PETITIONER: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH Vs. RESPONDENT: H. E. H. MIR OSMAN ALI KHAN DATE OF JUDGMENT: 25/10/1965 BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M. CITATION: 1966 AIR 1260 1966 SCR (2) 296 CITATOR INFO : R 1972 SC 202 (3,4,11) RF 1975 SC 838 (2) ACT: Income-tax Act (11 of 1922) s. 8 proviso 3-Scope of. Part B States (Taxation Concessions) Order, 1950-Effect of. Indian State-Status under International Law. HEADNOTE: In respect of the assessments made on the Nizam of Hyderabad for the assessment years 1950-51 and 1951-52 the following questions arose in the High Court in a reference under s. 66(1) of the Income-tax Act 1922 : (i) Whether having regard to the Covenant dated 25th January 1950 entered into by the assessee with the Government of India at the time of merger of the State of Hyderabad with the Dominion of India the assessee was not liable to tax under the Income-tax Act; (ii) whether under International law, the assessee was immune from taxation in respect of the assessment ear 1950-51; (iii) Whether having regard to the provisions of Part B States (Taxation Concession) order 1950 the assessee's income was totally 'exempt from tax; (iv) whether the interest received by the assessee in respect of certain income-tax free loans issued by the State Government was exempt from tax; and (v) whether the income payable to the assessee under two trusts-the Family Trust and the Miscel- laneous Trust-arising from Government securities settled by the assesses on the trusts, was exempt from payment of tax. The High Court answered some of the questions in favour of the assessee and others against him. The Commissioner of Income-tax and the assessee appealed to this Court. HELD : (i) The privileges guaranteed by the relevant articles of the merger agreement were only personal privileges of the assessee as an Ex Ruler, and those privileges did not justify his claim to immunity from taxation. [300 D] Sri Sudhansu Shekhar Singh Deo v. State of Orissa, [1961] 1 S.C.R. 779, followed. (ii) Hyderabad State never acquired international personality under the International Law and so its ruler could not rely upon International law for claiming immunity from taxation of his personal properties. From 1858, Hyderabad was under the suzerainty of the British Crown till the. Indian Independence Act of 1947 was passed, and thereafter, after negotiations it acceded to the Indian Dominion. It was never recognised as an international personality by the family of nations. The High Court, therefore, erred in holding that the income received by the assessee up to 26th January 1950, was not liable to tax under the Income-tax Act [302 E; 303 B; 304 F-G; 305 B] Further, the assessee's right to exemption if any, under International Law, during the accounting year, was irrelevant to the question of taxation under the Act. Under the Act, an individual is assessed to income tax on the income of the previous year at the rate or rates fixed for the year by the annual Finance Act. If during the assessment yew an individual is assessable to tax, the fact that during the previous year 2 97 he was not liable to tax at all because there was no income tax in the area to which the Act was extended, or because, under an income-tax Act in force therein during that year his income was exempted from tax, or because, of any other law including international law he was so exempt from tax, would not be of any relevance. After the extension of the Indian Income-tax Act to the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charge as well as the manner of computation of income did not depend upon the preexisting law, but only upon the provisions of the Act. After 26th January 1950, the assessee ceased to be a ruling Chief and he was, therefore, liable to assessment under the Act. If he was assessable to tax, the statutory charge on his income during the previous year was only traceable to the Act, which was retroactive in operation to that extent. [307 F-H; 308 A-C] (iii) The assessee was not entitled to any exemptions under the Part B State (Taxation Concessions) Order, 1950. [309 G] If the assessee was not liable to pay tax under the State law, his non-liability related only to the domain of exemption. It would be incongruous to say that a person exempted from taxation was paying a nil rate and on that basis contend that no tax was payable by him. The Order was only intended to provide a machinery for scaling down the rates of tax in relation to the rates prevailing in the Part B State. If there was a State law prescribing rates, it would afford the criterion for scaling down the Indian rate of tax; if there was no State law prescribing the rate the schedule of rates annexed to the Order would govern the taxation. [309 E-G] (iv) The assessee was entitled to exemption from tax both under s. 8, proviso (3) of the Income-tax Act, as well as under item 8 of the Notification dated 21st March 1922. [309 H; 311 F] In the case of the income from securities s. 8 applies, and under the 3rd proviso thereto the, income-tax payable on the interest receivable on any security of the State Government issued income-tax free shall be payable by the State Government and no tax on interest on such securities was payable by the assessee. The, proviso does not use the ex- pression "Government securities" but only mentions "securities of a State Government". Under cls. 58 and 60 of s. 3 of the General Clauses Act, 1897, the expression "State Government" takes in the Government of Hyderabad State. If so, in terms of the proviso, the income tax payable on the interest receivable on the securities of the Hyderabad Government, issued income-tax free, shall be payable by the State Government and the assessee was not liable. Also, as the assessee held the securities as his private property, under the Notification, the exemption applied both for income-tax and super-tax [310 C, G; 311 B-D, F] (v) In regard to the interest receivable by the assessee from the securities and loans of the two trusts, he was not liable to pay income-tax, but he was not exempt from payment of super-tax under item 8 of the Notification dated 21st March 1922. [313 H] The question had to be decided on a construction of s. 41 of the Act. But it is only after ascertaining the income and after giving exemptions, that s. 41 of the Act comes into play, and the income-tax authority ha.-. the option under s. 41, to assess the beneficiary directly or, in respect of the same income, the trustee on behalf of the beneficiary. Under s. 8 proviso (3) the assessee would not be liable to pay income-tax on the interest from the income-tax free securities. Since the interest on securities in the hands of the trustees does not become an income 298 other than such interest in the hands of the beneficiary, it retains its character as such interest whether the assess- ment is made on the trustee or the beneficiary. Therefore the assessee would not be liable to pay income-tax, but his liability to pay super-tax is not transferred by the proviso to the State Government. Nor could the assessee claim the benefit of the Notification for an exemption with respect to super-tax, because, under the trust deeds the Government loans ceased to be the private property of the assessee and after the ,execution of the trust deeds they were held by the trustees not on behalf of the assessee as his private property but for the purpose of discharging the obligations imposed on them under the trust deeds. [312 G; 313 E, F G, 314 A; 315 A-D] JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 46-49 of
1964.
