# HARISHIKESH GANGULI (DEAD) v. COMMISSIONER OF INCOME TAX, CALCUTTA

- **Citation:** [1972] 1 S.C.R. 310
- **Court:** Supreme Court of India
- **Decided:** 1971-08-18
- **Bench:** K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/harishikesh-ganguli-dead-v-commissioner-of-income-tax-calcutta-5357
- **Pages:** 6

## Headnote

Income-tax Act, 1922, s. 16(1)(c)-Settlor reserving benefit for himself under trust created by him-Trust whether becomes a revocable trust
within meaning of section-Effect of third proviso.
A
B
The assessee derived income from house properties and from the business of a registered partnership furn.
On March 19.
1953 the assessee
created a trust in respect of two houses. It was provided in 1ihe trust
deed that the trustees shall pay a sum of Rs. 200/ -
per month to the
C
settlor, for life for his own absolute use and benefit out of the income of
the trust estate remaining after payment of taxes, rents etc. The Incometax Officer held that the income from the aforesaid two properties was
assessable in the ban&; of the assessee inasmuch as he had retained a portion of the income from the trust properties for himself whereby the trust
became a revocable trust under the provisions of s. 16(1) ( c)
of the
Income-tax Act, 1922. The Appellate Assistant Commissioner up~eld the
view taken by the Income-tax Officer.
The Tribunal however held that
D
only the sum of Rs. 2400/ - annually payable to the assessee could be
taxed in his handS.
In reference the High Court decided against the
assessee.
In appeal to this Court by special leave,
HELD: The effect of the third proviso to s. 16(1) (c) is that a settlement or disposition containing a provision for retransfer of a part of the
income to the settler would not render the whole income of the settlement
chargeable in his hand provided the other conditions contained in the pro-. E
viso are satisfied. In other words the proviso comes to the rescue of the
settlor in that the portion of the income from the trust properties which
are settled on a third person is to be assessed in the hands of that person
and not in the hand of the settler, if the latter does not retain any power
to "deflect the same for a period exceeding six years or during the lifetime of the dcmee". Thus the settlement as a whole will not come within
the mischief of s. 16(1) (c) if the revocabiJity relates only to a part of the
income. [314 H-315 BJ
F
A significant change was made in the language with regard to revocable
transfers in the Income-tax Act, 1961.
Section
63(A) of that Act expressly refers to the whole or any part of the income or assets transferred.
It can well be said that the necessity for expressly mentioning part of the
income was felt because under the provisions of the 1922 Act part of the
income was not covered. [315 C-F]
There was no dispute in the present case that the trust created was a
genuine one. Since it fulfilled the conditions laid down . in the third
proviso only that part of the income which accrued or was received by the
settlor cou1d be assessed as his income The income accruing to the other
beneficiaries could not be included in the total income of the assessee.
[315 Fl
C.I.T. Patna v. Rani Bhuvaneshwari Kuer,
[1964]7
S.C.R. 920,
~pplied.
Ramji Kesluivji v. Commissioner of Income-tax, Bombay, 13 1.T.R.
105, referred to.
C.1.T. Calcutta v. litendranath Mallick, 50 I.T.R. 313, approved.
G
H
•
~
'
A
B
HARISHIKESH GANGULI (DEAD) V, C.I.T., CALCUTTA
31 !
(Grover, J.)
CML APPELLATE JURISDICTION : Civil Appeal NO.
1850
of 1967.
Appeal from the judgment ailld order dated September 30,
1966. of the Calcutta High Court in Income-tax Reference No.
102 of 1962.
M. N. Banerjee and P. K. Mukherjee, for the appellants.
Jagdish Sarup, Solicitor-General, R. N. Sachthey and B. D.
Sharma, for the respondent.
The Judgement of the Court was delivered by
Grover, J.
This is an appeal by special leave from a
C
judgment of the Calcutta High Court answering the following
question of law referred to it against the assessee and in favour
of the Revenue :-
D
E
F
G
H
"Whether on the facts and in the circumstances of
the case, the entire or any part of the income from the
house properties concerned could be included in the
total income of the assessee by virtue of the provisions
of s. 16 ( 1 )( c) of ihe Income tax Act, 19

## Text

310
HARISHIKESH GANGULI (DEAD)
v.
COMMISSIONER OF INCOME TAX, CALCUTTA
August 18, 1971
(K. S. HEGDE AND A. N. GROVER, JJ.]
Income-tax Act, 1922, s. 16(1)(c)-Settlor reserving benefit for himself under trust created by him-Trust whether becomes a revocable trust
within meaning of section-Effect of third proviso.
