A promise to pay a donation that is not legally enforceable does not constitute a settlement or disposition under Section 16(1)(c) of the Income Tax Act and is therefore not exempt from income tax.

Ramaswami, J.

1. In this case the Income-tax Appellate Tribunal has formulated the following question of law lor the determination of the High Court :

"Whether in the circumstances of this case the sums of Rs. 7,917 for the assessment year 1945-46 and Rs. 9458 for the assessment year 1346-47 paid by the Assessee to the Viceroys war purposes Fund are taxable in the hands of the Assessee?"

According to the statement of the case the assessee who is Maharaja of Darbhanga purchased Government securities 1953-55 bearing interest at 8 per cent, on 17-11-1943. The interest on these securities amounted to a sum of Rs. 7,917 for the assessment year 1945-48 and Rs. 9,458 for the assessment year 1943-47. It is not disputed that these figures are correct or that the amount of interest was actually paid to the Viceroys war purposes Fund by the assessee.

It is claimed that the Maharaja of Darbhanga purchased securities as a result of correspondence between him and the Vicerene of India. The assessee had agreed that he would purchase 13 lacs worth of securities and that the interest therefrom would be paid to the Viceroys war purposes Fund for the duration of the War. Before the Income-tax authorities it was claimed on behalf of the Maharaja that it should be held that a trust was created and that the interest accrued should not be taxed for the respective assessment years. As regards 1945-46 assessment, the Appellate Assistant Commissioner did not agree with the submission made by the assessee and ordered that the amount of interest should be taxed. For the assessment year 1946-47, however, the Appellate Assistant Commissioner adopted a different view and agreeing with the contention of the assessee held that the amount of interest was not taxable. Appeals were preferred against the order of the Appellate Assistant Commissioner in each case on behalf of the department and on behalf of the assessee. The Income-tax Appellate Tribunal held after hearing the parties that the amount of interest was not taxable in the hands of the assessee for both the assessment years.

2. On behalf of the Commissioner of Income-tax, learned Standing Counsel stressed the argument that the view taken by the Income Tax Appellate Tribunal is erroneous, that on a proper construction of Sec.16(1)(c), Income-tax Act the amount of interest which had accrued for the two assessment years on the amount of securities which had been purchased by the Maharaja was taxable in his hands. It was contended that no trust was created with respect to the securities purchased by the Maharaja but there was a mere promise made by the Maharaja to pay donation of the interest received from the securities to the Viceroys war purposes Fund. To put it differently, the argument is that there was no legally enforceable agreement between the Maharaja of Darbhanga on the one hand and the Viceroy or Vicerene of India on the other hand to the effect that the assessee would pay the amount of interest accrued on the Government securities for the period of the duration of the war. It was further argued that the third proviso to Sec.16(1)(c) does not contemplate a settlement or disposition in favour of an artificial entity like the Voceroys war purposes Fund. It was (submitted the assessee could claim exemption under the third proviso only in a case where settlement or disposition is made in favour of a living person and not in a case where an artificial entity either incorporated or unincorporated is a beneficiary under the transaction. The question at issue depends upon the proper construction of Sec.16(1)(c) which states as follows :

"In computing the total income of an assessee--(c) all income arising to any person by virtue of a settlement or disposition whether revocable or not ..... shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor : Provided that for the