Case: Harishikesm Ganguli (Dead) Vs. Commissioner Of Income Tax, Calcutta

Grover, J. 1. This is an appeal by special leave from a judgment of the Calcutta High Court answering the following question of law referred to it against the assessee and in favour of the Revenue:"Whether on the facts and in the circumstances of the case, the entire or any part of the income from the house properties concerned could be included in the total income of the assessee by virtue of the provisions of S. 16 (1) (c) of the Income-tax Act, 1922 read with the first proviso thereto?" 2. The assessee was assessed in the status of an individual. He derived income from house properties and from the business of a registered partnership firm H. Gangulya and Co. He had six houses one of which was 24, Mohanlal Street, Calcutta and the other at Jangambari in the city of Banaras. On March 19, 1953 the assessee created a trust in respect of these two houses. It was provided in the trust deed that the trustees shall pay a sum of Rs. 200/- per month to the settlor, for life for his own absolute use and benefit out of the income of the trust estate remaining after payment of taxes; rents etc. In other words he himself was one of the beneficiaries. 3. The Income-tax Officer held that the income from the aforesaid two properties was assessable in the hands of the assessee inasmuch as he had retained a portion of the income from the trust properties for himself. The trust had, therefore, become revocable under the provisions of S. 16 (1) (c) of the Income-tax Act 1922, hereinafter called the Act. The appellate Assistant Commissioner on appeal affirmed the view taken by the Income-tax Officer; When the matter came before the Appellate Tribunal it found that the assessee had irrevocably parted with the aforesaid two properties and the same had got vested in the trust. It was held that S. 16 (1). (c) would become applicable only if the settlor reserved to himself the entire income arising from the settled properties; if only a portion had been reserved by the settlor it would not make the settlement revocable it is not disputed that the total annual income from these properties came to over Rs. 19,000. Out of this the assessee, who was the settlor, was entitled to Rs. 2,400/- annually. According to the Tribunal only the amount of Rs. 2,400/- which had actually been received by the assessee under the terms of the trust deed could be included in his income. 4. The view of the High Court was that in order to be revocable under the first proviso to S. 16 (1) (c) it is sufficient if the settlement, disposition or transfer contains a provision for retransfer of a part of the income to the settlor, dispenser or transferor. It is not necessary that there must be a provision for the retransfer of the entire income. The word "income" includes any part of the income unless there is anything repugnant in the context. The High Court considered that the third proviso to S. 16 (1) (c) did not explain the first proviso but was a kind of rider of exception to it. Bearing in mind the object behind the enactment of S. 16 and on a consideration of the terms of the section the true meaning and scope of the first proviso seemed to be that the settlement in the present case was revocable in its entirety thus attracting the substantive clause of S. 16 (1) (c). 5. Clause (c) was introduced in S. 16 (1) in the year 1939. At the material times. 16 (1) stood thus:"S. 16 (1) In computing the total income of an assessee (a) . . . . . . . . . . . . . (b) . . . . . . . . . . . . . (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 from assets remaining the property of the settlor or dispenser, 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 of 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 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 amply 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." It is apparent that the above clause of S, 16 (1) with its provisos is unhappily worded. In Ramji Keshavji v. Commr., of Income tax Bombay, 13 ITR 105 = (AIR 1945 Bom 254 ) the Bombay High Court considered the scheme of S. 16 (1) (c). According to that decision the first stage is that when there is a revocable transfer of assets. The income derived from such assets is still to be considered the income of the settlor. The first proviso specifies what would be deemed a revocable transfer in spite of the deed being apparently irrevocable. The relevant question for the first proviso is "is this transfer revocable because it fulfils the conditions contained in the proviso?" The answer to that question can be in the positive or in the negative. If the answer is in the negative no further discussion can arise and S. 16 (1) (c) will not be applicable. If the answer be in the affirmative the deed, although ostensibly irrevocable, is deemed to be revocable. It will thus become revocable within the meaning of the substantive provisions of S. 16 (1) (c). Having reached that stage proviso (3) has to be considered. In the words of Kania J., as he then was "the scheme appears to be that although in fact, after