# COMMISSIONER OF INCOME-TAX, PUN.JAB, .JAMMU & KASHMIR, IDMACHAL PRADESH, PATIALA v. RAGHBIR SINGH

- **Citation:** [1965] 3 S.C.R. 684
- **Court:** Supreme Court of India
- **Decided:** 1965-04-09
- **Case number:** Civil Appeals Nos. 96 to 98. of 1964
- **Bench:** K. Subba Rao, J.C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-pun-jab-jammu-kashmir-idmachal-pradesh-patiala-v-3449
- **Pages:** 8

## Headnote

Indian Income-tax Act, 1922 (11 of 1922), s. 16(1)(c)-Deed of
trust-Trustees directed to pay debts of settlor and only thereafter
A
B
to apply trust income and property to the various purposes of the
trust-Such direction whether makes trust revocable-Whether proC
perty of trust indirectly re-transferred to the settlor-Income from
trust whether to be ta.ied in hands of settlor.
The respondent executed a deed of trust in respect of certain
shares owned by him in a company. The deed directed the trustees
to apply the income and property of the trust in the first instance
for paying off the settlor's debts, and thereafter for other purposes
of the trust. fo proceedings under the Indian In~ome-tax Act, 1922 n
it was held by the Income-tax Officer that the trust was a fictitious
transaction. The Appellate Assistant Commissioner held that the
transfer of the shares for the purpose of the trust Vl'llS not irrevocable
and therefore under the proviso to s. 16(l)(c) the respondent could
not escape liability. The Tribunal upheld the order of the Assistant Commissioner but referred to the High Court, inter alia, the
question whether the income from tl).e trust property ccmld be taxed
E
in the hands of the assessee. The High Court answered the question
in the negative. The Commisoioner of Income-tax, appealed to this
Court.
HELD: After the execution of the deed of settlement the income
from the shares arose to the trustees and was liable to be applied
for the purposes mentioned in the deed. The income had first to be
applied for satisfaction of debts which the settlor was under an
F
obligation to pay, but this did not amount to a re-transfer of the
income or assets to the settlor, nor did it invest the settlor with a
power to re-assume the income or assets. The assests and the income
were unmistakably impressed with the obligations arising out of the
trust. The settlor certainly obtained a benefit from the trust consequent upon the satisfaction of his liability, but on that account the
first proviso to s. 16(1) was not attracted. [690D-F]
G
The proviso contemplates cases in ~"ihich there is a provision for
retransfer of the income or assets and such provision is for retransfer directly or indirectly. It also contemplates cases where
there is a provision which confers a right upon the settler to reas•
sume power over the income or assets directly or indirectly. It is
the provision for retransfer directly or indirectly of income or assets
or for reassurnption of power directly, or indirectly over income or
H.
assets which brings the case within the proviso. Cases in which
there is a settlement, but there is no provision in the settlement for
retransfer or right to reassume power do not fall within the proviso,
even if as a result of the settlement, the settler obtains some benefit.
[690G, HJ
Ramji, Keshavji v. C.I.T. Bombay, [1945] 13 I.T.R. 105 and D. R.
Shahapura v. C.I.T., Bombay 14, I.T.R. 781 approved.
684
..
•
C.I.T. V. ItAGHBIB SINGH (Shah,_ J.)
685
A

## Text

COMMISSIONER OF INCOME-TAX, PUN.JAB, .JAMMU &
KASHMIR, IDMACHAL PRADESH, PATIALA
v.
RAGHBIR SINGH
April 9, 1965
[K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.]
Indian Income-tax Act, 1922 (11 of 1922), s. 16(1)(c)-Deed of
trust-Trustees directed to pay debts of settlor and only thereafter
A
B
to apply trust income and property to the various purposes of the
trust-Such direction whether makes trust revocable-Whether proC
perty of trust indirectly re-transferred to the settlor-Income from
trust whether to be ta.ied in hands of settlor.
The respondent executed a deed of trust in respect of certain
shares owned by him in a company. The deed directed the trustees
to apply the income and property of the trust in the first instance
for paying off the settlor's debts, and thereafter for other purposes
of the trust. fo proceedings under the Indian In~ome-tax Act, 1922 n
it was held by the Income-tax Officer that the trust was a fictitious
transaction. The Appellate Assistant Commissioner held that the
transfer of the shares for the purpose of the trust Vl'llS not irrevocable
and therefore under the proviso to s. 16(l)(c) the respondent could
not escape liability. The Tribunal upheld the order of the Assistant Commissioner but referred to the High Court, inter alia, the
question whether the income from tl).e trust property ccmld be taxed
E
in the hands of the assessee. The High Court answered the question
in the negative. The Commisoioner of Income-tax, appealed to this
Court.
