Commissioner of Income-tax Vs. Sri Brojendra Nath Kundu - Court Judgment

Dipak Kumar Sen, J.

1. In this reference under Section 256(1) of the Income-tax Act, 1961, we are called upon to construe a deed of trust dated 7th August, 1950, at the instance of the Commissioner of Income-tax, West Bengal-Ill, Calcutta. The facts as found and admitted and as also appearing from the records of the reference may be briefly stated as follows:

Brojendra Nath Kundu, the assessee, is the owner of a house, No. 10A, Chandni Chawk Street, Calcutta. The assessee married three times. His first wife died in 1930. His second wife is separated from him and is living apart and being maintained by the assessee at Rs. 25 per month. The third wife, viz., Umasashi Dassi, is living. The assessee has two issues by Umasashi, namely; Sambhu Nath Kundu and Bhola Math Kundu. The eldest son of the assessee is one Joydeb Kundu.

2. On the 7th August, 1950, the assessee executed a deed of trust. The said deed was rectified by another deed on the 11th February, 1960. The subject-matter of the said deed of trust is the premises No. 10A, Chandni Chawk Street. The assessee conveyed the said premises in trust to himself and his third wife, Umasashi Dassi, for the purposes as set out in the deed as follows:

'(1) To the use of the said settlor and/or his wife, Sm. Umasashi Dassi, during the natural life of the settlor and of the said Umasashi Dassi upon trust to realise the rents, issues and profits and to pay thereout the municipal taxes and other outgoings and to make necessary repairs and improvements to the properties hereby granted and to spend moneys on that account and to pay the moneys that may be due for interest to the Calcutta Improvement Trust on the charge created by the settlor in favour of the 'CIT' for exemption in respect of portion of the messuages, lands hereditaments and premises mentioned in the schedule hereunder written and also during the lifetime of the said settlor and of the said Sm. Umasashi Dassi to pay as beneficiaries the sum of Rs. 50 each per month for their maintenance and a sum of Rs. 100 (Rupees one hundred) per month to the said trustees, Babu Brojendra Nath Kundu, as remuneration for his trouble, skill and Joss of time, in executing the trust.

(2) Provided that the settlor shall not be accountable to anybody orto render any account whatsoever in respect of his dealing with properties hereby settled and/or to the income thereof but he is to see that theaccounts are kept only of the receipts and expenses.......

(4) Provided also further that the settlor shall have no power to cancel or revoke this trust by a separate deed or otherwise and to hold the property as his former free estate or vary all or any of the uses herein mentioned concerning the property hereby settled.

(5) Provided further that the settlor as one of the trustees shall have full power to lease out, mortgage, sell or otherwise encumber the properties fhereby granted or any part or parts thereof but the other trustees shall have no such powers except the power (which the other trustee or trustees will have) after the death of the said settlor to grant leases for not more than five years. In the event of the said Sm. Umasashi Dassi predeceasing the settlor he shall become the sole trustee.

(6) Provided also further that in the event of the settlor predeceasing the said Umasashi Dassi without making any appointment or in any way altering this trust, his sons, Sambhu Nath Kundu (now aged 12 years 3 months) and Bhola Nath Kundu (now aged 6 years 6 months) or any one of them who would attain majority and be alive at the time of his death or both (if both of them had attained majority) would, become the trustee or trustees in his place and stead jointly with the said Sm. Umasashi Dassi but without any power to sell or mortgage or otherwise encumber the property. Likewise, any of the said two sons (of the settlor) who may be minor and have not attained majority at the time of the settlor's death would also become the trustee (jointly) with his mother, Sm. Umasashi Dassi, and/or his brother immediately upon his attaining majority. Be it expressly declared that the eldest son of the settlor, namely, Shri Joydeb Kundu, shall under no circumstances have any right, title or interest in this trust estate.....