Appeals by special leave from the judgment and order dated
July 4, 1961 of the Andhra Pradesh High Court in Case
Referred No. 35 of 1959.
A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and
R. N. Sachthey, for the appellants.
I. N. A. Palkhivala, Anwarula Pasha, J. B. Dadachanji,O. C.
Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J. These four appeals by special leave granted
this Court are preferred against the judgment of a Division
Bench ,of the Andhra Pradesh High Court at Hyderabad in a
case referred to it by the Income-tax Appellate Tribunal,
Hyderabad Bench, under s. 66(1) of the Indian Income-tax
Act, 1922, hereinafter ,called the Act, in respect of
assessments made on H.E.H. the Nizam of Hyderabad for the
assessment years 1950-51 and 195152.
The Income-tax Officer, B. Ward, Hyderabad-Deccan, by his
,orders dated February 15, 1955, and March 31, 1956,
rejected the ,objections raised by the assessee and assessed
him to income-tax for the said two years. Against the said
orders the assessee filed two appeals before the Appellate
Assistant Commissioner, Hyderabad, who, by his orders gave
some relief in respect of the said assessments. On further
appeals by the assessee, the Income-tax Appellate Tribunal,
Hyderabad Branch, allowed the appeals of the assessee in
part and ordered the assessments to be revised accordingly.
At the instance of the assessee, the Income-tax Appellate
Tribunal drew up a statement of case and referred four
questions to the High Court of Andhra Pradesh for its
decision. On July 4, 1961, the High Court answered some of
the questions in favour of the assesses and others against
him. The Commis-
299
sioner of Income-tax filed two appeals to this Court, being
Civil Appeals Nos. 46 and 47 of 1964, insofar as the High
Court’s judgment went against the Revenue; and the assessee
filed two appeals, being Civil Appeals Nos. 48 and 49 of
1964 against that part of the High Court’s judgment which
rejected his contentions.
To avoid prolixity and repetition we shall state the
relevant facts in considering each of the questions
referred, to the High Court.
Questions 1 and 3 may be considered together. The said
questions read
Question 1. “Whether in the circumstances of
the case and having regard to International
Law and construction of Municipal Laws and/or
the covenant dated 25-1-1950 between the
Assessee and the Government of India, the
Assessee was liable to tax under the Indian
Income-tax Act, 1922, in respect of any part
of his income.”
Question 3. “Whether, in any event, the
Assessee enjoyed immunity from taxation under
the Indian Income-tax Act, 1922, in respect of
income which accrued or arose to him or was
received by him up to 26th January 1950.”
These two questions raise the following points : (1) Whether
under International Law the assessee is immune from taxation
in respect of the assessment year 1950-51; and (2) whether,
having regard to the said Covenant dated January 25, 1950,
he was not liable to, tax under the Indian Income-tax Act,
1922. The High Court held that under the International Law,
the assessee being a sovereign up to January 25, 1950, his
income up to that date was immune from taxation and that,
the Indian Income-tax Act not having expressly amended the
International Law in its application, to India, his income
till that date was not liable to tax under the, Income-tax
Act. As a corollary from the said conclusion, the High
Court held that as the assessee ceased to be a sovereign
from January 26, 1950, the income accrued to him thereafter
was liable to tax. The High Court rejected the contention
of the assessee that he was exempted from the liability to
pay income-tax under the Covenant entered into by him with
the Government of India at the time of merger.
The argument based upon the Covenant may easily be disposed
of. The relevant articles of the Covenant read as follows
Article 3. His Exalted Highness the Nizam of
Hyderabad and the members of his family shall
be en-
300
titled to all the personal privileges,
dignities and titles enjoyed by them whether
within or outside the territories of the
Dominion before the 15th August 1947.
Article 4. The Government of India guarantees
the succession according to the laws and
customs of the Gaddi of the State and the
personal rights, privileges, dignities and
titles of His Exalted Highness the Nizam of
Hyderabad.
The argument was that the assessee’s immunity from taxation
as a sovereign was a privilege guaranteed to him under the
said articles of the covenant. This question need not
detain us, as it was answered by this Court in Sri Sudhansu
Shekhar Singh Deo v. The State of Orissa(1) in the context
of the claim of exemption from agricultural income-tax by an
Ex-Ruler of an Indian State based upon articles in a merger
agreement, similar to the one now in question. This Court
held that the privileges guaranteed by the relevant articles
of merger agreement were only personal privileges of the
appellant as an Ex-Ruler and that those privileges did not
justify his claim to immunity from taxation. Following this
decision we reject the contention of the assessee based upon
the said articles of the Covenant.
