Charitable trust income set apart under a deed may remain exempt, while identifiable beneficiary shares escape the maximum-rate rule.

Trust income finally set apart under the governing deed for charitable application in a determinate proportion was treated as exempt under section 4(3)(i) of the Indian Income-tax Act, 1922, because immediate spending was not required where the income retained its charitable character. The remaining one-eighth share, being attributable to a known beneficiary with a fixed entitlement under the deed, did not fall within the first proviso to section 41(1), which applies only where beneficiaries or shares are indeterminate. The special maximum-rate assessment was therefore not attracted, and the identifiable private share was taxable only in the beneficiary's hands at the ordinary rate.

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Issues: (i) Whether seven-eighths of the annual income transferred to the reserve fund was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922; (ii) Whether the remaining one-eighth portion transferred to the reserve fund was liable to tax at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922.

Issue (i): Whether seven-eighths of the annual income transferred to the reserve fund was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.

Analysis: The reserve fund was created under the wakf deed as part of the trust arrangement and was intended to preserve, sustain, and develop the wakf business, which itself served both charitable purposes and the limited private benefit of the mutawalli. The deed showed that the reserve fund ultimately retained the character of wakf property and that its future application followed the same broad distribution pattern as the business income, namely, seven-eighths for charity and one-eighth for the mutawalli. Income need not be immediately spent to qualify for exemption if it is finally set apart for charitable application. On that footing, the charitable component of the reserve fund was treated as income applied or finally set apart for religious or charitable purposes.

Conclusion: Yes. Seven-eighths of the income transferred to the reserve fund was exempt under section 4(3)(i) of the Act.

Issue (ii): Whether the remaining one-eighth portion transferred to the reserve fund was liable to tax at the maximum rate under the first proviso to section 41(1) of the Indian Income-tax Act, 1922.

Analysis: The proviso to section 41(1) applies where income is receivable on behalf of persons whose identity or shares are indeterminate. Here, the relevant beneficial share of the reserve fund was attributable to a known beneficiary with a defined share under the deed. Since the charitable portion was exempt and the private portion belonged to a determinate beneficiary in a fixed proportion, the basis for applying the proviso was absent.

Conclusion: No. The one-eighth portion was not liable to tax at the maximum rate under the first proviso to section 41(1) of the Act.

Final Conclusion: The reserve fund income was split according to the trust deed, with the charitable component exempt and the private component taxable only in the beneficiary's hands at the ordinary rate, so the special maximum-rate assessment was not attracted.

Ratio Decidendi: Where trust income is finally earmarked under the governing deed for charitable application in a determinate proportion, that portion is exempt under section 4(3)(i), and the special maximum-rate provision for indeterminate beneficiaries does not apply to the remaining identifiable share.

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