ivil Appeals Nos
96 to 98 of 1964
Appeals by special leave from the judgments and orders dated September 22 1960 and December 6 1960 of the Punjab High Court in Income tax References Nos
19 of 1958 and 6 of 1959 respectively
SV Gupte Solicitor General R Ganapathy Iyer and RN Sachthey for the appellant
Deva Singh Randhawa and Harbans Singh for the respondent
The Judgment of the Court was delivered by Shah J
On April 10 1953 the estate of the joint Hindu family of which the respondent was a member was partitioned and the respondent was allotted besides other properties 400shares of the Simbhaoli Sugar Mills Private Ltd and was made liable to pay a business debt amounting to Rs 391875 due by the family to RB Seth Jessa Ram Fateh Chand of Delhi
On April 14 1953 the respondent executed a deed of trust in respect of 300 out of the shares of the Simbhaoli Sugar Mills which fell of to his share
The following are the material provisions of the deed of trust AND WHEREAS on partition the author was allotted amongst other properties four hundred shares of the Simbhaoli Sugar Mills Ltd and fixed with liability for discharge of certain debts of the Joint Hindu Family AND WHEREAS for discharge of the debts detailed in the schedule appearing hereafter the author now as absolute owner of the said shares has decided to settle on trust three hundred shares numbering 1 to 300 both inclusive out of the said shares for the benefit of his creditors and other beneficiaries named hereafter and for the objects mentioned hereafter
The author as holder of 300 shares out of the capital of Simbhaoli Sugar Mills Ltd divesting himself of all proprietary rights in the said shares
hereby declares that the said shares shall from this day be irrevocably held on Trust by the Trustees to be used by them for all or any of the purposes following that is to say  a To pay off the debts as detailed in Schedule A  attached hereto These debts were incurred for the benefit of the Joint Hindu Family of the author and on disruption of the Joint Hindu Family and partition of properties among its members made payable by the author
686 And after his debts are paid off
b To provide for the maintenance and education of the children and grand children of the author
c To open and run Hospitals and Nursing Homes
d To open and run School or SchooLs for the education of boys or girls in scientific and technical subjects
To open and maintain a reading room and a lending library
f To provide for the maintenance and education of orphans widows and poor people and for that to give scholarships for inland and overseas studies to found orphanage
widow houses and poor houses and to do all other things that the trustees may deem fit for carrying out the objects of the Trust
 By el
3 four persons including the respondent were appointed trustees and the respondent was to hold the office of Chairman of the Trust during his lifetime
The trust deed then provided In the books of the Company the shares will stand in the name of the Chairman for the time being who will have the power to operate the Bank accounts of the Trust to preside at the meetings exercise the right of th e vote in respect of the shares of the Trust
 Clause 5 provided It is hereby declared that the trustees shall have the following powers in addition to the powers and the authorities hereinfore contained i The trustees shall not be entitled to sell the shares except as provided hereafter but they can mortgage or pledge the same for raising funds as they may feel necessary for paying off the debts of the author provided ii   iii    iv  
Clause 6 provided That in carrying out the objects of the trust the trustees shall keep in mind and abide by the following directions i The payment of the debts of the author as detailed in Schedule A  referred to above shall receive the topmost priority and the trustees shall not spend any money out of the trust property or its income 687 in any direction till they have paid off all the debts of the author provided always if the trustees are unable to pay off the debts out of the income ie dividends bonuses etc
of the shares within a period of ten years they shall be entitled to sell the same or part of it and thus pay off the debts that may be due at that time
ii After debts are discharged the trustees shall spend the income of the trust property
remaining in their hands after full discharge of the debts on the maintenance of the children and grand children of the author and the remaining 20 on all or any of the other objects of the trust as the Trustees may think best
iii  
The respondent claimed before the Income tax Officer Eward
Amritsar that the dividend received by the trustees in respect of 300 shares of the Simbhaoli Sugar Mills was the income of the Trust and that he had no concern with that income as he had divested himself irrevocably of the ownership of the shares and that in any event Rs 19856 being the amount due as interest to R B Seth Jessa Ram Fateh Chand should be allowed as a permissible deduction in computing the net income from dividend of the shares
The Income tax Officer rejected the contentions of the respondent holding that the Trust was a fictitious transaction
The Appellate Assistant Commissioner held that the respondent had not irrevocably transferred the 300 shares of the Simbhaoli Sugar Mills and therefore by virtue of section 161c proviso one the respondent could not escape liability to pay tax on the dividend from the share
The respondent appealed to the Income tax Appellate Tribunal
but without success
