outside their jurisdiction. | The Supreme Court applied this ruling to bar the appellant from raising the constitutional challenge in the present appeal. |
| CIT v. Straw Products | Affirmed the principle laid down in Venkataraman & Co. | Referenced to reinforce that neither the High Court nor the Supreme Court can entertain a constitutional challenge in a tax revision originating from taxing authorities. |
Court's Reasoning and Analysis
1. Revocability of the Settlement: The settlement expressly empowered the settlor to “cancel or revoke or alter” the deed whenever certain contingencies occurred, or whenever other circumstances “require” alteration. The Court held that this clause squarely attracts the first proviso to Section 9(1): any instrument that allows the settlor to re-assume control over the assets or their income is deemed revocable. Consequently, the agricultural income must be assessed in the settlor’s hands.
2. Inapplicability of Section 126, Transfer of Property Act: Even if Section 126 applied and rendered the gift void, that would not aid the assessee; the critical fact is that the deed reserves a power of revocation sufficient to invoke Section 9(1).
3. Constitutional Challenge Barred: Following Venkataraman & Co., the Court reiterated that authorities under a taxing statute cannot decide the validity of the statute itself. Because the issue was not and could not be raised before the Agricultural Income-Tax authorities, it could not be entertained in a subsequent revision or appeal. Article 142 of the Constitution did not supply independent power for the Supreme Court to decide the question in this posture.
Holding and Implications
DISMISSED. The Supreme Court affirmed the High Court’s decision that the settlement deed is a revocable transfer within Section 9(1) of the Madras Agricultural Income-Tax Act. Accordingly, the agricultural income derived from the settled lands remains taxable in the hands of the settlor. No costs were awarded.
Implications: The decision confirms that any retained power enabling a settlor to cancel or alter a settlement, however broadly framed, brings the instrument within Section 9(1). Taxpayers cannot attack the constitutionality of such provisions in proceedings originating before taxing authorities; a separate, appropriate proceeding would be required. No new doctrine was created, but existing principles on revocable transfers and procedural bars were reinforced.
Sikri, J.— This appeal by special leave is directed against the judgment of the Madras High Court in a revision under Section 54(l) of the Madras Agricultural Income Tax Act, 1955, hereinafter referred to as the Act. whereby the High Court held that the settlement, which we will presently refer to. was hit by Section 9(l) of the Act, and the income from the lands settled were liable to be included in the assessable agricultural income of the assessee. The relevant facts are these: The appellant, C.T Senthilnathan Chettiar, hereinafter referred to as the assessee, executed a deed of settlement on November 19, 1959, in favour of Vatsala, who was his concubine. After reciting that the settlor had great love and affection for her, etc., the deed provides:
“Now this Indenture witnesseth that in consideration of the love and affection which the settlor has for the settlee and the promise which the Settlor had made to the Settle the Settlor hereby confers in favour of the Settlee a Life Interest only in the properties set out in the schedule hereunder, without any powers of alienation whatever. The Settlor puts the Settlee in possession of the properties set out in he Schedule. The Settlee shall take possession of the abovesaid properties and enjoy them for her life and without any powers of alienation. The Settlee shall not be entitled to alienate even her life interest in the properties set out in the schedule hereunder. After the lifetime of the Settlee, the properties set out in the schedule hereto shall be taken by the children born to the Settlee by the Settlor who may be alive at the time of the demise of the settlee, absolutely and with full powers of alienation. Should there be no children for the Settlee through the Settlor at the time of death of the Settlee, the properties set out hereunder shall revert back to the Settlor or his heirs.
This Indenture further witnesseth that the Settlor hereby specifically reserves his right to cancel or revoke or alter this settlement in case the Settlee fails to reside with the Settlor in his house and under his protection or conducts herself in any manner to the prejudice of the Settlor and or if any other circumstances intervene requiring the cancellation or alteration of this deed of Settlement.”
