COMMISSIONER OF INCOME-TAX, MADRAS

v.

MANAGING TRUSTEES, NAGORE DURGHA, NAGORE

April 8, 1965

[K. SuBBA RAo. J.C. SHAH AND S.M. SIKRI, JJ.J

Wakf-Scheme for management of Muslim Wakf-Trustees called Nattamaiga-rs to manage wakf property-Surplus income to be dist-ributed _among beneficiaries of trust called kasupangudars aci'cling to definite shares-Income how to be assessed,...., Aw!icabi !itu of Indiian Income Tax Act, 1922(11 ()f 1922). s. 41.

A scheme was settled in 1005 by the Madras High Court for the management of the income and properties of the Durgah consecrated to a saint in Tanjore District. Under the scheme the management of the properties of the Durgah was to be in the hands of eight trustees called Nattamaigars one of whom was to be elected by them as Managing Trustee. The net income of the trust was to be distributed among descendants of the foster son of the saint, called Kasupangudars, wh.ose definite shares were to be determined each year by a list prepared bv the Managing Trustee. For the assessment years 195~54 and 1954-55, the Income-tax Officer assessed the

gu; rplus income of the wakf in the hands of the Managing Trustee as an association of persons. The trustees unsuccessfully app€'aied to the Appellate Assistant Commissioner and the Appellate Tribunal.

The controversy centred round the question whether s.41 of the Indian Income-true Act, 1922 awliecl to the case. In a reference made by the Tribunal at the instance of the assessee "the High Court held that that s. 41 pplied to the case and that the income was received by the trustees on behalf of the beneficiaries. Aggrieved, the Commissioner of Income Tax appealed, by certificate, to this Court.

rt was contended on behalf of the appellant that as the properties vested in the managing trustee and he received the income in his own right and not on behalf of the beneficiaries, though for their benefit, the said income in the hands of the managing trustee fell outside the scope of s.41 of the Act.

HELD: The High Court had rightly answered the question in favour of tbe assessee.

(i) The techn'ral doctrine of vesting is not imported into s. 41.

This is apparent from the fact that a trustee appointed under a trust deed is brought under the section though legally the property vests in him. In the case of a Muslim Wakf the property vests in the Almighty; even so the mutawallis are brought under the seetion Thus in some of the persons enumer:_ated in the section property vests and in others it does not. A reasonable interpr-etation of the section is that all categories of persons mentioned therein are deemed to receive them on behalf of another person or persons or manage the same for his or their benefit. None of them has any benefbal interest in the income; he collects the income for the benefit of others.

In this view even if the N attamaigars were trustees in whom the

660 [lllUJj :l ~.C.J\.

:Properties of the Durgah vested, they should be deemed to have

A.. received the income only on behalf of the Kasupanaudars in definite shares. [662G-663B]

(ii) The mutawalli of a Muslim Wald is merely a manager and not a "trustee" as understood in the English system. (663E] Vidya Varuthi Thirtha v. Balusami Ayyar. (1921) 48 I.A. 32 and Al!ah Rakhi v. Mohammad Abdur Rahim, (1933) 61 I.A. 50, relied on.

Therefore in terms of s.41 of the Act the Nattamaigars were the manager of the properties on behalf of other and WeTe entitled to receive the income therefrom on behalf of them. [663G-H]

(iii) Under cl.3 of the scheme it was the "management and administration" of the Durgah and its properties which was vested in the Nattamaiga1& and not the properties themselves. In the absence .of clear words it could not be held that the High Court in framing C a scheme for the endowments of the Durgah had introduced a foreign concept of "trust" in derogation of Mohammadan Law. The scheme therefore did not vest the properties of the Durgah in the Nattamalgars and the contention on behalf of the &venue could not succeed. [664D, El

av1L AP PELLA TE JURISDICTION: Civil Appeals Nos. 213 and D 214 of 64.

Appeals from the judgment and order dated April 4, 1961. of the Madras High Court in Case Referred No. 130 of 1956.

Niren De, Additional Solicitor-General R. Ganapathy Iyer E and R. N. Sachthey, for the appellants (in both the appeals.)

A. V. Vishwanatha Stistri, M. M. Ismail and R. Gopalakrishnan, for the respondent in both the appeals.

The Judgment of the Court was delivered. by

Sobba Rao, J. In the town of Nagore in Tanjore District, Madras State, there is a Durgha consecrated to Hazerath Sayed Shahul Hameed Quadir Ali Ganja Savoy Andavar, who Jived some

400 years ago. The said Durgha receives large income from immovable properties endowed to it and the offerings in cash and kind made by the devotees. The Durgha and its properties are now G being administered under a scheme settled by the Madras High Court on March 16, 1955. Under the scheme the management of the administration of the affairs of the said Durgha vests hereditarily in 8 trustees called Nattamaigars, who constitute a board of trustees. The said board of trustees shall from among themselves elect one as a managing trustee and he shall hold office for a term H. of 3 years. The managing trustee shall at the end of each fasli prepare a balance-sheet verified by the manager and ascertain the net amount available for paymen, t to kasupangudars, who are the descendants of Saiyed Muhammed Eusoof, the foster son of the saint. The Managing Trustee shall declare the amount due to each of the kasupangu (share) and shall allocate the amount to each kasupangudar (sharer) in the list to be prepared for that purpose

c.I.T. v. DURGHA TRUSTEES (Subba Rao, J.) 661

in each year. He shall pay the amount to each kampangudar in accordance with the fat. It is said that at present there are 640 kasupangudars. Briefly stated. under the scheme the management of the properties of the Durgha, both movable and immovable, vests in Nattamaigars, and the kasupangudars are entitled to the surplus in accordance with their shares.

For the assessment years 1953-54 and 1954-55 the Income-tax Officer assessed the surplus income in the hands of the Managing Trustee as an association of persons. The Appellate Assistant Com: missioner, on appeal, confirmed the same. On further appeal, the Income-tax Appellate Tribunal took the same view. At the instance of the assessee, the Tribunal submitted the following question for the opinion of the High Court of Madras under s.66(1) of the Income-tax Act, 1922, hereinafter called the Act:

"Whether the prov; sions of Section 41 can be said to apply to the assessees in this case."

A Division Bench of the High Court, which heard the reference. held that the Managing Trustee qua the surplus income managed the property and derived the income on behalf of the kasupangudars and that the assessment should be made on the said Managing Trustee to the extent of the interest of each of the kasupangudars in the income received oy him. In the result it answered the question in the affirmative and in favour of the assessee. The Commissioner of Income-tex, Madras, on a certificate of fitness granted by the High Court, has preferred the present appeals against the said Order.

The learned Additional Solicitor General, appearing for the Revenue, contended that the Natmaigars being trustees, the properties of the Durgha vested in them and, therefore, they or the Managing Trustee administered the trust properties in their own right and not on behalf of the kasupangudars and hence s.41 of the Act did not apply, with the result the Income-tax Officer had G rightly assessed the surplus income in the hands of the trustees as an association of persons.

:a:

Mr. A. V. Viswanatha Sastri. learned counsel for the assesseerespondent. argued, on the other hand, that the Na[tamaigars of the Durgha were not trustees as understood in the law of trust but were only managers managing the properties on behalf of the Durgha and kasupangudars. On that assumption, his argument proceeded. as the Nattamaigars, as managers, held the surplus on behalf of the kasupangudars for distribution in definite shares. s.4 l of the

A.ct was attracted.

At the outset we may make it clear that in this appeal we are concerned only with the surplus remaining on hand with the Nattamaigars after meeting the expenses of the Durgha.

The problem presented in these appeals falls to be decided on A a true construction of s.41 of the Act. The material part of •.41 reads:

(!) In the case of income, profits or gain chargeable under this Act, which the Courts of Wards, the Administrators-General, the Official Trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a Court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or 'otherwise (including the trustee or trustees under any Wakf deed which is valid under the Mussalman Wakf Validating Act, 1913), are entitled to receive on benalf of any person, the tax shall be levied upon and recoverable from such Court of Wards, Administrators- General, Official Trustee, receiver or manager or trustee or trustees. in the like manner and to the. same amount as it would be. leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly.

Under this section the income of p; roperties receivable by

the enumerated persons for the benefit of others is liable to be E assessed to tax in their hands in the like manner and to the same amount as it would be leviable upon and recoverable from the person or persons on whose behalf such income .is receivable. This section centres on the basic fact that the person in whose hands the income is assessable shall be entitled to receive the same on behalf of any person; if he is not so entitled, the provisions of the F section cannot be invoked. So. it is contended that, as the properties vested in the managing trustee and he received the income in his own right and not on behalf of the beneficiaries, though for their benefit,. the said income in the hands of the managing trustee fell outside the scope of s.41 of the Act.

There are two answers to this contention. The doctrine of G vesting is not germane to this contention. In some of the enumerated persons in the section the property vests and in others it does not vest, .but they only manage the property. In geneql law the property does not vest in a receiver or manager but it vests in a trustee, but both trustees and receivers are included in s.41 of the iAct. The common thread that passes through all of them is that B they function legally or factually for others: they manage the property for the benefit of others. That the technical doctrine of vesting is not imported in the section is apparent from the fact that a trustee appo'nted under a trust deed is brought under the section though legally the property vests in him. In the case of a Muslim Wakf the property vests in the Almighty; even so the mutawallis are brought under the section. A reasonable interpretation of the

C.I.T. v. DURGllA TRUSTEES (Subba Rao, J.) 663

A section is that all the categories of persons mentioned therein are

deemed to receive the mcome on behalf of another person orpersons or manage the same for his or their benefit. None of them has any beneficial interest in the income; he collects the income for the benefit of others. In this view, even if the Nattamaigars were trustees in whom the properties of the Durgha vested, they should B be deemed to have received the income only on behalf of the kasu

pangudars in definite shares.

