Revocable transfer rules on trust income: dividend from irrevocably settled shares was not treated as the settlor's income.

Dividend income from shares settled on an irrevocable trust was not taxable in the settlor's hands under section 16(1)(c) of the Income-tax Act, 1922. The provision deems income from a revocable transfer to be the transferor's income only where the deed provides for retransfer of income or assets to the transferor, or reserves a right to reassume control over them. Mere indirect benefit to the settlor is insufficient. On the stated facts, the assessee had divested himself of the shares, retained no power to revoke the settlement, and had no right to control or reclaim the income or assets; the trust's application of income to debt discharge and other objects did not alter that position.

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Issues: Whether dividend income from shares transferred by the assessee to a trust was taxable as the assessee's income under section 16(1)(c) and its first proviso of the Income-tax Act, 1922.

Analysis: Section 16(1)(c) deems income from a revocable transfer to be the transferor's income, and the proviso treats a transfer as revocable only where it contains a provision for retransfer of income or assets to the transferor, or confers a right on the transferor to reassume power over the income or assets. Mere indirect benefit to the settlor is not enough. On the facts, the assessee divested himself of the shares under an irrevocable trust, retained no right to revoke the settlement, and had no power to control or reclaim the income or assets. The trust directed the trustees to apply the income for discharge of the debt and other trust objects, which did not amount to retransfer of income to the settlor or a reserved power to reassume control.

Conclusion: The dividend income was not the assessee's income and did not fall within section 16(1)(c) or its first proviso. The question was answered in the negative, in favour of the assessee.

Ratio Decidendi: A transfer is not treated as revocable merely because the settlor indirectly benefits from the trust income; section 16(1)(c) applies only where the deed provides for retransfer of income or assets to the transferor or reserves to him a right to reassume control over them.

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