A
B
The assessee derived income from house properties and from the business of a registered partnership furn.
On March 19.
1953 the assessee
created a trust in respect of two houses. It was provided in 1ihe trust
deed that the trustees shall pay a sum of Rs. 200/ -
per month to the
C
settlor, for life for his own absolute use and benefit out of the income of
the trust estate remaining after payment of taxes, rents etc. The Incometax Officer held that the income from the aforesaid two properties was
assessable in the ban&; of the assessee inasmuch as he had retained a portion of the income from the trust properties for himself whereby the trust
became a revocable trust under the provisions of s. 16(1) ( c)
of the
Income-tax Act, 1922. The Appellate Assistant Commissioner up~eld the
view taken by the Income-tax Officer.
The Tribunal however held that
D
only the sum of Rs. 2400/ - annually payable to the assessee could be
taxed in his handS.
In reference the High Court decided against the
assessee.
In appeal to this Court by special leave,
HELD: The effect of the third proviso to s. 16(1) (c) is that a settlement or disposition containing a provision for retransfer of a part of the
income to the settler would not render the whole income of the settlement
chargeable in his hand provided the other conditions contained in the pro-. E
viso are satisfied. In other words the proviso comes to the rescue of the
settlor in that the portion of the income from the trust properties which
are settled on a third person is to be assessed in the hands of that person
and not in the hand of the settler, if the latter does not retain any power
to "deflect the same for a period exceeding six years or during the lifetime of the dcmee". Thus the settlement as a whole will not come within
the mischief of s. 16(1) (c) if the revocabiJity relates only to a part of the
income. [314 H-315 BJ
F
A significant change was made in the language with regard to revocable
transfers in the Income-tax Act, 1961.
Section
63(A) of that Act expressly refers to the whole or any part of the income or assets transferred.
It can well be said that the necessity for expressly mentioning part of the
income was felt because under the provisions of the 1922 Act part of the
income was not covered. [315 C-F]
There was no dispute in the present case that the trust created was a
genuine one. Since it fulfilled the conditions laid down . in the third
proviso only that part of the income which accrued or was received by the
settlor cou1d be assessed as his income The income accruing to the other
beneficiaries could not be included in the total income of the assessee.
[315 Fl
C.I.T. Patna v. Rani Bhuvaneshwari Kuer,
[1964]7
S.C.R. 920,
~pplied.
Ramji Kesluivji v. Commissioner of Income-tax, Bombay, 13 1.T.R.
105, referred to.
C.1.T. Calcutta v. litendranath Mallick, 50 I.T.R. 313, approved.
G
H
•
~
'
A
B
HARISHIKESH GANGULI (DEAD) V, C.I.T., CALCUTTA
31 !
(Grover, J.)
CML APPELLATE JURISDICTION : Civil Appeal NO.
1850
of 1967.
Appeal from the judgment ailld order dated September 30,
1966. of the Calcutta High Court in Income-tax Reference No.
102 of 1962.
M. N. Banerjee and P. K. Mukherjee, for the appellants.
Jagdish Sarup, Solicitor-General, R. N. Sachthey and B. D.
Sharma, for the respondent.
The Judgement of the Court was delivered by
Grover, J.
This is an appeal by special leave from a
C
judgment of the Calcutta High Court answering the following
question of law referred to it against the assessee and in favour
of the Revenue :-
D
E
F
G
H
"Whether on the facts and in the circumstances of
the case, the entire or any part of the income from the
house properties concerned could be included in the
total income of the assessee by virtue of the provisions
of s. 16 ( 1 )( c) of ihe Income tax Act, 1922 read with
the first proviso thereto ?"
The assessee was assessed in the status of an individual. He
derived income from house properties and from the business of a
registered partnership firm H. Ganguly & Co. He had six houses
one of which was 24, Mohanlal Street, Calcutta and the other at
Jangambari in the city of Banaras.
On March 19,
1953 the
assessee created a trust in respect of these two houses.
It was
provided in the trust deed that the trustees shall pay a sum of
Rs. 200/- per month to the settlor for life for his.own absolute use
and benefit out of the income of the trust estate remaining after
payment of taxes, rents etc.
In other words he himself was one
of the beneficiaries.
The Income tax Officer held that the income from the aforesaid two properties was assessable in the hands of the assessee
inasmuch as he had retained a portion of the income from the
trust properties for himself.
The trust had, therefore, become
revocable under the provisions of s. 16 (1 )( c) of the Income tax
Act 1922, hereinafter called the 'Act'. The Appellate Assistant
Commissioner on appeal affirmed the view taken by the Income
tax Officer.