HELD: After the execution of the deed of settlement the income
from the shares arose to the trustees and was liable to be applied
for the purposes mentioned in the deed. The income had first to be
applied for satisfaction of debts which the settlor was under an
F
obligation to pay, but this did not amount to a re-transfer of the
income or assets to the settlor, nor did it invest the settlor with a
power to re-assume the income or assets. The assests and the income
were unmistakably impressed with the obligations arising out of the
trust. The settlor certainly obtained a benefit from the trust consequent upon the satisfaction of his liability, but on that account the
first proviso to s. 16(1) was not attracted. [690D-F]
G
The proviso contemplates cases in ~"ihich there is a provision for
retransfer of the income or assets and such provision is for retransfer directly or indirectly. It also contemplates cases where
there is a provision which confers a right upon the settler to reas•
sume power over the income or assets directly or indirectly. It is
the provision for retransfer directly or indirectly of income or assets
or for reassurnption of power directly, or indirectly over income or
H.
assets which brings the case within the proviso. Cases in which
there is a settlement, but there is no provision in the settlement for
retransfer or right to reassume power do not fall within the proviso,
even if as a result of the settlement, the settler obtains some benefit.
[690G, HJ
Ramji, Keshavji v. C.I.T. Bombay, [1945] 13 I.T.R. 105 and D. R.
Shahapura v. C.I.T., Bombay 14, I.T.R. 781 approved.
684
..
•
C.I.T. V. ItAGHBIB SINGH (Shah,_ J.)
685
A
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 96 to 98.
of 1964.
Appeals by special leave from the judgtl\ents and orders dated
September 22, 1960, and December 6, 1960 of the Punjab High
Court in Income-tax References Nos. 19 of 1958 and 6 of 1959
B respectively.
c
D
E
F
G
I1
S. V. Gupte, Solicitor-General, R. Ganapathy Iyer and R. N.
Sachthey, for the appellant.
Deva Singh Randhawa and Harbans Singh, for the respondent.
The Judgment of the Court was delivered by
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 Fateh 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
lo 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. The author as holder of 300 shares
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 b.y 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 .~n disruption of the Joint Hindu Family and
partitwn of properties among its members, made
payable by the author.
686
SUPREME VOURT REPORTS
[1965] 3 s.c.a.
And after his debts are P'.tid oil
A
(b) To provide for the maintenance and education of
the children and grand children of the author.
(c) To open and run Hospitals and Nursing Homes.
(d) To open and run School or Schools for the educa'
tion of boys or girls in scientific and technical subB
jects.
(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
e;
to give Scholarships for inland and overseas studies
to found orphanage, 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 includin~ tJ,~ respondent were appointed
D
trustees, and the respondent was to hold the office of Chairman
of the Trust during his lifetime. The trust deed then provided:
"Jn 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
E
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 authoriF
ties hereinfore 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
G
(ii)
(iii)
(iv)
Clause 6 provided:
,,
"That in carrying out the objects of th~ trust the trustees
shall keep in mind and abide by the following directions:-
(i) The payment of the debts of the author as de·ailed
in Schedule 'A' referred to above shall receive the
topmost priority and the trustees shall not spend
any money out of the trust pror,~rty or \ts income
H
B
c
C,I,T. V. RAGHllIR ~INGH (Shah, J.)
687
in any direction till they have paid off all the deb~
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 discharged the trustees shall spend
80 % of the income of the trust property, remaining in their hands after full discharge of the debts,
on the maintenance of the children and grand
children of the author and the remaining 20%
on all or any of the other objects of the trust as the
Trustees may think best.
(iii)
"
The respondent claimed before the Income-tax Officer, Eward, Amritsar that the dividend received by the trustees in respect
J> of 300 shares of the Simbhaoli Sugar Mills was the income of the
Trust and that he had no concern with that income as he had
"divested himself irrevocably of the ownership of the shares" and
that in any event Rs. 19,856/- being the amount due as interest
to R. B. Seth Jessa Ram Fateh Chand should be allowed as a
permissible deduction in computing the net income from dividend
E
of the shares. The Income-tax Officer rejected the contentions
of the respondent, holding that the Trust was a "fictitious transac-
. ti on". the Appellate Assistant Commissioner held that the respondent had not "irrevocably transferred the 300 shares of the
Simbhaoli Sugar Mills" and therefore by virtue of s. 16(l)(c) proviso one the respondent could not escape liability to pay tax on the
F
dividend from the share.
