Commissioner Of Income-Tax, Patna vs Rani Bhuwaneshwari Kuer

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 620 of 1963

Decision Date: 28 April, 1964

Coram: J.C. Shah, S.M. Sikri

In this case, the petitioner was the Commissioner of Income‑Tax, Patna, and the respondent was Rani Bhuwaneshwari Kuer. The judgment was delivered on 28 April 1964 by a bench of the Supreme Court of India consisting of Justice J C Shah and Justice S M Sikri. The decision is reported at 1965 AIR 6 and 1964 SCR (7) 920, and it also appears in later citation references. The controversy arose under section 16(1)(c) of the Indian Income‑Tax Act, 1922, together with its proviso, and it concerned whether the income of a trust created by the assessee could be taxed in the hands of the assessee. The respondent, who owned an estate known as “Tekari Rai”, executed an indenture of trust on 20 January 1941. By that instrument she conveyed the estate and certain zamindari lands to named trustees to be held on trust subject to conditions. The purpose of the deed was to raise funds to discharge the debts of the Tekari Raj. The settlor, her husband and her five sons were named as the beneficiaries of the trust. The original deed contained clause 43, which permitted the settlor, during her lifetime, to revoke or vary the trust or any of its provisions, but only after the settlement of specified debts and liabilities. Clause 43 was later altered by an amendment dated 12 January 1942, which added clause 45. Clause 45 postponed the exercise of the revocation right until certain leases remained in force. The lease granted to the Maharajadhiraj of Darbhanga was to continue until 1965, and the lease granted to Capt. Maharaj Kumar Gopal Saran Narain Singh was to continue until 1954. For the assessment year 1947‑48, the assessing officer included the income of the trust in the respondent’s total income. The respondent challenged the assessment before the High Court, which set aside the assessment order. The High Court held that because the trust was not revocable for a period of six years, the income received by the beneficiaries other than the assessee could not be taxed as the assessee’s income until the power of revocation vested in her. The Commissioner of Income‑Tax obtained special leave to appeal the High Court’s decision. The principal question before this Supreme Court was whether the income received by the beneficiaries other than the assessee could be included in the total income of the assessee under section 16(1)(c) of the Act.

The Court held that the third proviso to section sixteen paragraph one sub paragraph c of the Income‑tax Act does not eliminate the protection afforded by the principal clause for the whole deed of trust simply because a portion of the income is not covered by the prescribed conditions, or because the settlor may have a direct or indirect interest in a part of the income. The proviso excludes only that part of the income which arises to any person under a deed of settlement; it does not extend to the entire deed of trust. Consequently, the income that the settlor receives in the capacity of a beneficiary remains subject to tax. The Court further observed that the third proviso operates only in respect of settlements, dispositions, or transfers that are revocable under the first proviso for the purpose of the clause. Two conditions were identified as essential for the third proviso to apply: first, the trust must not be revocable for a period exceeding six years or during the lifetime of the beneficiary; second, the settlor or disponer must obtain no direct or indirect benefit from the income that is given to the beneficiary. When these conditions are satisfied, the portion of income that accrues to any person by virtue of a settlement that is not revocable for six years, or that is not revocable during the beneficiary’s lifetime, will be excluded from the settlor’s income, provided the settlor derives no direct or indirect benefit from that income. In construing the deed of trust, the Court found that the deed was not revocable within the six‑year period prescribed by section sixteen paragraph one sub paragraph c of the Act, relying on the decision in Ramji Keshavji v. Commissioner of Income‑tax, Bombay, 13 I.T.R. 105. Applying the third proviso to the facts of the present case, the Court concluded that the income received by the beneficiaries other than the assessee under the deed of trust could not, until the power of revocation vested in the assessee, be treated as the assessee’s income for the purpose of income‑tax assessment.

The appeal arose under the civil appellate jurisdiction and was numbered civil appeal sixty‑twenty of 1963. It was filed by special leave against the judgment and decree dated nine June 1961 of the Patna High Court in miscellaneous case number four hundred ninety‑seven of 1957. Counsel for the appellant and counsel for the respondent were instructed respectively. The judgment was delivered on twenty‑eighth April 1964. The Court noted that Rani Bhuwaneshwari Kuer, hereinafter referred to as the assessee, owned a seven‑sixteenth share in an estate known as Tekari Raj, which she had inherited from her parents. Subsequently, the assessee purchased a substantial portion of the remaining nine‑sixteenth share of the Raj. The estate held by the assessee was heavily encumbered, prompting her to execute an indenture of trust on twentieth January 1941, whereby the Tekari Raj and certain zamindari properties were conveyed to named trustees to be held in trust subject to specified conditions. The principal beneficiaries under the deed, after payment of debts, were the assessee, her husband and her five sons. The deed contained clauses directing the division of surplus net rents, issues and profits, and provisions concerning the devolution of beneficial interest upon the death of any beneficiary.

