Commissioner of Income-Tax, Bombay vs Ratilal Nathalal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 5 April, 1954

Coram: Jagannadhadas

The case was titled Commissioner of Income-Tax, Bombay versus Ratilal Nathalal and was listed on 5 April 1954; the judgment of the Supreme Court of India was delivered by Justice Jagannadhadas. The matter before the Court was an appeal filed under Section 66A of the Indian Income-Tax Act, challenging the decision of the High Court of Bombay, which had been made on a reference from the Income-Tax Appellate Tribunal pursuant to Section 66 of the same Act. The appeal concerned assessments for the four fiscal years 1942-43, 1943-44, 1944-45 and 1945-46, and arose from a series of transactions involving a Hindu undivided family. The family consisted of five members: Ramjibhai; his son Ratilal Nathalal, who was the respondent; Ramjibhai’s wife Kamlawanti; Ratilal’s wife Kantabai; and Ramjibhai’s unmarried daughter Pushpa. On 27 July 1933, the two coparceners, Ramjibhai and Ratilal, executed a trust deed concerning four units of house property that belonged to the joint family, which also possessed other properties at that time. The trust deed stipulated that the income from the settled property would be payable to Ramjibhai during his lifetime, and upon his death the income would pass exclusively to Ratilal, while also granting a right of residence in one part of the house to his mother Kamlawanti. After the death of Ratilal, the income was to be enjoyed by his wife Kantabai and by his natural born sons who were alive at the time of the death of the surviving settlor, Ramjibhai. The deed expressly reserved a power of revocation to Ramjibhai. Although Ramjibhai received the income during his life, the tax authorities treated that income as part of the joint family income under Section 16(1)(c) of the Act and added it to the other admitted family income. Section 16 of the Indian Income-Tax Act had been amended in 1939, and clause (c) of sub-section (1) as amended read: “In computing the total income of an assessee … all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, 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 purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to reassume power directly or indirectly over the income or assets.” The Court observed that, because the trust deed expressly reserved to Ramjibhai the power of revocation, the income in his hands was assessed on the basis that the settlor was the Hindu undivided family, and therefore the income of Ramjibhai was to be treated as family income. Ramjibhai died on 23 July 1940, but the tax authorities continued, after his death, to assess the income received by the respondent from the settled properties as family income, a assessment that the respondent contested.

Clause five of the amended provision stated that the term “settlement or disposition” would, for the purposes of the clause, include any disposition, trust, covenant, agreement or arrangement; moreover, the expression “settlor or disponer” in relation to a settlement or disposition was to be interpreted as including any person who made the settlement or disposition. Clause six then explained that, because the trust deed expressly reserved to Ramjibhai the power to revoke the trust, the income generated by the trust was assessed in his hands on the basis that the settlor was the Hindu undivided family and that, consequently, the income of Ramjibhai should be treated as the income of that family. Ramjibhai died on 23 July 1940, yet the Income-tax authorities continued after his death to assess the income that arose in the hands of the respondent from the properties settled as family income. The respondent objected, arguing that under the terms of the settlement the income was his individual income and that section 16(1)(c) did not apply to him. The tax authorities rejected this contention. The assessee then appealed to the Income-tax Appellate Tribunal, which by an order dated 16 March 1950 upheld the authorities’ view. The respondent subsequently raised a reference before the Bombay High Court under section 66(1) of the Act, asking the Court to decide the question: whether, on a true construction of the settlement deed, the income from the trust property was liable to be included in the income of the assessee’s Hindu undivided family.

The respondent’s contentions before the High Court were two-fold. First, it submitted that the settlor under the trust deed was not the Hindu undivided family, as the tax authorities had held, but rather the settlement had been made by two individual male members of the family, namely Ramjibhai and Ratilal. Second, it contended that, in any event, the income received by Ratilal was his personal income and not the joint-family income. The learned judges rejected the first submission, holding that both Ramjibhai and Ratilal had executed the trust deed not in their personal capacities but as the sole coparceners of the Hindu undivided family and as representatives of that family. On the second submission, however, the judges ruled in favour of the respondent and against the Commissioner, holding that the income accruing to Ratilal after Ramjibhai’s death was his individual income. The Commissioner of Income-tax therefore appealed that decision. The view of the High Court that the settlement deed was executed by Ramjibhai and Ratilal on behalf of the Hindu undivided family as the settlor was not contested by either party before this Court. Consequently, the only question remaining for determination was whether the High Court’s conclusion on the second point was correct.

