COMMISSIONER OF INCOME-TAX VS M.K. CHANDRAKANTH
1999 P T D 176
[225 ITR 101]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
M.K. CHANDRAKANTH
Tax Cases Nos. 831, 832 and References Nos.746 and 747 of 1984, decided on 15/04/1996.
Income-tax---
----Transfer of assets---Revocable transfer---Settlement of properties on trust for benefit of prospective son-in-law and daughter-in-law when settlor's children were minors---Clause in trust deed that if marriages did not take place within twenty years of settlement, trust funds would revert to settlor-- Clause not operative in relevant assessment years---Trust was not revocable in those years---Income from trust was not includible in total income of settlor---Indian Income Tax Act, 1961, Ss.61, 62 & 63.
The assessee created two trusts on October 1, 1969, for the benefit of his prospective son-in-law and prospective daughter-in-law. At the time of settlement, the daughter was a minor aged at gut six years arid the son was aged about three years. There was a direction in the trust deeds that the amounts had to be invested in the discretion of the trustees so as to produce; good income and that the income so earned should be accumulated till such time as the daughter and son got married. Clause 19 of the trust deeds stated that the trusts were irrevocable. Clause 22 of the trust deeds stated that if the intended marriages were not solemnised for any unforeseen reasons within a period of 20 years from the date of the trust deed, the trust funds would become reinvested in the settlor. There was a second supplementary deed which stated that the period of 20 years as stated in clause 22 of the first deed would be substituted by 25 years. It also stated that the funds instead of becoming reinvested with the settlor would go to the University of Madras For the assessment years 1977-78 and 1978-79, the assessee did not include the income from the trusts in his total income. This was accepted by the Income-tax Officer but the Commissioner of Income-tax on revision included it. However, the Tribunal restored the order of the Income-tax Officer. On a reference:
Held, that the supplementary deed would not be applicable for the assessment years under consideration. Clause 22 of the trust deed would take effect after 20 years if the marriages of the minors did not take place. But during the assessment years 1977-78 and 1978-79, clause 22 would have no application. Clause 22 would operate only on the failure of the operation of the settlement and not till then. During the operation of the settlement that clause would not come into force and the properties stood completely in the hands of the trustees and during that period the settlor, the assessee, could not either directly or indirectly enjoy either the whole or any part of the income or exercise any right of reassumption of power over the income or assets. During the assessment years in question, the trusts were not revocable. The income from the trusts was not includible in the total income of the settlor.
Sakthi Charities v. CIT (1984) 149 ITR 624 (Mad.) ref.
S.V. Subramaniam for the Commissioner.
R. Meenakshisundaram for the Assessee.
JUDGMENT
K.A.THANIKKACHALAM,J.---At the instance of the Department, the Tribunal referred the following question for the opinion of this Court, for the assessment years 1977-78 and 1978-79 under section 256(1) of the Income Tax Act, 1961.
"Whether, on the facts and circumstances of the case, and having regard to the provisions of section 63(a) of the Income Tax Act, 1961, and section 83 of the Indian Trusts Act, the Appellate Tribunal was right in holding that the irrevocability of trusts created by the assessee on October 1, 1969, for the benefit of his prospective son-in-law and daughter-in-law, respectively, was not affected by clause 22 of the settlement deed and that the income of the trusts was not includible in the hands of the assesses?"