The assessee was heavily encumbered, and in order to arrange for liquidation of the debts she executed an indenture of trust dated 20 January 1941. By executing that deed, the Tekari Raj estate and certain zamindari properties owned by the assessee were conveyed to named trustees to be held in trust subject to the conditions set out in the instrument. The deed named the assessee, her husband and her five sons as the principal beneficiaries after the debts had been paid. Clause twenty‑three directed that, after the trustees made the specified payments, they should divide the surplus of the net rents, issues and profits in the proportions expressly stated in that clause. Clauses twenty‑four and twenty‑five dealt with the devolution of the beneficial interest upon the death of any of the beneficiaries. Clause forty‑one provided that, after the debts and liabilities listed in schedule D of the deed were discharged, the settlor could create a permanent trust of selected villages demised under the deed. The purpose of that permanent trust was to maintain the Tekari forts, to observe Durga Puja and to fulfill other purposes that were specified in the deed. If settlor died before the schedule D debts were paid and without creating the permanent trust, she directed the trustees, after the discharge of those debts, to set apart property generating a net income of Rs 20,000. The amount was to form the corpus of the permanent trust and to meet expenses for repairing the forts, celebrating Durga Puja and other specified purposes. Clause forty‑two stated that the trust would terminate either after the schedule D debts were paid or after the death of the last surviving son, whichever occurred later. Clause forty‑three provided that any beneficiary or any of his heirs could later challenge the Indenture of Release and Agreement dated 6 December 1939, which the settlor had executed in favour of her husband. If such an objection was made, the challenger would lose his entitlement to be a beneficiary under the deed. The deed also stipulated that any breach by a beneficiary of any covenant, condition or limitation imposed by the deed would deprive that person of any right to receive money from the trust. Such a breach would also exclude the beneficiary from any share in the rents, issues or usufruct of the trust property. The deed further declared that a beneficiary who was excluded in this manner would be treated as having been removed from the classes of beneficiaries. The settlor could then decide how to deal with that beneficiary’s share of the rents, issues and profits. The deed always provided that the settlor could, at any time during her life, by any deed, revocable or

It was stated that the settlor possessed the power, at any time during her life, to revoke or vary the trust, whether in whole or in part, and to alter any provision of the deed, provided that such revocation or variation could not be carried out until the debts and liabilities listed in Schedule ‘D’ had been paid and discharged. Moreover, the parties agreed that, notwithstanding any revocation of the trust, the settlement created by the deed would continue to be valid and effective, subject only to the forfeiture clause that was contained in the deed.

Subsequently, the deed was altered by a deed of rectification dated 22 December 1941. That rectifying deed recorded that, with the consent of all persons who were parties to the original deed of trust, a direction was issued that the assessee, during her lifetime, retained the authority to revoke or vary the trust or any of its provisions, either wholly or partly, but again only to the extent that such action would not affect the payment and discharge of the debts and liabilities specified in Schedule ‘D’. The rectification further provided that the original deed of trust should be read and interpreted as if it originally contained a power granted to the settlor—here identified as the assessees—by deed, enabling her, while alive, to revoke or vary the trust or any of its provisions, wholly or partly, without jeopardising the settlement of the debts and liabilities mentioned in Schedule ‘D’.

A further deed, termed a deed of amendment, was executed by the assessee on 12 January 1942. By virtue of this amendment, paragraphs 22, 32, 33, 35, 36 and 37 of the original deed were expressly cancelled. In addition, other paragraphs—including paragraphs 23, 24 and 42—were amended and modified, and new paragraphs designated as 42(a), 44 and 45 were added to the deed. The amendment of paragraph 23 stipulated that any surplus rents, issues and profits generated from the trust property were to be divided into seven equal shares. The amendment of clause 24 provided that, upon the death of any of the sons, the deceased son’s share of the rents, issues and profits would become payable to his heir or heirs. The modifications introduced in paragraph 42 declared that the trust created by the deed could be terminated either after the outstanding debts and liabilities of the trust had been paid and discharged, or after the Thicca leases in favour of the Maharajadhiraj of Darbhanga or in favour of Capt. Maharaj Kumar Gopal Saran Narain Singh of Tekari had been extinguished, whichever of those events occurred last.