Now, we shall take the first question, excluding that part
of it which refers to the said Covenant, and question 3.
Mr. A. V. Viswanatha Sastri, learned counsel for the
Revenue, contended that under the International Law a
foreign sovereign ,was not immune from taxation in respect
of his private properties :situated in the taxing State;
even if there was such an immunity under the International
Law, the assessee, being under the suzerainty or the
paramountcy of the British Crown, had never enjoyed the
status of a sovereign as understood in the International Law
and, therefore, not governed by that law; and that, in any
event, as on January 26, 1950, the date when he became
liable to tax, he was no longer a sovereign and therefore he
could not claim exemption under the International Law.
Mr. Palkhiwala, learned counsel appearing for the assessee,
while conceding that the assessee could not claim exemption
under International Law in respect of the assessment for the
year 195152, argued that he was not liable to income-tax for
the assessment year 1950-51 on the ground that under the
Indian Income-tax Act, income-tax was charged on the
assessee’s income received ,during the accounting year and
that as during the accounting year
(1) [1961] 1 S.C.R. 779.
30 1
the assessee was a ruling chief, he was exempt from taxation
under the International Law. He argued that under the
International Law, as understood by English Courts, a
foreign sovereign was exempt from taxation, that the said
interpretation of the law had become the common law of
England and that the said common law was the law of India
before the Constitution and it continued to have force
thereafter by reason of Art. 372.
The validity of Mr. Palkhivala’s contention depends upon our
acceptance of four premises, namely (i) the English Courts
have finally accepted the view that under International Law
a sovereign is immune from taxation in respect of his
private property; (ii) that it had become a part of the
common law of England; (iii) that before the Indian
Constitution came into force, the said common law was
accepted and applied by the Indian Courts; and (iv) that the
said common law so accepted as the common law of this
country continued to be in force by reason of Art. 372 of
the Constitution.
International Law vis-a-vis the liability of a sovereign to
taxation in respect of his private property is in a process
of evolution. It has not yet become crystallized. It is
true that some of the textbooks on the subject and some of
the decisions support the view that sovereign rulers are
exempt from taxation : see Halsbury’s Laws of England, 3rd
Edn., Vol. 20, p. 589; Oppenheim’s International Law, 8th
Edn., Vol. 1, D. 759. But, even in England the House of
Lords in Sultan of Johore v. Abubakar Tunku Bendahar(1)
observed :
“Their Lordships do not consider that there
has been finally established in
England……………….. any absolute rule
that a foreign independent sovereign cannot be
impleaded in our courts in any circumstances.”
Interesting and instructive discussion on the question of a
foreign sovereign’s immunity from taxation in respect of his
private properties is found in the American Journal of
International Law, Vol. 46, at p. 239, under the heading
“Immunity from Taxation of Foreign State-owned property”.
After an elaborate consideration of the relevant material on
the subject, the learned author concludes thus, at p. 258 :
“Immunity from taxation should be the rule
when the activities concerned are those
normally and traditionally regarded as
governmental in character; but when a foreign
state engages in trading operations of a
(1) L.R. [1952] A.C. 318,343.
302
type generally open to private persons there
seems no need to better its competitive
position or to shift tax burdens to others
through giving it exemption from taxes.”
In dealing with taxation of property, the
learned author says, at p. 256, thus
“The use of these agreements, combined with
the practice discussed above, appears to be
bringing about a situation in which it will
become generally recognized that International
Law provides for the tax exemption of foreign
state-owned property used for functions
generally accepted as public.”
“It is by no means clear, however, that the
same result is either probable or desirable
when we are dealing with property used for
purposes which seem more commercial than
governmental.”
It may also be noticed that in India there is no absolute
prohibition against a ruler of a foreign state being sued in
India: see ss. 86 and 87 of the Code of Civil Procedure. He
can be sued with the consent of the Central Government. It
is not necessary in this case to decide this question, as we
are satisfied that H.E.H. the Nizam had never acquired
international personality under International Law. We have
noticed the aforesaid facts only to indicate that the
question is not free from difficulty and that it requires
serious consideration when it directly arises for decision.
We shall, therefore, assume for the purpose of these appeals
that a foreign sovereign who has acquired an international
personality has such an immunity from taxation.
We shall now proceed to consider the question why in our
view H.E.H. the Nizam had never acquired international per-
sonality. As a learned author puts it.
“Every civilised State which is a member of
the family of nations is an International
person. Recognition of a State as a, member
of the family of nations involves recognition
of such State’s (1) equality, (2) dignity, (3)
independence, and (4) territorial and personal
supremacy.”
According to Oppenheim, all the said qualities constitute,
as a body, the international personality of a State. Unless
the State of Hyderabad had the said qualities, its ruler
could not claim any of the immunities sanctioned by
International Law. A brief his-
3 0 3
tory of the status of the Hyderabad State vis-a-vis the
British Crown would help us to ascertain its status in
International Law.
In 1858 the British Crown took over from the East India Com-
pany the administration of the entire territory of India.
Thereafter, while the British India was under the direct
rule of the Crown, the Indian States remained under the
personal rule of their Chiefs under the suzerainty of the
Crown. In the Pronouncement of Lord Canning he clearly
stated
The Crown in England stands forth the unquestioned ruler and
paramount power in all India.”
This concept of suzerainty by the Crown was also described
a& “Paramountcy”. The relationship between the paramount
power and the Indian States was described in the “White
Paper on Indian States”, at p. 32, thus
“As already stated the paramountcy of the
British Crown was not co-extensive with the
rights of the Crown flowing from the Treaties.
