BEHRAMJI SORABJI LALKAKA Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) TWO questions have been raised on this reference and they are concerned with certain income arising to Freny, the daughter of the settlors, under the trust deed dated January 15, 1936. The settlors, who are the assessee and his wife, had three children Freny, Feroza and Phiroz and the trust deed provided that the properties belonging to the settlors which were moveables should be divided into three parts, one for each of the three children of the settlors, and the scheme of the trust deed was that during the lifetime of the settlors the trustee should hold these properties in trust and give the income for the maintenance of the three children of the settlors and the property was to be handed over to these three beneficiaries after the death of the survivor of the settlors. The trust deed made provisions with regard to the death of any of the three beneficiaries before the death of the survivor of the settlors, and Clause 4 deals with Phiroz predeceasing the survivor of the settlors. That clause considers various contingencies, whether Phiroz died leaving a widow surviving and any issue, or a widow surviving and no issue, or no widow surviving but leaving issue, and also the one with which we are concerned, viz. if he died surviving neither widow nor issue. In fact Phiroz died a bachelor after he had attained majority and in that eventuality Clause 4 (d) of the trust deed provided that the property coming to him should be divided into four equal parts and one part was to abide any will or codicil or any power of appointment which Phiroz might exercise and the remaining three parts were to be divided absolutely between Freny and Feroza, and if no power of appointment was exercised or if there was no provision in the will of Phiroz, then that part was also to go to Freny and Feroza equally. As neither of these two contingencies took place, therefore under the provisions of this trust deed it is clear that on the death of Phiroz the trustees held absolutely in equal shares for Freny and Feroza the property mentioned in Schedule E to the trust deed. The trust deed also contains a power of revocation which is set out in Clause 10 and that power is exercisable by the assessee at any time with the consent of his wife, Freny, Feroza and Phiroz or any two of them.

(2.) NOW the first question that arises is whether the income that arises to Freny under this trust deed is income arising from a revocable trust within the meaning of Section 16 (1) (c), and, if it is so, then undoubtedly that income would be deemed to be the income of the assessee. It is contended by Sir Jamshedji that the power of revocation given to the assessee under Clause 10 is a contingent power; it is based upon the contingency of his getting the consent of two of the beneficiaries and therefore this is not a revocable trust deed. NOW Section 16 (1) (c) provides that all income arising to any person by virtue of a revocable transfer of assets would be deemed to be the income of the transferor. The expression "revocable" is not qualified in any manner. The section does not speak of an absolute or unqualified power of revocation. If there is an income arising by virtue of a transfer of assets which is revocable, then that income must be deemed to be the income of the assessee. The only question that has got to be asked is whether the transfer is capable of being revoked by the assessee or not. There can be no doubt that this trust deed is capable of being revoked. It may be that before the power is exercised the consent of two beneficiaries might have to be taken, but even so although the revocation may be contingent or conditional, still the deed remains a revocable deed of trust. Our attention has been drawn to a decision (Ramji v. Commissioner of Income-tax, Bombay (1944) 47 BOm. L. R. 169 : S. C. 13 I. T. R. 105) to which Kania J. (as he then was) and myself were parties and we were considering the construction of the first proviso to Sub-clause (c ). Kania J. took the view that if the right to assume power over the income or assets was contingent then Section 16 (1) (c) would not apply. With very great respect I took the other view, viz. that the words of the section were wide enough to cover even a provision for re-transfer which was contingent in its nature. It is to be borne in mind that the first proviso to Section 16 (1) (c) is very wide in its terms and makes any transfer a revocable transfer if it contains any provision which in any way gives the settlor a right to resume power directly or indirectly over the income or the assets. Therefore it is sufficient if such a power is given to the settlor. It may be given in any way. But the relevant and material question is whether the settlor has taken such a power to himself. Therefore, in my opinion, this deed of trust is a revocable deed of trust and falls under Section 16 (1) (c) of the Act and therefore the income arising to Freny under this deed of trust must be taken to be the income of the settlors. That disposes of the first question.

(3.) THIS reference arises out of the assessment for the year 1939-40. On January 15, 1936, the assessee and his wife executed a deed settling several properties upon trust for the benefit of their three children, two daughters, Freny and Feroza, and a son, Phiroz. At the time of execution of this deed Feroza and Phiroz were minors. Clause 1 of the deed provides that the trustees shall during the lifetime of the settlors or either of them pay the interest and income of the investments mentioned in Schedules "d," "e," and "f" to the trust deed to Freny, Phiroz and Feroza respectively. Clause 2 of the deed provides that after the death of the survivor of them the settlors the trustees shall hold the investments mentioned in these three schedule absolutely for the said three children respectively. Clause 3 provides for the contingency of either of the two daughters predeceasing the survivor of the settlors. Clause 4 provides for the contingency of Phiroz, the son, predeceasing the survivor and it states that in that event the trustees shall hold the investments mentioned in Schedule "d" to the trust deed upon the trusts therein mentioned. We are not concerned with the trusts enumerated in Clauses (a), (b) and (c), in the events that have happened. When Phiroz died he did not leave him surviving either a widow or any children. Clause (d) inter alia provides that if Phiroz died without leaving a widow or issue without exercising the power of appointment and without disposing of his share by a deed or otherwise then "on failure of any such appointment absolutely for the said Freny Behramji Lalkaka and Feroza Behramji Lalkaka in equal shares. " Then Clause 10 of the deed of trust makes the trust deed revocable by the settlor with the consent of his wife and his three children or any two of them.