Revocable trust test: investment powers alone do not make a trust income taxable in the settlor's hands.

A trust deed is not revocable under the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 merely because it authorises investment of trust funds by way of deposits or loans with firms or persons connected with the settlor. The decisive test is whether the settlor retained, or could reassume, power over the income or assets as an absolute owner. Because such investment power remained confined to trustees under the trust and trust law, the proviso did not apply, and inclusion of the trust income in the settlor's assessment was not justified.

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Issues: Whether the trust deed created a revocable settlement under the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 so as to justify inclusion of the trust income in the settlor's assessment.

Analysis: The relevant test under the proviso is whether the settlor, by virtue of the trust deed, retained or could reassume power over the income or assets that he had before the settlement. A clause permitting trustees to invest trust funds, including by way of deposits or loans to firms or persons in which the settlor or trustees were interested, does not by itself confer a right on the settlor to take back the assets outside the trust or to exercise absolute ownership over them. The power, if any, remains that of a trustee and is confined by the trust and the law relating to trusts. Such a clause is therefore not enough to attract the mischief of the proviso.

Conclusion: The trust was not revocable within the meaning of the first proviso to section 16(1)(c), and the inclusion of Rs. 9,738 in the settlor's assessment was not justified; the answer was returned in favour of the assessee.

Final Conclusion: The reference was answered for the assessee on the construction of section 16(1)(c) of the Indian Income-tax Act, 1922, and the trust income was held not assessable in the settlor's hands on the ground urged by the revenue.

Ratio Decidendi: A trust deed is not revocable merely because it authorises investment of trust funds in loans or deposits, even with firms or persons connected with the settlor, unless it contains a provision enabling the settlor to reassume the power of an absolute owner over the trust income or assets.

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