My father's foreign trust can only be unwound if the settlor and the trustee act together. Does that still make it a revocable transfer taxable in his hands?
Yes. The Supreme Court held that section 63 does not require the power of revocation to be absolute or unconditional. Where a deed lets the settlor, acting together with the trustee, direct payment of the income or corpus to family members, the settlor has a right to reassume power over the income or assets, and the transfer is revocable. The Court also held that where a trust is discretionary the Revenue has an option under section 166 to assess either the trustees or the beneficiaries, though not both on the same income. The appeals were dismissed.
Decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)) on 1993-04-02, reported as AIR 1993 SC 1991; 1993 Supp (3) SCC 389; (1993) 201 ITR 611; (1993) 68 Taxman 59; 1993 AIR SCW 2004. It bears on section 63, section 166, section 61, section 5 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Assessment & Scrutiny matters.
Two propositions of continuing use come out of this judgment. First, on revocability: the argument that a joint or conditional power of revocation falls outside section 63 is rejected, following Chagla CJ in Behramji Sorabji - the question is simply whether the transfer is capable of being revoked, and a contingent or conditional power still makes the deed revocable. The Court distinguishes Sevantilal Maneklal, where the settlor could only choose among the objects of the trust, and applies Ratilal Nathalal, which requires the power to be given to the settlor as settlor. Second, on discretionary trusts: section 166 gives the Revenue an option to assess the trustees or the beneficiaries, which matters most where the trustees are abroad and cannot be reached, since otherwise the income would escape tax in both hands.
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The appellant's father executed three settlements in the United States on 1 January 1964, in identical terms, and two in the United Kingdom, all to provide for the education, maintenance and upkeep of the settlor's family members and their descendants. The settlor returned the whole of the trust income as his own for assessment years 1964-65 to 1969-70. He died on 22 August 1969, and the appellant, his eldest son, filed two returns for 1970-71 - one for the period to his father's death and one after - again including the whole of the trust income. The appellant later appealed for 1965-66 and 1966-67, and filed revisions for the other years, contending that the income was taxable neither in the settlor's hands nor in his, and that including it had been a mistake. The Appellate Assistant Commissioner allowed the appeals; the Tribunal set that aside for breach of Rule 46(2) and remitted. At that point the appellant went to the Settlement Commission, which computed the income for 1964-65 to 1970-71 and for 1970-71 to 1982-83 and directed demands to be raised. He appealed to the Supreme Court against both orders.
The appeals were dismissed with no costs. On the United States deeds, the clause empowering the settlor and the trustee acting together to direct payment of the whole or part of the income or corpus to family members attracted section 63. That section does not require the power of revocation vesting in the transferor to be absolute or unconditional, and merely because the trustee's concurrence had to be obtained it cannot be said that the deed gives the transferor no right to reassume power over the income or assets. On discretionary trusts, the Court held that by virtue of section 166 the Revenue has an option either to assess the trustees or to assess the beneficiaries, though both cannot be taxed simultaneously on the same income; the assessments made by the Commission on the deceased settlor and on the appellant were therefore unexceptionable. On the United Kingdom deeds the question of construction was academic, since both the settlor and the appellant had in fact received and declared the income, and section 5 is wide enough to bring it to tax. The Commission's direction that income proved to have been taxed abroad would not be taxed again in India met the double taxation plea.
On revocability the Court began with the deed and then with the section. Reading the clause in its setting, the power was given to the settlor to be exercised with the trustee, not the other way about: the trustee already had an absolute discretion under the neighbouring clauses to distribute income or principal among the family, so there would have been no point in separately empowering him to do the same jointly with the settlor. The Court also noted that the trustee was a large American bank, not someone acquainted with the family's affairs. Turning to section 63, which deems a transfer revocable if it provides for retransfer of income or assets to the transferor or in any way gives him a right to reassume power over them, the Court found nothing requiring that power to be exclusive or unconditional. It adopted Chagla CJ in Behramji Sorabji, that the only question is whether the transfer is capable of being revoked, so that a revocation contingent on the consent of beneficiaries still leaves a revocable deed, and Tendulkar J's refusal to read into the provision words that are not there. Section 63 corresponds to the first proviso to section 16(1)(c) of the 1922 Act, which was in the same terms. Ratilal Nathalal was satisfied because the power was conferred on the settlor in that capacity, and Sevantilal Maneklal was distinguished because the settlor there could only choose among the objects. On the United Kingdom trusts the Court declined to decide the construction, holding it academic on the Commission's findings: the settlor's and the appellant's own returns and correspondence showed receipt, and the appellant's objection had always been that a discretionary trust's income was not taxable, never that he had not received it.
