Sri Lakshmi Trust v. Commissioner of Income-tax

Per Balasubramanyam, JM - The question arising in this appeal is whether income of a nursing home which a Trust runs is business income for the sake of section 161(1A).

2. To narrate material facts: One Dr. B.K. Narayan Rao was an eminent opthalmologist and he had started a clinic by name Prabha Eye Clinic. His son-in-law (Dr. Krishna Murthy) and grandson (Dr. K. Ramamurthy) were/are also in the same medical line. To continue the clinic, his son, A.N. Rao, settled a trust by a document (regd.) dated 29-9-1978. An initial trust fund of Rs. 5,000 was contributed by him. The name of the trust is "Sri Lakshmi Trust". The beneficiaries of the trust are specified in clause 5 of the document. The trustees, initially appointed, are mentioned in clause 6. Various rights and duties of the trustees necessary for the purpose of carrying out the object of the trust were particularly described in the document. Among others, the trustees were empowered to run a nursing home to render professional service and to carry out such other activities relating thereto.

3. The trustees had accordingly functioned and the nursing home run by them came to acquire a distinction.

4. The impugned assessment pertains to assessment year 1985-86. The year of account terminated on 31-3-1985. The trust returned an income which was accepted. In the assessment completed under section 143(3), the total income was allocated among the beneficiaries since they were known and their shares were specific. Suffice it to say that no demand was raised in the hands of the trust.

5. The Commissioner of Income-tax, on examination of the original assessment, was of the view that the assessment was erroneous and prejudicial to the interests of revenue. He, therefore, initiated proceeding under section 263 whereby he proposed to do two things. He formed an opinion that there was an AOP of the beneficiaries relying on the decision of the Supreme Court in the case of N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 it was also his point that in view of section 161(1A), which applies to this assessment, the whole of the income realised from running of the nursing home should be assessed at maximum marginal rate in the hands of the trust itself. After hearing the assessee, the CIT passed the order now in appeal whereby he set aside the original assessment and gave directions to the ITO to make a fresh one as indicated earlier.

6. The order passed under section 263 is in challenge before us.

7. The CIT partially relies upon the decision of the Supreme Court in the case of N.V. Shanmugham & Co. ( supra) to say that the trust must be assessed in the status of AOP. The factors that clearly emerge from the trust deed are: (i) the beneficiaries are known and (ii) their shares are determinate. The trustees are empowered to run a nursing home for the benefit of the beneficiaries. N.V. Shanmugham & Co.’s case (supra) can have no application as pointed out by the Karnataka High Court in the case of CIT v. K. Shyamaraju (Trustees) [1991] 189 ITR 392.

8. The main plank on which the CIT’s order rests is that the income which the nursing home had generated was business income and, therefore, subject to the mischief of section 161 (1A). The rejoinder of Dr. Krishna, the learned advocate for the assessee, was that it was professional income.

9. Profits of business and profession are both assessable under section 28. Section 161(1A) has application only to profits and gains of business; but not of profession. The character of the income is the decider. Let some facts be stated before continuing in this line.

10. The main object of the trust was for imparting of proper technical education to the beneficiaries who are the children of Dr. K. Ramachandra Murthy, the son of the settlor. To ensure that, the trustees were directed to run a Nursing Home. This is how the relevant portion of the deed reads:

"The trustees for attaining the aforesaid objectives shall carry on business of running a ‘Nursing Home’ rendering professional service and other activities relating thereto and shall for the said purpose acquire a suitable building on lease or otherwise requisite and suitable equipment and personnel etc., and shall manage the same efficiently and judiciously with a view to strengthen and augment the financial resources of the trust."

11. The trustees managed to run the nursing home. The doctors, technicians in the medical/para-medical field are all employees of the trust. The trustees themselves do not have any medical qualification. In fact, the trustees do not work in the Nursing Home. The medical attendance is given by the organised personnel.