The same conclusion will be reached even if the problem was approached from a different angle. In the well-known decision of C the Privy Council in Vidya Varuthi Thirtha v. Balusami Ayyar(')

the inappropriateness of the use of the expression "trustee" to the maLager of a Hindu or Mahommedan religious endowments was brought out Therein their Lordships observed :

"Neither under the Hindu Law nor in the Mahommedan system is any proprty "conveyed" to a shebait or a mutawalli, in the case of a dedication. Nor is any property vested in him; whatever property he holds for the idol or the institution he holds as manager with certain beneficial interests regulated by custom and usage. Under the Mahommedan Law, the moment a wakf is created all rights of property pass out of the wakf, and vest in God Almighty. The curator, whether called mutawalli or saijadanishin, or by any other name, is merely a manager.

He is certainly not a "trustee" as understood in the English system."

F The Privy Council, in the coptext of a wakf property, reaffirmed the said observations, in Allah Rakhi v. Mohammad Abdur Rahim('). The effect of the s:i.id decisions is that Nattamaigars are only the managers of the properties in which the Durgha and the kasupangudars have beneficial interests. The properties do not vest in them. They receive the income therefrom on beh'alf of both G of them. After meeting the expenses of the Durgha they hold the balance on behalf of the kasupangudars and distribute the same in accordance with their shares. In this view, in 'terms of s. 41 of the Act the N attamaigats are the managers of the properties on behalf of others and are entitled to receive the income therefrom orr behaif of them. With the result, the income which they hold on H behalf of the kasupangudars can be assessed only in. their hand&

in the manner prescribed thereunder. But it is said that whatever may the doctrine of Hindu or Mohammadan law, under the terms of the aforesaid scheme the properties vested in the Nattam.aigars and, therefore, they receive the income in their own right and not on behalf of the kasupangudars. A careful reading of the relevant

(')(1921) L.R. 48 I.A. 302, 315.

(') (1933) L.R. 61. I. A. 50.

part of the schame does not countenance this argument. Clause 3 A of the scheme. which is the material clause, reads:

"The management and administration of the affairs of the Nagore Durgha at Nagore, Tanjore District, and other thakias :and shrines connected therewith (mentioned in Schedule A hereunder) and all properties-movables and 'immovables-which belong to or have been or may hereafter be given. dedicated, endowed thereto, shall subject to the provisions thereof vest hereditarily in the eighr

trustees or nattamaigars of the Durgha who shall constitute the Bmrd of Trustees. Each trustee or nattamaigar is entitled to hold office for life, and after him the trusteeship shall devolve on his next male heir in accordance with the custcm prevailing in respect of such office in the Durgha."

Under this clause the management and adminhtration of the Nagore Durgha and its properties vest in the N attamaigars. What vests in the Nattamaigars is not the properties of the Durgha but D the management and administration thereof. Unless the words are clear we are not prepared to hold that the High Court in framing a scheme for the endowments of the Durgha had introduced a foreign concept of "trust" in derogation of Mohammadan law.

We, therefore, hold that the scheme did not vest the properties of the Durgha in the Nattamaigars.

, Lastly, a faint argument was raised to the effect that under the scheme the managing trustee was not appointed under any order of a Court but was appointed by an agreement among the trustees. But in cl. 4 of the scheme the High Court gave a specific direction that the managing trustee shall be elected from among F the Board of Trustees. The Managing Trustee elected was certainly appointed under an order of a Court, for the election was held pursuant to the order of the Court. That apart, in the view we have taken, namely, that the Nattamaigars are not trustees in the English sense of the term, this question does not arise for consideration.

In the result. we hold that the High Court has rightly answered the question referred to it in the affirmative and in favour of the assessee. The appeals fail and are dismissed with costs. One hearing fee.

Appeals dismissed.

COMMISSIONER OF INCOME-TAX, MADRAS

April 8, 1965

K. SuBBA RAo

C. SHAH

S.M. SIKRI, JJ

Indiian Income Tax Act, 1922

s. 41

Tanjore District

Durgah

Indian Income-true Act, 1922

s. 41

s. 41

Madras High Court

Niren De

R. Ganapathy Iyer

R. N. Sachthey

A. V. Vishwanatha Stistri

M. M. Ismail

R. Gopalakrishnan

Sobba Rao

Madras State

March 16, 1955

Saiyed Muhammed Eusoof

High Court of Madras

Income-tax Act, 1922

Section 41

Madras

A. V. Viswanatha Sastri

Subba Rao

s. 41

(1921) L.R. 48 I.A. 302

Clause 3

Durgha

cl. 4


DAMJI V ALJI SHAH AND ANOTHER

LIFE INSURANCE CORPORATION OF INDIA & ORS.

B April 8, 1965.

[P. B. GAJENDRAGADKAR, C. J., M. HIDAYATULLAH,

RAGHUBAR DAYAL AND V." RAMASWAMI. JJ.J

Life Insurance Corporation Act, 1956, ss. 15 .and 44(a)-Indian Companies Act, 1956, ss. 446(1 )-Application by Life Insurance Corporation under s. 15 of L.I.C. Act-Defendant company ordered to be wound.up by court--..:Permission of High Court under s. 446(1). of Companies Act whether necessary for proceeding with application under s. 15.

Indian Insurance Act, 1938 s. )(}-Transfer of Funds from Life Insurance Fund to General Department of composiite 1nsurer-Per- 1nissibility.

The appellants were directors of an insurance company which was a composite insurer i.e. Qne carrying on other classes of ~1fe insurance business besides life insurance. Under s. 10(1) of the Indian Life Insurance Act, 1938, a composite insurer had to keep sepaate

accounts in respect of the different classes of business, and its receipts in respect of life insurance business had to &:o into a fund called the Life Insurance Fund which could be appl!ed only for the purposes of the Life Insurance business and had always. to be sufficient to meet the net .liabilities of the Life Insurance busmess. By resolution dated December 18, 1948, a sum of Rs. 1,10,000 was transferred from the General Department of the company to the Life Department to be added to the Life Fund; if this had not been done the said fund would have shown a deficit in the actuarial valuation report dated July' 18, 1949. In the profit appropriation account of the company for the latter year a sum of Rs. 60,000 out of the above sum was written off so that the sum advanced was reduced to Rs. 50,000. A further sum of Rs. 32,000 was again similarly transferred from the General to the Life Department by resolution passed in August 1953 with retrospective effect from December 31, 1952, in order to strengthen the position of the Life Fund which again would have shown a deficit if this had not been done. The advances thus made on both occasions were according to the relevant resolutions repayable only out of the 'valuation surplus', if any, in the life department. On January 8, 1956, the Board of Directors of the company transferred a sum of Rs. 82,000 from the Life Department to the General Department. by way of repayment of the above loans.

On January 19, 1956, by Ordinance No. 1 of 1956 the management of the life insurance business of all insurers in the country passed to the Central Government. On September 1, 1956, the Life Insurance Corporation of India came into being under the Life Insurance Corporation Act, 1956, and the assets and liabilities of the life insurance business carried on by all insurers became ·., rested in it. The corporation filed an application under s. 15 of the said Act before the Tribunal constitµted under the Act allegin!i' that transfer of Rs. 82,000 from the Life Department to the General Department of the aforesaid company was without consideration and not for any 665

SUPREME COURT REPORT8 [!96fi] 3 s.c.R.

necessity of the life insurance business and prayed for a decree A against appellants and the company jointly and severally for the said amount. The Tribunal overruled the defendants' objections as to its jurisdiction and granted a decree to the Corporation as prayed. The company did not appeal but the appellants came to this Court by special leave.

The following COI\tentions were raised on behalf of the appel- B !ants; (1) The tribunal had no jurisdiction to proceed with the proceedings on the petition presented by the Corporation without the leave of the High Court in .view of s. 446 of the Companies Act, 1956, the Company having been ordered to be wound up the High Court

on November 9, 1959; (2) In view of s. 44(a) of the L.I.C. Act noi..; of the provisions of the Act applied to the company and therefore the Tribunal could not proceed on the application of the CorPora- C tion subsequent to the company being: wound-up; (3) The transfer of Rs. 82,000 from the Life Fund to the General Department of the company was for corisic\eration and was necessary for the life insurance business.

HELD: (i) The provisions of s. 446 of the Companie.> Act did not affect the proceedings before the Tribunal.

It is in view of the exclusive jurisdiction conferred upon the company court in sub-s. (2) of s. 446 of the Companies Act to entertain and dispose of any suit or proceeding by or against a company which is being wound•up that provision has been made in sub-

s. (1) of that section that no suit or proceeding shall be filed, or if pending, proceeded with against such a company without permission having been taken from the Court. In view of the provision in s. 41 E of the L.LC. Act the company court has no jurisdiction to try matters which a Tribunal under the Companies Act is empowered to entertain and decide. It could not be disputed that the Tribunal was empowered to try the Corporation's application under s. 15 and the Company Court tiherefore had no jurisdiction to entertain or decide it. It must follow that the consequential provision of sub-s. (1) of s. 446 would not operate on the proceedings before the Tribunal.

[673E-GJ F

Further, the provisions of the Special Act i.e. the L.I.C. Act will over-ride the provisions of the general Act viz. the Companies Act which is an Act relating( to companies in general. [673H]

(ii) The company could not take advantage of the provisions of s. 44(a) of the L.I.C. Act. [674D-EJ

Section 44(a) provides that the provisions of the Act will not apply to an insurer whose business is being wound-up under orders of court. But the question of the applicability of the Act to a particular insurer is to be considered in relation to facts existing at the time when the Ac~ came into force i.e. July l, 1956 or on the appointed day, i.e. September I. 1956, when the assets and liabilities of the contr.olled insurer of the company stood transferred and vested in H the Corporation. The company was not being wound-up under orders of Court on the above dates. The L.I.C. Act and therefore s. 41 thereof did apply to the company. It could not cease to apply merely because subsequently the company was ordered to be wound-up. [673H-674B]

Section >M(a) was not applicable to the company for the further reason that when it was ordered to be wound-up in 1959 it was not an 'insurer' within the meaning of that word in. s. 2(6) since it was not carryine on life insurance business on that date. the said busi-

- '

6G7

'appoin~d ness having be~D. ', taken over day. [674C-D] .

