Revocable trust settlement treated as taxable where income was reserved for the settlor under section 16(1)(c).

A trust deed that reserved one-fourth of the income for the settlor was treated as a revocable transfer under section 16(1)(c), because the first proviso deems a settlement revocable where it provides for retransfer of income or confers a right to reassume control over the assets or income. The division of income into separate shares did not prevent the arrangement from being viewed as one revocable settlement. The third proviso was held inapplicable because it protects only settlements outside the first proviso and yielding no direct or indirect benefit to the settlor. As a result, the income from the settlement was includible in the settlor's hands.

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Issues: (i) Whether the trust created by the settlor resulted in a revocable transfer of assets within the meaning of section 16(1)(c) read with the first proviso. (ii) Whether three-fourths of the income of the trust could be included in the total income of the assessee having regard to the third proviso to section 16(1)(c).

Issue (i): Whether the trust created by the settlor resulted in a revocable transfer of assets within the meaning of section 16(1)(c) read with the first proviso.

Analysis: Section 16(1)(c) brings to tax income arising from a settlement where the assets remain the property of the settlor or where the transfer is revocable. The first proviso deems a settlement revocable if it contains a provision for retransfer of income or assets to the settlor, or gives the settlor a right to reassume power over the income or assets. The trust deed provided for one-fourth of the income to be paid to the settlor, which brought the arrangement within the first part of the first proviso. The settlement was therefore treated as revocable, and the fact that the trust divided the income into separate shares did not prevent the whole transfer from being treated as a single revocable settlement.

Conclusion: Yes. The trust was a revocable transfer within section 16(1)(c) read with the first proviso.

Issue (ii): Whether three-fourths of the income of the trust could be included in the total income of the assessee having regard to the third proviso to section 16(1)(c).

Analysis: The third proviso excludes only a settlement that is not revocable for the prescribed period and from which the settlor derives no direct or indirect benefit. That proviso was held to apply only where the settlement is merely deemed revocable by the later part of the first proviso and not where the deed itself reserves a benefit to the settlor. Since part of the income was reserved for the settlor, the arrangement fell outside the third proviso. Once the settlement was held revocable and not protected by the third proviso, all income arising under the settlement became includible in the settlor's hands.

Conclusion: Yes. Three-fourths of the income could be included in the total income of the assessee, and the third proviso did not apply.

Final Conclusion: The reference was answered in favour of the Revenue. The trust was held revocable under section 16(1)(c), and the income from the settlement was taxable in the hands of the settlor to the extent found by the court.

Ratio Decidendi: Where a settlement reserves any part of the income for the settlor, the entire settlement is treated as revocable under section 16(1)(c), and the exclusion in the third proviso is unavailable unless the settlement is outside the mischief of the first proviso and yields no direct or indirect benefit to the settlor.

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