This is a reference by the Income-tax Appellate Tribunal, Madras Bench, acting under section 66(1) of the Indian Income-tax Act, 1922. The questions referred are :
'1. Whether, the proceeding under section 34(1)(b) of the Income-tax Act, 1922 for the assessment year 1957-58 are valid
2. Whether the proceedings under section 147(b) of the Income-tax Act, 1961, for the assessment years 1958-59 to 1960-61 are valid
3. Whether the 40 per cent. of the profits of the business of Arya Vaidyasala payable to the two Thavazhies is assessables as unearned income in the hands of the trustees under section 41 of the India Income-tax Act, 1922, and subject to the levy of a special surcharge ?'
The years of assessments are four, 1957-58 to 1960-61. It is conceded on behalf of the assessee that questions Nos. 1 and 2 have to be answered in the affirmative that, is against the assessee and in favour of the department. We do so.
Question No. 3 will have to be answered in favour of the assessee if the income assessed ins 'earned income'. But it is urged on behalf of the department that the income is 'unearned income' and is therefore subject to the levy of special surcharge which of course is inapplicable in the case of 'earned income.' It is unnecessary to go into the details of the trust concerned for it has been the subject-matter if the decision of this court and that decision has been upheld by the Supreme Court. The decision of this court is in Commissioner of Income-tax v. Krishna Warriar. It was held therein that the trust is one which will fall under section 4(3)(i) of the Indian Income-tax Act, 1922 and that the business was not carried on by the trustees on behalf of the religious or charitable institutions so as to attract proviso (b) to the sub-section. This view has been confirmed by the Supreme Court in Commissioner of Income-tax v. P. Krishna Warriar and their Lordship observed :
'The dichotomy between the two expressions wholly and in part is not based upon the dedication of the whole or a fractional part of the property, but between the dedication of the said property wholly for religious or charitable purposes or in part for such purposes. If so understood, the two limbs of the substantive clause fall into a piece. The first limb deals with a property or a part of it held n trust wholly for religious or charitable purposes, and the second limb provides for such a property held in trust partly for religious or charitable purposes. On the said reading of the provision if follows that the entire business of Arya Vaidya Sala is held in trust for utilizing 60 per cent of its profits. i.e., a part of the income, for religious or charitable purposes. The present case, therefore, falls squarely within the scope of the substantive part of clause (i) of section 4(3) of the Act.'
It was held that in view of the above conclusion, the second proviso to clause (i) of section 4(3) is not applicable and so 60 per cent of the income the business was held to be not taxable.
The remaining 40 per cent. of the income is an income from the business and this is the earned income and therefore not liable to surcharge.
Counsel on behalf of the department has stressed that the trustee in this case has been assessed under section 41 of the Indian Income-tax Act, 1922, and he invited our attention to a passage from the commentary on the Indian Income-tax, 1922, by Kanga and Palkhivala, fourth edition, at page. 731.
'Whether a trustee carries on a business on behalf of the trust estate, the beneficiary would not be entitled to any relief in respect of earned income the reason being that the beneficiary himself does not carry on the business and therefore his income does not fall within the definition of earned income.'
We do not think that this is a case which will fall under section 41 of the Indian Income-tax Act, 1922. 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 on anybody else.
In the light of the above, question No. 3 will have to be answered in the negative, that is, in favour of the assessee and against the department. We do so. There will be no order as to costs in this income-tax referred case.