At the instance of the respondent the Tribunal drew up a statement of the case and referred the following questions to the High Court at Chandigarh 1 Whether the dividend income of 300 shares of the Simbhaoli Sugar Mills Private Ltd transferred by the assessee to section Raghbir Singh Trust was the income of the assessee liable to tax 2Whether the assessee was entitled to claim deduction of Rs 19856 paid as interest to RB Seth Jessa Ram Fateh Chand against the dividend income of the aforesaid 300 shares The High Court answered the first question in the negative and declined to answer the second question
With special leave
the Commissioner of Income tax has appealed to this Court
Section 2 sub section
15 defines total income as meaning total amount of income profits and gains referred to in sub section
1 of section 4 688 computed in the manner laid down in the Act
Section 16 of the Income tax Act enumerates the exemptions and exclusions admissible in the computation of total income in certain specified cases
The material part of cl
c of sub section
1 of section 16 is as follows In computing the total income of the 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 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 settler disponer or transferor a right to reassume power directly or indirectly over the income or assets Provided further that the expression settlement or disposition  shall for the purposes of this clause 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 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 Clause c was intended while seeking to protect a genuine settlement by which the tax payer intends to part with control over property and its income
to circumvent attempts made by him to reduce his liability to pay income tax by the expedient of so arranging a settlement or disposition of property that the income does not accrue to him but he reserves a power over or interest in the property settled or disposed of or in the income thereof
By cl 689 c income arising to any person by virtue of a settlement or disposition whether revocable or not is deemed to be income of the settlor or disponer if the assets remain the property of the latter
Again income arising to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor
The first proviso then deems a settlement statutorily revocable if it contains any provision for retransfer directly or indirectly of the income or assets settled to the settlor or where it gives to the settlor a right to reassume power directly or indirectly over the income or assets
By the second proviso the expression settlement or disposition includes a disposition trust covenant agreement or arrangement the Legislature has thereby sought to bring within the net transactions similar to though not strictly within the description of settlements and dispositions
The third proviso carves out from the amplitude of cl
c as expounded by the first and the second provisos income arising to any person from a settlement which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor derives no benefit direct or indirect
It was observed in a recent judgment of this Court Commis sioner of Income tax Bihar and Orissa vs Rani Bhuwanesliwari Kuer1 that By the first proviso settlements dispositions or transfers of the character described therein are deemed revocable for the purpose of the principal clause
The function of proviso I and proviso 2 is plainly explanatory
The second proviso in terms says that the expression settlement or disposition is to include any disposition trust covenant agreement or arrangement and the expression settlor or disponer is to include any person by whom the settlement or disposition was made
Similarly the first proviso states that settlements dispositions or transfers if they are of the character described shall for the purpose of the principal clause be revocable transfers
 The terms of section 161c first proviso are reasonably plain
A settlement or disposition is deemed to be statutorily revocable if there is a provision therein for retransfer of the income or assets or which confers a right to reassume power over the income or assets
The provision may even be for retransfer indirectly or for conferring power to reassume indirectly over the income or the assets
But the actual retransfer or exercise of the power to reasume is not necessary if there be a provision of the nature con templated the proviso operates
The terms of the deed may now be examined
The shares were settled upon trust and four trustees one of whom was the respondent were appointed
Genuineness of the trust is no longer 1 202
690 in dispute
The direction that the shares are to stand in the name of the Chairman for the time being appears to have been necessitated by section 33 of the Indian Companies Act 1913 which prevented notice of any trust expressed implied or constructive to be entered on the register
The deed recites that the shares are to be held on trust irrevocably by the trustees for all or any of the purposes mentioned therein
The purpose for which the shares are to be held in the first instance is to pay off the debt due to RB Seth Jessa Ram Fatch Chand and it is only after the debt is paid off that the directions in cls
b to f of cl 2 come into operation
The deed is in terms expressly irrevocable but on that account the operation of the first proviso is not excluded
If by the direction for application of the income for satisfaction of the debts due by the respondent it could be said in law that there is a provision for retransfer directly or indirectly of the income or a right to reassume directly or indirectly power over the income the settlement would be deemed revocable recital that it is irrevocable notwithstanding
But the income from the shares since the execution of the deed of settlement arises to the trustees and it is liable to be applied for the purposes mentioned in the deed
The income has to be applied for satisfaction of debts which the settlor was under a obligation to discharge
