Business income held in trust retained earned-income character, defeating special surcharge on beneficiaries' profit share.

Income arising from a business held in trust retained its character as earned income where the trust itself was the relevant legal owner and the business was treated as property held for application of profits to the trust objects. On that basis, the beneficiaries' 40 per cent share of profits was not treated as unearned income and was not liable to special surcharge. Section 41 was held inapplicable because the trustee was not carrying on the business on behalf of another person in the statutory sense needed to deny earned-income treatment.

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Issues: Whether the 40 per cent share of business profits payable to the beneficiaries under the trust is assessable as unearned income and liable to special surcharge, or whether it constitutes earned income not chargeable to surcharge.

Analysis: The trust had already been held to fall within the statutory exemption applicable to property held wholly or partly for religious or charitable purposes, and the business was treated as property held in trust for applying a part of the profits to the stated objects. On that footing, the income retained the character of business income. The Court further held that section 41 did not apply because the trust was created in relation to the business itself, and the trustee was not carrying on the business on behalf of another person in the sense required to deny the character of earned income.

Conclusion: The 40 per cent share of profits was earned income and was not liable to special surcharge; the answer was in favour of the assessee.

Final Conclusion: The reference was answered by upholding the assessee's contention on the surcharge issue, with no order as to costs.

Ratio Decidendi: Income arising from a business held in trust remains earned income where the trust itself is the relevant legal owner of the business and the trustee is not carrying on the business on behalf of another person for the purposes of the earned-income exclusion.

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