For the assessment years 1977-78 and 1978-79 the relevant previous years ended on April 12, 1977, and April 12, 1978, respectively. The assessee is an individual deriving income from property, business and share income from a firm called M.K. Krishna Chetty. On October 1, 1969, the assessee settled upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law a sum of Rs.15,000 each. In the deeds of settlement executed for this purpose, there was a direction that the amount has to be invested in the discretion of the trustees so as to produce good income and that the income so earned should be accumulated till such time as the daughter and son got married. At that time the daughter was a minor aged about six years. In clause 19 of the trust deed, it was declared that the trust is "irrevocable". Clause 22 of the trust deed provided that "if the said intended marriage is not solemnised for any unforseen reasons within a period of 20 years from the date of the trust deed, the deed of trust would become void and the trust fund shall become reinvested in the settlor as a beneficial owner thereof, subject as aforesaid, the settlor shall have no manner of right, title or interest in the said money or its accumulations or accretions thereof". By a supplementary deed executed on October 26, 1979, the said clause 22 had been amended to read:
"If the said intended marriage were not to be solemnised for any unforeseen reason or reasons within a period of 25 (twenty-five) years from the date of this deed, this deed of trust shall become invested with 'University of Madras which is an educational institution. The settlor or his legal heirs shall have no right, title or interest whatsoever in the said trust property or its accumulations or accretions thereof."
Thus, in the supplementary deed also it was reiterated that the trust is an irrevocable trust.
For the assessment year 1977-78, the assessee filed a return admitting the total income of Rs.1,52,580 in which neither the income from these trusts were shown nor included. The Commissioner of Income-tax, under section 263 of the Income Tax Act, 1961, held that since clause 22 of the trust deed indicated that the settlor would become entitled to the trust property alongwith the accumulated income in the event of the intended marriage not coming off, the trust had conferred a benefit on the settlor, consequently, the income arising out of the trust should have been held as income arising under a revocable trust and should have been assessed in the hands of the assessee under the provisions of section 61 read with section 63(a)(ii) of the Income Tax Act. Therefore, the Commissioner of Income-tax was of the opinion that the action of the Income-tax Officer in not including the income of the trust was erroneous and prejudicial to the interests of the Revenue. After hearing the objections raised by the assessee, the Commissioner of Income-tax directed the Income-tax Officer to include in the assessment of the assessee the income from the said trusts, viz., M.C. Shyamala Marriage Benefit Trust and M.S. Sowmiyaram Marriage Benefit Trust. Similarly, for the assessment year 1978-79 also the Commissioner of Income-tax exercised his jurisdiction under section 263 of the Income Tax Act and after hearing the assessee, he directed tile Income-tax Officer to include in the assessment of the assessee the income from the said two trusts.
Aggrieved by the order passed by the Commissioner of Income-tax in both the assessment years under consideration, the assessee filed appeals before the Appellate Tribunal. The Appellate Tribunal, after hearing learned counsel appearing for the assessee as well as learned Departmental representative, ultimately held that the Commissioner of Income-tax was not justified in directing the Income-tax Officer to include in the assessment of the assessee the income arising out of the trusts referred to above.
Before us, learned senior standing counsel appearing for the Department submitted that the Tribunal was not correct in holding that both the abovesaid trusts are irrevocable trusts. It was further submitted that clause 19 and clause 22 in the trust deed, dated December 6, 1971, are contradictory and in view of clause 22 since there is retransfer of the corpus of the trusts in favour of the donor or transferor, the trusts should be considered as revocable trusts. Learned senior counsel further submitted that the second deed executed on October 26, 1979, stating that the corpus is on the interest of the trusts, if the trusts fail, would go to the University of Madras would virtually amount to application of income. Further according to learned senior standing counsel, the second deed executed on October 26, 1979, would not be capable of giving retrospective effect to what is stated in the second deed from the execution of the first deed. According to learned senior standing counsel, what we are concerned in the assessment years under. consideration is the first trust deed executed on December 6, 1971, and the second deed executed on October 26, 1979, has no relevance for this period. In support of his contention, reliance was placed upon a decision of this Court in the case of Sakthi Charities v. CIT (1984) 149 ITR 624. Learned senior standing counsel further submitted that even if clause 22 was incorporated in accordance with section 83 of the Indian Trusts Act, still the fact remains that when the trusts fail, the corpus on the interest of the trust would go back to the donor or the transferor. In such case also section 63 would apply and the trust would become revocable trusts and in such a case the income of the trusts is assessable in the hands of the assessee. It was further submitted that the Tribunal was not correct in holding that the trusts are revocable trusts and, therefore, income from the trusts cannot be assessed in the hands of the assessee.
