My client's trust deed says that if the purpose fails after twenty years the fund reverts to the settlor. Does that clause alone make the trust revocable, so that the income is taxed in the settlor's hands from day one?
No. A clause that operates only on the failure of the settlement, after a fixed period, does not make the trust revocable while the settlement is running. For the years in which the contingency has not arisen the deed must be read without that clause, and if during the operation of the settlement the settlor can neither enjoy the income nor reassume power over the income or assets, s.63 is not attracted and s.61 does not apply.
Decided by the High Court (Thanikkachalam J (as printed in the report header; the judgment uses the plural 'we')) on 1996-04-15, reported as [1997] 225 ITR 101 (Mad); assessment years 1977-78 and 1978-79. It bears on section 61, section 63, section 62, section 263 of the Income Tax Act 1961, in Charitable Trusts & Exemption, How Tax Law Is Read and Revision & Rectification matters.
This is the working answer on transfers that are irrevocable for a specified period, the subject of s.62, and it is the clause most trust deeds contain. The Madras High Court's approach is temporal: ask whether, in the assessment year in question, the settlor has any present right to the income or any present power of resumption. A reverter clause pointed at a future failure of the object — here framed under s.83 of the Indian Trusts Act — answers no. The decision also shows the Revenue route that failed: the Commissioner used s.263 to direct inclusion, and the direction was set aside.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee created two trusts, the M.C. Shyamala Marriage Benefit Trust and the M.S. Sowmiyaram Marriage Benefit Trust, settling Rs 15,000 each upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law; at the time of settlement the daughter was about six and the son about three. The trustees were directed to invest the amounts so as to produce good income and to accumulate the income until the daughter and son married. Clause 19 of each deed stated that the trusts were irrevocable. Clause 22 provided that if the intended marriage was not solemnised for any unforeseen reason within twenty years from the date of the deed, the deed would become void and the trust funds would become reinvested in the settlor as beneficial owner, the settlor otherwise having no right, title or interest in the money or its accumulations or accretions. A supplementary deed was executed to clarify clause 22, substituting twenty-five years for twenty years and providing that on failure the trust fund would go to the University of Madras instead of reverting to the settlor. For assessment years 1977-78 and 1978-79 the assessee did not return the trust income. The Commissioner, acting under s.263, held that clause 22 conferred a benefit on the settlor so that the income arose under a revocable trust assessable in his hands under s.61 read with s.63, and directed the Income-tax Officer to include it. The Tribunal set aside those directions and the Department obtained a reference.
The question referred was answered in the affirmative and against the Department, with no costs (para 12). Clause 22 was incorporated for the application of the income of the trust in case the object of the trust failed, in accordance with s.83 of the Indian Trusts Act, and would take effect only after twenty years if the marriages did not take place; it had no application in assessment years 1977-78 and 1978-79. For those years the deed had to be read without clause 22. During the operation of the settlement the properties stood completely in the hands of the trustees, and the settlor could neither directly nor indirectly enjoy the whole or any part of the income nor exercise any right of resumption of power over the income or assets. On a plain reading of s.63 with the trust deed the trusts were therefore not revocable trusts, and the Tribunal had been right to hold that the Commissioner was not justified in directing inclusion of the trust income in the assessee's assessment.
The Court set out s.63, under which a transfer is deemed 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 if 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, and accepted that the Department's case was that clause 22 contemplated a retransfer on failure of the trust. It answered that by separating the existence of the clause from its operation: because clause 22 could take effect only after twenty years and the contingency had not arisen in the years under assessment, the deed had to be read for those years without clause 22, and read that way it left the settlor with no present enjoyment and no present power of resumption. The characterisation of clause 22 as a provision for the application of the trust income on failure of the object, referable to s.83 of the Indian Trusts Act, supported that separation (para 12).
Thus, the provisions of cl. 22 would operate only on the failure of the operation of the settlement and not till then.
