The department has treated my client's trust as revocable, taxed the income in the settlor's hands, and is now attaching the trust's rents under s.226(3) to recover the settlor's arrears for a string of other years. Can it do that?
Not on that basis. Section 65 is the only route by which the person in whose name the asset stands can be made to pay, and it permits recovery only on the service of a notice of demand on that person and only of the portion of the tax levied on the assessee which is attributable to the income so included. Where no such notice was served, and where the demand covers years and amounts unrelated to the trust income, s.65 has been breached and the recovery notices are liable to be quashed.
Decided by the High Court (S. Mukharji J) on 1979-01-09, reported as [1980] 122 ITR 576 (Cal). It bears on section 65, section 63, section 62, section 61, section 226(3), section 156, section 281 of the Income Tax Act 1961, in Demand, Recovery & Stay, Charitable Trusts & Exemption and Assessment & Scrutiny matters.
Section 65 is a provision the library has been silent on, and it is where clubbing meets recovery. The lesson is that a finding of revocability in the settlor's assessment does not, by itself, put the trust property at the Revenue's disposal: the department must take the separate step of serving a notice of demand on the trustee or beneficiary, and even then it can reach only the tax referable to the included income. The judgment also shows both sides of the trap — the Court quashed the recovery while recording its own doubts about the genuineness of the trust and expressly preserving the Revenue's right to move to have the trust deed set aside, and holding that s.281 could not be stretched to cover years when no proceeding was pending.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Narayan Prosad Chowdhury settled shares in Calcutta property on trust by a deed dated 18 May 1972, the trustees being the petitioners, one of whom was his wife. The trust was expressed to be irrevocable and was created for the maintenance, education and marriage of his minor sons and daughters and for the maintenance of his wife, but the settlor was given a right of residence and maintenance together with one-seventh of the net income of the trust property. In the settlor's assessment for 1973-74 the Income-tax Officer held the trust revocable, relying on the proviso to s.62(1) and on s.63(a), and included an estimated trust income of Rs 20,000 in the settlor's hands; that assessment was under appeal before the Appellate Assistant Commissioner. The department then issued notices under s.226(3) to the tenants of the property requiring them to pay over sums due to 'Sri Narayan Pd. Chowdhury or trustees', and pursued four certificate cases, to recover arrears of about Rs 95,107 of income-tax and about Rs 24,581 of wealth-tax spread over assessment years from 1964-65 to 1975-76. A notice of demand under s.156 had been served on the trustees for 1973-74 alone. The trustees moved the High Court under article 226. The Revenue contended that the trust was a fraud on creditors and relied on s.281.
The rule was made absolute to the extent indicated: the notices under s.226(3) and the certificate proceedings were quashed, the appeal for 1973-74 being left to the Appellate Assistant Commissioner to decide in accordance with law, with liberty to the petitioners to contend there that the trust is not revocable and with nothing in the decision prejudicing the Revenue's right to move by suit or otherwise to set aside the trust deed (para 16). Except for assessment year 1973-74 no notice of demand had been given to the trustees or the beneficiaries, and the provisions of s.65 had accordingly been clearly breached; and even for 1973-74 it was not clear that the sums demanded were confined to the tax attributable to the income from the trust property (para 9). Section 281 was not attracted except in relation to 1973-74, because for the other years there was no proceeding pending whose completion produced the sums sought (para 14). No order as to costs (para 18).
The Court read s.65 as the provision governing the liability of a person in respect of income included in the income of another, and construed it as requiring service of a notice of demand on the trustee or beneficiary and as limiting what may then be demanded to that portion of the tax levied on the assessee which is attributable to the income so included (paras 5 and 6). Testing the department's figures against that limit, it found that most of the arrears related to years before or after the year in which the trust was created, that they included tax on income other than the trust income, and that wealth-tax had been swept in as well, so s.65 had been breached (para 9). The Court declined to decide whether the reservation of a right of residence brought the settlement within s.63, saying that while its own inclination was that reserving a part of the income under clause 5 of the deed answered s.63(a)(i), it would not rest its decision there lest the pending appeal be prejudiced, and proceeded prima facie on the Income-tax Officer's unreversed finding of revocability (paras 7 and 8). It rejected the Revenue's attempt to treat the trust as void while simultaneously assessing it as revocable, observing that a trust treated as revocable cannot in the same breath be called void (para 10), and held that the alternative remedy before the Certificate Officer was an empty formality since that officer could not decide title (para 14). On the merits of the trust the Court recorded serious doubts about its genuineness, noting that the settlor had valued the same property at Rs 2,42,864 in his wealth-tax return but at Rs 45,000 for the settlement, while holding that it was not called upon to decide the question finally (para 13).
