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 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.) The second question is whether the income which Freny receives from the property which was originally earmarked for Phiroz and which on the death of Phiroz is now held by the trustees absolutely in trust for Freny to the extent of a moiety can be deemed to be the income of the assessee within the meaning of Section 16(1)(c) of the Act. Now, as I have pointed out, under Clause 4 of the deed on the death of Phiroz the trustees hold the property which was intended for him and which is described in Schedule "E" in the events that have happened absolutely for Freny and Feroza in equal moiety. We are inclined to agree with the contention of Sir Jamshedji that as far as this particular property is concerned the trust has come to an end and the trustees are merely bare trustees holding the property for Freny and Feroza who are absolutely entitled to the same. If the trust has come to an end with regard to this particular property and if Freny has become absolutely entitled to the moiety of the property, then Section 16(1)(c) can have no application because that clause only refers to the income which arises to any person by virtue of a revocable transfer of assets. This income which arises to Freny no longer arises by virtue of the trusts made by the settlors but it now arises by reason of the fact that she has become absolutely entitled to the property and she claims the income as the absolute owner of the property. It may be that the trustees are still in possession but they are not trustees to carry out the trusts mentioned in the trust deed. They are merely bare trustees. The trusts are extinguished and they are carried out as far as this particular property is concerned.