-----~---~-~ -----

(iii) The Tribunal rightly passed a decree in favour of the Corporation. 1

No question of lending money by. one department of the com pan;· to the other can ordinarily be contemplated. The assets of the . cmnpany really constitute one entity evn though the company maintains separate accounts with respect to its various insurance businesses. From. the facts it was clear that the amounts of Rs. 1,10.000 and Rs. 32,000 had been transferred from the General Department to the Life Fund to meet the deficit in the Life Fund which was likely to occur on both occasions. The circumstances showed that the sum of Rs. 82,000 was transferred back to the General Department in a hurry in anticipation of some law depriving the \.'.'ompany of -its life insurance business. It was moreover a condition of the alleged 'loans' that they would be repaid only when there was a 'valuation surplus' in the Life Fund. There was no such surplus in the-

Li1~ Fund at the time when the sum .was transferred from it to-· the General Department. [674G]

SUPREME COURT REPORTS [1965] 3 s.c.:a.

The facts of the case briefly are these. 'Fhe company was a A composite irtsurer, i.e., an insurer who carried on, in. addition to lite insurance business, other classes of insurarlce business. The LIC Act came into force on July. I. 1956 and the Corporation was established on September 1, 19§6 which was the "appointed day'

cording to s. 2([) of that Act. On that day. in view of s. 7, all tne' assets and liabilities appertaining tG the life insurance business Ir (called the controlled business, vide s. 2(3)) of the Company stood transferred to and vested in the Corporation. It was found that certain amounts which had been transferred from the' Life Insurance Fund in the books of the company to the General Department had not been transferred in accordance with the provisions C of the Insurance Act 1938 (Act 4 of 1938) \\lhich governed the company and shoµld have continued to be included in the assets appertaining to the controlled business of th!' company. It was , therefore tl)at an application under s. 15 of the.LTC Act was made by the Corporation to the Tribunal. •

We may now state how this amount of Rs. 82.000/- happened D to be transferred from the Life Insurance Fund (or fhe Life Fundl cf the company to its General Department. The .company had .to 'keep separate accounts pf all receipts" 'and payments in respect of each class of insurance business, in v!ew of s. "10(1) of the Insurance Act. It had to maintain a Life Fund in connection with its life insurance business in view of s:'-10.QJ. Sub-s. (2) provided thal E where an insurer carried on business of life insurance, all receipts due in respect, of such business be carried to and would form a separate fund called the Life Insurance Fund and its assets be/ kepl distinct and separate from all other assets of the insurer and deposits made by the insurer in respect of life insurance business.

Sub-s.- (3) of s. 10 pi:ovided that the life insurance fund would be as absolutely t, he security of the life policy holders as though it belonged to an insurer carrying on no other.business than life insurance business and" that it should not be applied directly or in- . directly for any purpose other than those of the life insurance business of the insurer. The amount in this fund had to be sufficient to meet the net liabiiitie's in regard to the life insurance policies issued by the company. If it was not so maintained. the company stood the chance of being barred from carrying on life insurance business.

By resolution dated December 18. 1948, Rs. Ll0.000/- were H transferred from the General Department to the Life Department as advance to the- Life -Department Revenue Account for being added to the Lify Fund. subject to the condition that the Life Dcrartment would not be liable kl pay any interest thereon and

tht no repayment of the Jc.an would be made except out of the valuation surplus of the Life Department. The first actuarial valuation report of the company for the year 1944--.-48, dated July 18,

....,~...,...--

DAMJI VALJI 'V, L.I.C. (Dayal, J,) 669

1949, showed that the net liability of the company was Rs, 6,55,718 and that the amount in the Life Fund was Rs. 6,57,4501and therefore the fund showed a surplus of Rs. 1,732/- over the net liabilities. If the sum of Rs. 1,10,000/- had not been transferred to the Life Department Revenue Account prior to Dece~

ber 31, 1948, this valuation report would have shown the net hab1lity exceeding the amount in the life fund by about a . lakh of rupees, It is clear that the amount as, so transferrd m ord.er to avoid the consequences of the net hab1httes exceedmg the Life Fund.

The Profit & Loss Appropriation Account for the year 1949 shows that Rs. 60,000 /- out of this amount of Rs. l, 10,000 /- was written off as the company had made profits. Rs, 32,000 Iwere again similarly transferred to the Life Fund from the General Department with retrospective effect from December 31, 1952 in order to strengthen the position of the Life Fund,

The second actuarial valuation report for the period 1949-- 52, dated September 9, 1953, showed that the policy liability amounted to Rs, 15,36,068, that the Life Fund stood at Rs, 15,35,890/- and that thus the Life Fund exceded the net liabi• lity by Rs. 2,822 /-. There was thus a surplus as Rs, 32,000 /- had been transferred to strengthen the Life Fund, with retrospective effect in view of the resolution dated August 20, 1953 whicb

rads:

"Resolved that a lean of Rs, 32,000 /- (thirty two thousand only) bearing no interest be hereby given to Life Department by General Department with retrospective effect as on 3 lst December 1952, the repayment of which shall be made only out of the future Valuation Surplus or surpluses of the Life Department or it may be written off from the future profits of the General Department This will have effect in the accounts of the Company for the year ended 31st December 1952,"

It is to be noted that this resolution itself said that the amount would be repaid only out of the future Valuation Surplus or surpluses of the Life Departtnent or might be written off from the future profits of the General Department

It was this amount of Rs. 82,000/- (Rs. 50,000/- plus Rs. 32,000/-) which, by a resolution dated January 6, 1956 was transferred to the General Department from the Life Fund, The resolution reads: -

"Resolved that a loan of Rs. 82,000 /- (eighty two thousand only) advanced to Life Depaxtment Revei; me Ac-' count by General Department be and is hereby repaid to General Department and the balance of Rs, 60,000 /-

670 BUl'REMK COURT REPOll'fS [1965] 3 s.c.11.

due to Gen-era! Department by Life Department Revenue A Account be and is hereby kept in reserve for future and hence no adjustment in regard to Rs. 60,000/- will be made for the present."

This resolution was confirmed by the Board of Directors at its meeting dated February 6, 1956.

We may now refer to the changes in law with respect to life insurance business in 1956 and an anticipation of which probahly led to the resolution of January 6, 1956. On January 19, 1956, the Life Insurance (Emergency Provisions) Ordinance, 1?56 (Ord. No.- I of 1956) was promulgated by the President. It came into force C from that day which was called the 'appointed day'. Section 3(1) provided that the management of the 'controlled business' of all insurers would vest in the Central Government on and from the appointed day. 'Controlled business', according to cl. (2) of s. 2, meant all the business appertaining to the life insurance business, if the insurer carried on any other class of insurance business also. D Clause (b) of sub-s. (3) prohibited the incurring of any expenditure by the insurer without the previous approval of the person specified by the Central Government in that behalf, from the assets appertaining to the controlled business otherwise than for the purpJse of making routine payments etc., specified in that clause. E : hosepurposes do not include the repayment of an advance made from the General Department to . the Life Fund or to the Life Department Revenue Account. Clause (c) of sub-s. (3) further prohibited the insurer, without the previous approval of the authorised person, to transfer or otherwise dispose of any such assets appertaining. to the controlled business oi create any charge or hypothe- F cation, lien or other encumbrance thereon. It would therefore appear that possibly the Board of Dir.ectors were not right in confirming the resolution of January 6, 1959 after the Ordinance had come into force. However, that is not the point raised in these proceedings.

We have already referred to the coming into force of the LIC G

Act on July l. 1956 and of the transfer and vesting in the Corporation of al! the assets and the liabilities pertaining to the life insurance business in view of s. 7 of that Act. Section 15 provides that ihe Corporation may appcy for relief to the Tribunal in respect of a transaction which is made by the insurer whose controlled B business had been transferred to and vested in the Corporation under the Act at any time within 5 years before January 19, 1956 and by which the composite insurer has transferred any property from his life department to his general department without consideration or for an inadequate consideration and the transfer was not reasonably necessary for the purpose of the conttalled 1'usiness of the insurer or was made with an unreasonable lack of prudence

DAMJI VAI, JI v. L.I.C. (Dayal, J.) 671

on the part of the. insurer regar<l being had in either case to. the circumstances at the time. The Corporation, in such proceedmgs, had to make all parties to the transaction parties to the application.

Sub-s. (2) of s. 15 empowered the Tribunalto make such order against any of the parties to the application as t thought just having regard to the extent to which those parties we'.e respectively responsible for the transactio~ or benefite? from 1t and all the circumstances of the case. Section 16 provided for the payment of compensation to the insurer whose controlled business had been transferred to and vested in the Corporation under the Act. Section 17 provided for the constitution of Tribunals which were empowered by sub-s. (4) to regulate their own procedure and decide all matters within their competence. Section 41 provided that no civil Court would have jurisdiction to entertain or adjudicate upon any matter which a Tribunal was empowered to decide or determine under the Act. Section 44 inter a/ia provided that nothing contained in the Act would apply in relation to any insurer whose business was being voluntarily wound-up or was being wound-up under orders of the Court.

The Cc>rporation, by its application under s. 15. contended that the transfer ofRs. 82,000/- from theLife Fund to the General E Department under the resolution of January 6, 195,, was iilegal, being contrary to and in contravention of the insurance Act and as such was inoperative, bad in law and not binding on the petitioner.

It was further contended that the said transfer was without consideration and was not reasonably necessary for the purpose of the controlled business of the company and I or was made witb F unreasonable lack of prudence on the part of the company, regard

being had to the circumstances at the time. It was therefore toot it prayed inter alia for a decree against the respondents for a sum of Rs. 82,000 /- with interest. It impleaded the company as respondent No. 9, the appellants in C.A. 676 of 1962 as respondents Nos. 1 and 4 and the appellant in C.A. 677 of 1962 as respondent G No. 2. Ghanshyamdas and Damji Valji were also parties to the resolution dated February 7. 1956. Other directors who were parties to the resolution of January 6 were also impleaded.