It was based on Treaties, Engagements, Sanads
as supplemented by usage and sufferance and by
decisions of the Government of India and the
Secretary of State embodied in political
practice.”
The said White Paper further discloses that
while the States were responsible for their
own internal administration, the Crown
accepted responsibility for their external
relations and defence. The Indian States had
no international status, and for external
purposes, they were practically in the same
position as British India. The Government of
India Act, 1935, gave the Indian States an
option to join the federation subject to
certain conditions; but that part of the said
Act was abandoned in 1939. The Indian
Independence Act of 1947 introduced a change
in the relationship between the Crown and the
said States. Section 7 (1) (b) of the Indian
Independence Act of 1 947, reads :
“As from the appointed day the suzerainty of
His Majesty over the Indian States lapses, and
with it, all treaties and agreements in force
at the date of the passing of this Act between
His Majesty and the rulers of Indian States,
all functions exercisable by His Majasty at
that date with respect to Indian States, all
obligations of His Majesty existing at that
date towards Indian States or the rulers
thereof, and all powers, rights, authority, or
jurisdiction exercisable by His Majesty at
up CI/65-6
304
that date in or in relation to Indian States
by treaty, grant, usage, sufferance or
otherwise; and
Provided that notwithstanding anything in
paragraph (b)…….. of this sub-section,
effect shall, as nearly as may be, continue to
be given to the provisions of any such
agreement as is therein referred to which
relate to customs, transit and communications,
posts and telegraphs, or other like matters,
until the provisions in question are denounced
by the Ruler of the Indian States…….. on
the one hand, or by the Dominion or Province
or other part thereof concerned on the other
hand, or are superseded by subsequent
agreements.
Though under this Act the paramountcy of the Crown lapsed in
regard to Hyderabad and other States, the preexisting agree-
ments with those States continued in respect of specified
matters. The lapse of suzerainty or the breaking of ties
with the British Crown did not ipso facto raise their status
to that of international personality. It created a void and
the position of the States was in a fluid state. No de
facto or de jure recognition was given to the Hyderabad
State or to any other State by the family of nations. But,
after protracted negotiations, the Nizam issued a
proclamation on November 23, 1949, accepting the
Constitution of India, shortly to be adopted, subject to
ratification by the constituent assembly of the Hyderabad
State. The said constituent assembly ratified it and
thereafter the Hyderabad State was included in Part B of the
First Schedule to the Constitution : see Appendix LIV, White
Paper on Indian States (N.S. 6), p. 369, and Basu’s
Commentary on the Constitution of India, 4th Edn., Vol. 4,
pp. 32-34. It will be seen from the said history that
Hyderabad was under the suzerainty of the British Crown till
the ,Indian Independence Act of 1947 was passed and that
thereafter, after negotiations with the Indian Dominion, it
finally acceded to it. It was never recognized as an
international personality by the family of nations. It was
all through a vassal of the British Crown. Oppenheim says
in his book on International Law, Vol. 1, 5th Edn., at pp.,
165-166, that “the position of the Indian ‘States to Great
Britain is like that of vassal of States which have no
international relations whatever either between themselves
or with foreign States”. In Hall’s International Law, 8th
Edn., the learned author says that the States of the Indian
Empire of Great Britain were protected States and that they
were not subject to international law. The, decision in
Sayce v. Ameer Ruler Sadiz
30 5
Mohammad Abbasi Bahawalpur State(1) holding that the Ameer
of Bahawalpur State was a foreign sovereign immune from the
jurisdiction of the English Courts was solely based upon the
certificate of the Commonwealth Relations Office and it does
not help us in deciding the present case.
It is, therefore, clear that Hyderabad State did not acquire
international personality under the International law and so
its ruler could not rely upon international law for claiming
immunity from taxation of his personal properties.
The problem may be looked at from a different perspective,
i.e., on the basis of the provisions of the Indian Income-
tax Act. The Indian Income-tax Act, 1922, hereinafter
called the Act. admittedly applied to Hyderabad State from
January 26, 1950 Under S. 3 of the Act, where any Central
Act enacts that income-tax shall be charged in any area at
any rate or rates, tax at that rate or those rates shall be
charged for that area in accordance with and subject to the
provisions of the Act in respect of the total income of the
previous year of every individual etc. Under S. 2 of the
Finance Act of 1950 (Act 25 of 1950), subject to the
provisions of sub-ss. (3), (4) and (5) for the year
beginning on 1st day of April 1950, income-tax shall be
charged at the rates specified in Part 1 of the First
Schedule; under S. 13 thereof. if immediately before the 1st
day of April 1950, there was in force in any Part B States,
other than the States mentioned therein, any law relating
to, income-tax or super-tax or profits of business etc.,
that law shall cease to have effect for the purposes of
assessment under the Indian Income-tax Act, 1922, for the
year ending March 31, 1951, or any subsequent year. Under
s. 2(14A), “taxable territories” shall be deemed to include
the merged territories as respects any period after the 31st
day of March, 1949, for any of the purposes of the Act and
as respects any period included in the previous year, for
the purpose of making any assessment for the year ending on
the 31st day of March, 1950, or for any subsequent year.