Paragraph 42(a) further explained that, after the steps outlined in paragraph 41 had been completed and when the final contingency described in the modified paragraph 42 had arisen, the beneficiaries, their heirs, successors‑in‑interest or any representatives who had acquired rights from any of the beneficiaries under the deed would be entitled to partition the trust property in proportion to their respective shares.

The material portion of paragraph 45 stated that the settlement made under the present instrument was to be permanent, unalterable and irrevocable insofar as the interests created by the instrument were concerned, but it also affirmed that each beneficiary retained the full right to make further arrangements regarding his or her share.

The deed allowed the beneficiary to make any arrangement concerning devolution, succession, or alienation of his share as he thought fit, but it expressly provided that the trust created by the deed would remain irrevocable until two conditions were satisfied. First, all debts and other liabilities relating to the trust property had to be fully paid or discharged. Second, the Thicca leases granted in favour of the Honorable Maharajadhiraj of Darbhanga or Captain Maharaj Kumar Gopal Saran Narain Singh had to remain in force and effective. The trust would become irrevocable only after the later of those two events occurred. The deed further stipulated that paragraph 43 of the Indenture of Trust dated 20 January 1941 must always be read subject to this provision.

In the assessment proceedings for the year 1947‑48, the Income‑Tax Officer of the Gaya‑Palamau Circle rejected the assessee’s claim that the income of the trust should be taxed in the hands of the trustees under the settlement deed, and applied section 16(1)(c) of the Indian Income‑Tax Act, 1922 to bring the trust income within the assessee’s total income. The officer’s order was affirmed on appeal before the Appellate Assistant Commissioner, but the Income‑Tax Appellate Tribunal set aside that affirmation. The Tribunal observed that revocation means taking back something already given, and held that the assessee had not taken back anything under the original deed of trust; consequently, the trust could not be classified as a revocable trust within the meaning of section 16(1)(c) of the Act.

The Patna High Court, exercising its powers under section 66(2) of the Act, directed the Tribunal to state a case and posed two specific questions to it: (1) whether the trust created by the assessee qualified as a revocable trust within the meaning of section 16(1)(c); and (2) whether the income derived from the property covered by the settlement could be deemed income of the assessee under the same provision. After examining the deed dated 20 January 1941, as amended by a subsequent deed of 12 January 1942, the High Court concluded that the deed fell within the definition of a revocable trust in section 16(1)(c). However, the Court observed that the trust was not revocable for a period of six years from its creation, and therefore the third proviso to section 16(1)(c) — which governs both the substantive part of the section and its first proviso — applied. Accordingly, the Court held that income received by the beneficiaries other than the settlor under the deed was not to be included in the assessee’s total income.

Based on that reasoning, the High Court directed that the income arising from the trust property, which formed the subject‑matter of the settlement, should not be assessed to tax under the third proviso to section 16(1)(c), except to the extent that the power of revocation granted by the deed had been exercised by the assessee. The Court also declared that the assessee remained liable to pay tax on any income she received in her capacity as a beneficiary of the trust. This order was subsequently appealed to the Supreme Court by the Commissioner of Income‑Tax, Patna, raising the question whether, under the third proviso, income received by beneficiaries other than the assessee could be excluded from the assessee’s assessable income when the settlement was irrevocable for more than six years and the assessee derived no direct or indirect benefit from that income.

The High Court held that the power of revocation granted by the deed of trust could not be exercised by the assessee as long as the deed’s terms were not breached. In addition, the High Court declared that the assessee remained liable to pay tax on any income she received in her capacity as a beneficiary from the trust property. The Commissioner of Income‑Tax, Patna, having obtained special leave, appealed the High Court’s order to this Court. The primary issue for determination in the appeal is whether, under the third proviso to clause (c) of section 16(1), income received by beneficiaries other than the assessee is to be treated as income arising to them by virtue of a settlement that is not revocable for a period exceeding six years, and from which the assessee derives no direct or indirect benefit. Section 16(1)(c) states:

“(1) In computing the total income of an assessee— (a) — (b) — (c) 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 provisions 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. Provided further that the expression ‘settlement or disposition’ shall for the purpose of this clause include any disposition, trust, covenant, agreement or arrangement, and the expression ‘settlor or disponer’ in relation to a settlement or disposition shall include any person by whom the settlement or disposition was made. Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit, but that the settlor shall be liable to be assessed on the said income as and when the power to revoke arises to him.”