The aforesaid three d:rectors, the appellants before us, contested the claim. of the Corporation and justified the transfer of H Rs. 82,000 /- to the General Department from the Life Fund on the ground that the amount had been lent by the General Department to the Life Department and had been paid back to the General Department by transfer from the Life Fund v.:hen the Lifo Fund showed surplus, according to the report of the Actuary dated July 25, 1955. It was also contended before the Tribunal that the petition coald not be proceeded with without the leave of the Bombay High Court in view of s. 446 of the Indian Companie'

672 SUPREME COUR'f !\~PORTS

11965) 3 S.C.R.

Act and that the petition was also not maintainable by reason of A s. 44 of the LIC Act. Several other grounds were also taken before the Tribunal. We are not now concerned with them.

The Tribunal held that the amounts of Rs. 1,10,000/- and Rs. 30,000 /- were not advanced to the Life Department as Joans and that the transfer of Rs. 82,000/- was not out of the valuation B surplus and that therefore the transfer of this amount could not be said to be for consideration a.nd necessa.ry or reasonabl, y necessary for the purpose of the controlled business of the company or even a prudent transaction having regard to the interest of the life policy holders. It held that no leave of the Bombay High Court was necessary for proceeding with the petition and that the peti- C tion was maintainable and that s. 44 of the LIC Act did not bDr the applicability of the provisions of the Act to the respondent company. It therefore decreed the suit and ordered the company and the directors, respondents I to 4, to pay to the Corporation jointly and severally a sum of Rs. 82,000 /- together with interest D thereon at 6 per cent per annum from September I, 1956 till full paymeni. It is against this decree that C.A. 676 of 1962 has been filed, by special leave, by Damji Valji Shah and Jayantilal Hirjibhai Chawda and C.A. 677 of 1962 by Ghanshyamdas. This judgment will govern both these appeals.

The points raisd by learned counsel for the appellants are:

(i) The Tribunal had no jurisdiction to proceed with the proceedings on the petition presented by the Corporation without the leave

of the High Court in view of s. 446 of the Companies Act, 1956, the company having been ordered to be wound-up by the High Court on November 9, 1959, (ii) In view of s. 44(a) of the LIC Act none of the provisions of the Act applied to the company and F therefore the Tribunal could not proceed on the application of the Corporation subsequent to the company being wcund-up. (iii) The transfer of Rs. 82,000 /- from the Life Fund to the General Department of the company was for consideration and was necessary for the life insurance business.

The fourth point sought to be urged was that the provisions of s. J5(J)(f) of the LIC Act were ultra vires as they contravened the provisions of Arts. 14 and 19 of the Constitution. This contention was .not raised before the Tribunal during the arguments and was therefore considered by it to have been abandoned. We did

not therefore allow it to be raised before us.

Sub-s. (I) of s. 446 of the Companies Act provides that when a winding-up order has been made or the Official Liquid1tor has been appointed as Provisional Liquidator. no suit or other legal proceeding shall be commenced or, if pending at the date of the winding-up order, shall be proceeded with against the ccmpany except by leave of the Court and subject to such terms as the

l>AMJ! VAT.JI t'. 1 .. 1.c. (Day.d, J.) 6i3

Court may impose. Subs. (2) provides. inter alia, that the Court which is winding-up the company shall, notwithstanding anything contained in any law for the time being in force, have jurisdiction to entertain or dispose of any suit or proceeding and any claim made by or against the company. Sub-s. (3) provides that any suit or prcceeding by or against the company which is pending in any Court other than that in which the winding-up is proceeding may, notwithstanding anything contained in any other law for the time being in force. be transferred to and disposed of by that Court. The question is whether these provisions would affect the proceedings of I he Tribunal.

In this connection, reference may be made to s. 41 of the LIC Act which provides that no civil Court shall have jurisdiction to entertain or adjudicate upon any matter which a Tribunal is empowered to decide or determine under that Act. It is not dis puted that the Tribunal had jurisdiction to entertain the application of the Corporation and.adjudicate on the matters raised thereby. The Tribunal is given the exclusive jurisdiction over this matter.

It is in view of the exclusive jurisdiction hich sub-s. (2) of s. 446 of the Companies Act confers on the company Court to entertain or dispose of any suit or proceeding by or against a company or any claim made by or against it that the restriction referred to in sub-s. (]) has been imposed on the commencement of the procee:lings or proceeding with such' proceedings against a company after a winding-up order has been made. In view of s. 41 of the UC Act the company Court has no jurisdiction to entertain and adjudicate upon any matter which the Tribunal is empowered to decide or determine under that Act. It is not disputed that the Tribunal has jurisJiction under the Act to entertain and decide matters raised in the petition filed by the Corporation under s. 15 of the uc Act. It must follow that the consequential provision of sub-s. (]) of s. 446 of the Companies Act will not operate on the .proceedings which be pending before the Tribunal G or which .may be sought to be commenced before it.

Further, the provisions of the special Act i e _ the LIC Act, will over-ride the provisions of the general Act viz., the Companies Act which is an Act relating to companies in general.

11 It is however conten:led for the appellants that in view of s. 44(a) of the LIC Act, s. 41 will not apply to the company whose business was being woun1:up under orders of Court and that therefore the provisions of s. 446 of the Companies Act will affect the procedings before the Tribunal. The contention is not sound. The question of the applicability of the Act to a particular insurer is to be considered in relation to facts existing when the Act came jnto force. In view of s. 44 of the LIC Act it will not apply to

674 SUPREME COC:RT ll>'PORTS

(1965] 3 S.C.R,

an insurer whose business is being wound-up under orders of C<1un A. at the time when .. that Act came into force in 1956 or on the 'appointed day' i.e., September I, 1956. when the assets and li<•bilities pertaining to the controlled business cf the company stood transferred and vested in the CorpDration. The company was l'Ol being wound-up under orders of the Court on July I, 1956 when the Act came into force or on the appointed day mentioned earlier.

The Act did apply to the c0mpany.

It cannot cease lo apply merely because subsequently the company was ordered to be wound-up.

The word 'insurer' is defined in cl. 161 of s. 2 of the UC Act and means an insurer as defined in the Insurance Act who carries a on life insurance business in India and includes the Government and a provident society as defined in s. 65 of the Insurance Act.

On November 9, 1959, when the company was ordered to be woundup it was not an 'insurer' within the meaning of the definition as the company did not carry on life insurance business in India en & that date. Its life insurance busine., s had been taken over by the Corporation on the appointed day and it ceased to carry on that business thereafter. It follows therefore that the company was not an insurer on November 9, 1959 und cannot lil"ke advantage of the provisions of cl. (a) of s. 44 oi the UC Act.

We are therefore of opinion that the Tribunal had jurisdiction to continue the proceedings after November 9, 1959 when the company was ordered to be wound-up and that the provisions of s. 446, Companies Act, or s. 44(al. LIC Act, do not in any "'ay affect its jurisdiction to continue the proceedings.

We now come to the third point raised for the appellants. We agree with the Tribunal that the amounts of Rs. 1.10.000/- .tnd

Rs. 32,000 /- w, ere not lent to the Life Department as such by the General Department. No question of lending money by one depmment of the company to the other can be ordinarily contemplated.

The assets of the company really constitute one entity, even though G the company maintains separate accounts with respect to its various insurance business. It carried on other types of insuran_ce business also. We have already shown how the provisions of the Insurance Act require the company to keep a separate account for the life insurance business and to have a separate fund known as the Life Insurance Fund and to which were to be credited all H receipts due in respect of the life business and the amount deposited by the insurer in respect of life insurance business. Such a deposit is to be made in view of s. 7(1) of the Insurance Act. This requires the insurer to deposit and keep deposited with the Reserve Bank of India for and on behalf of the Central Government either in cash or in approved securities or partly in cash and partly in approved securities the sums specified in the various clauses iq

VAi.Ji !'.

L.l, C. (Day l, ,/.) 67fi.

A regard to the different types of life insurance businosses. Oause

(a) requ~"s a ,\erosit of Rs. 2,00,000/- where the business done <>r to b~ done is life insurance onl:y. Clause (e) requires a deposit of Rs. 3,00,000/- where the business done or to be done is life insurance and any one of the three classes mentioned in clauses (bl to (d).

ll<rnse (e) further provides that out of the deposit of Rs. 3,00,000 /-, Rs. 2.00,000 /- shall be the deposit for life insurance business.

Section 7 lays down a statutory amount which the insurer has to deposit. It does not however restrict the insurer to deposit a larger amount in respect of life insurance business. Section 8\1) places certain restrictions about the use to be made of the depo>its under s. 7. Section 8(2) hew.ever deals with any deposit andprovides that where a deposit is made in respect of life inurancc business, the deposit made in respect thereof shall mt be available for the discharge of any liability of the insurer other than liabilities arising out of policies of life insurance issued by the ins11rcr.

D This means that when an insurer puts certain money in the funds pertaining to the life insurance business and especially to a life insurance fund. such an amount can; be used only fer the discharge

of liabilities of the insurer arising out of life insurance policies issued by him.

The amounts of Rs. 1,10,000/- and Rs. 32.000/- would thug amount to deposits made by tre company in. respect of life insur- <rnce business in order to augment the life funj. This can be done either to bring the funds tc an amount exceeding the expected net lia bi\itics on the poiicies or merelv to augment that fund. It makes no difference to the company how it distributed its funds so long as its statutory liabilities. were atisfied. ·

The very con'..luct of the company with respect to lhc~.e amounts belies the alleged nature of the transfers of these amcunts to (he Life Department. The sum of Rs._ 60,000 /- out ,, f Rs. 1.10,000/- was written off in 1949. A loan of such an amount is not usually writlen off, No special reason is assiQneci for writing oil the loan. The resolution about the transfer of Rs. 32,000,'- ; c, elf speaks of the possibility o{ the amount being written off. A le11der does not think in this wav at the time he advances a loan.