but that is not to say that there is a provision for retransfer of the income or assets to the settlor or that the settlor is invested with power to reassume the income or assets
The assets and the income are unmistakably impressed with the obligations arising out of the deed of trust
The settlor it is true obtains benefit from the trust consequent upon satisfaction of his liability but on that account the first proviso is not attracted
We are unable to accept the argument of counsel for the revenue that by the use of the expression indirectly in the first proviso the Legislature sought to bring within the purview of el
c cases where the settler was under the guise of a trust seeking to discharge his own liability
The proviso contemplates cases in which there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly
It also contemplates cases where there is a provision which confers a right upon the settlor to reassume power over the income or assets directly or indirectly
It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within the first proviso
Cases in which there is a settlement but there is no provision in the settlement for retransfer or right to reassume power do not fail within the proviso even if as a result of the settlement the settler obtains a benefit
It has been held in two cases decided by the High Court of Bombay that a person under an obligation arising out of his status 691 may execute a trust to discharge his own obligation without attracting the operation of section 151c
In Ramji Keshavji vs Commissioner of Income tax Bombay1 under a consent decree
the assessee executed a deed of trust conveying certain properties for the benefit of his wife
to the trustees
The deed provided that the net income from the properties shall be paid to the assessee s wife during her lifetime and that she shall maintain her minor children by the assessee anal run the household
It was held by the High Court that the income derived from the trust property and payable to the assessee s wife during her lifetime could not be deemed to be the assessee s income for the direction in the deed did not amount to a provision for retransfer of the income or assets or for reassumption of power directly or indirectly over income or assets within the meaning of the first proviso to section 161c
In DR Shahapure vs Commissioner of Income tax Bombay2 the assessee with the object of making a provision for his wife made an entry in his business books of account crediting Rs 20000  and endorsed against the entry
The capital supplied to you will remain entirely mine but you will get the income over it up to the end of your life
This capital I will not take back up to the end of your life but I will do business for you on this capital and see that you get Rs 600 per annum for you
No specific assets were set apart to
meet the sum of Rs 20000 and there were no other entries in the books with regard to it
The High Court held that the entry was an irrevocable covenant to pay the income accruing on Rs 20000 with a guarantee that it shall be Rs 600 a year and therefore the case was covered by the third proviso to section 161 c of the Act and the income which was paid to the wife under the covenant could not be deemed to be the income of the assessee under the first part of section 161c
In our view these cases were correctly decided
The appeals fail and are dismissed with costs
One hearing fee
Appeals dismissed
1 194513 ITR105


Summary:
The respondent executed a deed of trust in respect of certain shares owned by him in a company
The deed directed the trustees to apply the income and property of the trust in the first instance for paying off the settlor s debts and thereafter for other purposes of the trust
In proceedings under the Indian Income tax Act 1922 it was held by the Income tax Officer that the trust was a fictitious transaction
The Appellate Assistant Commissioner held that the transfer of the shares for the purpose of the trust was not irrevocable and therefore under the proviso to section 161c the respondent could not escape liability
The Tribunal upheld the order of the Assistant Commissioner but referred to the High Court inter alia the question whether the income from the trust property could be taxed in the hands of the assessee
The High Court answered the question in the negative
The Commissioner of Income tax appealed to this Court
HELD After the execution of the deed of settlement the income from the shares arose to the trustees and was liable to be applied for the purposes mentioned in the deed
The income had first to be applied for satisfaction of debts which the settlor was under an obligation to pay but this did not amount to a re transfer of the income or assets to the settlor nor did it invest the settlor with a power to re assume the income or assets
The assests and the income were unmistakably impressed with the obligations arising out of the trust
The settlor certainly obtained a benefit from the trust consequent upon the satisfaction of his liability but on that account the first proviso to section 161 was not attracted
690D F The proviso contemplates cases in which there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly
It also contemplates cases where there is a provision which confers a right upon the settler to reassume power over the income or assets directly or indirectly
It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within the proviso
Cases in which there is a settlement but there is no provision in the settlement for retransfer or right to reassume power do not fall within the proviso even if as a result of the settlement the settler obtains some benefit
1690G H Ramji Keshavji vs CIT Bombay and DR Shahapura vs CIT Bombay approved