Charitable trust exemption and settlor taxation fail where business assets remain with the settlors and income is merely earmarked.

Exemption under section 4(3)(i) of the Indian Income-tax Act, 1922 requires property to be held under trust or other legal obligation wholly for religious or charitable purposes; a mere arrangement to apply part of future business income to charity is insufficient, so the exemption fails where no business property is effectively transferred to trustees. Section 16(1)(c) applies where income arises from assets that remain the settlors' property, including revocable or ineffective settlements lacking real transfer of the underlying assets, and the resulting income is assessable in the settlors' hands. The commentary therefore treats the business income as taxable in the hands of the settlors.

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Issues: (i) Whether the 1/4th share of the business income was exempt under section 4(3)(i) of the Indian Income-tax Act, 1922; (ii) Whether the settlement attracted section 16(1)(c) of the Indian Income-tax Act, 1922 as a transfer of income from assets remaining the property of the settlors; (iii) Whether, if section 16(1)(c) applied, the income was assessable in the hands of the settlors.

Issue (i): Whether the 1/4th share of the business income was exempt under section 4(3)(i) of the Indian Income-tax Act, 1922.

Analysis: Exemption under section 4(3)(i) required income derived from property held under trust or other legal obligation wholly for religious or charitable purposes. The document showed only an arrangement for allocation of a portion of future income to charity, but no effective transfer of the business property to trustees for charitable purposes. The property therefore was not held under trust within the meaning of the provision.

Conclusion: The claim to exemption failed and the issue was decided against the assessee.

Issue (ii): Whether the settlement attracted section 16(1)(c) of the Indian Income-tax Act, 1922 as a transfer of income from assets remaining the property of the settlors.

Analysis: Section 16(1)(c) applied where income arose by virtue of a settlement or disposition from assets still remaining the settlor's property, and the proviso extended to revocable arrangements where income could in effect be re-transferred or re-assumed. The deed did not show any real transfer of the business assets to the trustees, and the income continued to arise from the settlors' own property. The arrangement was therefore within the statutory charge.

Conclusion: Section 16(1)(c) applied and the issue was decided in favour of the Revenue.

Issue (iii): Whether, if section 16(1)(c) applied, the income was assessable in the hands of the settlors.

Analysis: Once the income was found to arise from assets remaining the property of the settlors, the statutory deeming provision made that income taxable in their hands.

Conclusion: The income was assessable in the hands of the settlors and the issue was decided in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee on the substantive tax questions, and the business income remained taxable in the hands of the settlors.

Ratio Decidendi: For exemption under section 4(3)(i), the property itself must be held under trust or other legal obligation for charitable or religious purposes; a mere arrangement to apply part of the future income to charity is insufficient, and where assets remain the settlor's property, section 16(1)(c) applies to tax the resulting income in the settlor's hands.

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