Settlement revocability: dividends held under an irrevocable trust without retransfer provisions are not taxed as settlor's income.

Court addressed whether dividends from 300 shares transferred to a trust were taxable as the settlor's income under the deeming provisions for settlements. Applying the proviso's test, the deed was held irrevocable and contained no provision for retransfer of income or assets to the settlor nor any right for the settlor to reassume control; incidental indirect benefit from discharge of settlor's obligations did not amount to a statutory retransfer or reassumption. Consequently the income was not attributable to the settlor and was not assessable as his income; revenue appeals were dismissed and the trust-treated dividends remained outside the settlor's tax net.

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Issues: (i) Whether the dividend income of 300 shares of Simbhaoli Sugar Mills Private Ltd., transferred by the settlor to the S. Raghbir Singh Trust, was the income of the settlor liable to tax under section 16(1)(c) of the Income-tax Act, 1961.

Analysis: The Court examined section 16(1)(c) which deems income arising by virtue of a settlement or disposition from assets remaining the property of the settlor, or income arising by virtue of a revocable transfer, to be the income of the settlor. The first proviso deems a settlement revocable if it contains any provision for retransfer (directly or indirectly) of the income or assets to the settlor or any provision conferring a right to reassume power over the income or assets. The deed in question vested 300 shares in trustees, declared the settlement irrevocable, directed that dividends be applied first to pay the settlor's pre-existing debts and thereafter for specified charitable and familial objects, and required the shares to be held and applied by trustees; there was no provision in the deed for retransfer of the shares or income to the settlor nor any provision giving the settlor a right to reassume power over the income or assets. The fact that the settlor derived an indirect benefit upon discharge of his obligations did not, in itself, constitute a statutory provision for retransfer or a right to reassume power within the meaning of the first proviso. The Court distinguished cases where a settlor reserved or reacquired control or where the settlement was effectively revocable, and treated the trust here as genuine and not captured by proviso 1. The third proviso (non-application where settlement is not revocable for more than six years or during lifetime and settlor derives no benefit) was considered inapplicable since the deed was irrevocable, but the dispositive factor remained absence of any retransfer or reassumption provision.

Conclusion: The dividend income of the 300 shares held on trust was not the income of the settlor and was not liable to be assessed as the settlor's income; the appeals by the revenue are dismissed (decision in favour of the assessee).

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