Settlor's reserved power under trust deed must be lawful to trigger tax inclusion of trust income in settlor's hands.

The first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922 applies only where the trust deed lawfully reserves to the settlor a power to retransfer income or assets, or to reassume control over them. A mere power to issue directions within the trust framework, including directions for application of funds to charitable objects, is not enough. Powers that could be exercised only by breaching the trust deed or ignoring statutory restrictions do not amount to a legally enforceable right to reassume power. On that basis, the proviso was not attracted and the trust income was not assessable in the settlor's hands.

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Issues: Whether the trust deed conferred on the settlor a right to retransfer the income or assets, or to reassume power directly or indirectly over them, so as to attract the first proviso to section 16(1)(c) of the Indian Income-tax Act, 1922.

Analysis: The first proviso applies only where the settlement itself lawfully gives the settlor a power to take back control over the income or assets. A mere ability to give directions within the framework of the trust, or to direct application of trust funds to specified charitable objects, is not the same as a right to reassume power. The trust deed conferred wide administrative directions, but those powers remained subject to the trust deed and the governing law, including the Bombay Public Trusts Act, 1950. Powers that could only be exercised by breach of trust or in disregard of statutory restrictions do not amount to a legally enforceable right to reassume power within the meaning of the proviso.

Conclusion: The first proviso to section 16(1)(c) was not attracted, and the trust income was not assessable in the settlor's hands.

Ratio Decidendi: The first proviso to section 16(1)(c) is attracted only by a lawful power reserved in the trust instrument enabling the settlor to retransfer income or assets or to reassume control over them; powers exercisable only in breach of trust or contrary to governing law do not satisfy the proviso.

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