Revocable settlement provisos under Income-tax Act prevent settlor taxation until power of revocation arises; beneficiary liability then possible.

The note examines whether income from property subject to a trust settlement is taxable in the settlor's hands under section 16(1)(c) by applying the first and third provisos: provisions for forfeiture and retransfer or reassumption of power render the transfer revocable under the first proviso, making the settlor potentially liable; however, temporal limits and outstanding leases/debts mean the settlement is not revocable for a period exceeding six years, so the third proviso excludes taxation of trust income in the settlor's hands until the power of revocation arises, with liability arising thereafter and also as a beneficiary.

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Issues: Whether the income from the property which is the subject matter of the settlement of the trusts can be taxed in the hands of the settlor and, if so, to what extent.

Analysis: The Court examined section 16(1)(c) of the Income-tax Act and its first and third provisos, and the trust instruments (indenture dated 20-01-1941 and amendment dated 12-01-1942). Paragraphs 43 and 45 provide for forfeiture and retransfer on specified contingencies and permit the settlor to revoke or reassume power directly or indirectly; section 31 of the Transfer of Property Act validates the forfeiture as a condition subsequent. Applying the first proviso, the provisions for retransfer and reassumption of power render the settlement a revocable transfer within the meaning of section 16(1)(c). The Court then considered the third proviso and the temporal limitations in paragraphs 42 and 45, noting that the trust is not revocable for a period exceeding six years given the outstanding leases and debts; accordingly the third proviso excludes application of clause (c) where the settlement is not revocable for the specified period and the settlor derives no direct or indirect benefit, while preserving the settlor's liability if and when power of revocation arises and recognising the settlor's position as a beneficiary.

Conclusion: The income from the settled property cannot be taxed in the hands of the settlor under section 16(1)(c) of the Income-tax Act; the question is answered in favour of the assessee and against the revenue. The assessee remains liable to assessment only to the extent income accrues to her when the power of revocation is exercised and as a beneficiary of trust income.

Ratio Decidendi: A settlement containing contingent provisions for retransfer or reassumption of power is deemed revocable under the first proviso to section 16(1)(c), but where the settlement is not revocable for a period exceeding six years and the settlor derives no benefit, the third proviso excludes taxation of the trust income in the settlor's hands until the power of revocation arises.

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