G
H
The respondent appealed to the Income-tax Appellate Tribunal, but without success.
At the instance of the respondent the
Tribunal drew up a statement of the case and referred the following questions to the High Court at Chandigarh:
"(!) Whether the dividend income of 300 shares of the
Simbhaoli Sugar Mills, Private Ltd. transferred by the
assessee to S. Raghbir Singh Trust was the income of
the assessee liable to tax?
(2) Whether the assessee was entitled to claim deduction
of Rs. 19,856/- paid as interest to R. B. Seth Jessa Ram
Fateh Chand against the dividend income of the aforesaid 300 shares?"
The High Court answered the first question in the negative and
declined to answer the secon.d question.
With special leav~ •. the
· Commissioner of Income-tax has appealed to this Court.
Section 2 sub-s. (15) defines "total income" as meaning total
arn ount of income, profits and gains referred to in sub-s. (!) of s. 4
688
SUPREME COURT REPORTS
[1965] 3 s.c.R.
computed in the manner laid down in the Act. Section 16 of the A
Income-tax Act enumerates the exemptions and exclusiollS admissible in the computation.of total income in certain specified cases.
The material part of cl. (c) of sub-s. (!)of s. 16 is as follows:
"In computing the total income of the assessee-
(c) all income arising to any person by virtue of a
B
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 c
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 settle·
ment, disposition or transfer shall be deemed to
D
be revocable if it contains any provision for the
retransfer directly or indirectly of the income or
assets to the settlor, disponer or transferor, or in
any way gives the settler, disponer or transferor
a right to reassume power directly or indirectly
over the income or assets :
E
Provided further that the expression 'settlement or
disposition' shall for the purposes of this clause
include any disposition, trust, covenant, agreement
or arrangement, and the expression 'settlor or disponer' in relation to a settlement or disposition F
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."
Clause (c) was intended, while seeking to protect a genuine settlement by which the tax-payer intends to part with control ove~ property and its income, to cir~umvent attempts made ~y him to
reduce his liability to pay mcome-tax by the expedient of so
arranging a settlement or disposition of property that t~e inco~e
does not accrue to him, but he reserves a power over or mterest m
tho property settled or disposed of, or in the income thereof. By cl.
G
H
c.I.'l'. 'I'. l<AGl!Bm '''"11 (Sliali, J.)
689
~
A
(c) income arising to any person by virtue of a settlement or disposition whether revocable or not is .deemed to be income of the
settlor or disponer if the assets remain the property of the latter.
Again income arising to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor. The
first proviso then deems a settlement statutorily revocable, if it
.B
contains any provision for retransfer directly or indirectly of the
income or assets settled, to the settlor, or where it gives to the
settlor a right to reassume power directly or indirectly over the
income or assets.
By the second proviso the expression "settlement or disposition" includes a disposition, trust, covenant, agreeinent or arrangement the Legislature has thereby sought to bring
C within the net, transactions sirnilai to though not strictly within the
description of settlements and dispositions. The third proviso
carves out from the amplitude of cl. (c) as expounded by the fi~t
and the second provisos income arising to any person from a settlement which is not revocable for a period exceeding sill years or
during the lifetime of the person and from which income the
D settlor derives no benefit direct or indirect.
E
.F
·G
l!
It was observed in a recent judgment of this Court: Commissioner of Income-tax, Bihar and Orissa v. Rani Bhuwaneshwari
K uer(') that:
·
"By the first proviso, settlements, dispositions or transfers
of the character described therein, are deemed revocable for the purpose of the principal clause. The function of proviso I and proviso 2 is plainly explanatory.
The second proviso in terms says that the expression
"settlement or disposition" is to include any disposition, trust, covenant, agreement or arrangement, and
the P.Xpression "settlor or disponer" is to include any
person by whom the settlement or disposition was
made. Similarly the first proviso states that. settlements,
dispositions or transfers, if they are of the character
described, shall for the purpose of the principal clause
be revocable transfers."
The terms of s. l 6(l)(c) first proviso are reasonably plain. A
settlement or disposition is deemed to be statutorily revocable if
there is a provision therein for retransfer of the income or assets
or which confers a right to reassume power over the income or
assets. The provision may even be for retransfer indirectly or for
conferring power to reassume indirectly over the income or the
assets.
But the actual retransfer or exercise of the power to reassume is not necessary; if there be a provision of the nature contem]illated,. the proviso operates.
The terms of the deed may now be ·examined. The shares
were settled upon trust, and four trustees one of whom was the
respondent were appointed. Genuineness of the trust is no longer
(') ~3 l.T.R. 19~. 29~.