The effect of these provisions is that every individual was
liable to income-tax from April 1, 1950, at the rates
mentioned in the Finance Act in respect of his total income
of the previous year in the merged territories. It is not,
and it cannot be, disputed that on April 1, 1950, the
assessee was not a ruling chief but an ordinary citizen of
Indian, residing, within the meaning of S. 4 of the Act, in
that part of India which was a part of Hyderabad State and
so he would be liable to income-tax on April 1, 1950, in
respect of the
(1) [1952] 2 All E.R. 64
306
total income he received in the previous year in the merged
territory. It cannot also be disputed that the, said
taxable total income would be computed after giving the
necessary allowances and deductions in the manner Drescribed
by Ch. III of the Act. But it is said that as the assessee
was exempted under International Law from taxation of his
income of the previous year, the Act could not reach that
income. That conclusion, according to the learned counsel
for the assessee, flows from the nature of the tax, namely,
that though the year of assessment is 1950-51, the charge is
not on the income of the year of assessment, but on the
income of the previous year. Decided cases no doubt support
the contention of the assessee that what is charged in the
assessment year or the tax year is the income earned during
the accounting year or the earning year. The Act of 1918
which followed the English Acts levied tax on the income of
the year of assessment, taking the income of the previous
years as a standard or as a measure. But by the Act of 1922
this principle was changed. Now under the Act, tax is
assessed in the assessment year on the income of the
previous year. ‘The Judicial Committee in Maharaja of
Pithapuram v. Commissioner of Income-tax, Madras(1) has
brought out this distinction when it said :
“In the first place, it is clear to their
Lordships that under the express terms of
Section 3 of the Indian Income-tax Act, 1922,
the subject of charge is not the income of the
year of assessment, but the income of the
previous year. This is in direct contrast to
the English Income-tax Acts, under which the
subject of assessment is the income of the
year of assessment, though the amount is
measured by a yardstick based on previous
years.”
This Court in Commissioner of Income-tax, Bombay City v. A
marchand N. Shroff (2) restated that principle with
approval.
Even so, the income of the assessee during the accounting
Year has to be computed only in the manner prescribed by the
Act. Deductions and exemptions from the total income can
only be those that are provided under the Act. This aspect
of the case has been brought out with clarity in The Union
of India v. Madan Gopal Kabra(3). The facts in that case
were : the respondent resided and carried on business in the
District of Jodhpur in Rajasthan which was one of the States
specified in Part B. of the First Schedule to the
Constitution of India, 1950. The
(1) (1945) 13 I.T.R. 221, 223.
(3) (1954) 25 L.T.R. 58.
(2) (1963) 48 I.T.R. 59.
307
Constitution came into force on January 26, 1950. The
Indian Finance Act, 1950, amended the Indian Income-tax Act,
1922, in certain respects and made it applicable to the
whole of India, except the State of Jammu and Kashmir. In
May 1950, the respondent was required to file a return of
his income for the year ending March 31, 1950. It was
contended by the respondent that the income which accrued or
arose to him or was received by him prior to April 1, 1950,
was not liable to tax on the ground that such income was not
liable to be charged under the provisions of any law
validity in force in: Rajasthan. This Court held that under
sub-cl. (1) of cl. (b) of s. 2(14A) of the Income-tax Act,
Rajasthan was to be deemed to be a taxable territory for the
purpose of s. 4A as respects any period before or after
March 31, 1950. On that fiction, as the respondent was a
resident in such territories within the meaning of s. 4A,
the income accruing or arising to him in Rajasthan during
the year 1949-50 would be taxable. This Court further
pointed out that Parliament under Arts. 245 and 246 of the
Constitution, read with entry No. 82 of List 1 of the
Seventh Schedule thereof, can make laws with respect to
taxes on income for the whole of the territory of India with
retrospective effect. The effect of the said decision is
that though by reason of the Finance Act of 1950 the
assessee was assessable to income-tax only from April 1,
1950, his income of the previous year was taxable even
though the said income was not liable to tax before the
Indian Income-tax Act was made applicable to Rajasthan. To
that limited extent it had retrospective operation. If so,
we do not see how a person, who was exempted from tax before
the Act was extended under the State law or under the
International Law, would be in a better position.
The legal position as we apprehend may be stated thus Under
the Act an individual is assessed to income-tax on the
income of the previous year at the rate or rates fixed for
the year by the annual Finance Act. The total income of the
assessee during the previous year is computed in accordance
with the provisions of the Income-tax Act after giving the
relevant allowances and deductions therefrom. If during the
assessment year an individual is assessable to tax, the fact
that during the previous year he was not liable to tax at
all because there was no income-tax Act in the area to which
the Act was extended or because that under an Income-tax Act
in force therein during that year his income was exempted
from tax or because of any other law, including
International Law, he was so exempt from tax, would not be
of any relevance. After the extension of the Act to the
308
Hyderabad State the charge was under the Act and not under
the provisions of the previous law. Thereafter, the charge
as well as the manner of computation of income did not
depend upon the preexisting law, but only upon the
provisions of the Act. Applying the said principles to the
instant case, it is manifest that after January 26, 1950,
the assessee ceased to be a ruling chief and he was,
therefore, liable to assessment under the Act. If he was
assessable to tax, the statutory charge on his income during
the previous year was only traceable to the Act, which was
retroactive in operation to that ‘extent. His right to
exemption, if any, under International Law during the
accounting year was irrelevant to the question of taxation
under the Act,, as the said law ceased to apply to him
during the assessment year.
We, therefore, hold that the High Court went wrong in hold-
ing that the income received by the assessee up to January
26, 1950, was not liable to tax under the Act.