It is clear that.the amount was re31\y being transferred to the Life Fund through the Life Department Revenue Acc; Junt as otherwise the Life Fund on the actuarial valuation would have stood at a H figure much below the amourit of the net liabilities on the policies as calculated in Form H, Schedule Four to the lnsurnnce Act, which is a Form giving summary and valuation of the policies. cf the company as at the date of the valuation. Form I is for the valuation balance-sheet of the company at the corresponding date and requires in one column the net liability under business as shown in the summary and valuation of policies and in the other column the balance of life insurance fund as shown

~76

SUPRRMF. COURT REPORT-, [l 965] ~. s.c.n.

in the balance sheet, and also provides for noting the eventual posi A tion about the Life Fund being in surplus or fo deficiency 'as compared to the net liability. Wheri the amount was not lent as a loan, no question of its repayment as such could have arisen in 1956. ofcourse whenever the Life Fund showed an actuarial valuati0n surplus' tht surplus or part of it could be transferred to t]]e General Department according to the desire of the management.

The amount of Rs. 82,000 /. was not transferred as a result of the actuarial valuation as contemplated by _the various resolu tions which authorised the transfer of the amount from the General Department to the Life Department Revenue Account. It was definitely provided in those resolutions that no repayment of the C amount would be inade except out. of valuation surpluses of the Life Department.

The expression 'valuation surplus" has a .technical meaning under the Act.

D . Section 13(]) of the Insurance'. Act provides that e<very insurer carrying on life insurance business shall, ii) respect cf the life insur ance business transacted in lndia.-cause once at least in every three ylf.irs an investigation to be macie-b¥ an ectuary into the financial condition of the life insurance business c•rried on by him, includ E ing the valuation of pis liabilities in respect thereto. An abstract of the report of the actuary is to be made in accordance with 'the regulations contained in Part r cf the Fourth SchMule and in con- Jormity with the requirements of Part II of that Schedule. Section. - ~- 13(2) provides that the provisions of sub-s. (]) regirding the m, aking of an ab; tract shall <i; pply whenever at any other time an investiga F lion into the financial conditicn of the insurer. is made with a 'view to the distribution of profits or an iqvestigation is made of which the resi:t, are m<1de public. The abstract is to be certified on behalf of the insurer to the effect 1hat fulJ anj effective particulars of every' policy under which there is a liability either actual or contingent have been furnishej to the actuary for the purpose of inves- G ligation.

Section 15 requires the submission of the aforesaid abstract to the Controller within the specified period. Part II of the Fourth Schedule requires that° every extract prepared in eccordance with the requirements of that part of the Schedule win have the state- H ment of a consolidated revenue. a.ccount in' Ferm G, a sumrnarv an:! valuation in Form H. a valuation balance sheet in Form I and a statement in Farm DDD rs set forth in Part IT of the Third Sche dule annexed to it. The valuation balance sheet in Form I requires the, noting of a surplus: if any, of the balence of the life insurance fund as compared tc thenet •liability in tire business as shown in the sum111ary and valu"ation of policies. It is the surplus noted in this

- __ ___..__

DAM.JI VAi.Ji v. L.I.C. (Duy;!, J.) 677

Form I which is really the valuation surplus. It was out of such surplus that the company resolved that the advances of Rs. l, I0,000/- and Rs. 32,000 /- could be paid to the General Department by the Life Department. No such actuarial valuation was made by the actuary prior to the transfer of Rs. 82,000/- to the General Fund by the resolution dated January 6, 1956.

Reliance in this connection is placed on behalf of the appellants on the letter of the actuary dated July 25, 1955. The actuarY'

states:

"On the above basis, the valuation shows a policy liability of Rs. 20,20,421.

The Life Insurance Fund is Rs. 21,32,455. Thus there is a surplus of Rs. 1.12.033.

The surplus includes Rs. 53,300 being the amount of appreciation on investments taken into account by you in the past two years.

Thus the net working surplus is Rs. 58,733/-.

The cost of Bonus at the rate of Rs. JO/- per thousand is approximately Rs. 48,000 /-.

Thus the surplus is sufficient to enable a bonus declaration at the above rate even after excluding the appreciation amount or setting it a part as an additional reserve for future use.

Conclusion: The result is satisfactory. Cont" nuing the same method of working as you have followed. the statutory valuation as on 31-12-55 will surely enable you to declare a higher bonus."

firstly, it does not appear th3t the actuary had really conducted an investigation and submitted the valuation report as required by s. 13, of the Insurance Act. There is nothing on the record to show that any ubstract in Form I, Fourth Schedule, was prepared

and submitted to the Controller. Further. the letter shows that the G net working surplus was only Rs. 58,733/- as the ostensible surplus of Rs. 1,12,033 /- included Rs. 53,300 /- by which certain invest ments of the company had appreciated in that period. 'When the net working surplus was much less than Rs. 82,000/- which were transferred from the Life Department to the General Department, the transfer of Rs. 82,000/- cannot be said to have been in accord- :H ance with the terms on which the alleged Joan was made to the Life Department from the General Department. When the Life Department had not Rs. 82,000 /- with itself, there could not have been any necessity to pay that amount to the General Department.

In fact, the alleged loan could be paid only when there would have been a valuation surplus in the accounts of the Life Department but this does not mean that the Life Department was bound to pay back the amount. the moment it had any valuation surplus.

678 SUPRE~IE COURT REPOJtTS [196rtj 3 s.c.R.

Its liability to pay the alleged loan could arise only when there was a valuation surplus. Its paying the amount actually would: depend upon the circumstances prevailing at the time.

Jn the circumstances, we cannot resist the conclusion thar the Directors passed a resolution for the transfer of this amount on January 6, 1956 in anticipation of some law depriving the ccm- B pany of its life insurance business. It may be that it was a close secret that an Ordinance would te issued on January 19. But all the same, possibly, persons in the insurance world could have had an inkling of the trend of events.

The content of the resolution passed en January 6, indicates g that the directors had no clear idea at the time as to how much t-he Life Department. according to them, owed to the General Department.

The resolution speaks not only of the transfer of Rs. 82,000 /- to the General Depa.rtment but also refers to t.hei bafance of Rs. 60,000 /- due to the General Department by the Lifo Department Revenue Account. The amount had been written off D in 1950 and could not have tl1ereafter been considered to be a loan advanced to the Life Department Revenue Account from the General Department. It seems that the resolution was passed in some hurry and the Directors could not definitely decide as to how any further amount upto Rs. 60.000 /- could be taken back te the General Department from the Life Department Revenue Account. E Any way, such a resolution of the Directors indicates that any entries with respect to the alleged loans were made for the purpose of accounting and the necessities of the business. Money in the Life Fund had to be augmented in 1948 and 1952 in order to make the Life Fund xceed the net liabilities of !he company on account of the life insurance policies. ' F

We are therefore of opinion that the Tribunal took a correct view about the nature of the transfer of Rs. 1,10,000/- in 1948 and Rs. 32,000 /- in 1952 to the Life Insurance Fund and rightly held that the transfer of Rs. 82,000 /- to the General Department by'

resolution dated Januarv 6, 1956, was not in acordance with the G i; rovisions of the rn, urance Act and that con, equently that amount continued to form part of the assets of the life insurance business of the comoany upto September !, 1956 and that as such vested in the Corporation which could recover it from the company and the directors responsible for the transfer of the amount to the General Department.

The appeals therefore fail and are dismissed with costs, one hearing fee.

Appeals dismissetl-

DAMJI V ALJI SHAH AND ANOTHER

P. B. GAJENDRAGADKAR

M. HIDAYATULLAH

RAGHUBAR DAYAL

V." RAMASWAMI

Life Insurance Corporation Act, 1956

ss. 15

Indian Companies Act, 1956

ss. 446(1 )

s. 15

s. 446(1)

Companies Act

s. 15

Indian Insurance Act, 1938

s. 10(1)

Indian Life Insurance Act, 1938

December 18, 1948

July' 18, 1949

December 31, 1952

January 8, 1956

January 19, 1956

Central Government

September 1, 1956

s. 15

s. 446

Companies Act, 1956

November 9, 1959

s. 44(a)

s. 446

s. 446

Companies Act

s. 41

s. 15

s. 446

Companies Act

s. 44(a)

Section 44(a)

July l, 1956

s. 41

s. 2(6)

July.

September 1, 19§6

s. 2([)

s. 7

s. 2(3)

Insurance Act

s. 15

Insurance Act

s. 10

December 18. 1948

Dece~

ber 31, 1948

September 9, 1953

August 20, 1953

3 lst December 1952

31st December 1952

January 6, 1956

Section 3(1)

s. 2

January 6, 1959

Act

July l. 1956

s. 7

Section 15

s. 15

Section 16

Section 17

Section 41

Section 44

s. 15

January 6, 195

insurance Act

Ghanshyamdas

Damji Valji

February 7. 1956

July 25, 1955

Bombay High Court

s. 446

s. 44

s. 44

Damji Valji Shah

Jayantilal Hirjibhai Chawda

Ghanshyamdas

s. 446

Companies Act, 1956

s. 44(a)

Arts. 14 and 19

s. 446

Companies Act

s. 41

s. 446

Companies Act

s. 41

s. 15

s. 446

Companies Act

Companies Act

s. 44(a)

s. 41

s. 446

Companies Act

s. 44

July I, 1956

cl. 161

s. 2

Insurance Act

India

s. 65

Insurance Act

s. 44

s. 446

Companies Act

Insurance Act

Insurance Act

Section 7

Section 8

s. 7

Section 8(2)

Schedule Four to the lnsurnnce Act

Section 13(])

Section 15

Fourth Schedule

s. 13

Insurance Act

Fourth Schedule

Januarv 6, 1956


UNION OF INDIA AND ANR. v.

INDIA FISHERIES (P) LTD.

April 9, 1965

[K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, JJ.]