690
SUPRF.?.1F. COURT REPORTS
[1965] 3 S.C.R.
in dispute.
The direction that the shares are to stand in the name
A
of the Chairman for the time being appears to have been necessitated bys. 33 of the Indian Companies Act, 1913 which prevented
notice of any trust, expressed, implied or constructive to be entered on the register.
The deed recites that the shares are to be
held on trust irrevocably by the trustees for all or any of the purposes mentioned therein.
The purpose for which the shares are
B
to be held in the first instance is to pay ofI the debt due to R. B.
Seth Jessa Ram Fateh Chand, and it is only after the debt is paid
off that the directions in els. (b) to m of cl. 2 come into operation.
The deed is in terms. expressly irrevocable, but on that account
the operation of the first proviso is not excluded. If by the direction for application of the income for satisfaction of the debts due
C
by the respundcnl, it could be said in law that there is a provision
for retransfer directly or indirectly of the income or a right to
reassume directly or indirectly power over the income, the settlement would be deemed revocable, recital that it is irrevocable
notwithstanding.
But the income from 'the shares since the execution of the
deed of settlement arises t0 the trustees and it .is liable to be applied
for the purposes mentioned in the deed.
The income has to be
applied for satisfaction of debts which the settlor was under an
obligation to discharge, but that is not to say that there is a provision
D
for retransfer of the income or assets to the settlor, or that the
E
settlor is invested with power to reassume the income or assets.
The assets and the income are unmistakably impressed with the
obligations arising out of the deed of trust. The settlor it is true
obtains a benefit from the trust consequent upon satisfaction of
his liability, but on that account the first proviso is not attracted.
We are unable to accept the argument of counsel for the
revenue that by the use of the expression "indirectly" in the first
proviso the Legislature sought to bring within the purview of cl.
F
(c) cases where the settler was under the guise of a trust see1'ing to
discharge his own liability. The proviso contemplates cases in
which there is a provision for retransfer of the income or assets
G
and such provision is for retransfer directly or indirectly. It also
contemplat~s cases where there is a provision which confers a right
upon the settlor to reassume power over the · income or assets
directly or indirectly. It is the provision for retransfer directly or
indirectly of income or assets or for reassumption of power directly
or indirectly over income or assets which brings the case within H
the first proviso. Cases in which there is a settlement, but there
is no provision in the settlement for retransfer or right to reassume
power do not fall within the proviso, even if as a result of the
settlement,- the settler obtains a benefit.
[t has been held in two cases decided 'by the High Court of
Born.Day that a person under an obligation arising out of his status
C.l.T. t1• JtAtilf'nll< :-;1:Kt:11 (Shah, .J.)
691
A
may execute 1_1 trust to discharge his own obligation without attracting the operation of s. l5(l)(cl.
In Ramii Kesliavii v. Cmnmissin11er nf /11cnme-tax, Bombay(') under a consent decree. the assessee executed a deed of trust conveying certain properties for the
benefit of his wife to the trustees.
The deed provided that the net
income from the properties shall be paid to the assessee's wife
B
during her lifetime and that she shall maintain her minor children
by the assessce anJ "run the household". It was held by the High
Court that the income derived from the trust property and payable
to the assessee's wife during her lifetime could not be deemed to
be the assessee's income. for the direction in the deed did not
amount to a provision for retransfer of the income or assets or for
C reassumption of power directly or indirectly over income or assets
within the meaning of the first proviso to s. l6(1)(c). In D. R.
Shahapure v. Commissioner of Income-tax, Bombay(') the assesseewith the object of making a provision for his w_ife made an entry
in his business books of account crediting Rs. 20.000/-, and endorsed against the entry. "The capital supplied to you will remain
D entirely mine but you will ge: the income over it up to the end of
your life. This capital I will not take back up to the end of your life
but I will do business for you on this capital and see that you get
Rs. 600 per annum for you".
No specific assets were set apart to
meet the sum of Rs. 20,000/- and there were. no other entries in
the books with regard to it.
The High Court held that the entry
E
was an irrevocable covenant to pay the income accruing on
Rs. 20,000/- with a guarantee that it shall be Rs. 600 a year, and
therefore the case was covered by the third proviso to s. 16(1) (c)
of the Act and the income which was paid to the wife under the
covenant could not be deemed to be tre income of the ~ssessee
under the first part of s. 16(l)(c). In our view these cases were
F
correctly decided.
The appeals fail and are dismissed with costs. One hearing
fee.
Appeals dismissed ..
(') (19'11) 13 I.T.R. 105.
(') H I.T.R. 781.