The second question reads :
“Whether, having regard to the provisions of
Part B States (Taxation Concessions) Order,
1950, the assessee’s income during the year of
account was totally exempt from tax.”
The High Court answered the question against the assessee.
The facts relevant to the question are as follows : The
assessee was assessed to income-tax in respect of his income
arising in Hyderabad in connection with the assessment years
1950-51 and 1951-52, having regard to the provisions of Part
B States (Taxation Concession) Order, 1950. It was
contended that the assessee was immune from liability to tax
under the law of income-tax of Hyderabad and, therefore, the
rate payable by him in terms of the order would be nil; with
the result that he would not be liable to any tax. The
question turns upon the relevant provisions of the said
Order. The said Order was issued by the Central Government
in exercise of the power conferred on it under S. 60-A of
the Act. Under that section, the Central Government has the
power, if it considers necessary or expedient so to do, to
avoid any hardship or anomaly, or removing any difficulty,
that may arise as a result of the extension of the Act to
the merged territories, by general or special law to make an
exemption, reduction in rate or other modification in
respect of income-tax in favour of any class of income, or
in regard to the whole or any part of the, income of any
person or class of persons. Pursuant to that power the
Central Government issued Part B States (Taxation
Concession) Order, 1950, making exemptions, reductions in
the
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rate of tax and modifications specified in that Order. At
the outset it may be noticed that under this Order no
exemption was given to an Ex-Ruler from paying income-tax or
super-tax in respect of income accrued to him in the
Hyderabad State. A perusal of paragraphs 3 (ii) (a), 3
(iii), 3 (iv), 3 (v) and 3 (vi), Para 4(iii), Para 5 and
Para 6 of the Order shows that the Order was made mainly to
give relief to assessees in Part B States where the rates of
tax were less than the rates prescribed in the Act. “Indian
rate of tax” was defined in Para 3 (iii) and “State rate of
tax” was defined in Para 3 (v). Under the Explanation to
Para 3 (v), if there was no State law relating to charge of
income-tax and super-tax, the Schedule annexed to the Order
prescribed the rates. The tax on the basis of “Indian rate
of tax” and the “State rate of tax before the appointed day
were calculated and the lesser rate was made payable : see
paras 5 and 6 of the Order. The entire scheme evolved a
machinery to give a rebate on the difference of tax
calculated on the basis of the said two rates. The said
scheme had nothing to do with exemptions either under the
said Order or under the Act. It was argued that, as under
the State law the assessee was immune from liability to tax,
he was in effect liable to pay only nil tax under the State
law. On the basis of nil tax under the State law, the
argument proceeded, by applying the principles of the said
Order, no tax would be payable by the assessee. We cannot
accept this argument. The Order was only intended to
provide a machinery for scaling down the rates of tax in
relation to the State rates. If there was a State law
prescribing rates, it would afford the criterion for scaling
down the Indian rate of tax; if there was no State law
prescribing the rate, the schedule of rates annexed to the
Order would govern the taxation. If the assessee was not
liable to pay tax under the State law, his non-liability
related only to the domain of exemption. It would be
incongruous to say that a person exempted from taxation was
paying a nil rate. This would be an obvious attempt to
subvert the scheme of the Order to reach a desired result.
We, therefore, hold, agreeing with the High Court, that the
assessee was not entitled to any exemptions under the said
Order.
We shall now take up the first part of the 4th question
which reads :
“Whether on the facts of the case the interest
received by the Assessee in respect of 3%
Nizam Government Income-tax free loan, 1360-70
Fasli of the face value of Rs. 1,45,200, the 2
1/2% Nizam
Government Income-tax free development loan,
1364-69 fasli of the face value of Rs. 1.05
crores, the 21% Nizam Government loan, 1363-73
fasli of the face value of Rs. 200, and the
21% Hyderabad Government loan, 1384 fasli of
the face value of Rs. 8 crores was exempt from
tax.”
This question relates only to the assessment year 1951-52.
The securities were issued by the Hyderabad State free from
income-tax. The High Court held that they were exempt from
income-tax under S. 8 of the Act. Under S. 8 of the Act,
tax shall be payable by an assessee under the head “interest
on securities” in respect of the interest receivable by him
on any of the securities of the State Government. But,
under the third proviso thereto, the income-tax payable on
the interest receivable on the securities of the State
Government issued income-tax free shall be payable by the
State Government. It was argued for the Revenue that the
expression “securities of a State Government” in the proviso
does not include the securities issued by the Hyderabad
State. This contention was sought to be sustained on the
basis of the definition of “Government securities” in s.
3(24) of the General Clauses Act, 1897, which reads :
“Government securities” shall mean securities
of the Central Government or of any State
Government, but in any Act or Regulation made
before the commencement of the Constitution
shall not include securities of the Government
of any Part B State.”
Relying upon this clause it was contended that the
securities issued by the Government were not covered by the
said proviso. There is an obvious fallacy in this argument.
To ascertain the ,meaning of an expression in a Central Act,
it is permissible to look into the General Clauses Act to
find out how that expression is defined in the General
Clauses Act. The General Clauses Act affords a dictionary
for words used in the Central Acts to the extent provided
thereunder. Proviso 3 to s. 8 of the Act does not use the
expression “Government securities”, but only mentions
‘.’securities” of a State Government. There is, therefore,
no scope to ascertain the meaning of the latter expression
with reference to the definition given to a different
expression in s. 3 (24) of the General Clauses Act. On the
other hand, the ,expression “State Government” is defined in
cl. (60) of s. 3 of the General Clauses Act and it reads :
” “State Government”,-(a) as respects anything
done before the commencement of the
Constitution,
311
shall mean, in a Part A State, the Provincial
Government of the corresponding, Province, in
a Part B State, the authority or person
authorised at the relevant date to exercise
executive government in the corresponding
Acceding State, and in a Part C State, the
Central Government.”