Incqme Tax Act 1922, s. 49E-Department's power to set off r•- fundable amount against tax remaining due-Whether available in respect of tax due from company in liquidation-Whether subject to ss. 228 and 229 of the Companies Act, 1913.

The respondent company was directed to be wound-up and an official liquidator appointed by an order of the High Court in October,

1950. In December, 1950, the respondent was assessed to tax amounting to Rs. 8737 /- for the year 194&-49. A claim made for this tax on the official liquidator was adjudged and allowed as an ordinary claim and certified as such in April, 1952. The Liquidator declared a dividend ol'W annas in the Rupee in August, 1954 and paid a sum of Rs. 5188 to the Department, leaving a balance of Rs. 3549.

In June, 1954, the Department made a demand from the respondent and was paid Rs. 2565 as advance tax for the year 1955-56. On a regular assessment being made for that year, only Rs. 1126 Was assessed as payable, so that a sum of Rs. 1460, inclusive of interest, became refundable to the respondent. However, the Income Tax Officer, purporting to exercise the power available to him under s. 49E of the Income Tax Act, 1922, set off this amount against the balance of Rs. 3549 due for the year 194&-49. A revision petition filed by respondent in respect of this set off was rejected bv the Commissioner of Income Tax. ·

Thereafter, a petition under Art. 226 filed by the respondent to set aside the orders of the Income Tax Officer and the Commissioner was allowed by the High Court, mainly on the ground that the demand for Rs. 8737 in respect of 1948-49, being adjudged nd certified came to have all the incidents and character of an unsecured debt payable by the liquidator to the Department; it was therefore governed by the pcovisions of Company Law and no other remedy or method to obtain satisfaction of the claim was available to the creditor.

In the appeal to this Court it was contended on behalf of the appellant that s. 49E gave statutory power to Income-tax Officer to set off a refundable amount against any tax remaining payable and that this power was not subject to any provision of any other law.

HELD: The Income Tax Officer was in error in applying s. 49E and 8'tting off the refund due to the respondent. [6B3C-D]

The effect of ss. 228 and 229 of the Companies Act, 1913, is, inter aLia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid pari passu. Once the claim of the Depertment has to be proved and is proved in liquidation proceedings, it 679

~.·, ''' [1965] 3 S.('. lt. . -~-t -- -- '

cannot~ , by" eXercising the-\ right. under-· s. .i 49E get: priority -over 'the A • other unsecured creditors and thus defeat the very object of ss. 223 . <ind 229 of the Companies Act. Furthermore, if_ there is arrapparent~· conflict between two independant provisions of lavt, the special pro- - visioii n1us't prevail. Section 49E is a general. Provision applicable to ,.--- . all a~essees in all circumstances; ss. 228 and 229 deal with proof of cieo.s and their payment in liquidation. Section 49E can be reconciled with ss. 228 and 229 by holding that s . .49E applies when insol- ' B'• . pency rules do not apply. [682H-683JJ]

Civ1i APPELLATE JuR1so1crioN: Civil Appeal No. 211 of 1964.

, T-.

' 'Appeal from. the judgment ad order dated February 22; 1961 of the Bombay High Court in Miscellaneous Application No. 352 C of 1959. ·

Niren De, Additional Solicitor General, R'. Ganapathy Iyer and R. N. Sachthey, for the appellants.

 A. V. Viswanatha Sastri, T. A. Ramachandran, J. B. Dadachanji, 0. C. Mathur and llavinder Narain, for the respondents..

D The Judgment of the Court was delivered by Sikri, J. This appeal is in pursuant to a certificate ()f fitness granted by the High Court of Maharashtra at Bombay under Art. I 33(1)(c) of the Constitu.tion is directed against the judgment of the said High Court in a petition under Art. 226 of E the Constitution filed by the respondent. -

The lndia Fisheries (P) Ltd. hereinafter called the respon• dent was a private limited company and. was directed to be wound- Dp by an order of the Bombay High Court, dated October II, 1950, and a Court Liquidator was appointed as the Official Liquidator F thereof with all powers under s. 179 of the Indian Companies Act, 1913 <VII of 1913) to be exercised by him under s. 180 without sanction or intervention of the Court save and except in case of sa!es of immovable property belonging to the respondent. For the assessment year 1948-49, the respondent was assessed on December 8; 1950, the tax being assessed at Rs. 8, n7 /15/-. On or about G . March 15,' 1951, the Income Tax Officer lodged a claim in respect of this tax with the Official Liquidator. That claim was adjudged and allowed as an ordinary claim and certified as such on April 2,

1952. In August, 1954, the Official Liquidator declared a dividend . of 9f annas in a rupee and paid to the Income Tax Department a sum of Rs. 5,188/3/- aginst the claim made by the"Income Tax H Officer as an ordinary creditor. Thus a balance of Rs. 3,549/12/~ still remained payable to the Income Tax Department from the assets of the respondent.

For the year 1955-56, the Department made a demand from the respondent on June 22, 1954, for a sum of Rs. 2,565/6/- as advance tax. ' This was paid by the Official Liquidator.· On. a

UNION OF !NlllA '' INDIA FISHERIES (Sikri, J.) 681

regular assessment being made for the said year, only Rs. 1,126/ 12/- was assessed as payable by the respondent. After adjus.ting this sum against the advance payment of Rs. 2,565/6/-, Rs. 1,46011/-

became refundable to the respondent, inclusive of interest. Instead of refunding the said balance to the respondent, the Income Tax Officer set off the said amount against the balance of Rs. 3,549 / l 2/-

which was still outstandin• in resoect of the Income-tax demand 0 - • • • • for the year 1948-49. The respondent filed. a reymon pelih?n to the Commissioner of Income-tax, but the said pellhon was reiected by the Commissioner on September 21, 1959,. hoding that the action of the Income Tax Officer was perfectly iusttfied under the provision of s. 49E cf the Income Tax Act.

On November 25, 1959, the respondent filed a petition under art. 226 of the Constitution and prayed for a writ, direction or order for setting aside the orders oL the Income Tax Officer and the Income Tax Commissioner. He further prayed for any further writ, direction or order restraining the Dpartment from setting off the refund against the tax dues and directing them to hand over the balance to the Official Liquidator.

The High Court held that the demand of Rs. 8,737 /12/- in' respect of the assessment year 1948-49, being adjudged and certified, came to have all the incidents and character of an unsecured debt payable by the Official Liquidator to the Department. The High Court observed that "this claim thereafter was governed by the provisions of the Company law and could be paid to the crerlitor orily in accordance with the provisions of the Company law. No

other remedy nor any other method of obtaining satisfaction d this claim was available to the creditor thereafter. It was no longer the amount of tax remaining payable by a person to whom the refund was due within the meaning of Section 49E of the Income Tax Act. In our opinion, therefore, the provision of Section 49E was not available to the Department for setting off the amount of the excess towards the balance of its claim of Rs. 8,737 /15/- which the department had proved in the insolvency of the company and G was being dealt with in the Insolvency." The High Court accordingly set aside the orders passed by the Department in so far as they set off the amount of the refund towards the tax remaining payable, and directed the Income Tax Officer to deal with and dispose of the claim of the present respondent for the refund an.ct pass appropriate

orders in respect of the said amount of refund under the provisions of s. 48 of the Income Tax Act.

The learned Additional Soliditor.General, on behalf f the appellant, contends that s. 49E gives statutory power to the Income Tax Officer. inter alia, to set off the amount to be refunded or any part of that amount against the tax remaining payable by the person to whom the refund is due, and this statutory power is not subject to any provision of any other law. He says that the Companies Act

j)82 [!Hi0] 3 s.e.Jt.

does not take away this power. Section 49E is in the following A terms:

"Where under any of the provisions of this Act, a refund is found to be , ue to any person, the Income-tax Officer, Appellate. Assistant Commissioner or Commissioner, as the case may be, may, in lieu cf p3yment of B the refund, set off the amount to be refunded, or any part of that amount against the tax, interest or penalty, if any, remaining p1yable by the person to whom the refund is due." Un the face of this provision, tbere is no doubt that this section is not subject to any other provision of law. But it will C be surprising if this power can be exercised in such a way as to defeat the provisions of the Indian Companies Act. It is not denied by the learned Additional Solicitor-General that the State has no priority in respect of this claim. The question then arises whether s. 49E is subject to the Insolvency Rules contained in the Companies Act. Section 228 of the Companies Act, 1913, provides: D

"228. Debts of all descriptions to be proved.- In every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Act of the law of insolvency) all debts payable on a contingency, and all cla.ims against the company, present or future, certain or contingent, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or for some other rson do not bear a certain value."

Section 229 provides:

"Applis;:ation of insolvency rules in winding up of insolvent companies.- In the winding up of an insolvent company the same

rules shall prevail and be observed with regard to the G respective rights of secured and unsecured creditors and to debate provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case, would be entitled to prove for H and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section."

The effect of these stattttory provisions is, inter alia, that an unsecured creditor must prove his debts and all unsecured debts

UNION OF INDIA V. INDIA FISHERIES (Sikri, J.) 683

are to be paid pari passu. Therefore, once the claim of the Department bas to be proved and is proved in the liquidation proceedings, the Department cannot by exercising the right under s. 49E of the Income Tax Act get priority over the other unsecured creditors.

If we were to read s. 49E in the way suggested by the learned Additional Solicitor-General, it would be defeating the very object underlying ss. 228 and 229 of the Companies Act, 1913. If there is an apparent conflict between two independant provisions of law, the special provision must prevail. Section 49E is a general provision applicable to all assessees and in all circumstances; ss. 228 and 229 deal with the proof of debts and their payment in liquidation. In our opinion, s. 49E can be reconciled with ss. 228 and 229 by holding thats. 49E applies when insolvency rules do not apply.

Accordingly, agreeing with the High Court, we hold that the Income Tax Officer was in error in applying s. 49E and setting ofli the refund due. The Commissioner was equally in error in affirming this order.