2. The Agricultural Income Tax Officer included the income from the lands settled under this deed in the hands of the assessee. The assessee filed a revision before the Commissioner of Agriculture Income who held that the document evidenced a revocable transfer and the settled lands were an asset remaining the property of the Settlor within the meaning of Section 9(l) of the Act. He refused to exclude the income from the lands settled in the deed from the assessable income of the assessee.
3. The assessee then filed a revision under Section 54(l) of the Act to the High Court. The High Court agreeing with the Commissioner held that the settlement was hit by Section 9(l) of the Act. The assessee having obtained leave from this Court the appeal is now before us.
4. We may mention that this Court at the time of hearing of the application under Article 136 gave liberty to the appellant to urge additional grounds, one ground being that Section 9(l) of the Act was ultra vires the legislature. and also violative of Article 14 of the Constitution of India.
5. The relevant provisions of Section 9(l) of the Act, which are in terms similar to Section 16(l)(c) of the Indian Income Tax Act, 1922, are as follows:
“9. (1) In computing the total agricultural income of an assessee, all agricultural 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 this Act, from assets remaining the property of the settlor or disponer shall be deemed to be the agricultural income of the settlor or disponer, and all agricultural income arising to any person by virtue of a revocable transfer of assets shall be deemed to be the agricultural income of the transferor:
Provided that, for the purposes of this sub-section, a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the agricultural income or assets to the settlor, disponer or transferor or in any way gives the settlor, disponer or transferor a right to re-assume power directly or indirectly over the agricultural income or assets:
Provided further that the expression ‘settlement or disposition' shall, for the purposes of this sub-section, include any disposition, trust, covenant, agreement or arrangement and the expression ‘settlor or disponer' in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made:
Provided also that this sub-section shall not apply to any agricultural 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 life-time of the person and from which agricultural income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed on the said agricultural income as and when the power to revoke arises to him.”
6. The learned counsel for the appellant contends that the case was governed by the third proviso to Section 5(1) and that till the power of revocation was exercised the income should not be assessed in the hands of the assessee. He further contends that the settlement deed creates two interests viz. a life interest coupled with and followed up by an absolute interest created in favour of the children of the settlor through the settlee, and even if the initial transfer in favour of Vatsala is terminated under the deed, the ultimate transfer gets accelerated; in other words an absolute estate becomes vested in the children. The learned counsel also relies on Section 126 of the Transfer of Property Act.
7. In our opinion, the High Court was right in holding that the settlement deed amounts to a revocable transfer of assets within Section 9(l), proviso 1. The settlement deed specifically reserves power to the settlor to cancel or revoke or alter the settlement in any circumstances which require the cancellation or alteration of the deed of settlement. It seems to us that this clause falls squarely within proviso 1 for the assessee could at any time reassume power over the assets or the agricultural income by just cancelling or altering the terms of the deed.
8. We are unable to appreciate how Section 126 of the Transfer of Property Act helps the assessee. If Section 126 is applicable, it is quite clear that the gift would be wholly void. But we are not concerned with this question. We assume that the gift is valid, but the settlor has specifically retained the power to cancel or revoke or alter the settlement.
9. The learned counsel then urges that Section 9(l) of the Act is void. He points out that a similar question regarding the validity of Section 16(l)(c) of the Indian Income Tax 1922, was left open in Sardar Rnldev Singh v. CIT and Balaji v. Income-lax Officer, Special Investigation Circle, Akola. But we arc unable to allow him to raise this point because this Court has held in Venkataraman and Co. v. State of Madras that the authorities under a taxing statute are not concerned with the validity of the taxing provisions and the question of ultra vires is foreign to the scope of their jurisdiction. As no such point could be raised be ore the Income tax authorities, neither the High Court nor the Supreme Court can go into these questions in a revision or reference from the decision of those authorities. This case was followed in CIT v. Straw Products.
10. There is nothing in Article 142 of the Constitution, relied on by the counsel, to enable us to deal with the question in the present appeal. Accordingly we cannot allow him to urge this point before us, but it would be open to him to raise the point in any appropriate proceeding.
11. In the result the appeal fails and is dismissed but in the circumstances of the case there will be no order as to costs.
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