On the other hand, learned counsel appearing for the assessee while supporting the order passed by the Tribunal submitted that clause 22 of the trust deed dated December 6, 1971, would come into operation only after 20 years as per the first deed and after 25 years-as per the second deed, dated October 26, 1979. Therefore, during the assessment years under consideration, only the first deed, dated December 6, 1971, was in force and clause 22 would not be applicable for the period relating to the assessment year under consideration. Learned counsel appearing for the assessee also submitted that the marriage of both the minors takes place within the period stipulated in the trust deed and, therefore, there is no question of the trust; being incapable of execution without exhausting trust property. Therefore, learned counsel appearing for the assessee submitted that inasmuch a: clause 22 in the trust deed, dated October 26, 1979, was introduced it compliance with section 83 of the Indian Trusts Act and which would come into force only after 20 years according to the first trust deed and after 25 years according to the second trust deed, during the assessment years under consideration, clause 22 has got no relevance and, therefore, it need not be looked into. According to learned counsel, even if clause 22 is not incorporated by act of law, section 83 of the Indian Trusts Act would come into operation. For these reasons, according to learned counsel for the assessee, inasmuch as no income was transferred to the donor from the trust the assessment year under consideration, no assessment can be made in his hands inasmuch as the abovesaid trusts are not revocable trusts.
We have heard learned senior standing counsel for the Department as well as learned counsel appearing for the assessee. We have already set out the facts in detail. We have also incorporated the relevant clauses in both the trust deeds for the sake of convenience in the foregoing paragraphs. Sections 61 to 63 of the Income Tax Act, 1961, state as under
"61. Revocable transfer of assets ---
-----All income arising to any person by virtue of a revocable transfer of assets shall be charged to income tax as the income of the transferor and shall be included in his total income.
62.Transfer irrevocable for a specified period ---
-------(1) The provisions of section 61 shall not apply to any income arising to any person by virtue of a transfer---
(i) by way of trust which is not revocable during the lifetime of the beneficiary, and, in the case of any other transfer, which is not revocable during the lifetime of the transferee; or
(ii) made before the 1st day of April, 1996, which is not revocable for a period exceeding six years
Provided that the transferor derives no direct or indirect benefit from such income in either case.
(2) Notwithstanding anything contained in subsection (1), all income arising to any person by virtue of any such transfer shall be chargeable to income-tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.
63 'Transfer' and 'revocable transfer' defined-----
-----For the purposes of sections 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 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 of assets ;
(b) Transfer includes any settlement, trust, covenant, agreement or arrangement. "
The fact remains that the assessee created two trusts known as M.C. Shyamala Marriage Benefit Trust and M.S. Sowmiyaram Marriage Benefit Trust. The trusts were created under the two settlement deeds, dated December 6, 1971, and October 26, 1979. On October 1, 1969, the assessee settled upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law a sum of Rs.15,000 each. At the time of settlement the daughter was a minor aged about six years and the son was aged about three years. There was a direction in the trust deeds that the amounts have to be invested in the discretion of the trustees so as to produce good income and that the income so earned should be accumulated till such time as the daughter and son got married. Clause 19 of the trust deeds states that the trusts are irrevocable. Clause 22 of the trust deeds states that if the said intended marriage is not solemnised for any unforeseen reasons within a period of 20 years from the date of the trust deed, the deed of trust would become void and the trust's funds shall become reinvested in the settlor as a beneficial owner thereof, subject as aforesaid, the settlor shall have no manner of right, title or interest in the said money or its accumulations or accretions thereof. The second deed was executed on October 26, 1979. This second deed, which is a supplementary deed was executed for clarifying what is stated in clause 22 of the first deed, dated December 6, 1971. In the supplementary deed it was stated that the period of 20 years as stated in clause 22 of that first deed would be substituted by 25 years. So also in the first deed what is stated is that if the trust fails, the trust fund shall become reinvested in the settlor as the beneficial owner thereof, and was change into in case the trust fails, the trust fund shall come to the University of Madras. For the assessment years under consideration, the assessee filed a return not showing the income from these trusts.