On this aspect, therefore, in my opinion, the provisions of Section 65 of the I.T. Act, 1961, has been clearly breached except for the assessment year 1973-74.
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Handle my notice → Ask a CA on WhatsAppNot on that basis. Section 65 is the only route by which the person in whose name the asset stands can be made to pay, and it permits recovery only on the service of a notice of demand on that person and only of the portion of the tax levied on the assessee which is attributable to the income so included. Where no such notice was served, and where the demand covers years and amounts unrelated to the trust income, s.65 has been breached and the recovery notices are liable to be quashed. This was decided by the High Court (S. Mukharji J) and bears on section 65, section 63, section 62, section 61, section 226(3), section 156, section 281 of the Income Tax Act 1961. It is reported as [1980] 122 ITR 576 (Cal). Section 65 is a provision the library has been silent on, and it is where clubbing meets recovery. The lesson is that a finding of revocability in the settlor's assessment does not, by itself, put the trust property at the Revenue's disposal: the department must take the separate step of serving a notice of demand on the trustee or beneficiary, and even then it can reach only the tax referable to the included income. The judgment also shows both sides of the trap — the Court quashed the recovery while recording its own doubts about the genuineness of the trust and expressly preserving the Revenue's right to move to have the trust deed set aside, and holding that s.281 could not be stretched to cover years when no proceeding was pending. If it applies to you, the first step is this: When a s.226(3) notice or a certificate proceeding reaches trust property on the strength of a clubbing finding, ask first whether a notice of demand under s.65 was ever served on the trustee or on the person in whose name the asset stands; if it was not, that is the ground.
Narayan Prosad Chowdhury settled shares in Calcutta property on trust by a deed dated 18 May 1972, the trustees being the petitioners, one of whom was his wife. The trust was expressed to be irrevocable and was created for the maintenance, education and marriage of his minor sons and daughters and for the maintenance of his wife, but the settlor was given a right of residence and maintenance together with one-seventh of the net income of the trust property. In the settlor's assessment for 1973-74 the Income-tax Officer held the trust revocable, relying on the proviso to s.62(1) and on s.63(a), and included an estimated trust income of Rs 20,000 in the settlor's hands; that assessment was under appeal before the Appellate Assistant Commissioner. The department then issued notices under s.226(3) to the tenants of the property requiring them to pay over sums due to 'Sri Narayan Pd. Chowdhury or trustees', and pursued four certificate cases, to recover arrears of about Rs 95,107 of income-tax and about Rs 24,581 of wealth-tax spread over assessment years from 1964-65 to 1975-76. A notice of demand under s.156 had been served on the trustees for 1973-74 alone. The trustees moved the High Court under article 226. The Revenue contended that the trust was a fraud on creditors and relied on s.281. The matter was decided on 1979-01-09 by the High Court (S. Mukharji J). On those facts the High Court held as follows. The rule was made absolute to the extent indicated: the notices under s.226(3) and the certificate proceedings were quashed, the appeal for 1973-74 being left to the Appellate Assistant Commissioner to decide in accordance with law, with liberty to the petitioners to contend there that the trust is not revocable and with nothing in the decision prejudicing the Revenue's right to move by suit or otherwise to set aside the trust deed (para 16). Except for assessment year 1973-74 no notice of demand had been given to the trustees or the beneficiaries, and the provisions of s.65 had accordingly been clearly breached; and even for 1973-74 it was not clear that the sums demanded were confined to the tax attributable to the income from the trust property (para 9). Section 281 was not attracted except in relation to 1973-74, because for the other years there was no proceeding pending whose completion produced the sums sought (para 14). No order as to costs (para 18).
