Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1965 Supreme(SC) 119

SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commr. of Income-tax, Punjab, Jammu and Kashmir and Himachal Pradesh, Patiala (In all the Appeals), Appellant
Versus
S. Raghbir Singh (In all the Appeals), Respondent.
Civil Appeals Nos. 96 to 98 of 1964.
Advocates appeared
Mr. S. V. Gupte, Solicitor General of India, (M/s. R. Ganapathy Iyer and R. N. Sachthey, Advocates, with him), for Appellant (In all the appeals); M/s. Deva Singh Randhawa and Harbans Singh, Advocates, for Respondent (In all the Appeals).

Advocates:
DEVA SINGH RANDHAVA, HARBANS SINGH, R.Ganapathy Iyer, R.N.SACH, S.V.Gupta

A settlement is not revocable within the meaning of S. 16(1)(c) of the Income-tax Act, 1922, merely because the settlor obtains a benefit from the trust.

Headnote:
INCOME TAX - S. 16(1)(c) - Settlement or disposition - Revocable settlement - Provision for retransfer of income or assets - What amounts to - Settlement by assessee to discharge his own liability - Whether attracts S. 16(1)(c).
Fact of the Case:

The assessee executed a deed of trust in respect of 300 shares of a company, the income from which was to be used to pay off his debts and thereafter for the maintenance of his children and grandchildren and for other charitable purposes. The Income-tax Officer held that the trust was a fictitious transaction and that the assessee was liable to pay tax on the dividend from the shares. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the order of the Income-tax Officer.
Finding of the Court:

The Supreme Court held that the settlement was not revocable within the meaning of S. 16(1)(c) of the Income-tax Act, 1922, and that the assessee was not liable to pay tax on the dividend from the shares.
Issues: Whether the settlement was revocable within the meaning of S. 16(1)(c) of the Income-tax Act, 1922.
Ratio Decidendi: The first proviso to S. 16(1)(c) of the Income-tax Act, 1922, deems a settlement or disposition to be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets of the settlor or disponer, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets.
Final Decision: The appeals were dismissed.

Judgement

SHAH, J.: On April 10, 1953 the estate of the joint Hindu family of which the respondent was a member was partitioned, and the respondent was allotted, besides other properties, 400 shares of the Simbhaoli Sugar Mills Private Ltd., and was made liable to pay a business debt amounting to Rs. 3,91,875 due by the family to R. B. Seth Jessa Ram Fetch Chand of Delhi. On April 14, 1953 the respondent executed a deed of trust in respect of 300 out of the shares of the Simbhaoli Sugar Mills which fell to his share. The following are the material provisions of the deed of trust:

"And whereas on partition, the author was allotted amongst other properties, four hundred shares of the Simbhaoli Sugar Mills Ltd. and fixed with liability for discharge of certain debts of the Joint Hindu Family and whereas for discharge of the debts detailed in the schedule appearing hereafter, the author now as absolute owner of the said shares has decided to settle on trust three hundred shares numbering 1 to 300 both inclusive, out of the said shares for the benefit of his creditors and other beneficiaries named hereafter and for the objects mentioned hereafter.

2. That the author as holder of 300 shares x x x x x out of the capital of Simbhaoli Sugar Mills Ltd., divesting himself of all proprietary rights in the said shares, hereby declares that the said shares shall from this day be irrevocably held on Trust by the Trustees to be used by them for all or any of the purposes following that is to say:

(a) To pay off the debts as detailed in Schedule A attached hereto: These debts were incurred for the benefit of the Joint Hindu Family of the author and on disruption of the Joint Hindu Family and partition of properties among its members, made payable by the author.

And after his debts are paid off.

(b) To provide for the maintenance and education of the children and grand-children of the author.

(d) To open and run School or Schools for the education of boys or girls in scientific and technical subjects.

(e) To open and maintain a reading room and a lending library.

(f) To provide for the maintenance and education of orphans, widows and poor people and for that to give scholarships for inland and overseas studies, to found orphange, widow houses and poor houses and to do all other things that the trustees may deem fit for carrying out the objects of the Trust".

By cl. 3 four persons including the respondent were appointed trustees, and the respondent was to hold the office of Chairman of the Trust during his lifetime. The trust deed then provided:

"In the books of the Company, the shares will stand in the name of the Chairman for the time being who will have the power to operate the Bank accounts of the Trust, to preside at the meetings, exercise the right of the vote in respect of the shares of the Trust." Clause 5 provided:

"It is hereby declared that the trustees shall have the following powers in addition to the powers and the authorities hereinbefore contained:

(i) The trustees shall not be entitled to sell the shares except as provided hereafter but they can mortgage or pledge the same for raising funds as they may feel necessary for paying off the debts of the author, provided *

(ii) * * * *

(iii) * * * *

(iv) * * * *"

Clause 6 provided:

"That in carrying out the objects of the trust the trustees shall keep in mind and abide by the following directions:

(i) The payment of the debts of the author as detailed in Schedule A referred to above shall receive the topmost priority and the trustees shall not spend any money out of the trust property or its income in any direction till they have paid off all the debts of the author provided always if the trustees are unable to pay off the debts, out of the income i.e. dividends, bonuses etc. of the shares within a period of ten years they shall be entitled to sell the same or part of it and thus pay off the debts that may be due at that time.

(ii) After debts are disch

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