1966 (8) TMI 22 - HC - Income Tax

Whether the 40 % of the profits of the business of A payable to the two Thavazhies is assessable as unearned income in the hands of the trustees u/s 41 of the IT Act, 1922, and subject to the levy of a special surcharge - this case will not fall u/s 41 - here a trust has been created in relation to the business which has been held by the Supreme Court to be property and the trustee does not carry on the business on behalf of anybody else

Summary

Issues:
1. Validity of proceedings under section 34(1)(b) of the Income-tax Act, 1922 for the assessment year 1957-58.
2. Validity of proceedings under section 147(b) of the Income-tax Act, 1961 for the assessment years 1958-59 to 1960-61.
3. Assessability of 40% of the profits of the business of Arya Vaidyasala as 'unearned income' in the hands of the trustees under section 41 of the Indian Income-tax Act, 1922, and subject to the levy of a special surcharge.

Analysis:
The High Court of Kerala heard a reference by the Income-tax Appellate Tribunal regarding the validity of proceedings under different sections of the Income-tax Acts for various assessment years. It was acknowledged that the proceedings under sections 34(1)(b) and 147(b) were valid, and the court ruled in favor of the department on these issues. However, the crucial question was whether 40% of the profits of Arya Vaidyasala's business should be considered 'unearned income' in the hands of the trustees under section 41 of the Income-tax Act, 1922. The department argued for the levy of a special surcharge on this income, contending it was unearned. The court referred to a previous decision upheld by the Supreme Court, which clarified that the business was held in trust for utilizing 60% of its profits for religious or charitable purposes, falling within the scope of the relevant provision. Consequently, the court held that 60% of the income was not taxable.

Regarding the remaining 40% of the income, the court determined it to be earned income from the business and therefore not subject to surcharge. The department highlighted section 41 of the Income-tax Act, 1922, arguing that the trustee should be assessed under this provision. However, the court disagreed, emphasizing that the trust was created concerning the business, which was considered property by the Supreme Court, and the trustee did not operate the business on behalf of anyone else. Consequently, the court ruled in favor of the assessee on this issue, against the department. The judgment concluded by stating that there would be no order as to costs in this Income-tax referred case.