Revocable trust test under income tax law: settlor must retain legal power to reassume trust income or assets.

A trust is not treated as revocable under the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 unless the deed itself enables the settlor to reassume power, directly or indirectly, over the income or assets by retransfer or equivalent control. On a proper reading of the trust deed and rectification deed, the clause excluding accountability and the powers reserved to the settlor as trustee did not create any legal right to take the trust property or income outside the trust. The disputed income therefore could not be included in the assessee's income under section 16(1)(c).

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Issues: Whether, on a proper construction of the deed of trust and the rectification deed, the income from the relevant portion of the house property could be included in the assessee's income under section 16(1)(c) of the Indian Income-tax Act, 1922.

Analysis: The trust deed, as rectified, had to be read to ascertain whether it contained any provision for a direct or indirect retransfer of the income or assets to the settlor, or conferred on him a right to reassume power over the trust property. The clause excluding accountability and the powers reserved to the settlor as trustee were held not to amount to a legal right to take the trust property or income outside the trust. The governing principle applied was that the proviso to section 16(1)(c) is attracted only where the settlor can lawfully reassume power over the income or assets by virtue of the trust instrument.

Conclusion: The trust was not hit by section 16(1)(c) of the Indian Income-tax Act, 1922, and the disputed income could not be included in the assessee's income.

Ratio Decidendi: A trust is not revocable within the meaning of the first proviso to section 16(1)(c) unless the deed itself enables the settlor to reassume power, directly or indirectly, over the trust income or assets by way of retransfer or equivalent control.

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