The learned Additional Solicitor-General also urged that the application under art. 226 was misconceived because the Income Tax Officer had jurisdiction. But if we interpret s. 49E as we have done, it is a clear case of lack of jurisdiction. At any rate, there is an error apparent on the face of the orders and the High Court was quite right in exercising its jurisdiction under Art. 226.

The appeal is accordingly dismissed with costs.

Appeal dismissed.

LjP(D ).'iSC r-5

UNION OF INDIA AND ANR

INDIA FISHERIES (P) LTD

April 9, 1965

K. SUBBA RAO, J.

C. SHAH

S. M. SIKRI, JJ.

Incqme Tax Act 1922

s. 49E

ss. 228 and 229

Companies Act, 1913

s. 49E

Income Tax Act, 1922

Art. 226

s. 49E

s. 49E and 8

ss. 228 and 229

Companies Act, 1913

ss. 223

Companies Act

Section 49E

ss. 228 and 229

Section 49E

ss. 228 and 229

Niren De

R'. Ganapathy Iyer

R. N. Sachthey

A. V. Viswanatha Sastri

T. A. Ramachandran

B. Dadachanji

. C. Mathur

llavinder Narain

Sikri

Art. 226

lndia Fisheries (P) Ltd.

Bombay High Court

October II, 1950

s. 179

Indian Companies Act, 1913

s. 180

April 2,

1952

June 22, 1954

s. 49E

November 25, 1959

art. 226

Section 49E

Section 49E

s. 48

s. 49E

says that the Companies Act

Section 49E

Companies Act

s. 49E

Companies Act

Section 228

Companies Act, 1913

Section 229

s. 49E

s. 49E

ss. 228 and 229

Companies Act, 1913

Section 49E

ss. 228 and 229

s. 49E

ss. 228 and 229

s. 49E

art. 226

s. 49E

Art. 226


COMMISSIONER OF INCOME-TAX, PUN.JAB, .JAMMU &

KASHMIR, IDMACHAL PRADESH, PATIALA

RAGHBIR SINGH

April 9, 1965

[K. SUBBA RAO, J.C. SHAH ANDS. M. SIKRI, JJ.]

Indian Income-tax Act, 1922 (11 of 1922), s. 16(1)(c)-Deed of trust-Trustees directed to pay debts of settlor and only thereafter

to apply trust income and property to the various purposes of the trust-Such direction whether makes trust revocable-Whether pro- C perty of trust indirectly re-transferred to the settlor-Income from trust whether to be ta.ied in hands of settlor.

The respondent executed a deed of trust in respect of certain shares owned by him in a company. The deed directed the trustees to apply the income and property of the trust in the first instance for paying off the settlor's debts, and thereafter for other purposes of the trust. fo proceedings under the Indian Inome-tax Act, 1922 n it was held by the Income-tax Officer that the trust was a fictitious transaction. The Appellate Assistant Commissioner held that the transfer of the shares for the purpose of the trust Vl'llS not irrevocable and therefore under the proviso to s. 16(l)(c) the respondent could not escape liability. The Tribunal upheld the order of the Assistant Commissioner but referred to the High Court, inter alia, the question whether the income from tl).e trust property ccmld be taxed E in the hands of the assessee. The High Court answered the question in the negative. The Commisoioner of Income-tax, appealed to this Court.

HELD: After the execution of the deed of settlement the income from the shares arose to the trustees and was liable to be applied for the purposes mentioned in the deed. The income had first to be applied for satisfaction of debts which the settlor was under an F obligation to pay, but this did not amount to a re-transfer of the income or assets to the settlor, nor did it invest the settlor with a power to re-assume the income or assets. The assests and the income were unmistakably impressed with the obligations arising out of the trust. The settlor certainly obtained a benefit from the trust consequent upon the satisfaction of his liability, but on that account the first proviso to s. 16(1) was not attracted. [690D-F] G The proviso contemplates cases in ~"ihich there is a provision for retransfer of the income or assets and such provision is for retransfer directly or indirectly. It also contemplates cases where there is a provision which confers a right upon the settler to reas• sume power over the income or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income or assets or for reassurnption of power directly, or indirectly over income or H. assets which brings the case within the proviso. Cases in which there is a settlement, but there is no provision in the settlement for retransfer or right to reassume power do not fall within the proviso, even if as a result of the settlement, the settler obtains some benefit.

[690G, HJ Ramji, Keshavji v. C.I.T. Bombay, [1945] 13 I.T.R. 105 and D. R.

Shahapura v. C.I.T., Bombay 14, I.T.R. 781 approved. 684

C.I.T. V. ItAGHBIB SINGH (Shah,_ J.) 685

A CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 96 to 98. of 1964.

Appeals by special leave from the judgtl\ents and orders dated September 22, 1960, and December 6, 1960 of the Punjab High Court in Income-tax References Nos. 19 of 1958 and 6 of 1959 B respectively.

S. V. Gupte, Solicitor-General, R. Ganapathy Iyer and R. N.

Sachthey, for the appellant.

Deva Singh Randhawa and Harbans Singh, for the respondent.

The Judgment of the Court was delivered by

Shah, J. On April 10, 1953 the estate of the joint Hindu family of which the respondent was a member was partitioned, and the respondent was allotted, besides other properties, 400 shares of the Simbhaoli Sugar Mills Private Ltd., and was made liable to pay a business debt amounting to Rs. 3,91,875/- due by the family to R. B. Seth Jessa. Ram Fateh Chand of Delhi.

On April 14, 1953 the respondent executed a deed of trust in respect of 300 out of the shares of the Simbhaoli Sugar Mills which fell to his share. The following are the material. provisions of the deed of trust:

"AND WHEREAS on partition, the author was allotted amongst other properties, four hundred shares of the Simbhaoli Sugar Mills Ltd., and fixed with liability for discharge of certain debts of the Joint Hindu Family AND WHEREAS for discharge of the debts detailed in the schedule appearing hereafter, the author now as absolute owner of the said shares has decided lo settle on trust three hundred shares numbering 1 to 300 both inclusive, out of the said shares for the benefit of his creditors and other beneficiaries named hereafter and for the objects mentioned hereafter.

2. The author as holder of 300 shares out of the capital of Simbhaoli Sugar Mills Ltd. divesting himself of all proprietary rights in the said shares, hereby declares that the said shares shall from this day be irrevocably held on Trust by the .Trustees to be used b.y them for all or any of the purposes following, that is to say:-

(a) To pay off the debts as detailed in Schedule 'A' attached hereto: These debts were incurred for the benefit of the Joint Hindu Family of the author and .n disruption of the Joint Hindu Family and partitwn of properties among its members, made payable by the author.

SUPREME VOURT REPORTS [1965] 3 s.c.a.

And after his debts are P'.tid oil A

(b) To provide for the maintenance and education of the children and grand children of the author.

(c) To open and run Hospitals and Nursing Homes.

(d) To open and run School or Schools for the educa'

tion of boys or girls in scientific and technical sub- B jects.

(e) To open and maintain a reading room and a lending library.

(f) To provide for the maintenance and education of orphans, widows and poor people and for that e; to give Scholarships for inland and overseas studies to found orphanage, widow houses and poor houses and to do all other things that the trustees may deem fit for carrying out the objects of the Trust."

By cl. 3 four persons includin~ tJ,~ respondent were appointed D trustees, and the respondent was to hold the office of Chairman of the Trust during his lifetime. The trust deed then provided:

"Jn the books of the Company, the shares .will stand in the name of the Chairman for the time being, who will have the power to operate the Bank accounts of the Trust, to E preside at the meetings, exercise the right of the vote in respect of the shares of the Trust."

Clause 5 provided:

"It is hereby declared that the trustees shall have the following powers in addition to the powers and the authori- F ties hereinfore contained: -

(i) The trustees shall not be entitled to sell the shares except as provided hereafter but they can mortgage or pledge the same for raising funds as they may feel necessary for paying off the debts of the author, provided G (ii)

(iii) (iv)

Clause 6 provided:

"That in carrying out the objects of th~ trust the trustees shall keep in mind and abide by the following directions:-

(i) The payment of the debts of the author as deailed

in Schedule 'A' referred to above shall receive the topmost priority and the trustees shall not spend any money out of the trust pror, rty or \ts income

C, I, T. V. RAGHllIR ~INGH (Shah, J.) 687

in any direction till they have paid off all the deb~ of the author, provided always if the trustees are unable to pay off the debts, out of the income i.e. dividends, bonuses 'etc. of the shares within a period of ten years they shall be entitled to sell the same or part of it and thus pay off the debts that may be due at that time.

(ii) After debts are discharged the trustees shall spend

80 % of the income of the trust property, remaining in their hands after full discharge of the debts, on the maintenance of the children and grand children of the author and the remaining 20%

on all or any of the other objects of the trust as the Trustees may think best. (iii) "

The respondent claimed before the Income-tax Officer, Eward, Amritsar that the dividend received by the trustees in respect J> of 300 shares of the Simbhaoli Sugar Mills was the income of the Trust and that he had no concern with that income as he had "divested himself irrevocably of the ownership of the shares" and that in any event Rs. 19,856/- being the amount due as interest to R. B. Seth Jessa Ram Fateh Chand should be allowed as a permissible deduction in computing the net income from dividend E of the shares. The Income-tax Officer rejected the contentions of the respondent, holding that the Trust was a "fictitious transac- . ti on". the Appellate Assistant Commissioner held that the respondent had not "irrevocably transferred the 300 shares of the Simbhaoli Sugar Mills" and therefore by virtue of s. 16(l)(c) proviso one the respondent could not escape liability to pay tax on the F dividend from the share.

The respondent appealed to the Income-tax Appellate Tribunal, but without success.

At the instance of the respondent the Tribunal drew up a statement of the case and referred the following questions to the High Court at Chandigarh:

"(!) Whether the dividend income of 300 shares of the

Simbhaoli Sugar Mills, Private Ltd. transferred by the assessee to S. Raghbir Singh Trust was the income of the assessee liable to tax?