The Court read s.65 as the provision governing the liability of a person in respect of income included in the income of another, and construed it as requiring service of a notice of demand on the trustee or beneficiary and as limiting what may then be demanded to that portion of the tax levied on the assessee which is attributable to the income so included (paras 5 and 6). Testing the department's figures against that limit, it found that most of the arrears related to years before or after the year in which the trust was created, that they included tax on income other than the trust income, and that wealth-tax had been swept in as well, so s.65 had been breached (para 9). The Court declined to decide whether the reservation of a right of residence brought the settlement within s.63, saying that while its own inclination was that reserving a part of the income under clause 5 of the deed answered s.63(a)(i), it would not rest its decision there lest the pending appeal be prejudiced, and proceeded prima facie on the Income-tax Officer's unreversed finding of revocability (paras 7 and 8). It rejected the Revenue's attempt to treat the trust as void while simultaneously assessing it as revocable, observing that a trust treated as revocable cannot in the same breath be called void (para 10), and held that the alternative remedy before the Certificate Officer was an empty formality since that officer could not decide title (para 14). On the merits of the trust the Court recorded serious doubts about its genuineness, noting that the settlor had valued the same property at Rs 2,42,864 in his wealth-tax return but at Rs 45,000 for the settlement, while holding that it was not called upon to decide the question finally (para 13). In the words reproduced by the source cited on this page: "On this aspect, therefore, in my opinion, the provisions of Section 65 of the I.T. Act, 1961, has been clearly breached except for the assessment year 1973-74." The decision followed or applied Hrishikesh Ganguly v. CIT [1971] 82 ITR 160 (SC) — referred to for the difference between s.63 and the proviso to s.16(1)(c) of the 1922 Act; In re Eichholz (deceased) [1959] 1 All ER 166 — referred to.
It was decided by the High Court on 1979-01-09 and is reported as [1980] 122 ITR 576 (Cal). 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 65, section 63, section 62, section 61, section 226(3), section 156, section 281, 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 rule was made absolute to the extent indicated: the notices under s.226(3) and the certificate proceedings were quashed, the appeal for 1973-74 being left to the Appellate Assistant Commissioner to decide in accordance with law, with liberty to the petitioners to contend there that the trust is not revocable and with nothing in the decision prejudicing the Revenue's right to move by suit or otherwise to set aside the trust deed (para 16). Except for assessment year 1973-74 no notice of demand had been given to the trustees or the beneficiaries, and the provisions of s.65 had accordingly been clearly breached; and even for 1973-74 it was not clear that the sums demanded were confined to the tax attributable to the income from the trust property (para 9). Section 281 was not attracted except in relation to 1973-74, because for the other years there was no proceeding pending whose completion produced the sums sought (para 14). No order as to costs (para 18). It arises in Demand, Recovery & Stay, Charitable Trusts & Exemption and Assessment & Scrutiny matters, on section 65, section 63, section 62, section 61, section 226(3), section 156, section 281 of the Income Tax Act 1961, and was decided by S. Mukharji 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. Then check the quantum: compare the tax demanded with the tax attributable to the included income alone, year by year — recovery of the settlor's other liabilities, or of wealth-tax, is outside s.65 altogether. Note the proviso: where the asset is held jointly by more than one person, they are jointly and severally liable for the tax attributable to the income from the asset. Do not rest on this to establish that the trust is irrevocable — the Court deliberately refrained from deciding whether reserving a right of residence and a share of income makes a settlement revocable under s.63, so as not to prejudice the pending appeal. Expect a s.281 argument from the Revenue and test it against dates: s.281 bites only where the transfer was made during the pendency of a proceeding whose completion produces the sum sought to be recovered.
Validity check could not be completed. Validity check could not be completed. No search was made for later treatment of this 1979 decision. Note that s.65 has since been amended to refer to the Assessing Officer, and the recovery machinery in Chapter XVIID and s.281 have both been amended since; the construction of the words of s.65 relied on here is unaffected by those changes so far as could be seen, but that was not independently confirmed. 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 judgment reproduces s.65 as it then stood, referring to the Income-tax Officer; the section now refers to the Assessing Officer, and its opening words also pick up clause (i) of s.27. The report is internally inconsistent about the date of the trust deed — paragraph 1 records a deed dated 18 March 1972 while paragraphs 3, 5, 8, 12 and 14 all use 18 May 1972; 18 May 1972 is the date the reasoning proceeds on. The judgment was delivered by a single Judge on the original side and quashes recovery steps while leaving the merits of revocability to a pending appeal, so it is not authority on revocability itself. Paragraphs 1 to 18 were transcribed continuously. 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 rule was made absolute to the extent indicated: the notices under s.226(3) and the certificate proceedings were quashed, the appeal for 1973-74 being left to the Appellate Assistant Commissioner to decide in accordance with law, with liberty to the petitioners to contend there that the trust is not revocable and with nothing in the decision prejudicing the Revenue's right to move by suit or otherwise to set aside the trust deed (para 16). Except for assessment year 1973-74 no notice of demand had been given to the trustees or the beneficiaries, and the provisions of s.65 had accordingly been clearly breached; and even for 1973-74 it was not clear that the sums demanded were confined to the tax attributable to the income from the trust property (para 9). Section 281 was not attracted except in relation to 1973-74, because for the other years there was no proceeding pending whose completion produced the sums sought (para 14). No order as to costs (para 18).
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