(7) Provided also further that during the minority of any of the said two sons of the settlor the trust herein or such of them as may survive the other will upon the death of any of the trustees hereby appointed shall out of the income be liable to defray the maintenance and education expenses of such minor son or sons as to pay Rs. 100 (Rupees one hundred) monthly and every month to the son or sons who has or have attained majority likewise after the death of the settlor, the trustee or trustees shall be liable to defray the maintenance of Rs. 50 (Rupees fifty) per month to the said Sm. Umasashi Dassi till the period of distribution mentioned in clauses 8 and 9 hereof. The trustees shall further defray the marriage expenses of the settlor's unmarried daughter, namely, Kumari Annapurna Coondoo.

(8) Provided also further that after and upon the death of the settlor and of his wife, the said Sm. Umasashi Dassi, the trustee or trustees shall after defraying thereout: (1) the outgoings such as, municipal taxes, costs of repairs, interest payable to the Calcutta Improvement Trust, etc., and other liabilities, if any ; (2) the expenses and/or payments under clause 7 hereof make improvements to the properties hereby settled and shall hold the residue, if any, of the income for the benefit of the said two sons (Sambhu Nath and Bhola Nath) of the settlor till his said son, Sambhu Nath, attains the age of 18 years.

Provided also further that upon the said son, Sambhu Nath, attaining the age of 18 years, the then trustees shall distribute the surplus mentioned in the last mentioned clause to the said two sons (Sambhu Nath and Bhola Nath) in equal shares, and divide and partition the lots A, B and C delineated in the map or plan hereto annexed in the manner following, that is to say, lot A to Shri Sambhu Nath Coondoo, lot B to Shri Bholanath Coondoo, and lot C to Sm. Umasashi Dassi (to be held and enjoyed by her during her lifetime). In the event of her death (which let God forbid) or of any of the said two sons (Sambhu Nath and Bhola Nath) such son's sons or son (if only one son) shall be entitled to get the share of such deceased son. In the event of the said Sm. Umasashi Dassi having had died in the meantime and before such distribution, the lot C shall be partitioned and divided between the settlor's said two sons and held by them in equal shares absolutely provided there is no other issue of the settlor in the meantime. If any other issue is begot by the settlor in the meantime such issue or issues of the settlor through the said Sm. Umasashi Dassi shall get the lot C and the same would be made over and transferred to them by the trustees.'

3. In 1950, at the time when the said deed was executed, Sambhu Nath and Bhola Nath, the two sons of the assessee were minors. Sambhu Nath attained majority in or about 1958.

4. In respect of assessment year 1961-62, which is the year in question in this reference--the relevant financial year ending on the 31st March, 1961--the assessee for the first time excluded income from a portion of the said premises from its total income on the ground that the said portion of the income belonged to his son, Sambhu Nath. Sambhu Nath in his own turn showed income, being the said portion of the income from the said premises, in the return filed by him for the first time for the same assessment year.

5. The Income-tax Officer came to the conclusion that the entire income from the premises should be assessed in the hands of the assessee as in the past and made the order of assessment accordingly.

6. In appeal, the Appellate Assistant Commissioner agreed with the finding of the Income-tax Officer and confirmed the assessment.

7. In further appeal before the Tribunal it was contended on behalf of the assessee that the trust was created by the assessee for the benefit of his two sons and the assessee and his third wife were the trustees. It was further urged that mistakes in the original deed of trust had been rectified by the subsequent deed. It was contended on behalf of the revenue on the other hand that the terms of the deed showed that the trust was revocable and as such the said trust came within the mischief of Section 16(1)(c) of the Indian Income-tax Act, 1922. It was contended further that the subsequent deed of rectification could not be taken into account as the said subsequent deed purported to change the entire trust.

8. The Tribunal held that the rectification in the instant case was made prior to the year of account and as such for the assessment year in question the deed of rectification was good and valid. The Tribunal found that the rectified deed of trust as it stood could not be said to be hit by Section 16(1)(c) of the Indian Income-tax Act, 1922, and held that the income from the portion of the said premises as claimed should not have been included in the income of the assessee.