reading the provisions of S. 16 (1) (c) with proviso (1), the transfer is revocable, the law will not still consider the income derived from such settlement, the income of the settlor, provided the settlement is not revocable for a period exceeding six years or during the lifetime of the person for whom the income is settled, and, further from which income the settlor derives no direct or indirect benefit. Chagla J., as he then was, delivered a separate judgment although he agreed with the answer given to the reference by Kania J. In his opinion the only way to reconcile the substantive provision of sub-cl- (c), provisos. (1) and (3) was to hold that proviso (3) contained a limitation which applied as much to the substantive provisions of sub-clause (c) as to proviso (1). 6. The view expressed in the Ramji Keshavji case, 13 ITR 105 = (AIR 1945 Bom 254 ) was approved by this court in Commr. of I. T. Patna v. Rani Bhuvaneshwari, Kuer, (1964) 7 SCR 920 = (AIR 1965 SC 6 ). In that case the assessee, who owned an estate known as Tekari Rai created a trust with a view to liquidate the debts of Tekari Rai. The beneficiaries under the deed were the settlor, her husband and her sons. It was declared that the settlement made was to be permanent and irrevocable but each beneficiary had full right to make any sort of arrangement about devolution or succession or make such alienation as was considered fit about his share. It was observed that two conditions were necessary for the application of the third proviso to section 16 (1) (c), (1) that the trust should not be revocable for a period exceeding six years or during the lifetime of the beneficiary and (2) the settlor or disponer should have no direct or indirect benefit from the income given to the beneficiary, The following observations at page 927 (of SCR) = (at PP. 10-11 of AIR) are noteworthy:"The third proviso to S. 16 (1) (c) does not operate to exclude the income which the settlor receives as a beneficiary, from liability to income tax it merely excludes that part of the income which is under the deed of settlement given to another person from liability to tax in the hands of the settlor, if the conditions prescribed by the third proviso are fulfilled. The contention raised by the Commissioner that if under the deed of trust the settlor has reserved to himself as a beneficiary any part of the income of the property settled, the third proviso will not apply to the deed of trust runs contrary to the plain words of the statute." 7. The further contention of the Commissioner that the third proviso only operated in respect of deeds of settlement or dispositions which were referred to in clause (c) but not the deeds of settlement or disposition which by the first proviso were deemed to be revocable was rejected by saying that the function of provisos (1) and (2) was plainly explanatory and it was impossible to hold that the third proviso did not operate in respect of settlement; dispositions or transfers which were by the first proviso revocable for the purposes of that clause. 8. We have referred to the above case in extenso because in our opinion it fully covers the point which has arisen in the present case. 9. In the light of the above principles it would not be wrong to say that the effect of the third proviso is that a settlement or disposition containing a provision for retransfer of a part of the income to the settlor would not render the whole income of the settlement chargeable in his hand provided the other conditions contained in the proviso are satisfied. In other words the proviso comes to the rescue of the settlor in that the portion of the income from the trust properties which are settled on a third person is to be assessed in the hands of that person and not in the hand of the settlor, if the latter does not retain any power to "deflect the same for a period exceeding six years or during the lifetime of the donee" . Thus the settlement as a whole will not, come within the mischief of S. 16 (1) (c) if the revocability relates only to a part of the income. (See C. I. T. Calcutta v. Jitendranath Mallick (1963) 50 ITR 313 (Cal.)) 10. We are in entire agreement with the above view of the Calcutta High Court and consider that the same is supported by the decision of this court in Rani Bhuvaneshwari Kuers case, (1964) 7 SCR 920 = (AIR 1965 SC 6 ). We may also refer to the significant change made in the language with regard to revocable transfers in the Incame-tax Act 1961. Section 63 of that Act provides:"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) . . . . " It can, weil be said that the necessity for expressly mentioning part of the income was felt because under the provisions of the Act part of the income was not covered. There is no dispute in the present case that the trust created was a genuine one. Since it fulfilled thy conditions laid down in the third proviso only that part of the income which accrued or was received by the settlor could be assessed as his income. The income accruing to the other beneficiaries could not be included in the total income of the assessee.