Clause (58) of S. 3 of the General Clauses Act defines
“State” to mean as respects any period before the
commencement of the Constitution (Seventh Amendment) Act,
1956, a Part A State, a Part B State or a Part C State.
With the aid of the said definitions it will be clear that
the expression “State Government” used in the proviso to s.
8 of the Act takes in the Government of the Hyderabad State.
If so, in terms of that proviso, the income-tax payable on
the interest receivable on the securities of the Hyderabad
Government issued income-tax free shall be payable by the
State Government. Therefore, there are no merits in the
contention and the High Court rightly rejected it.
In regard to the same securities the assessee claimed exemp-
tion from payment of income-tax and super-tax under item 8
of the Notification dated March 21, 1922, issued by the
Finance Department of the Government of India. It reads :-
“The interest on Government securities held
by, or on behalf of, Ruling Chiefs and Princes
of India as their private property.”
This exemption applies both for income-tax and super-tax.
If the assessee was entitled to this exemption, he would get
a larger relief than he would under the third proviso to s.
8 of the Act. The said securities were held by the assessee
as his private property and, therefore, he was clearly
entitled to this exemption. We, therefore, hold,agreeing
with the High Court, that the assessee was entitled to the
exemption under the said item in respect of the said
securities.
Then we come to questions 4(ii) and 4(iii). They read
Question 4(ii) “Whether on the facts of the
case the interest in respect of securities of
the Government of India or of the Government
of Hyderabad (including Nizam Government
Promissory Note), which became payable to the
Assessee under the trust created by him known
as “the Family Trust”, was exempt from payment
of tax in his hands.”
Question 4(iii) “Whether the interest in
respect of securities of the Government of
India or of the
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Government of Hyderabad (including Nizam
Government Promissory Note,) which became
payable to the Assessee under the trust
created by him known as “the Miscellaneous
Trust’ was exempt from payment of tax in his
hands.”
These two questions relate to Government securities settled
by the assessee in trust, but the income whereof was payable
to him under the provisions of the relevant deeds of trust.
The assessee executed the two trusts–one dated May 10,
1950, known as H.E.H. Nizam’s “Family Trust” and the other
dated August 6, 1950, known as H.E.H. Nizam’s “Miscellaneous
Trust’. Under cl. 3 of the deed of trust relating, to the
Family Trust, the net income of the trust fund, after
defraying the expenses and charges of collection, had to be
paid by the trustees thereunder to the assessee for and
during the term of his natural life. Under the
Miscellaneous Trust it was provided that subject to the
provisions of sub-cls. (a) to (j) of cl. 2 of the said deed,
the trustees should pay the balance of the interest and
income of the trust fund to the assessee for and during the
term of his natural life. At this stage it is not necessary
to notice the other recitals in the deeds. We shall have to
-consider the recitals in the said two deeds in greater
detail at a later stage. The assessee claimed exemption in
regard to the said interest on the ground that he was
exempted under the third proviso to S. 8 of the Act and
under item No. 8 of the notification issued by the Finance
Department of Government of India on March 21, 1922. The
High Court held that after the execution of the trust deed,
the assessee was divested of his ownership of the securities
and the trustees became their owners. On that basis, it
further held that, though the income was interest on
securities in the hands of the trustees, it was in the hands
of the assessee only the income which he got from the
trustees. Briefly stated, the High Court held that the
character of the income, namely, interest on securities, had
changed when it reached the hands of the assessee.
The question falls to be decided on a construction of s. 41
of the Act. The relevant part of s. 41 reads :
“(1) In the case of income, profits or gains
chargeable under this Act which trustee or
trustees appointed under a trust declared by a
duly executed instrument in writing whether
testamentary or otherwise are entitled to
receive on behalf of any person, the tax shall
be levied upon and recoverable from such
trustee or trustees, in the like
313
manner and to the same amount as it would be
leviable upon and recoverable from the person
on whose behalf such income, profits or gains
are receivable, and all the provisions of this
Act shall apply accordingly
(2) Nothing contained. in sub-section (1)
shalt prevent either the direct assessment of
the person on whose behalf income, profits or
gains therein referred to are receivable, or
the recovery from such person of the tax
payable in respect of such income, profits or
gains.”
Under this section the Revenue has the option to levy or
collect tax from the trustee or the beneficiary; the tax can
be levied upon and recoverable from the trustee in the like
manner and to the same amount as it would be leviable upon
and recoverable from` the person on whose behalf such
income, profits or gains are receivable. In short, it
imposes a vicarious liability on the trustee. The
expression “all the provisions of this Act shall apply
accordingly” indicates that there is no distinction in the
matter of assessability of the income in the hands of a
trustee or the beneficiary, as the case may be. Indeed, s.
41 of the Act comes into play only after the income is
computed in accordance with Ch. III of the Act. In the case
of income from securities s. 8 applies, and under the second
proviso thereto, the income-tax payable on the interest
receivable on any security of the State Government issued
income-tax free shall be payable by the State Government.
