1983 (1) TMI 166 - AT - Income Tax

Trust income excluded from settlor's assessment under Income-tax Act

The Tribunal vacated the Commissioner's directive, holding that the trusts were irrevocable. The income from the trusts should not be included in the ... Assessment Year, Revocable Transfer, Revocable Trust Issues Involved:1. Applicability of Section 61 read with Section 63(a)(ii) of the Income-tax Act, 1961.2. Irrevocability of the trust.3. Interpretation and effect of Clause 22 of the trust deed.4. Resulting trust under Section 83 of the Indian Trusts Act, 1882.5. Commissioner's directive to include trust income in the settlor's assessment.Detailed Analysis:1. Applicability of Section 61 read with Section 63(a)(ii) of the Income-tax Act, 1961:The Commissioner held that the provisions of Section 61 read with Section 63(a)(ii) were attracted, arguing that the income of the trusts should be assessed in the hands of the settlor. This was based on Clause 22 of the trust deed, which indicated that the settlor would become entitled to the trust property if the intended marriage did not occur. The Commissioner believed this clause conferred a benefit on the settlor, thus making the trust revocable.2. Irrevocability of the Trust:The assessee contended that the trust was irrevocable as declared in Clause 19 of the trust deed. The supplementary deed reaffirmed the irrevocability, stating that no part of the income or assets could revert to the settlor or his heirs. The assessee argued that Clause 22 should be ignored or deemed invalid as it conflicted with the irrevocability clause.3. Interpretation and Effect of Clause 22 of the Trust Deed:Clause 22 provided that if the intended marriage did not occur within twenty years, the trust would become void, and the trust fund would revert to the settlor. This clause was later amended to direct the trust property to the University of Madras if the marriage did not occur within twenty-five years. The Tribunal analyzed whether Clause 22 made the trust revocable and concluded that it did not, as it merely provided for the disposition of the trust property upon the trust's extinguishment.4. Resulting Trust under Section 83 of the Indian Trusts Act, 1882:The Tribunal referred to Section 83 of the Indian Trusts Act, which states that if a trust is incapable of execution or is completely executed without exhausting the trust property, the property must be held for the benefit of the author of the trust or his legal representative. Clause 22 was seen as a provision that mirrored this legal principle, ensuring that the property would revert to the settlor if the trust's purpose was not fulfilled. This did not make the trust revocable but rather provided for a resulting trust.5. Commissioner's Directive to Include Trust Income in the Settlor's Assessment:The Tribunal disagreed with the Commissioner's directive, stating that the inclusion of Clause 22 did not make the trust revocable. They emphasized that the trust remained irrevocable both before and after the supplementary deed. The Tribunal concluded that the provisions of Section 63(a)(ii) did not apply, and the income from the trusts should not be included in the settlor's assessment.Conclusion:The Tribunal vacated the Commissioner's direction, accepting the assessee's appeals and holding that the trusts were irrevocable. The income arising from the trusts should not be included in the settlor's assessment under the provisions of Section 61 read with Section 63(a)(ii) of the Income-tax Act, 1961.