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Handle my notice → Ask a CA on WhatsAppNo. A clause that operates only on the failure of the settlement, after a fixed period, does not make the trust revocable while the settlement is running. For the years in which the contingency has not arisen the deed must be read without that clause, and if during the operation of the settlement the settlor can neither enjoy the income nor reassume power over the income or assets, s.63 is not attracted and s.61 does not apply. This was decided by the High Court (Thanikkachalam J (as printed in the report header; the judgment uses the plural 'we')) and bears on section 61, section 63, section 62, section 263 of the Income Tax Act 1961. It is reported as [1997] 225 ITR 101 (Mad); assessment years 1977-78 and 1978-79. This is the working answer on transfers that are irrevocable for a specified period, the subject of s.62, and it is the clause most trust deeds contain. The Madras High Court's approach is temporal: ask whether, in the assessment year in question, the settlor has any present right to the income or any present power of resumption. A reverter clause pointed at a future failure of the object — here framed under s.83 of the Indian Trusts Act — answers no. The decision also shows the Revenue route that failed: the Commissioner used s.263 to direct inclusion, and the direction was set aside. If it applies to you, the first step is this: Date the contingency. If the reverter can only operate after a fixed period, and that period has not run in the assessment year under dispute, read the deed without the clause for that year, as the Court did.
The assessee created two trusts, the M.C. Shyamala Marriage Benefit Trust and the M.S. Sowmiyaram Marriage Benefit Trust, settling Rs 15,000 each upon trust for the benefit of his prospective son-in-law and prospective daughter-in-law; at the time of settlement the daughter was about six and the son about three. The trustees were directed to invest the amounts so as to produce good income and to accumulate the income until the daughter and son married. Clause 19 of each deed stated that the trusts were irrevocable. Clause 22 provided that if the intended marriage was not solemnised for any unforeseen reason within twenty years from the date of the deed, the deed would become void and the trust funds would become reinvested in the settlor as beneficial owner, the settlor otherwise having no right, title or interest in the money or its accumulations or accretions. A supplementary deed was executed to clarify clause 22, substituting twenty-five years for twenty years and providing that on failure the trust fund would go to the University of Madras instead of reverting to the settlor. For assessment years 1977-78 and 1978-79 the assessee did not return the trust income. The Commissioner, acting under s.263, held that clause 22 conferred a benefit on the settlor so that the income arose under a revocable trust assessable in his hands under s.61 read with s.63, and directed the Income-tax Officer to include it. The Tribunal set aside those directions and the Department obtained a reference. The matter was decided on 1996-04-15 by the High Court (Thanikkachalam J (as printed in the report header; the judgment uses the plural 'we')). On those facts the High Court held as follows. The question referred was answered in the affirmative and against the Department, with no costs (para 12). Clause 22 was incorporated for the application of the income of the trust in case the object of the trust failed, in accordance with s.83 of the Indian Trusts Act, and would take effect only after twenty years if the marriages did not take place; it had no application in assessment years 1977-78 and 1978-79. For those years the deed had to be read without clause 22. During the operation of the settlement the properties stood completely in the hands of the trustees, and the settlor could neither directly nor indirectly enjoy the whole or any part of the income nor exercise any right of resumption of power over the income or assets. On a plain reading of s.63 with the trust deed the trusts were therefore not revocable trusts, and the Tribunal had been right to hold that the Commissioner was not justified in directing inclusion of the trust income in the assessee's assessment.
The Court set out s.63, under which a transfer is deemed 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 if 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, and accepted that the Department's case was that clause 22 contemplated a retransfer on failure of the trust. It answered that by separating the existence of the clause from its operation: because clause 22 could take effect only after twenty years and the contingency had not arisen in the years under assessment, the deed had to be read for those years without clause 22, and read that way it left the settlor with no present enjoyment and no present power of resumption. The characterisation of clause 22 as a provision for the application of the trust income on failure of the object, referable to s.83 of the Indian Trusts Act, supported that separation (para 12). In the words reproduced by the source cited on this page: "Thus, the provisions of cl. 22 would operate only on the failure of the operation of the settlement and not till then."