Decision:
1[ds]It is apparent that the above clause of S, 16 (1) with its provisos is unhappily worded. In Ramji Keshavji v. Commr., of Income tax Bombay, 13 ITR 105 = (AIR 1945 Bom 254  ) the Bombay High Court considered the scheme of S. 16 (1) (c). According to that decision the first stage is that when there is a revocable transfer of assets. The income derived from such assets is still to be considered the income of the settlor. The first proviso specifies what would be deemed a revocable transfer in spite of the deed being apparently irrevocable. The relevant question for the first proviso is "is this transfer revocable because it fulfils the conditions contained in the proviso?" The answer to that question can be in the positive or in the negative. If the answer is in the negative no further discussion can arise and S. 16 (1) (c) will not be applicable. If the answer be in the affirmative the deed, although ostensibly irrevocable, is deemed to be revocable. It will thus become revocable within the meaning of the substantive provisions of S. 16 (1) (c). Having reached that stage proviso (3) has to be considered. In the words of Kania J., as he then was "the scheme appears to be that although in fact, after reading the provisions of S. 16 (1) (c) with proviso (1), the transfer is revocable, the law will not still consider the income derived from such settlement, the income of the settlor, provided the settlement is not revocable for a period exceeding six years or during the lifetime of the person for whom the income is settled, and, further from which income the settlor derives no direct or indirect benefit. Chagla J., as he then was, delivered a separate judgment although he agreed with the answer given to the reference by Kania J. In his opinion the only way to reconcile the substantive provision of sub-cl- (c), provisos. (1) and (3) was to hold that proviso (3) contained a limitation which applied as much to the substantive provisions of sub-clause (c) as to proviso (1)7. The further contention of the Commissioner that the third proviso only operated in respect of deeds of settlement or dispositions which were referred to in clause (c) but not the deeds of settlement or disposition which by the first proviso were deemed to be revocable was rejected by saying that the function of provisos (1) and (2) was plainly explanatory and it was impossible to hold that the third proviso did not operate in respect of settlement; dispositions or transfers which were by the first proviso revocable for the purposes of that clause8. We have referred to the above case in extenso because in our opinion it fully covers the point which has arisen in the present case9. In the light of the above principles it would not be wrong to say that the effect of the third proviso is that a settlement or disposition containing a provision for retransfer of a part of the income to the settlor would not render the whole income of the settlement chargeable in his hand provided the other conditions contained in the proviso are satisfied. In other words the proviso comes to the rescue of the settlor in that the portion of the income from the trust properties which are settled on a third person is to be assessed in the hands of that person and not in the hand of the settlor, if the latter does not retain any power to "deflect the same for a period exceeding six years or during the lifetime of the donee" . Thus the settlement as a whole will not, come within the mischief of S. 16 (1) (c) if the revocability relates only to a part of the income. (See C. I. T. Calcutta v. Jitendranath Mallick (1963) 50 ITR 313 (Cal.))  10. We are in entire agreement with the above view of the Calcutta High Court and consider that the same is supported by the decision of this court in Rani Bhuvaneshwari Kuers case, (1964) 7 SCR 920   = (AIR 1965 SC 6  )It can, weil be said that the necessity for expressly mentioning part of the income was felt because under the provisions of the Act part of the income was not covered. There is no dispute in the present case that the trust created was a genuine one. Since it fulfilled thy conditions laid down in the third proviso only that part of the income which accrued or was received by the settlor could be assessed as his income. The income accruing to the other beneficiaries could not be included in the total income of the assessee.