9. From this order, at the instance of the Commissioner of Income-tax, the Tribunal has referred to this court the following question :

' Whether, on the facts and in the circumstances of the case, and on a proper construction of the terms of the deed dated the 7th August, 1950, and the deed of rectification dated the 11th February, 1960, the Tribunal was right in holding that the income from the portion of the house property at 10A, Chandni Chawk Street, Calcutta, could not be included in the income of the assessee under Section 16(1)(c) of the Indian Income-tax Act, 1922 '

10. Mr. Suhas Sen, learned counsel on behalf of the revenue, relied on Clauses 1, 2 and 5 of the rectified deed of trust and contended that the trust in question is really in favour of the assessee and his wife and no one else. Clause 1 mentions specific use in favour of the assessee and his wife. The deed did not provide at least for the accounting year in question any payment to be made to the sons of the assessee.

11. Mr. Sen further contended that under clauses 2 and 5 of the said deed, the settlor was empowered to deal with the property settled in any manner he thought best and his co-trustee or trustees, if any, could have no say in the matters covered under Clause 5, namely, leasing, mortgaging, selling or otherwise encumbering the trust properties;

12. Lastly, Mr. Sen contended that under Clause 2 of the deed the settlor was not accountable to any person in respect of his dealings with the properties settled under the trust or the income of the said properties. The only obligation imposed by the deed was that the settlor had to see that .the accounts were kept only of receipts and expenses.

13. From his analysis of the aforesaid clauses Mr. Sen submitted that the trust in question really provided for reassumption of power to the settlor directly and/or indirectly over the income and assets of the said trust and, therefore, the said trust was hit by the first proviso to Section 16(1)(c) of the Indian Income-tax Act, 1922.

14. In support of his contentions Mr. Sen relied on several decisions. The first decision cited was in the case of K. Subramania Pillai v. Agricultural Income-tax Officer : [1964]53ITR764(Mad) . In this case a settlement was . made by the assessee of his immovable properties in favour of his wife and three sons. Two of the said sons were minors. The deed of trust provided that certain additional properties were included in the schedule to the deed for the purpose of providing a 'stridhanam ' to his daughter and his sons were directed to execute a deed in favour of the daughter in respect of one of the properties settled for the purpose of creating the said stridhanam. It was further provided that in case any obstruction or delay was caused to the execution of the said deed by any of the sons, the settlor would have full right and authority to execute such a deed by selecting properties of equal value from the properties settled on the sons. On these facts the Madras High Court held that the settlement contained a provision for re-assumption of power over the settled properties and was, therefore, a revocable settlement within the meaning of the proviso to Section 9(1) of the Travancore-Cochin Agricultural Income-tax Act, 1950. The said Section 9(1) corresponded to Section 16(1)(c) of the Indian Income-tax Act, 1922.

15. Mr. Sen next cited the decision in the case of Commissioner of Income-tax v. Jitendra Nath Mallick : [1963]50ITR313(Cal) . In this case, which was decided by this court the settlor had agreed to advance to the beneficiary for the purpose of conducting certain testamentary proceedings a sum of Rs. 25,000 in consideration of receiving Rs. 1,25,000 if the proceedings terminated in favour of the beneficiary. Out of this promised sum of Rs. 25,000 a sum of Rs. 5,000 was outstanding. The settlor executed a trust deed which contained a clause giving power to the trustees to pay the said sum of Rs. 5,000 to the said beneficiary and further provided that if the suit concluded is in favour of the said beneficiary the principal sum of Rs. 25,000 and an additional sum of Rs. 60,000 would belong to the trust and the residue was to be taken absolutely by the settlor.

16. This court held that the above clause in the deed did not provide for nor could be construed to provide for re-transfer of the income or the assets of the trust in favour of the settlor within the meaning of Section 16(1)(c) of the Indian Income-tax Act, 1922. The ratio decidendi in this case appears to us to be that if portions of the income of a trust are settled on different persons and the settlor had a direct or indirect interest in some portion and not in others, the settlor should be assessed under Section 16(1)(c) only with respect to that portion of the income in which he had a direct or indirect interest. The settlor's right to a part of the income from the investment or part of the settled fund did not attract the operation of the said section with regard to the entire settlement.