It was decided by the High Court on 1996-04-15 and is reported as [1997] 225 ITR 101 (Mad); assessment years 1977-78 and 1978-79. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 61, section 63, section 62, section 263, 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 taxpayer. The question referred was answered in the affirmative and against the Department, with no costs (para 12). Clause 22 was incorporated for the application of the income of the trust in case the object of the trust failed, in accordance with s.83 of the Indian Trusts Act, and would take effect only after twenty years if the marriages did not take place; it had no application in assessment years 1977-78 and 1978-79. For those years the deed had to be read without clause 22. During the operation of the settlement the properties stood completely in the hands of the trustees, and the settlor could neither directly nor indirectly enjoy the whole or any part of the income nor exercise any right of resumption of power over the income or assets. On a plain reading of s.63 with the trust deed the trusts were therefore not revocable trusts, and the Tribunal had been right to hold that the Commissioner was not justified in directing inclusion of the trust income in the assessee's assessment. It arises in Charitable Trusts & Exemption, How Tax Law Is Read and Revision & Rectification matters, on section 61, section 63, section 62, section 263 of the Income Tax Act 1961, and was decided by Thanikkachalam J (as printed in the report header; the judgment uses the plural 'we'). 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. Show, year by year, that the settlor could neither directly nor indirectly enjoy the income nor exercise any right of resumption while the settlement was operating — that is the test the Court applied under s.63. Where the reverter is framed as an application of the fund on failure of the object under s.83 of the Indian Trusts Act, say so; the Court treated that characterisation as material. Consider substituting a gift over to a third party for a reverter to the settlor — the supplementary deed here did exactly that, redirecting the fund to a university instead of back to the settlor. If the inclusion comes by way of s.263 rather than in the assessment itself, take the merits and the revision point together, as the assessee successfully did.
Validity check could not be completed. Validity check could not be completed; no search for later treatment was carried out, and it is not known whether the Department appealed. The reasoning sits comfortably with the Bombay High Court's statement in CIT v. Mr. and Mrs. Govind B.C. Ghanekar that s.63 enlarges rather than restricts the meaning of 'revocable transfer', but no decision applying or doubting this judgment was located on this pass. 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.
The report's dates do not hold together. Paragraph 8 records that the trusts were created under two settlement deeds 'dt. 6th December, 1971 and 26th October, 1979', then says 'On 1st October, 1979, the assessee settled upon trust ... a sum of Rs. 15,000 each', and later says 'The second deed was executed on 1st October, 1979'. The reasoning in paragraph 12 proceeds throughout on the first deed being dated 6 December 1971, and that is the date relied on here; the date of the supplementary deed could not be settled. Note also that on one retrieval pass the fetch layer reported the disposal as being 'in the negative' — the verbatim text of paragraph 12, obtained identically on two separate queries, answers the question 'in the affirmative and against the Department', and that is what this entry records. The entry rests on paragraphs 3, 8 and 12; the intervening paragraphs were not reached. The judgment quotes s.62 in the course of setting out the statutory scheme but decides the case under s.61 read with s.63. 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 question referred was answered in the affirmative and against the Department, with no costs (para 12). Clause 22 was incorporated for the application of the income of the trust in case the object of the trust failed, in accordance with s.83 of the Indian Trusts Act, and would take effect only after twenty years if the marriages did not take place; it had no application in assessment years 1977-78 and 1978-79. For those years the deed had to be read without clause 22. During the operation of the settlement the properties stood completely in the hands of the trustees, and the settlor could neither directly nor indirectly enjoy the whole or any part of the income nor exercise any right of resumption of power over the income or assets. On a plain reading of s.63 with the trust deed the trusts were therefore not revocable trusts, and the Tribunal had been right to hold that the Commissioner was not justified in directing inclusion of the trust income in the assessee's assessment.
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