The matter before the Court centered on deciding whether the view adopted by the High Court on the second issue was correct. The learned Judges of the High Court had expressed their view in the following terms: “Now the settlement of this property was made by Ramjibhai and Ratilal not in their individual capacity but as members of the joint family and as representing that family. It is clear on this trust deed that the income which Ratilal receives after the death of Ramjibhai is received by him not on behalf of the joint family but in his own individual capacity. Ratilal alienated the property in one capacity and he receives the benefit under the trust deed in an altogether different capacity. Therefore it cannot be stated that this trust deed in any way benefits the joint family.” The learned Attorney-General appearing for the Income-Tax Commissioner, while conceding that a plain reading of the trust deed showed that the income in Ratilal’s hands was intended to be his personal income, argued that the High Court judges had erred in introducing the question of the capacity in which Ratilal held the income into the operation of Section 16(1)(c) of the Income-Tax Act. He set out his contention as follows. The terminal part of Section 16(1)(c) provides that any income which arises for any reason by virtue of a revocable transfer of assets shall be deemed to be the income of the transferor. The first proviso to that provision declares that a settlement shall be deemed revocable if it contains any clause that provides for the re-transfer, directly or indirectly, of the income or assets to the settlor. The second proviso adds that the term “settlor” with respect to a settlement shall include any person by whom the settlement or disposition was effected. On the basis of the second proviso, it was urged that Ratilal, although he was only one of the two individuals who executed the settlement deed, should be treated as the “settlor”. Consequently, the clause in the trust deed that the income was to be enjoyed by Ratilal after Ramjibhai’s death was, in substance, a provision for a re-transfer of the income to the settlor. Under this interpretation, the terminal part of clause (c) of sub-section (1) of Section 16 would be attracted, and the income that accrued to Ratilal would have to be deemed the income of the transferor, namely the Hindu undivided family, given the undisputed finding that the settlor was the joint family. The Court identified the flaw in this line of reasoning as stemming from a contradictory treatment of the parties: the argument regarded Ratilal as one of two settlors for the purpose of applying the second proviso, while simultaneously treating the family as the settlor for the purpose of invoking the terminal part of clause (c) of Section 16(1). If, from the outset, the settlor was the Hindu undivided family and the trust deed was executed by both individuals in their capacity as the sole surviving coparceners representing that family, then the second proviso, which treats one out of a group of settlors as the “settlor”, could not be applied because the family constitutes a unit that is independent of and larger than the two coparceners and is not merely a collection of the individuals who acted on its behalf. The discussion therefore concluded at the point where the second proviso which

In this case, the Court observed that a rule which treats only one member of a group of settlors as the “settlor” could not be applied, because a Hindu undivided family constitutes a unit that is independent of and larger than the two coparceners, and it is not merely a collection of the individuals who acted on its behalf. Consequently, the provision in the settlement deed that returned the income to Ratilal, even if it were described as a retransfer of the income, could not be regarded as a retransfer to the original settlor, namely the Hindu undivided family. As a result, the last portion of clause (c) of Section 16(1) could not be brought into operation. The Court therefore concluded that the appellant’s contention—that the income which the trust deed intended to be the individual income of the respondent Ratilal should, by successive application of the legal fictions created in the last portion of clause (c) of Section 16(1) and its two provisos, become the joint family income—was untenable. This reasoning was sufficient to dispose of the appeal. Because the primary issue had been resolved, the Court found it unnecessary to comment on the argument based on Ramji Keshavji v. Commissioner of Income-tax, Bombay, which asserted that no “retransfer of income” occurred in the present case. Accordingly, the appeal was dismissed with costs, and the dismissal of the appeal was affirmed.