Revocable settlement: contingent rights enabling reassumption of control render entire trust income assessable to the settlor.

The deed dated 10/08/1949 was construed to determine whether its terms permitted retransfer or reassumption of control so as to render the settlement revocable under section 16(1)(c). Clause 1 created only a limited monthly income charge; clause 5 conferred a contingent right to follow and realise trust property enabling reassumption of power; clause 10 operated complementarily to effect indirect control; clause 12 created a limited income interest; clause 13 did not effect a novation removing contingent settlor benefits. Because a provision enabling reassumption of power (even contingently or as to part) exists, the whole trust income is treated as assessable to the settlor unless temporal benefit limits apply.

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Issues: Whether, on a proper construction of the trust deed dated 10/08/1949, the trust contained provisions for retransfer of income or assets to the settlor or gave the settlor a right to reassume power directly or indirectly such that the whole income of the trust fell within the ambit of section 16(1)(c) of the Income-tax Act, 1961.

Analysis: The Court examined the trust deed provisions (notably clauses 1, 5, 10, 12 and 13) against the statutory definition of a revocable transfer in section 16(1)(c) of the Income-tax Act, 1961, including its provisos. The first proviso treats a settlement as revocable if it contains any provision for retransfer of income or assets to the settlor or gives the settlor a right to reassume power over them. The third proviso limits the reach of revocability where the settlor derives no direct or indirect benefit for a period exceeding six years or during the lifetime of the beneficiary. The Court analysed clause 1 and held that it created only a chargeable interest in respect of Rs. 400 per month payable to the settlor (recoverable as income of the settlor under the third proviso). The Court construed clause 5 and concluded that its terms left the settlor with a contingent right to follow and realise trust properties (including sale and recovery for a shortfall), thereby enabling the settlor to reassume power over assets. Clause 10 was held to facilitate a device by which the settlor could indirectly affect and regain control over trust assets complementary to clause 5. Clause 12 was held to create only a limited income interest (chargeable under the third proviso) and clause 13 did not effect a novation that would prevent the settlor retaining contingent benefits; it did not, however, itself amount to a provision for retransfer. The Court applied precedent (including Ramji Keshavji v. CIT and CIT v. Kikabhai Premchand) and the statutory scheme to conclude that a provision enabling reassumption of power over assets, even if contingent or relating to a part of the estate, renders the whole settlement revocable within the meaning of the first proviso unless the third proviso's temporal and benefit conditions are satisfied.

Conclusion: The trust deed contains provisions (notably clause 5, with supporting effect from clause 10) that give the settlor a right to reassume power directly or indirectly over the assets; accordingly, the whole income of the trust falls within the ambit of section 16(1)(c) of the Income-tax Act, 1961, and is assessable in the hands of the settlor. The reference is answered in the affirmative against the assessee.

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