Revocable transfer in a foreign trust can trigger transferor taxation, while treaty protection may still shield the income.

A trust deed that lets the settlor, who is also the sole beneficiary, terminate the trust and re-assume control over the fund and its proceeds creates a revocable transfer under the Income-tax Act. Income arising from such a transfer is assessable as the transferor's income, and representative-assessment provisions may also apply to the trustee. The foreign law character of the trust does not exclude Sections 61, 63, 160, 161 or 166, and a foreign trust may still fall within the Act. Treaty protection under Article 24 of the India-UAE DTAA was recognised on the facts, so the trust income was not chargeable in India.

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Issues: (i) Whether the capital contribution made or proposed to be made by the settlor to the foreign trust constituted a revocable transfer under the Income-tax Act, 1961. (ii) Whether the income arising from the trust's investments in India was assessable in the hands of the settlor and exempt under Article 24 of the India-UAE DTAA. (iii) Whether the provisions relating to revocable transfers and representative assessees were inapplicable merely because the trust was constituted under foreign law and was not an Indian trust.

Issue (i): Whether the capital contribution made or proposed to be made by the settlor to the foreign trust constituted a revocable transfer under the Income-tax Act, 1961.

Analysis: The trust deed permitted the settlor, who was also the sole beneficiary, to terminate the trust and re-assume control over the trust fund and its proceeds. Section 63 treats a settlement or trust as a transfer, and a transfer is revocable where the transferor retains a right to re-assume power over the income or assets. The court held that the deed contained sufficient clauses of re-transfer and reversion to characterise the contribution as a revocable transfer.

Conclusion: The contribution was a revocable transfer in favour of the assessee.

Issue (ii): Whether the income arising from the trust's investments in India was assessable in the hands of the settlor and exempt under Article 24 of the India-UAE DTAA.

Analysis: Income arising by virtue of a revocable transfer is chargeable as the income of the transferor under Section 61. If Section 61 were not applied, the trustee would still be assessable only in a representative capacity, and the income would take the colour of the beneficiary's income under Sections 160 and 161. As ADIA was the resident institution covered by Article 24 of the DTAA, the income, once attributed to it, was entitled to treaty protection. The court also rejected reliance on the trust being routed through Jersey to deny the treaty benefit when direct investment by ADIA itself would have been exempt.

Conclusion: The income was taxable, if at all, in the hands of the settlor and was protected by Article 24 of the India-UAE DTAA.

Issue (iii): Whether the provisions relating to revocable transfers and representative assessees were inapplicable merely because the trust was constituted under foreign law and was not an Indian trust.

Analysis: Nothing in Sections 61, 63, 160, 161 or 166 limits their operation to trusts created under Indian law. A foreign trust can still be a trust for the purposes of the Act, and the absence of ratification of the Hague Trust Convention did not exclude the application of the Act. The court also held that there is no statutory bar against the settlor being the sole beneficiary, and the trustee could be assessed in a representative capacity even if resident outside India.

Conclusion: The foreign origin of the trust did not disapply the relevant provisions of the Act.

Final Conclusion: The ruling of the Authority for Advance Ruling was set aside, and the trust income was held not chargeable in India either on the footing of revocable transfer under the Act or on the footing of representative assessment read with treaty protection.

Ratio Decidendi: Where the trust deed reserves to the settlor a right to terminate the trust and re-assume control over the income or assets, the contribution is a revocable transfer under the Income-tax Act, and the resulting income is assessable as the transferor's income with the benefit of the applicable treaty where available; the application of these provisions is not confined to trusts created under Indian law.

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