No tax on interest on such securities is payable by the
assessee. After ascertaining the income and after giving
the exemptions, the income-tax authority has the option to
assess the beneficiary directly or, in respect of the same
income, the, trustee on behalf of the beneficiary. This
construction finds support in the decision of the Bombay
High Court in Commissioner of Income-tax, Ahmedabad v.
Balwantrai Jethalal Vaidya(1). If that be the scope of the
assessment under s. 41 of the Act, we find it difficult to
appreciate the contention that the interest on securities in
the hands of the trustee becomes an income other than such
interest in the hands of the beneficiary. The interest
retains its character whether the assessment is made on the
trustee or the beneficiary. We cannot, therefore, accept
the construction put upon s. 41 of the Act by the High
Court.
This legal position only gives the assessee relief in
regard’ to income-tax payable on the interest from
securities; but the third
(1) (1958) 34 I.T.R. 187.
314
proviso to s. 8 of the Act’ does not transfer the liability
of the assessee to pay super-tax to the State Government.
The exemption from super-tax was claimed under item 8 of the
notification issued under s. 60 of the Act. We have
extracted that item earlier in another context. The
interest mentioned in this item is exempt from both income-
tax and super-tax. The short question, therefore, is
whether the interest payable to the assessee was in respect
of Government securities held by or on behalf of the
assessee as his private property. The answer to this
question depends upon the provisions of the said two trusts,
namely, the Family Trust and the Miscellaneous Trust. The
Family Trust was executed by the assessee on May 10, 1950,
in respect of the Government securities of aggregate face
value of Rs. 9 chores which were his private properties.
Under the deed of trust, the trustees were appointed and the
securities were handed over to them. The trustees so
appointed were to collect and recover the interest and other
income from the securities and were, after meeting the
overhead charges, to pay the residue of the income of the
trust fund to the assessee absolutely for and during the
term of his natural life. After the death of the assessee,
the trustees should divide the trust fund and allot it to
the innumerable relatives and others mentioned in the trust
deed. The trust deed also gave various other directions to
the trustees. In short. under the said trust deed the title
to the securities was transferred to the trustees and they
were under an obligation to pay the interest or to give the
corpus in the manner prescribed thereunder during the life
time of the assessee or thereafter. Under the trust deed
the securities were not held by the trustees on behalf of
the assessee as his private property : they were held by the
trustees for carrying out the trust in terms of the trust
deed. After the execution of the trust deed, the securities
ceased to be the private property of the assessee and
thereafter he would only be entitled to the interest on the
securities during his life time in the manner prescribed
thereunder. We cannot, therefore, hold that the securities
were held by the trustees as private property ;of the
assessee.
The Miscellaneous Trust consisted of Hyderabad and Govern-
ment of India Loans. Under this trust deed, trustees were
appointed and the said amounts were transferred to them.
Under the document the trustees wereunder an obligation to
manage the said fund, recover interest and other income
therefrom, and, after bearing the overhead charges, pay the
income therefrom in different proportions to the relatives
of the assessee and other persons mentioned therein. It is
not necessary to consider the
315
complicated provisions of this document. It would be enough
to state that under this trust deed also the amounts
representing them loans mentioned therein ceased to be the
private property of the, assessee and the trustees
thereunder held the said property for discharging the
various obligations imposed on them and for paying the
income therefrom to the different persons mentioned therein
and in the manner prescribed thereunder. The Government
loans, therefore, ceased to be the private property of the
assessee and after the execution of the trust deed they were
held by the trustees not on behalf of the assessee as his
private property, but for the purpose of discharging the
obligations imposed on, them under the deed.
We, therefore, hold that the income from the said two trusts
did not earn the exemption under item 8 of the said
notification.
The result of our view is that in regard to the
interest receivable by the assessee from the said securities
and loans, he was not liable to pay income-tax, but he was
not exempt from payment of super-tax under item 8 of the
said notification.
The next question, as recast by the High Court, reads
Question 4 (iv) “Whether on the facts of the case, the
interest at Rs. 1,97,180/- on the Government of India
securities should be regarded as having accrued in
the Hyderabad State and therefore chargeable at the rate
obtaining under the Hyderabad Income-tax Act.”
It was argued that the income sought to be taxed accrued in
Hyderabad, because the securities were effaced to
be payable in Hyderabad and, therefore, chargeable
only at the rate obtaining under the Hyderabad
Income-tax Act. The High Court negatived the contention. It
held that the said interest accrued only in British
India. Though the assessee raised the question of the
correctness of the view expressed by the High Court in the
special leave petition, at the time of arguments the learned
counsel for the assessee did not press this point,
Therefore, the opinion expressed by the High Court in this
regard stands. We should not be understood to have
expressed our view one way or other. In the result, we
answer the questions as follows
Question 1 in the affirmative.
Question 2 in the negative.
Question 3 in the negative.
Question 4(i) : in the affirmative
316
.lm15
Question 4(ii) : the assessee was exempt from payment of
income-tax, but he was not exempt from payment of super-tax.
Question 4(iii) : the assessee was exempt from payment of
income-tax. but he was not exempt from payment of super-tax.
Question 4(iv) : in the negative.
The aforesaid answers given by us to the 4 questions
referred to the High Court by the Income-tax Appellate
Tribunal will be substituted in the place of those given by
the High Court. We modify the order of the High Court
accordingly in all the appeals. As the parties failed in
part and succeeded in part, they will bear their own costs
here and in the High Court.
Appeals allowed in part.
317