Section 63 does not say that the power of revocation vesting in the transferor should be absolute or unconditional.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that section 63 does not require the power of revocation to be absolute or unconditional. Where a deed lets the settlor, acting together with the trustee, direct payment of the income or corpus to family members, the settlor has a right to reassume power over the income or assets, and the transfer is revocable. The Court also held that where a trust is discretionary the Revenue has an option under section 166 to assess either the trustees or the beneficiaries, though not both on the same income. The appeals were dismissed. This was decided by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)) and bears on section 63, section 166, section 61, section 5 of the Income Tax Act 1961. It is reported as AIR 1993 SC 1991; 1993 Supp (3) SCC 389; (1993) 201 ITR 611; (1993) 68 Taxman 59; 1993 AIR SCW 2004. Two propositions of continuing use come out of this judgment. First, on revocability: the argument that a joint or conditional power of revocation falls outside section 63 is rejected, following Chagla CJ in Behramji Sorabji - the question is simply whether the transfer is capable of being revoked, and a contingent or conditional power still makes the deed revocable. The Court distinguishes Sevantilal Maneklal, where the settlor could only choose among the objects of the trust, and applies Ratilal Nathalal, which requires the power to be given to the settlor as settlor. Second, on discretionary trusts: section 166 gives the Revenue an option to assess the trustees or the beneficiaries, which matters most where the trustees are abroad and cannot be reached, since otherwise the income would escape tax in both hands. If it applies to you, the first step is this: When testing a settlement against section 63, ask only whether the transfer is capable of being revoked; do not argue that a power needing another person's concurrence is outside the section.
The appellant's father executed three settlements in the United States on 1 January 1964, in identical terms, and two in the United Kingdom, all to provide for the education, maintenance and upkeep of the settlor's family members and their descendants. The settlor returned the whole of the trust income as his own for assessment years 1964-65 to 1969-70. He died on 22 August 1969, and the appellant, his eldest son, filed two returns for 1970-71 - one for the period to his father's death and one after - again including the whole of the trust income. The appellant later appealed for 1965-66 and 1966-67, and filed revisions for the other years, contending that the income was taxable neither in the settlor's hands nor in his, and that including it had been a mistake. The Appellate Assistant Commissioner allowed the appeals; the Tribunal set that aside for breach of Rule 46(2) and remitted. At that point the appellant went to the Settlement Commission, which computed the income for 1964-65 to 1970-71 and for 1970-71 to 1982-83 and directed demands to be raised. He appealed to the Supreme Court against both orders. The matter was decided on 1993-04-02 by the Supreme Court (Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J)). On those facts the Supreme Court held as follows. The appeals were dismissed with no costs. On the United States deeds, the clause empowering the settlor and the trustee acting together to direct payment of the whole or part of the income or corpus to family members attracted section 63. That section does not require the power of revocation vesting in the transferor to be absolute or unconditional, and merely because the trustee's concurrence had to be obtained it cannot be said that the deed gives the transferor no right to reassume power over the income or assets. On discretionary trusts, the Court held that by virtue of section 166 the Revenue has an option either to assess the trustees or to assess the beneficiaries, though both cannot be taxed simultaneously on the same income; the assessments made by the Commission on the deceased settlor and on the appellant were therefore unexceptionable. On the United Kingdom deeds the question of construction was academic, since both the settlor and the appellant had in fact received and declared the income, and section 5 is wide enough to bring it to tax. The Commission's direction that income proved to have been taxed abroad would not be taxed again in India met the double taxation plea.