(2) Whether the assessee was entitled to claim deduction of Rs. 19,856/- paid as interest to R. B. Seth Jessa Ram Fateh Chand against the dividend income of the aforesaid 300 shares?" The High Court answered the first question in the negative and declined to answer the secon.d question.

With special leav~ •. the Commissioner of Income-tax has appealed to this Court.

Section 2 sub-s. (15) defines "total income" as meaning total arn ount of income, profits and gains referred to in sub-s. (!) of s. 4

SUPREME COURT REPORTS [1965] 3 s.c.R.

computed in the manner laid down in the Act. Section 16 of the A Income-tax Act enumerates the exemptions and exclusiollS admissible in the computation.of total income in certain specified cases.

The material part of cl. (c) of sub-s. (!)of s. 16 is as follows:

"In computing the total income of the assessee-

(c) all income arising to any person by virtue of a B settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed c to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor :

Provided that for the purposes of this clause a settle

ment, disposition or transfer shall be deemed to D be revocable if it contains any provision for the retransfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settler, disponer or transferor a right to reassume power directly or indirectly over the income or assets : E

Provided further that the expression 'settlement or disposition' shall for the purposes of this clause include any disposition, trust, covenant, agreement or arrangement, and the expression 'settlor or disponer' in relation to a settlement or disposition F shall include any person by whom the settlement or disposition was made:

Provided further that this clause shall not apply to any income arising to any person by virtue of a settlement or disposition which is not revocable for a period exceeding six years or during the lifetime of the person and from which income the settlor or disponer derives no direct or indirect benefit but that the settlor shall be liable to be assessed. on the said incomeas and when the power to revoke arises to him."

Clause (c) was intended, while seeking to protect a genuine settlement by which the tax-payer intends to part with control ove~ property and its income, to cirumvent attempts made y him to reduce his liability to pay mcome-tax by the expedient of so arranging a settlement or disposition of property that te incoe does not accrue to him, but he reserves a power over or mterest m tho property settled or disposed of, or in the income thereof. By cl.

c.I.'l'. 'I'. l<AGl!Bm '''"11 (Sliali, J.) 689

~ A

(c) income arising to any person by virtue of a settlement or disposition whether revocable or not is .deemed to be income of the settlor or disponer if the assets remain the property of the latter.

Again income arising to any person by virtue of a revocable transfer of assets is deemed to be the income of the transferor. The first proviso then deems a settlement statutorily revocable, if it .B contains any provision for retransfer directly or indirectly of the income or assets settled, to the settlor, or where it gives to the settlor a right to reassume power directly or indirectly over the income or assets.

By the second proviso the expression "settlement or disposition" includes a disposition, trust, covenant, agreeinent or arrangement the Legislature has thereby sought to bring C within the net, transactions sirnilai to though not strictly within the description of settlements and dispositions. The third proviso carves out from the amplitude of cl. (c) as expounded by the fit and the second provisos income arising to any person from a settlement which is not revocable for a period exceeding sill years or during the lifetime of the person and from which income the D settlor derives no benefit direct or indirect.

It was observed in a recent judgment of this Court: Commissioner of Income-tax, Bihar and Orissa v. Rani Bhuwaneshwari K uer(') that: "By the first proviso, settlements, dispositions or transfers of the character described therein, are deemed revocable for the purpose of the principal clause. The function of proviso I and proviso 2 is plainly explanatory.

The second proviso in terms says that the expression "settlement or disposition" is to include any disposition, trust, covenant, agreement or arrangement, and the P.Xpression "settlor or disponer" is to include any person by whom the settlement or disposition was made. Similarly the first proviso states that. settlements, dispositions or transfers, if they are of the character described, shall for the purpose of the principal clause be revocable transfers."

The terms of s. l 6(l)(c) first proviso are reasonably plain. A settlement or disposition is deemed to be statutorily revocable if there is a provision therein for retransfer of the income or assets or which confers a right to reassume power over the income or assets. The provision may even be for retransfer indirectly or for conferring power to reassume indirectly over the income or the assets.

But the actual retransfer or exercise of the power to reassume is not necessary; if there be a provision of the nature contem]illated,. the proviso operates.

The terms of the deed may now be examined. The shares were settled upon trust, and four trustees one of whom was the respondent were appointed. Genuineness of the trust is no longer

(') ~3 l.T.R. 19~. 29~.

SUPRF.?.1F. COURT REPORTS

[1965] 3 S.C.R.

in dispute.

The direction that the shares are to stand in the name A of the Chairman for the time being appears to have been necessitated bys. 33 of the Indian Companies Act, 1913 which prevented notice of any trust, expressed, implied or constructive to be entered on the register.

The deed recites that the shares are to be held on trust irrevocably by the trustees for all or any of the purposes mentioned therein.

The purpose for which the shares are B to be held in the first instance is to pay ofI the debt due to R. B.

Seth Jessa Ram Fateh Chand, and it is only after the debt is paid off that the directions in els. (b) to m of cl. 2 come into operation.

The deed is in terms. expressly irrevocable, but on that account the operation of the first proviso is not excluded. If by the direction for application of the income for satisfaction of the debts due C by the respundcnl, it could be said in law that there is a provision for retransfer directly or indirectly of the income or a right to reassume directly or indirectly power over the income, the settlement would be deemed revocable, recital that it is irrevocable notwithstanding.

But the income from 'the shares since the execution of the deed of settlement arises t0 the trustees and it .is liable to be applied for the purposes mentioned in the deed.

The income has to be applied for satisfaction of debts which the settlor was under an obligation to discharge, but that is not to say that there is a provision

for retransfer of the income or assets to the settlor, or that the E settlor is invested with power to reassume the income or assets.

The assets and the income are unmistakably impressed with the obligations arising out of the deed of trust. The settlor it is true obtains a benefit from the trust consequent upon satisfaction of his liability, but on that account the first proviso is not attracted.

We are unable to accept the argument of counsel for the revenue that by the use of the expression "indirectly" in the first proviso the Legislature sought to bring within the purview of cl.

(c) cases where the settler was under the guise of a trust see1'ing to discharge his own liability. The proviso contemplates cases in which there is a provision for retransfer of the income or assets G and such provision is for retransfer directly or indirectly. It also

contemplats cases where there is a provision which confers a right upon the settlor to reassume power over the income or assets directly or indirectly. It is the provision for retransfer directly or indirectly of income or assets or for reassumption of power directly or indirectly over income or assets which brings the case within H the first proviso. Cases in which there is a settlement, but there is no provision in the settlement for retransfer or right to reassume power do not fall within the proviso, even if as a result of the settlement,- the settler obtains a benefit.

[t has been held in two cases decided 'by the High Court of Born.Day that a person under an obligation arising out of his status

C.l.T. t1• JtAtilf'nll< :-;1:Kt:11 (Shah, .J.) 691

A may execute 1_1 trust to discharge his own obligation without attracting the operation of s. l5(l)(cl.

In Ramii Kesliavii v. Cmnmissin11er nf /11cnme-tax, Bombay(') under a consent decree. the assessee executed a deed of trust conveying certain properties for the benefit of his wife to the trustees.

The deed provided that the net income from the properties shall be paid to the assessee's wife B during her lifetime and that she shall maintain her minor children by the assessce anJ "run the household". It was held by the High Court that the income derived from the trust property and payable to the assessee's wife during her lifetime could not be deemed to be the assessee's income. for the direction in the deed did not amount to a provision for retransfer of the income or assets or for C reassumption of power directly or indirectly over income or assets within the meaning of the first proviso to s. l6(1)(c). In D. R.

Shahapure v. Commissioner of Income-tax, Bombay(') the assesseewith the object of making a provision for his w_ife made an entry in his business books of account crediting Rs. 20.000/-, and endorsed against the entry. "The capital supplied to you will remain D entirely mine but you will ge: the income over it up to the end of your life. This capital I will not take back up to the end of your life but I will do business for you on this capital and see that you get Rs. 600 per annum for you".

No specific assets were set apart to meet the sum of Rs. 20,000/- and there were. no other entries in the books with regard to it.

The High Court held that the entry E was an irrevocable covenant to pay the income accruing on Rs. 20,000/- with a guarantee that it shall be Rs. 600 a year, and therefore the case was covered by the third proviso to s. 16(1) (c) of the Act and the income which was paid to the wife under the covenant could not be deemed to be tre income of the ssessee

under the first part of s. 16(l)(c). In our view these cases were F correctly decided.

The appeals fail and are dismissed with costs. One hearing fee.

Appeals dismissed ..

(') (19'11) 13 I.T.R. 105.

(') H I.T.R. 781.

COMMISSIONER OF INCOME-TAX, PUNJAB, .JAMMU & KASHMIR, HIMACHAL PRADESH, PATIALA

RAGHBIR SINGH

April 9, 1965

K. SUBBA RAO, J

C. SHAH ANDS. M. SIKRI, JJ.

Indian Income-tax Act, 1922

s. 16(1)(c)

Indian Inome-tax Act, 1922

s. 16(l)(c)

s. 16(1)

C.I.T. V. ItAGHBIB SINGH

S. V. Gupte

R. Ganapathy Iyer

Deva Singh Randhawa

Harbans Singh

Shah

Simbhaoli Sugar Mills Private Ltd.

R. B. Seth Jessa. Ram Fateh Chand

Delhi

April 14, 1953

Simbhaoli Sugar Mills

Simbhaoli Sugar Mills Ltd.

cl. 3

Clause 5

Clause 6

T. V. RAGHllIR ~INGH (Shah

R. B. Seth Jessa Ram Fateh Chand

s. 16(l)(c)

Income-tax Appellate Tribunal

High Court at Chandigarh

S. Raghbir Singh Trust

Section 2

s. 4

Section 16

Income-tax Act

s. 16

Indian Companies Act, 1913

Seth Jessa Ram Fateh Chand

cl. 2

High Court of Born.Day

s. 16(1)

s. 16(l)(c)