1970 (3) TMI 26 - HC - Income Tax

High Court upholds tax-exempt trust established in 1939 trust deed

The High Court determined that a valid trust was established under the trust deed dated October 11, 1939, meeting all legal requirements and consistently ... Validity of a trust and its claim to exemption from tax u/s 4(3)(i) of Indian Income Tax Act, 1922 Issues Involved:1. Validity of the trust under the trust deed dated October 11, 1939.2. Whether the trust was revocable under section 16(1)(c) of the Income-tax Act, 1922, and thus its income exempt from tax under section 4(3)(i) of the Act.Detailed Analysis:1. Validity of the Trust:Facts and Background:- The assessee is a charitable and religious trust represented by the trustees of Sreeram Surajmull Charity Trust, established by a deed dated October 11, 1939.- The Income-tax Officer concluded the trust came into existence only on the execution of the trust deed and found against the assessee on several points.- The Appellate Assistant Commissioner and the Tribunal upheld the trust's validity and its claim to tax exemption.Trust Deed Analysis:- The trust deed transfers properties to three trustees, including the settlor, and specifies the trust properties and their management.- The deed was duly attested, registered, and openly executed, indicating no secrecy or fraud.Income-tax Officer's Findings:- The Officer argued there was no proper divestment of Rs. 47,336-1-0 as the cash book showed only Rs. 11,267-15-3.- He also found no divestment of 20 preference shares and the house property at Benares.Appellate Assistant Commissioner's Findings:- The Commissioner found the trust was valid and genuine, with proper divestment of properties.- The trust had been recognized as valid for about 20 years, and the exemption was consistently granted by income-tax authorities.Tribunal's Findings:- The Tribunal endorsed the findings of the Appellate Assistant Commissioner, confirming the trust's validity and entitlement to exemption under section 4(3)(i) of the Income-tax Act.Legal Principles:- A credit entry in the books of account can constitute property for creating a trust if followed by a formal registered trust deed.- The trust deed's recitals and operative clauses clearly indicate the transfer of properties to the trustees and the establishment of a valid trust.Conclusion:- The High Court held that a valid trust was created under the trust deed dated October 11, 1939, as it met all legal requirements and had been consistently recognized by tax authorities.2. Revocability of the Trust:Income-tax Officer's Argument:- The Officer contended the trust was revocable under section 16(1)(c) due to the settlor's control over the corpus and the appointment of trustees.Appellate Assistant Commissioner's Rebuttal:- The Commissioner dismissed these objections, stating the powers of the trustees were normal and the settlor could legally appoint himself as a trustee.Tribunal's Findings:- The Tribunal upheld the Appellate Assistant Commissioner's reasoning, confirming the trust was not revocable.Legal Interpretation:- Section 16(1)(c) deems a trust revocable if it contains provisions for retransfer or reassumption of power over the income or assets by the settlor.- The trust deed in question did not contain any such provisions, either directly or indirectly.Relevant Case Law:- The Supreme Court in Commissioner of Income-tax v. Jayantilal Amratlal emphasized that the right to reassume power must be dependent on the settlor's volition alone.- The High Court distinguished the present case from Commissioner of Income-tax v. Kikabhai Premchand, noting the absence of any provision for loans or revocation in the trust deed.Conclusion:- The High Court held that the trust was not revocable under section 16(1)(c) and its income was exempt from tax under section 4(3)(i) of the Income-tax Act, 1922.Final Judgment:- Both questions were answered in favor of the assessee.- The Commissioner was ordered to pay the costs of the reference.