Deemed revocable trust settlement: reversion and control clauses kept trust income outside the settlor's tax assessment.

A trust deed and its amendment provided for reversion of trust property or income to the settlor and preserved a right to reassume control over the assets, making the settlement revocable or deemed revocable under section 16(1)(c) of the Income-tax Act. The forfeiture and reversion clause was treated as a valid condition subsequent under section 31 of the Transfer of Property Act, so the first proviso to section 16(1)(c) applied. The third proviso also operated because the trust was not irrevocable for a period exceeding six years. As a result, the trust income was not assessable in the settlor's hands.

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Issues: Whether the settlement created by the assessee was revocable or deemed revocable so as to attract section 16(1)(c) of the Income-tax Act, and whether the income from the trust properties could be assessed in the assessee's hands as settlor.

Analysis: The trust deed, read with the deed of amendment, contained provisions by which the trust property or its income could revert directly or indirectly to the settlor, and the settlor retained a right to reassume power over the income or assets. Such a forfeiture and reversion clause was held to be legally valid as a condition subsequent under section 31 of the Transfer of Property Act. On that footing, the first proviso to section 16(1)(c) applied and the settlement was deemed revocable. The third proviso was also held to control the clause, since the trust was not revocable for a period exceeding six years and the statutory protection therefore operated in favour of the assessee.

Conclusion: The income from the trust properties could not be taxed in the hands of the assessee in her character as settlor.

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