Taxability of business profits applied to charity: profits remain assessable income unless the business is carried on for a qualifying charitable institution.

Profits from a cloth distribution scheme were treated as the assessees' taxable income because the activity was carried on by them and the scheme contemplated profit-making, even though the Deputy Commissioner exercised control and the profits were later applied to charity. The statutory exemption under section 4(3)(i-a) of the Indian Income-tax Act, 1922 did not apply because the business was not carried on on behalf of a religious or charitable institution in the prescribed manner. Subsequent charitable use of the profits did not alter their character as income or confer exemption.

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Issues: (i) Whether the profits arising from the cloth distribution scheme accrued as income to the assessees and were assessable to income-tax. (ii) Whether such income was exempt under section 4(3)(i-a) of the Indian Income-tax Act, 1922.

Issue (i): Whether the profits arising from the cloth distribution scheme accrued as income to the assessees and were assessable to income-tax.

Analysis: The scheme was worked by the assessees and yielded profits. Control by the Deputy Commissioner did not prevent the activity from being a business carried on by the assessees. The arrangement showed that the assessees were treated as owners of the business, and paragraph 14 of the scheme itself contemplated profits resulting from the scheme. The later application of profits to charity did not change their character as income of the assessees.

Conclusion: The profits accrued as income to the assessees and were assessable to income-tax.

Issue (ii): Whether such income was exempt under section 4(3)(i-a) of the Indian Income-tax Act, 1922.

Analysis: The exemption applied only to income derived from business carried on on behalf of a religious or charitable institution, and the business had to be carried on in the prescribed manner. The scheme was not carried on on behalf of any religious or charitable institution. Once the profits were found to be the assessees' income, their subsequent use was immaterial to the exemption claim.

Conclusion: The income was not exempt under section 4(3)(i-a).

Final Conclusion: The reference was answered in favour of the revenue on both questions, and the assessees were held liable to tax on the profits.

Ratio Decidendi: Profits earned from a business carried on by assessees remain their taxable income, even if they agree to apply the profits to charity, unless the business is in fact carried on on behalf of a qualifying religious or charitable institution within the statutory exemption.

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