17. Lastly, Mr. Sen relied on the decision in the case of Commissioner of Income-tax v. Sir Kikabkai Premchand [1948] 16 ITR 207 . In that case before the Bombay High Court a trust deed was executed for the purpose of establishing a sanatorium and the trusts declared were to remain in force and irrevocable for a period of 6 years 3 months from the date of the execution of the deed. The settlor had appointed himself a trustee along with the others and practically retained all the powers of the trustees in his own hands. The deed provided that the settlor as a trustee would have complete power to give loans from the assets of the said trust to any person including himself with or without security or howsoever as he would determine as if he were absolutely entitled to such moneys.

18. On these facts the Bombay High Court held that under the deed the settlor derived an indirect benefit in the income of the trust. It was, however, held that the third proviso to Section 16(1)(c) did not apply to the facts and the income of the trust was subject to tax in the hands of the settlor.

19. Mr. Sukumar Mitra, learned counsel for the assessee, contended on the other hand that under the trust deed before the court, in the instant case, the benefit to be derived by the settlor was specifically determined and the deed did not otherwise provide for any re-transfer in favour of the settlor either specifically or by implication. Mr. Mitra contended further that none of the clauses in the said deed could be construed to mean that the settlor qua settlor could reassume power over any part of the assets or income of the said trust which he had prior to the execution of the trust.

20. He conceded that reading the rectified deed it could not be said that in the assessment year in question any money could be paid to Sambhu Nath as one of the beneficiaries under the said trust even though he had become a major. But, according to him it, was immaterial for purposes of answering the question referred whether any money would be payable to any person apart from the settlor and his wife or whether after making specific payments to the settlor and his wife as provided the residue of the income would accumulate. He submitted that whatever be the position there was no scope for any application of Section 16(1)(c) of the Indian Income-tax Act, 1922.

21. In support of his contentions Mr. Mitra relied on a decision of this court in the case of Commissioner of Income-tax v. Sir S.M. Bose : [1952]21ITR135(Cal) . In this case the assessee had settled certain properties on himself as a trustee to hold it in trust for his daughter. The deed specifically provided that the trustee was to take possession of the properties and after paying the outgoings, the income of the estate was to be paid to the daughter during her term of natural life for her sole and separate use. There was provision as to how such income would be dealt with after the death of the daughter but the settlor retained no right whatsoever on either the corpus or the income of the trust and there was no power of revocation.

22. The said deed provided that 'as long as the present trustee, namely, the settlor or persons named as trustees in addition or substitution, shall act as trustees they shall not be accountable to any of the beneficiaries under these presents relating to his or their dealings as to the income of the trust estate.'

23. It was contended on behalf of the revenue in that case that the deed as quoted above provided that the settlor could reassume power over the income of the trust estate and as such the entire income of the trust should be assessed as part of the income of the assessee under Section 16(1)(c).

24. Harries S.J., in his judgment, considered the deed and found as follows --See : [1952]21ITR135(Cal) :

' In my view however this provision does not give the settlor controlover the income. It is merely a provision limiting the rights of thebeneficiary to question certain acts of the trustee. The deed is an out andout settlement to the trustee and after the execution of this deed the trusteeheld this property upon certain trusts and he could not obtain any of theincome without a breach of trust.

Provisions are made to prevent frivolous litigation and prevent questioning the bona fides of the trustee, but those provisions do not have the effect of giving the settlor a right to reassume power directly or indirectly over the income or the assets. After this deed was executed the income of these properties belonged to the cestui que trust and if the settlor as trustee used this income he would be guilty of a breach of trust. The first proviso to Section 16(1)(c) only contemplates cases where the settlor can lawfully reassume power over the income or the assets. Unless that was so, the proviso would cover every trust where a settlor has made himself trustee because a trustee acting dishonestly could always assume control over the income.'