The High Court concluded that the deed of trust left the assets in the ownership of the settlor, and because the trust was not revocable for a period of six years, the income received by beneficiaries other than the assessee could not be taxed as income of the assessee until such time as the power to revoke could arise in his favour. The matter in dispute before this Court, therefore, concerns the applicability of the third proviso to section 16(1)(c) in the circumstances described.

The Court explained that the third proviso to section 16(l)(c) is intended to exclude from the operation of the main clause any income that accrues to a person under a deed of settlement executed by the assessee, provided that two specific conditions are satisfied. The first condition requires that the trust created by the deed must not be revocable for a period exceeding six years or during the lifetime of the beneficiary. The second condition mandates that the settlor or disponer must obtain no direct or indirect benefit from the income that is transferred to the beneficiary. The counsel representing the Commissioner argued initially that the third proviso applied to the trust established by the assessee because, in the Commissioner’s view, the deed had been revoked within six years of its execution, and moreover, that a proper reading of the covenants of the deed of trust showed that it was indeed revocable within that six‑year period. The Court noted that the allegation of revocation within six years had never been raised before the revenue authorities, the Tribunal, or even the High Court, and therefore could not be entertained at this stage. Moreover, the Court found the claim to be plainly unsustainable. The Court observed that certain recitals appear in the deed dated 18 September 1946, styled “Deed for further alteration of terms & constitution of trust,” which state that the liabilities referred to in Schedule ‘D’ of the original deed of trust dated 20 January 1941 had been fully discharged, that the beneficiaries had received the surplus rents, issues and profits according to their respective shares, and that the settlor, by a deed of trust dated 28 May 1946, had conveyed and settled a portion of her seventh share in the rents, issues and profits of the trust properties, as well as in the corpus of Shri Bhubneshwari Hari Haresh Private Trust for meeting certain expenses. The Court held that these recitals do not, even on a superficial examination, indicate that the trust was ever revoked, and therefore the new ground of revocation raised for the first time in this Court could not be taken into consideration. The Court then turned to the terms of the original deed. Clause 43 of the deed of trust dated 20 January 1941 expressly made the trust revocable, but it stipulated that revocation could not occur before the payment of the debts and the discharge of the liabilities enumerated in Schedule ‘D’. By contrast, clause 45, which was introduced through a deed of amendment dated 12 January 1942, declared that the settlement made under the deed was permanent, unalterable and irrevocable with respect to the interest created by the amendment, and that it would remain irrevocable so long as the debts listed in Schedule ‘D’ and other liabilities of the trust, including all liabilities on the trust properties, were not fully paid and discharged, and so long as the leases in favour of the Maharajadhiraj of Darbhanga or Capt Maharaj Kumar Gopal Saran Narain Singh remained good and effective, whichever event occurred last. The Court noted that it was conceded that the lease in favour of the Maharajadhiraj of Darbhanga was

In this case, the lease granted to the Maharajadhiraj of Darbhanga was to remain in force until 1965, while the lease given to Capt Maharaj Kumar Gopal Saran Narain Singh was to remain effective until 1954. Clause 45 of the deed of amendment stipulated that the right of revocation could not be exercised as long as the Thicca leases in favour of the Maharajadhiraj of Darbhanga and Capt Maharaj Kumar Gopal Saran Narain Singh continued to be valid and effective. Because those leases persisted, the Court was unable to hold that the deed of trust was revocable within the six‑year period prescribed by section 16(l)(c) of the Act. The Commissioner, however, argued that the third proviso to section 16(l)(c) did not shield the assessee from the substantive operation of that clause, on the ground that the assessee derived a direct benefit from the terms of the deed of trust. The third proviso contains two cumulative conditions whose satisfaction excludes the income arising from a settlement from being included in the settlor’s taxable income. The effect of those conditions is that any income that accrues to a person under a settlement that is not revocable for six years, or that is not revocable during the beneficiary’s lifetime, will not be taxed in the hands of the settlor, provided that the settlor receives no direct or indirect benefit from that income. The Court observed that the third proviso does not eliminate tax liability for income that the settlor receives as a beneficiary; it merely excludes from tax the portion of income that, under the deed of settlement, is allocated to another person, if the prescribed conditions are met. The Commissioner’s contention that the third proviso would not apply where the settlor, as a beneficiary, retained any part of the income ran contrary to the plain language of the statute.

