Bhargava, J. - (1.) Seth Walchand Hirachand and his wife, Bai Kasturbai, owned certain shares, had several insurance policies, owned house property and also held lease lands. The two of them together joined in executing an indenture on 25th November, 1946, by which they created a trust. The trustees were both of them themselves and three brothers of Seth Walchand. The provisions of the trust, with which we are concerned, laid down that, after defraying the expenses for management of the trust properties and certain other expenses, such as, rents, rates, etc., the trustees were to pay to Bai Kasturbai, during her life-time, the income arising from the trust funds and properties. Further. Seth Walchand himself and Bai Kasturbai, during their life-time, had the right of residence in some of the house property, free of rent and without any obligation for payment of any outgoings or moneys in respect thereof. These provisions were contained in clause 7 of the deed of trust. The next provision contained in clause 8 of the deed was that, from and after the death of Bai Kasturbai, the trustees were directed to apply the net rents, profits and income of the properties and trust funds, at, their discretion, on charitable purposes enumerated in the deed of trust. It is not disputed that all the charitable purposes mentioned in the trust constituted public charities. Seth Walchand died and, thereafter, Bai Kasturbai, on 21st July, 1953, executed a deed in which the relevant clause runs as follows:-"Bai Kasturbai Walchand doth hereby surrender, release, quit claim, transfer and assign unto the Trustees all the income to arise as from the 21st day of July one thousand nine hundred and fifty-five from the Trust funds of the investments for the time being representing the same and her beneficial life interest and all her rights, claims and demands under the said Indenture of Settlement including the liberty to occupy and enjoy rent free of the lands, hereditaments, messuages and premises described in the First and Second Schedules hereto to the intent that her beneficial interest may be determined as aforesaid and that the same may be immediately vested in the Trustees and that the Trustees may utilise the same for charitable purposes mentioned in the said Indenture of Settlement."
(2.) Subsequent to the execution of this deed, the question arose of assessment to income-tax of the income from the trust properties for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60. The corresponding previous years were the financial years ending on 31st March in the years 1956 to 1959. It was claimed by the Trust that, during these previous years, those properties were held under a trust wholly for charitable purposes, and consequently, the income was exempt from income-tax under S. 4 (3) (i) of the Income Tax Act (hereinafter referred to as "the Act"). The Income-tax Officer, however, held that the deed executed by Bai Kasturbai did not amount to a renouncement of her rights under the trust deed, and that it really amounted to a transfer of the income received by her for purposes of the use of the trust. Since the income of the trust was receivable by Bai Kasturbai, it could not be held that the trust properties were held wholly for charitable purposes. On appeals, the Appellate Assistant Commissioner disagreed with the Income-tax Officer and accepted the submission made by the respondent, holding that the income received by the Trust, after the execution of the deed of surrender by Bai Kasturbai, was exempt from tax under S. 4 (3) (i) of the Act in view of the applicability of S. 9 of the Indian Trusts Act, 1882. The Income-tax Appellate Tribunal, on further appeal, upheld the same decision, but on a slightly different ground. The Tribunal's view was that the surrender by Bai Kasturbai was valid under S. 58 of the Indian Trusts Act, and consequently, after that deed was executed, the properties were held wholly for charitable purposes and the income was exempt from tax under S. 4 (3) (i) of the Act. Thereupon, at the request of the Commissioner of Income-tax, the following question was referred for the opinion of the High Court of Bombay: "Whether clause 8 of the trust settlement made on the 25th November, 1946, came into operation immediately following the declaration made by Bai Kasturbai on the 21st July, 1955, and as such the income that accrued or arose to the trustees from the trust property from 21st July, 1955, onwards was exempt under S. 4 (3) (i) of the Act - The High Court answered the question in favour of the Trust, which is the respondent in these appeals before us, and consequently, the Commissioner of Income-tax has come up to this Court in these appeals by special leave.
(3.) It appears that, in this case, the question that was framed by the Income-tax Appellate Tribunal and referred to the High Court was not happily worded, so that it will need a slight amendment which, we shall indicate later. The real question under dispute was whether, after the execution of the deed of surrender on 21st July, 1955, the income from the trust properties was exempt from income-tax under S. 4 (3)(i) of the Act or not. In dealing with this question, it has to he kept in view that, even under the deed of trust as originally executed on 25th November. 1946. the income from the trust properties was not the income of Bai Kasturbai. Whenever a valid trust is executed, the property vests in the Trustees, and the income accruing from those properties is the income of the trust and not of the beneficiaries. For purposes of income-tax law, however, the income under Section 41 (1) of the Act is treated as received by the Trustees on behalf of the beneficiaries, but is to be taxed in the hands of the Trustees in the like manner and to the same amount as it would be leviable upon the person on whose behalf such income is receivable. The liability of the income to tax is, therefore, independent of the income actually being received by the beneficiaries and may be subjected to tax as soon as it is earned by the trust. The exception is that, where the trust properties are held wholly for charitable or religious purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes, it is exempt from income-tax. In the present case, therefore, in clearing with the question referred to the High Court, any assumption that the income of the trust properties was received by Bai Kasturbai will not be correct. The income during her life-time was clearly taxable as income in the hands of the trustees received by them on behalf of Bai Kasturbai.;