When the matter came before the Appellate Tribunal it found that the assessee had irrevocably parted with the
aforesaid two properties and the san1e had got vested in ilie trust.
It was held that s. 16 (1 )( c) would become applicable only if the
setitlor r>~served to himself the entire income arising from
the
settled properties; if only a portion had been reserved by the
312
SUPREME COURT REPORTS
[1971) l S.C.R.
settlor it would not make the settlement revocable.
It is not disA
puted that the total annual income from these properties came to
over Rs. 19.000.
Out of this the assessee who was the settlor,
was entitled to Rs. 2,400/- annually.
According to the Tribunal
only the amount of Rs. 2,400/- which had actually been received
by the assessee under the terms of the trust deed could be included in his income.
B
The view of the High Court was that in order to be revocable
under the first proviso to s. 16 (1 )( c) it is sufficient if the settlement, disposition or transfer contains a provision for retransfer of
a part of the income to the settlor, disponer or transferor.
It is
not necessary that there must be a provision for the retransfer of
the entire income.
The word "income" includes any part of the
C
income unless there is anything repugnant in the context.
The
High Court considered that the third proviso to s. 16(1)(c) did
not explain the first proviso but was a kind of rider or exception
to it.
Bearing in mind the object behind the enactment of s. 16
and on a consideration of the tenns of the section the true meaning and scope of the first proviso seemed to be that the settlement
D
in the present case was revocable in its entirety thus attracting the
substantive clause of s. 16(1)(c).
Clause (c) was introduced ins. 16(1) in the year 1939.
At the material time s. 16 ( 1) stood thus :-
"S. 16 (I) In computing the total income of an
£
asses see
(a)
(b)
(c) all income arising to any person by virtue of a
settlement or disposition whether revocable or
not, and whether effected bef?re or after the
commencement of
the
Indian
Income
tax
(Amendment Act, 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 asseh shall be deemed
to be 'income of the transferor :
F
G
Provided that for the purposes of this
clause a
settlement, disposition of transfer shall be deemed to be
revocable if it contains any provision for the retransfer
directly or indirectly of the inc?me or asset~ to the setH
tlor, disponer or transferor, or 11:1 any way gives the settlor, disponer or transfero~ a nght to reassume power
directly or indirectly over income or assets;
A
B
c
D
E
F
G
H
HARISHIKESH GANGULI (DEAD) V. C.1.T., CALCUTTA
(Grover, J.)
. Pr?vid?d further that the expression 'settlement or
d1spos!l!on . shall for the purposes of this clause include
any d1spos1t10n, trust covenant, agreement or arrangement and the expression ',settlor or disponer' in relation
to a settlement or d1spos11Ion shall include any person
by whom the settlement or disposition was made;
Provided fu~ther that this clause shall not apply to
any mco111;e an.s1_ng to any .Person by virtue of a settle,
ment or d1spos111on which .1s not r~vocable for a period
exceedmg s1x.yea~s or dunng the life time of the person
and from which mcome 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."
313
It is apparent that the above clause of s. 16 (I) with its provisos
is unhappily worded.
In Ramji Keshavji v.
Commissioner of
Income tax Bombay(1 ), the Bombay High Court considered the
scheme of s. 16 (1) ( c). According to that decision
the first
stage is that when there is a revocable· transfer of assets.
The
income derived from such assets is still to be considered the
income of the settlor.
The first proviso specifies what would be
deemed a revocable transfer in spite of the deed being apparently
irrevocable.
The relevant question for the first proviso is "is this
transfer revocable because it fulfils the conditions contained in the
proviso?" The answer to that question can be in the positive or
in the negative. If the answer is in the negative no further discussion can arise and s. 16{ I) ( c) will not be applicable. If the
answer be in the affirmative the deed, although ostensibly irrevocable, is deemed to be revocable.
It will thus become revocable
within the meaning of the substantive provisions of s. 16(1)(c).
Having reached that stage proviso (3) has to be considered.
In
the words of Kania J., as he then was "the scheme appears to be
that although in fact,' after reading the provision of s. 16(1 )(c)
with proviso ( 1), the transfer is revocable, the law will not still
consider the income derived from such settlement,. the income of
the settlor, provided the settlement is not revocable for a pe$od
exceeding six years or during the lifetime of the person for whom
the income is settled, and. further from which income the settlor
derives no direct or indirect benefit." Chagla J., as he then was,
delivered a separate judgment although he agreed with ilie answer
given to the reference by Kania J.
