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’ render