12. The argument advanced on behalf of the assessee was that the Income of the Nursing Home is income for the medical treatment given by the personnel having specialised qualification although they are paid by the trust and, therefore, the impugned income should be taken as professional income. We were referred to the statement of Kuldip Singh. J. In para 28 of the judgment in Sodan Singh v. Municipal Committee [1989] 4 SCC (pp. 135-174) to say that "profession means an occupation carried on by a person by virtue of his personal and specialised qualifications, training or skill". This was in the context of explaining that "occupation has a wide meaning such as any regular work, profession, job, principal activity, employment, business or a calling in which an individual is engaged". It is clear from the statement its elf that "profession" and "business" are different although they may for certain purposes fall within the compass of the "occupation".

13. When one says professional income, we naturally ask whose professional income? Dr. Krishna argued that section 161(1A) merely refers to "profits and gains of business" and that it is not linked to any person. The argument proceeded to say that for the purpose of section 161(1A) we need not see as to whose professional income it was. The argument is no doubt attractive, but lacks the conviction of carrying. Sub-clause (1A) itself refers to the income of the person who is liable as a representative assessee as per clause (iv) of section 161. So, it is the income of the representative assessee that section 161(1A) suggests.

14. The surgeons/doctors who are employed by the trust are paid for their services. The income of those employees may be either professional or salary in their hands depending upon the terms of engagement. So far as the trust is concerned, it has no nexus to profession. A very helpful precedent cited by the revenue is of the Madras High Court given in the case of Dr. Dr. P. Vadamalayan… v. The Commissioner Of Income Tax, Madras…. [1969] 74 ITR 94.

15. A doctor by profession was maintaining and running a Nursing Home. Many equipments had been installed in the Nursing Home. He had claimed development rebate in respect of the new items of equipment added in that year and used in the activity carried on by him. The point was whether the income of the Nursing Home should be classified as "income from business" or "income from profession". Though the assessee himself was a qualified medical man, their Lordships held that a professionalist who expands his activity and in the process embarks upon other activities which are commercial in nature the centrifuged activity is one of business.

16. The working of a Nursing Home comprises of many activities. Specialists give medical advice or treatment. There are working units such as operation theatre, equipments for conducting tests, providing beds/ accommodation to In-patients for all of Which charges are collected. This is easily ascribable to commercial activity. Even if the person who runs the Nursing Home is himself a professionalist it is not possible to segregate the various activities involved in it, select one as the essence, and designate it as professional. There is an organic unity in the working so much so dissection is impossible. Even when the owner of the Nursing Home is himself a doctor and engages himself in giving services as a qualified man in his field, still, as the Madras High Court has pointed out, the centrifuged activity is one of business it was held in that case that running a Nursing Home even by a professionalist was commercial in nature and that it was a business of the owner of the Nursing Home. The present is a case still stronger, since the persons who rendered medical services were mere employees.

17. It must, therefore, be concluded that the income of the Nursing Home was business income.

18. The next point urged before us was in regard to manner of assessment. The Commissioner holds that there must be an assessment on the trust in cases failing under section 161(1A) and tax has to be charged on the whole of the income at the maximum marginal rate. He was, therefore, of the view that allocation of the income among the beneficiaries was not correct. So long as the beneficiaries are known and their shares are determinate, the income has to be allocated among the beneficiaries and in the individual assessments maximum marginal rate has to be charged on the whole of the income of each beneficiary.. Our conclusion in this regard is based upon the decision of the Tribunal in the case of Mohammed Omer Family Trust v. ITO [1992] 40 ITD 1 (Hyd.) (SB) cited by Dr. Krishna. Therefore, the Commissioner’s order is not strictly in terms of law and the maximum marginal rate will have to be applied in the individual assessments of the beneficiaries on the whole of their income. This point is accordingly answered.

19. In the result, the order of the Commissioner is modified and the appeal by the assessee stands allowed as indicated above.