In his opinion the only way
to reconcile the substantive provision of sub-cl. ( c), provisos (I)
and (3) was to hold that proviso (3) contained a limitation which
applied as much to the substantive provisions of sub-clause ( c)
as to proviso (I).
(I) 13 J.T.R. 105.
314
SUPRE!J'.E COURT REPORTS
(1972] 1
S,C.lf..
The view expressed in the Ramji Keshavji case(1)
was
approved by this court in C.I.T. Patna v. Rani Bhuvaneshwari
Kuer(2). In that case tjie assess~, who owned an estate known
as 'Tekari Raj', created a trust with a view to liquidate the debts
of Tekari Raj.
The beneficiaries under the deed were the settlor,
her husband and her sons. It was declared th<!t the settlement
made was to be permanent and irrevocable but each beneficiary
had full right to make any sort of arrangement about devolution
or succession or make such alienation as was considered fit about
his share.
It was observed that two conditions were necessary for
the application of the third proviso to section 16(l)(c), (1) that
the trust should not be revocable for a period exceeding six years
A
B
o.· 1-uring the life-time of the beneficiary and (2) the settlor or c
di'' lOiler should have no direct or indirect benefit from the income
giv)n to the beneficiary.
The following observations at page 927
are noteworthy :
"The third proviso to s. 16 (1 )( c) does not operate
to exclude the income which the settlor receives as a
beneficiary, from liability to income
tax; it merely
excludes that part of the income which is under the deed
of settlement given to another person from liability to
tax in the hands of the settlor, if the conditions prescribed by the third proviso are fulfilled.
The contention raised by the Commissioner that if under the deed
of trust the settlor has reserved to himself as a beneficiary any part of the income of the property settled,
the third proviso will not apply to the deed of trust runs
contrary to the plain words of the statute".
I>
E
The further contention of the Commissioner that the third
proviso only operated in respect of deeds of settlement or dispositions which were referred to in clause ( c) but not the deeds of F
settlement or disposition which by the first proviso were deemed
to be revoc:ible was rejected by saying that the function of provisos ( l) and (2) was plainly explanatory and it was impossible
to hold that the third proviso did not operate in respect of settlement, dispositions or transfers which were by the first' proviso
revocable for the purposes of that clause.
We have referred to the above case in extenso because in our
opinion it fully covers the point which has arisen in the present
case.
In the light of the above principles it would not be wrong to
G
say that the ~ect of the third proviso is that a settlement or disposition containing a provision for retransfer of a part of the H
income to the settlor would not render the whole income of the
(I) 13 J.T.R. 105
(2) 0964) 7 SCR 920
A
B
c
D
E
F
G
HARISH!KflSH GANGULI (DEAD) V. C.!.T., CALCUTTA
31 S:
(Grover,/.)
settlement chargeable in his band provided the other conditions
contained in the proviso are satisfied.
In other words the proviso
comes to the rescue of the settlor in that the portion of the income
from the trust properties which are settled on a third person is to
be assessed in the bands of that person and not in the hand of the
settlor, if the latter does not retain any power to "deflect the same
for a periOd exceeding six years or during the lifetime of the
donee". Thus the settlement as a whole will not come within the
mischief of s. 16 ( 1 )( c) if the revocability relates only to a part
of the income.
[See C.I .. T. Calcutta v. Jitendranath Mallick(' )l
We are in entire agreement with the above view of the Cal·
cutta High Court and consider that the same is supported by the
decision of this court in Rani Bhuvaneshwari Kuer's case(2). We
may also refer to the significant change made in the language with
regard to revocable transfers in the Income tax Act 1961. Section
63 of that Act provides :
"For the purposes of section 60, 61 and 62 and of
this Section-
( a) a transfer shall be deemed to be revocable if-
(i) it contains any provision for
the retransfer
directly or indirectly of the whole or any part
of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to
reassume power directly
or indirectly over
the whole or any part of the income or assets :
(b) ........................ "
It can well be said that the necessity for expressly mentioning
part of the income was fdt becaure under the provisions of the
Act part of the income was not covered.
There is no dispute in
the present case that the trust created was a genuine one.
Since
it fulfilled the conditions laid down in the third proviso only that
part of the income which accrued or was received by the settlor
could be assessed as his income. The income accruing to the
other beneficiaries could not be included in the total income of
the asseSsee.
The appeal is consequently allowed and the judgment of the
High Court is set aside.
The question which was referred shall
stand answered in favour of the assessee and against the Revenue.
In view of the nature of the points involved the parties shall bear
their own costs.
G.C.
(I) 50 !TR 313
Appeal allowed.
(2) [1964] 7 S.C.R. 920