According to the Department, in view of the provisions contained in section 61 read with section 62(a)(i) and (ii) of the Income Tax Act, 1961, read with clause 22 of the trust deed dated December 6, 1971, which alone is applicable for the assessment years under consideration, since the supplementary deed executed on October 26, 1979, would not be applicable during the assessment years under consideration, inasmuch as the trust fund was to be retransferred for the benefit of the settlor in case the trust fails, the trust would become a revocable trust. In such a case, the income from the trusts would be assessable in the hands of the assessee.
Accordingly to the assessee, the result of the trusts would be mentioned in the trust deeds. If the result is not mentioned, the provisions of section 83 of the Indian Trusts Act would come into operation. Therefore, in order to comply with the provisions of section 83 of the Indian Trusts Act, clause 22 was incorporated. It was further submitted that clause 22 in the first deed would take into effect only after 20 years as per the first deed and 25 years after the supplementary deed, provided no marriage took place to the minors. Therefore, according to the assessee, during the assessment years under consideration, this clause 22 would not have any application at all. According to the assessee, the marriage of the minors took place within the period stipulated in the first deed, dated December 6, 1971. Hence, the contingency as provided under clause 22 of the first deed has not taken place in the present case. Even according to the assessee, the supplementary deed executed on October 26, 1979, which states that the clarification contained therein would take effect from the date of the execution of the first trust deed, cannot be taken into consideration in the assessment years under consideration, because during that time the supplementary deed was not in existence, inasmuch as it was written on October 26, 1979.
Therefore, the point for consideration is, whether in the assessment years 1977-78 and 1978-79, the income arising out of the trust can be included in the hands of the assessee, who is the donor/transferor in view of what is contained in clause 22 of the trust deed, dated December 6, 1971. As already stated the supplementary deed October 26, 1979, would not be applicable for the assessment years under consideration in view of the decision of this Court rendered in Sakthi Charities v. CIT (1984) 149 ITR 624. Now we are left with only on trust deed that is the first deed executed on December 6, 1971.
Section 63 of the Income Tax Act, 1961, lays down that a transfer shall be deemed to be revocable if 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 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. For the transfer to be deemed revocable, the trust deed must contain a provision for retransfer directly or indirectly or the whole or any part of the income or assets to the transferor. According to the Department, clause 22 contemplates retransfer of the income of the trust to the transferor when the trust fails. Therefore, a combined reading of section 63 with clause 22 would postulate that the trusts in question are revocable trust. We-have already seen that clause 22 was incorporated for the purpose of application of income of the trust in case the object of the trust fails. The clause 22 was incorporated in accordance with the provisions contained in section 83 of the Indian Trsuts Act. Clause 22 would take effect after 20 years, if the marriages of the minors did not take place. But during the assessment years 1977-78 and 1978-79, clause 22 would have no application. Therefore, in order to understand whether the trusts in question are revocable or not we have to read the first deed dated December 6, 1971, minus clause 22. Thus, the provision of clause 22 would operate only on the failure of the operation of the settlement and not till then. During the operation of the settlement, that clause will not come into force and during the operation of the settlement, the properties stand completely in the hands of the trustees and during that period the settlor, the assessee, cannot either directly or indirectly enjoy either the whole or any part of the income or exercise any right of reassumption of power over the income or assets. Therefore, a plain reading of section 63 alongwith the trust deed, dated December 6, 1971, would go to show that the trusts in question are not revocable trusts. Therefore, the Tribunal was correct in holding that the Commissioner of Income-tax was not justified in directing the Income-tax Officer to include in the assessment of the assessee the income arising to the trusts of M.C. Shyantala Marriage Benefit Trust and M.S. Sowmiyaram Marriage Benefit Trust. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.
M.B.A./1659/FCReference answered.