Trust revocability and settlor control determine taxability of trust income; mere limits on beneficiary challenges are insufficient.

A trust deed was held to constitute a valid settlement where the settlor divested himself of the property, retained no power of revocation, and kept no beneficial control over corpus or income. On the tax issue, income from the trust properties was held not taxable in the settlor's hands under section 16(1)(c) because the deeming provision applies only where the settlor retains a lawful right to retransfer assets or income, or otherwise reassume power over them. A clause limiting beneficiaries' ability to challenge the trustees' dealings did not amount to revocable control. The trust income was therefore outside the assessee's taxable income.

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Issues: (i) Whether the trust deed executed by the assessee created a valid and proper trust in favour of his daughter. (ii) Whether the income from the trust properties was taxable in the assessee's hands under section 16(1)(c) of the Indian Income-tax Act.

Issue (i): Whether the trust deed executed by the assessee created a valid and proper trust in favour of his daughter.

Analysis: The deed was treated as an out and out settlement in the ordinary form of a trust. The settlor divested himself of the property, retained no power of revocation, and reserved no right over either the corpus or the income. The arrangement placed the property upon trust for the daughter and did not leave the settlor with any beneficial control.

Conclusion: The trust deed was a valid and proper trust in favour of the assessee's daughter.

Issue (ii): Whether the income from the trust properties was taxable in the assessee's hands under section 16(1)(c) of the Indian Income-tax Act.

Analysis: Section 16(1)(c) deems income to be the settlor's where assets remain his property or where the settlement is revocable within the meaning of the proviso. The proviso applies only if the settlement contains a provision for retransfer of income or assets, or otherwise gives the settlor a right to reassume power over them. A clause limiting the beneficiaries' power to question the trustees' dealings did not amount to retention of control by the settlor. After the settlement, the income belonged to the beneficiary, and any use of it by the settlor as trustee would be a breach of trust, not a lawful reassumption of power.

Conclusion: The income from the trust properties was not taxable in the assessee's hands as his income.

Final Conclusion: The reference was answered against the Commissioner and the income arising from the trust properties was held to be outside the assessee's taxable income.

Ratio Decidendi: A settlement is not revocable for the purpose of the deeming provision unless the settlor retains a lawful right to retransfer the income or assets, or otherwise to reassume power over them; a mere restriction on beneficiaries' ability to challenge trustees' conduct does not amount to such retained control.

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