Revocable trust transfer rules under income tax law can tax trust income in the settlor's hands.

A trust deed, though executed before 1 April 1961, was examined under the Income-tax Act, 1961 for the relevant assessment years. Sections 61 to 63 treat income from a revocable transfer as taxable in the transferor's hands, and a transfer is revocable if the deed expressly or indirectly permits retransfer of income or assets, or a reassumption of power over them. On the deed's terms, the settlor's retained right to reside in part of the property and receive a fixed annual amount out of trust income constituted a reservation of benefit and power. The trust was therefore treated as revocable, and the income was assessable in the settlor's hands.

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Issues: Whether the trust settlement created a revocable transfer within the meaning of sections 61, 62 and 63 of the Income-tax Act, 1961, so that the income from the trust property was includible in the settlor's hands.

Analysis: The trust deed, though executed before 1 April 1961, had to be examined under the 1961 Act for the relevant assessment years. The statutory scheme of sections 61 to 63 made income from a revocable transfer taxable in the hands of the transferor, and a transfer was revocable if the deed contained any provision for retransfer of income or assets, directly or indirectly, or conferred a right to reassume power over them. On the terms of the deed, the settlor retained a right to reside in part of the property and to receive a fixed annual amount out of the trust income, which amounted to a reservation of benefit and power within the mischief of the 1961 Act. The court applied the principle that the later statute controlled the assessment and that a reservation enabling the settlor to retain part of the income or enjoyment of the settled property could make the transfer revocable for tax purposes.

Conclusion: The trust was revocable under the Income-tax Act, 1961, and the income was rightly assessed in the hands of the settlor; the answer to the referred question was in favour of the Revenue.

Ratio Decidendi: For assessment under the Income-tax Act, 1961, a trust is revocable where the deed reserves to the settlor, directly or indirectly, a right to retransfer income or assets or to reassume power over them, including by retaining part of the trust income or enjoyment of the settled property.

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