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

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 = appeal accepted, 0 = rejected): 1

Explanation:
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.