Revocable trust doctrine and validating statute protection kept trust income outside tax liability for the beneficiary.

A trust is not treated as revocable merely because the settlor may direct income only to the trust's stated religious or charitable purposes; a right to apply income within those purposes is not a right to reassume the assets or income, so the Pilgrimage Money Trust income was not taxable in the settlor's hands. The Princess Niloufer Trust arrangement also protected the interest on the deposit from tax because the agreement expressly made it tax-free for the assignee-beneficiary, and the validating statute gave the trust deed overriding effect notwithstanding inconsistent income-tax law. On that basis, both sums were outside tax liability.

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Issues: (i) Whether the income of Rs. 82,853 arising from the Pilgrimage Money Trust was taxable in the assessee's hands under the first proviso to Section 16(1)(c) of the Indian Income-tax Act, 1922; (ii) Whether the sum of Rs. 1,00,000 received from the trustees of the Princess Niloufer Trust was taxable in the assessee's hands and, if so, whether it was exempt under the agreement dated 8-10-1949 read with the validating statute.

Issue (i): Whether the income of Rs. 82,853 arising from the Pilgrimage Money Trust was taxable in the assessee's hands under the first proviso to Section 16(1)(c) of the Indian Income-tax Act, 1922.

Analysis: The first proviso deems a settlement revocable only where the deed contains a provision for retransfer of income or assets to the settlor or gives the settlor a right to reassume power over them. A direction that the trustees apply the income only for the objects of the trust does not amount to a right to take back the income or assets outside the trust. Clause 3(c) confined the settlor's discretion to pilgrimage and related religious or charitable expenditure within the trust purposes, and therefore did not bring the settlement within the mischief of the proviso.

Conclusion: The income of Rs. 82,853 was not taxable in the assessee's hands and the answer to this issue was in favour of the assessee.

Issue (ii): Whether the sum of Rs. 1,00,000 received from the trustees of the Princess Niloufer Trust was taxable in the assessee's hands and, if so, whether it was exempt under the agreement dated 8-10-1949 read with the validating statute.

Analysis: The agreement expressly declared the interest on the deposit to be free from income-tax and other taxes, and the assessee, as assignee and beneficiary, fell within the protected class. Section 3 of the Nizam's Trust Deed (Validation) Act, 1950 gave the scheduled trust deed overriding legal force notwithstanding any other law, so the tax-free character of the income could not be displaced by the income-tax law.

Conclusion: The sum of Rs. 1,00,000 was not liable to tax in the assessee's hands and the answer to this issue was in favour of the assessee.

Final Conclusion: Both referred questions were answered for the assessee, and the Department's attempt to assess either sum failed.

Ratio Decidendi: A trust is not rendered revocable merely because the settlor retains discretion to apply the income only within the trust's defined purposes, and a validating statute may give overriding effect to a trust deed that expressly exempts specified income from taxation.

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