Irrevocable family settlement income excluded from settlor's tax liability where no direct or indirect benefit was retained.

Income arising under an irrevocable family arrangement was treated as falling within the extended meaning of settlement or disposition under Section 16(1)(c) of the Income-tax Act, 1922, because the capital continued to belong to the settlor. The third proviso nevertheless applied because the settlement was not revocable for the relevant period and the settlor derived no direct or indirect benefit from it. The beneficiary had complete freedom to use the income, and the settlor retained no power of disposition over it. A possible maintenance claim by the wife did not amount to a benefit to the settlor, so the income was not assessable as the settlor's income.

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Issues: Whether income arising under an irrevocable family arrangement, where the capital remained the assessee's property, was assessable as the assessee's income under Section 16(1)(c) of the Income-tax Act, 1922, or was excluded by the third proviso because the assessee derived no direct or indirect benefit.

Analysis: The arrangement was construed as an irrevocable covenant within the extended meaning of "settlement or disposition" in Section 16(1)(c). The income arose from assets that continued to belong to the assessee, so the substantive part of the clause was attracted. However, the third proviso excluded such income where the settlement was not revocable for the relevant period and the settlor derived no direct or indirect benefit. On the facts, the beneficiary had complete freedom to use the income as she pleased, and the assessee retained no power of disposition over it. The mere possibility that the wife might have had a maintenance claim did not amount to a benefit received by the assessee.

Conclusion: The third proviso applied, and the income was not taxable as the assessee's income.

Ratio Decidendi: Income settled by an irrevocable arrangement on a beneficiary, from assets still belonging to the settlor, is not deemed to be the settlor's income if the settlor derives no direct or indirect benefit from the settlement and the proviso to Section 16(1)(c) is satisfied.

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