On revocability the Court began with the deed and then with the section. Reading the clause in its setting, the power was given to the settlor to be exercised with the trustee, not the other way about: the trustee already had an absolute discretion under the neighbouring clauses to distribute income or principal among the family, so there would have been no point in separately empowering him to do the same jointly with the settlor. The Court also noted that the trustee was a large American bank, not someone acquainted with the family's affairs. Turning to section 63, which deems a transfer revocable if it provides for retransfer of income or assets to the transferor or in any way gives him a right to reassume power over them, the Court found nothing requiring that power to be exclusive or unconditional. It adopted Chagla CJ in Behramji Sorabji, that the only question is whether the transfer is capable of being revoked, so that a revocation contingent on the consent of beneficiaries still leaves a revocable deed, and Tendulkar J's refusal to read into the provision words that are not there. Section 63 corresponds to the first proviso to section 16(1)(c) of the 1922 Act, which was in the same terms. Ratilal Nathalal was satisfied because the power was conferred on the settlor in that capacity, and Sevantilal Maneklal was distinguished because the settlor there could only choose among the objects. On the United Kingdom trusts the Court declined to decide the construction, holding it academic on the Commission's findings: the settlor's and the appellant's own returns and correspondence showed receipt, and the appellant's objection had always been that a discretionary trust's income was not taxable, never that he had not received it. In the words reproduced by the source cited on this page: "Section 63 does not say that the power of revocation vesting in the transferor should be absolute or unconditional."
It was decided by the Supreme Court on 1993-04-02 and is reported as AIR 1993 SC 1991; 1993 Supp (3) SCC 389; (1993) 201 ITR 611; (1993) 68 Taxman 59; 1993 AIR SCW 2004. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 63, section 166, section 61, section 5, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with no costs. On the United States deeds, the clause empowering the settlor and the trustee acting together to direct payment of the whole or part of the income or corpus to family members attracted section 63. That section does not require the power of revocation vesting in the transferor to be absolute or unconditional, and merely because the trustee's concurrence had to be obtained it cannot be said that the deed gives the transferor no right to reassume power over the income or assets. On discretionary trusts, the Court held that by virtue of section 166 the Revenue has an option either to assess the trustees or to assess the beneficiaries, though both cannot be taxed simultaneously on the same income; the assessments made by the Commission on the deceased settlor and on the appellant were therefore unexceptionable. On the United Kingdom deeds the question of construction was academic, since both the settlor and the appellant had in fact received and declared the income, and section 5 is wide enough to bring it to tax. The Commission's direction that income proved to have been taxed abroad would not be taxed again in India met the double taxation plea. It arises in Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 63, section 166, section 61, section 5 of the Income Tax Act 1961, and was decided by Supreme Court of India - B.P. Jeevan Reddy and N. Venkatachala, JJ (judgment by Jeevan Reddy, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check in whose capacity the power is conferred - Ratilal Nathalal requires it to be given to the settlor as settlor - and read the clause against the trustee's own distributive powers, as the Court did here. If the department assesses the beneficiary of a discretionary trust, do not object that only the trustees can be assessed; object instead if the same income is being taxed in both hands. Where foreign trust income has borne tax abroad, put the proof on record - the Commission's direction here was that income proved to have been taxed in the United States or the United Kingdom would not be taxed again in India.
Still good law. I read the surviving parts of the judgment, including the whole of the section 63 discussion, the holding on section 166 and the operative dismissal. I checked no later authority in this session, and the Settlement Commission provisions the appeals arose under have since been substantially changed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
About 28,000 characters of the middle of the harvested page are missing. What falls in that gap includes the Court's discussion of how far an order of the Settlement Commission can be interfered with under Article 136 or Article 226, and part of the analysis of the trust deeds; the record above therefore says nothing about the judicial review point, for which this judgment is also cited, because the only account of it on the harvested page is a reporter's headnote. The batch line listed sections 245D, 245D(4) and 245I; I have taken the sections from the parts of the judgment I could read. The Court records that an appeal against the Gujarat Full Bench decision it discusses was then pending, and expresses agreement with the dissenting opinion of P.D. Desai, J, without deciding that appeal. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with no costs. On the United States deeds, the clause empowering the settlor and the trustee acting together to direct payment of the whole or part of the income or corpus to family members attracted section 63. That section does not require the power of revocation vesting in the transferor to be absolute or unconditional, and merely because the trustee's concurrence had to be obtained it cannot be said that the deed gives the transferor no right to reassume power over the income or assets. On discretionary trusts, the Court held that by virtue of section 166 the Revenue has an option either to assess the trustees or to assess the beneficiaries, though both cannot be taxed simultaneously on the same income; the assessments made by the Commission on the deceased settlor and on the appellant were therefore unexceptionable. On the United Kingdom deeds the question of construction was academic, since both the settlor and the appellant had in fact received and declared the income, and section 5 is wide enough to bring it to tax. The Commission's direction that income proved to have been taxed abroad would not be taxed again in India met the double taxation plea.
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