1964 (4) TMI 15 - SC - Income Tax

Beneficiaries' Income Not Taxable Until Trust Revocation: Supreme Court Ruling

Commissioner Of Income-Tax, Bihar And Orissa Versus Rani Bhubneshwari Kuar

The Supreme Court upheld the High Court's decision, ruling that the income received by beneficiaries other than the assessee could not be taxed as the ... Whether by the third proviso to clause (c) of section 16(1), income received by the beneficiaries other than the assessee is income arising to them by virtue of a settlement which is not revocable for a period exceeding six years, and from which income the assessee derives no benefit direct or indirect? Held that:- The High Court was, therefore, right In holding that by virtue of the third proviso to section 16(1)(c) of the Indian Income-tax Act, 1922, the income received by the beneficiaries under the deed of trust other than the assessee could not, until the power of revocation arose to the assessee, be deemed to be the income of the assessee for the purpose of assessment to income-tax. Appeal dismissed. Issues Involved:1. Whether the trust created by the assessee is a revocable trust within the meaning of section 16(1)(c) of the Indian Income-tax Act.2. Whether the income from the property which is the subject-matter of the settlement can be deemed to be the income of the assessee under section 16(1)(c) of the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Revocability of the Trust:The primary question was whether the trust created by the assessee was a revocable trust under section 16(1)(c) of the Indian Income-tax Act. The deed of trust dated January 20, 1941, as modified by subsequent deeds, contained provisions for revocation and amendment. The Income-tax Officer and the Appellate Assistant Commissioner initially held that the trust was revocable, making the income taxable in the hands of the assessee. However, the Income-tax Appellate Tribunal reversed this decision, stating that the trust was not revocable as the assessee had not taken back what was given by the original deed. The High Court of Patna, however, concluded that the trust was revocable but not within six years from its creation, thus invoking the third proviso to section 16(1)(c). This proviso exempts trusts that are not revocable for more than six years from being taxed as the settlor's income.2. Taxability of the Income:The second issue was whether the income from the trust property could be deemed as the assessee's income. The High Court held that the income received by the beneficiaries other than the assessee was not taxable as the assessee's income until the power to revoke the trust arose. The Supreme Court examined whether the third proviso to section 16(1)(c) applied, which exempts income from being taxed as the settlor's if the trust is not revocable for more than six years and the settlor derives no direct or indirect benefit from the income. The court found that the trust deed, as amended, made the trust irrevocable until certain conditions were met, such as the discharge of debts and the duration of specific leases. Therefore, the income received by the beneficiaries other than the assessee could not be deemed as the assessee's income.Applicability of the Third Proviso:The Supreme Court emphasized that two conditions must be met for the third proviso to apply: the trust should not be revocable for more than six years or during the lifetime of the beneficiary, and the settlor should derive no direct or indirect benefit from the income. The court rejected the Commissioner's argument that the trust was revoked within six years, noting that this claim was not raised in earlier proceedings and lacked evidence. The court also dismissed the contention that the third proviso did not apply to settlements deemed revocable by the first proviso, clarifying that the third proviso operates to exclude income given to another person under the deed of settlement from being taxed as the settlor's income, provided the conditions are met.Conclusion:The Supreme Court upheld the High Court's decision, ruling that the income received by the beneficiaries other than the assessee could not be taxed as the assessee's income until the power to revoke the trust arose. The appeal by the Commissioner of Income-tax, Patna, was dismissed with costs, affirming that the trust was protected under the third proviso to section 16(1)(c) of the Indian Income-tax Act.