The Court further noted that the third proviso excludes from the operation of the principal clause only that part of the income that arises to any person under a deed of settlement; it does not withdraw the protection of the entire deed of trust merely because a portion of the income is not covered by the conditions or because the settlor retains a direct or indirect interest in that portion. The argument that the third proviso should apply solely to deeds of settlement or disposition expressly referred to in clause (c) and not to those deemed revocable by the first proviso was likewise rejected. In other words, the benefit of the third proviso could not be denied in cases where a settlement or disposition is considered revocable under the first proviso simply because it contains a provision for the re‑transfer of income or assets to the settlor, or otherwise gives the settlor a right to reassume control. The Court concluded that the third proviso operates to exclude from tax only the income allocated to another person under the settlement, subject to its conditions, and does not excuse the settlor’s own beneficiary income from taxation.

The Court examined the allegation that a provision allowing the retransfer of income or assets—whether directly or indirectly—to the settlor, or granting the settlor, disponer, or transferor a right to reacquire control over the income or assets, could exempt the transaction from the operation of the third proviso. The Court stated that it could not accept this contention. It explained that, under the first proviso, any settlement, disposition or transfer possessing the characteristics described therein is to be treated as revocable for the purposes of the principal clause of Section 16(1)(c). The Court clarified that the roles of proviso I and proviso II are purely explanatory. Proviso II expressly widens the meaning of “settlement or disposition” to include any disposition, trust, covenant, agreement or arrangement, and it expands “settlor or disponer” to cover any person who effected the settlement or disposition. Likewise, the first proviso declares that settlements, dispositions or transfers of the described character shall, for the purpose of the principal clause, be regarded as revocable transfers.

The Court observed that if this interpretation is correct—an interpretation the Court endorses—then it would be impossible to maintain that the third proviso does not apply to settlements, dispositions or transfers that are deemed revocable under the first proviso for the purposes of the principal clause. To illustrate this point, the Court referred to the decision of the Bombay High Court in Ramji Keshavji v. Commissioner of Income‑tax, Bombay, where Justice Kania, speaking for the Court, analysed the scheme of Section 16(1)(c). The High Court articulated that the first step is to recognise that when a transfer of assets is revocable, the income generated from those assets continues to be treated as the settlor’s income. The law then, through proviso I, determines what constitutes a revocable transfer even when the deed appears irrevocable. The pivotal question, according to the High Court, is whether the transfer satisfies the conditions set out in proviso I and therefore qualifies as revocable. The answer can only be affirmative or negative. If the answer is negative, the deed is plainly not revocable and consequently falls outside the ambit of Section 16(1)(c). If, however, the answer is affirmative, the deed—though seemingly irrevocable—shall be deemed revocable and consequently becomes a revocable transfer of assets within the meaning of Section 16(1)(c).

Having reached that conclusion, the High Court proceeded to consider the implications of proviso III. The Court explained that the scheme is such that, even after recognising the transfer as revocable under proviso I, the income derived from the settlement will not be treated as the settlor’s income if the settlement is not revocable for a period exceeding six years or for the lifetime of the person for whose benefit the income is settled, and provided that the settlor derives no direct or indirect benefit from that income. The Supreme Court affirmed that this passage accurately summarises the effect of the third proviso to Section 16(1)(c). Consequently, the High Court’s reasoning was upheld.

In this case the Court held that, according to the third proviso to section 16(1)(c) of the Indian Income‑tax Act of 1922, any income that was received by the beneficiaries under the deed of trust, where those beneficiaries were persons other than the assessee, could not be treated as the assessee’s income for tax assessment purposes until such time as the power of revocation became available to the assessee. In other words, the income of the other beneficiaries remained outside the scope of the assessee’s tax liability until the revocation right vested in the assessee. On the basis of this legal principle the Court concluded that the appeal was untenable. Consequently the appeal was dismissed and the costs were awarded against the appellant. The order therefore recorded the dismissal of the appeal. The judgment was reported under the citation L/P(D)ISCI‑2504‑5‑10‑65 GIPS.