1969 (2) TMI 11 - SC - Income Tax

Trustees' income from trust declared earned income, exempt from special surcharge.

The High Court of Kerala held that income allocated to the thavazies under a trust was earned income and not subject to special surcharge as it fell under ... Whether the 40 per cent. of the profits of the business of Arya Vaidyashala payable to the two thavazies is assessable 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 - Held yes - Revenue's appeal dismissed Issues:Interpretation of tax liability on income directed to beneficiaries under a trust, applicability of special surcharge on unearned income, definition of earned income under the Income-tax Act.Analysis:The case involved a dispute regarding the tax liability on income directed to beneficiaries under a trust. The trustees of the estate were directed to carry on a business and allocate income for the benefit of a hospital, school, and two thavazies. The issue revolved around the applicability of special surcharge on unearned income in the account years relevant to the assessment years 1957-58 to 1961-62. The Income-tax Officer levied a special surcharge on the total income of the trust, considering it unearned income. The matter was taken to the High Court of Kerala to determine if the income allocated to the thavazies was assessable as unearned income under section 41 of the Indian Income-tax Act, 1922.The High Court of Kerala held that the income paid to the thavazies was earned income and not liable to surcharge. The court reasoned that since the trustees did not carry on the business on behalf of any beneficiary, the income did not fall within the terms of section 41 of the Income-tax Act. The Finance Act, 1957, imposed a surcharge on income-tax and super-tax, including a special surcharge on unearned income. The definition of earned income under section 2(6AA) was crucial in determining the tax liability. Earned income was defined as income chargeable under the head 'Profits and gains of business, profession or vocation' carried on by the assessee.Under the will of the deceased, the trustees were directed to manage the business, which generated income chargeable under the head 'Profits and gains of business, profession or vocation.' Although the trustees did not have a beneficial interest in the income, it was still considered earned income in their hands. Therefore, the special surcharge on unearned income under the Finance Acts of 1957 to 1961 did not apply to the income directed to the thavazies. The Supreme Court upheld the decision of the High Court, ruling in favor of the trustees and dismissing the appeals with costs.