25. Relying on this decision Mr. Mitra contended that Clause 2 of the deed in the instant case which provided that the settlor would not be accountable to anybody or to render any account whatsoever in respect of his dealing with the trust property settled should be similarly construed and it cannot be construed from the deed that it provided for reassumption of power by the settlor over the corpus or the income of the trust property.

26. It appears to us that the contentions raised on behalf of the assessee are of some substance. Section 16(1)(c) of the Indian Income-tax Act, 1922, has been construed in a number of earlier decisions including those cited before us. The basic scheme of the section read with its first proviso appears to us to be as follows. Where under a settlement any income arises to the settlor the same has to be assessed in the hands of the settlor, whether the settlement is revocable or irrevocable. If under a settlement any income arises to any other person apart from the settlor the same can still be assessed in the hands of the settlor provided the settlement is revocable. The first proviso lays down that even if a settlement on the face of it is stated to be irrevocable, if the same provides for a direct or indirect retransfer of the income or assets of the settlement to the settlor or gives the settlor a right to reassume power directly or indirectly over such income or asset the said settlement should be deemed to be revocable.

27. The expression 'reassumption of power' has been construed and explained by the Supreme Court in the case of Commissioner of Income-tax v. Jayantilal Amratlal : [1968]67ITR1(SC) . The deed in this case gave wide powers to the settlor. Under the clauses of the deed the settlor could direct the trustees to set aside any portion of the income of the trust for certain purposes ; the settlor could also direct any specific fund or investment or property forming part of the trust and/or the income thereof to be utilised and applied exclusively for one or more charitable objects; the settlor had power to direct the trustees to hand over the income of the trust or any part thereof to any institution, association or society, to be applied for all or any of the charitable purposes without being bound to see to the application thereof ; the settlor had power to direct the trustees to invest the trust fund in shares of companies or any debentures or in giving loans to any public company or firm of good standing and reputation and the settlor could direct the trustees to vary the investments. There was a separate clause providing that ' all questions arising in the management and administration of the trusts or powers hereof and all differences of opinion amongst the trustees to be disposed of in accordance with the opinion of the settlor during his lifetime '. It was contended before the Supreme Court that under this deed the settlor retained absolute powers over the income and corpus of the trust estate and to the trust in question the first proviso to Section 16(1)(c) should be applied as the deed gave the settlor right to reassume power directly or indirectly over the income and assets of the trust. The Supreme Court held that the said deed and the clauses thereof were not hit by Section 16(1)(c) and that the income of the trust could not be assessed in the hands of the settlor. Sikri J. on page 10 of his judgment observed as follows--See : [1968]67ITR1(SC) :

'What then is the fair meaning of Section 16(1)(c), proviso (i)? It seems to us that the words 'reassume power' give indication to the correct meaning of the proviso. The latter part of the proviso contemplates that the settlor should be able, by virtue of something contained in the trust deed, to take back the power he had over the assets or income previous to the execution of the trust deed. A provision enabling the settlor to give directions to trustees to employ the assets or funds of the trust in a particular manner or for a particular charitable object contemplated by the trust cannot be said to confer a right to reassume power within the first proviso. Otherwise a settlor could never name himself a sole trustee. It seems to us that the latter part of the proviso contemplates a provision which would enable the settlor to take the income or assets outside the provisions of the trust deed.....'

28. In the deed before us we cannot find any clause which provides for retransfer either directly or indirectly of the assets or the income of the trust back to the settlor. It also appears to us in the light of the law laid down by the Supreme Court that none of the other clauses in the deed including Clause 2 can be stretched to hold that the same gave to the settlor a right to re-assume power directly or indirectly over the income or the assets of the trust. In that view of the matter we answer the question referred to us in the affirmative and in favour of the assessee.

29. There will be no order as to costs.

Deb, J.

I agree.