{"id":253197,"date":"1965-10-25T00:00:00","date_gmt":"1965-10-24T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-h-e-h-mir-osman-ali-khan-on-25-october-1965"},"modified":"2015-11-03T08:49:55","modified_gmt":"2015-11-03T03:19:55","slug":"commissioner-of-income-tax-vs-h-e-h-mir-osman-ali-khan-on-25-october-1965","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-h-e-h-mir-osman-ali-khan-on-25-october-1965","title":{"rendered":"Commissioner Of Income-Tax, … vs H. E. H. Mir Osman Ali Khan on 25 October, 1965"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax, … vs H. E. H. Mir Osman Ali Khan on 25 October, 1965<\/div>\n
Equivalent citations: 1966 AIR 1260, 1966 SCR (2) 296<\/div>\n
Author: K Subbarao<\/div>\n
Bench: Subbarao, K.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX, ANDHRA PRADESH\n\n\tVs.\n\nRESPONDENT:\nH.   E. H. MIR OSMAN ALI KHAN\n\nDATE OF JUDGMENT:\n25\/10\/1965\n\nBENCH:\nSUBBARAO, K.\nBENCH:\nSUBBARAO, K.\nSHAH, J.C.\nSIKRI, S.M.\n\nCITATION:\n 1966 AIR 1260\t\t  1966 SCR  (2) 296\n CITATOR INFO :\n R\t    1972 SC 202\t (3,4,11)\n RF\t    1975 SC 838\t (2)\n\n\nACT:\nIncome-tax Act<\/a> (11 of 1922) s. 8<\/a> proviso 3-Scope of.\nPart B States (Taxation Concessions) Order, 1950-Effect of.\nIndian State-Status under International Law.\n\n\n\nHEADNOTE:\nIn respect of the assessments made on the Nizam of Hyderabad\nfor  the assessment years 1950-51 and 1951-52 the  following\nquestions  arose in the High Court in a reference  under  s.\n66(1)<\/a> of the Income-tax Act 1922 : (i) Whether having regard\nto the Covenant dated 25th January 1950 entered into by\t the\nassessee with the Government of India at the time of  merger\nof  the\t State of Hyderabad with the Dominion of  India\t the\nassessee  was  not liable to tax under the  Income-tax\tAct<\/a>;\n(ii)  whether  under  International law,  the  assessee\t was\nimmune\tfrom  taxation\tin respect  of\tthe  assessment\t ear\n1950-51;  (iii) Whether having regard to the  provisions  of\nPart   B  States  (Taxation  Concession)  order\t  1950\t the\nassessee's income was totally 'exempt from tax; (iv) whether\nthe interest received by the assessee in respect of  certain\nincome-tax  free  loans issued by the State  Government\t was\nexempt\tfrom tax; and (v) whether the income payable to\t the\nassessee  under two trusts-the Family Trust and the  Miscel-\nlaneous Trust-arising from Government securities settled  by\nthe assesses on the trusts, was exempt from payment of tax.\nThe  High Court answered some of the questions in favour  of\nthe  assessee and others against him.  The  Commissioner  of\nIncome-tax and the assessee appealed to this Court.\nHELD  :\t (i)  The  privileges  guaranteed  by  the  relevant\narticles   of  the  merger  agreement  were  only   personal\nprivileges  of\tthe  assessee  as an  Ex  Ruler,  and  those\nprivileges  did\t not  justify his  claim  to  immunity\tfrom\ntaxation. [300 D]\nSri Sudhansu Shekhar Singh Deo v. State of Orissa<\/a>, [1961]  1\nS.C.R. 779, followed.\n(ii) Hyderabad\t  State\t  never\t   acquired    international\npersonality  under  the International Law and so  its  ruler\ncould not rely upon International law for claiming  immunity\nfrom  taxation\tof  his\t personal  properties.\t From  1858,\nHyderabad was under the suzerainty of the British Crown till\nthe.   Indian  Independence  Act of  1947  was\tpassed,\t and\nthereafter,  after  negotiations it acceded  to\t the  Indian\nDominion.   It\twas  never recognised  as  an  international\npersonality  by\t the  family of nations.   The\tHigh  Court,\ntherefore, erred in holding that the income received by\t the\nassessee  up  to 26th January 1950, was not  liable  to\t tax\nunder the Income-tax Act<\/a> [302 E; 303 B; 304 F-G; 305 B]\nFurther,  the  assessee's right to exemption if\t any,  under\nInternational\tLaw,   during  the  accounting\t year,\t was\nirrelevant to the question of taxation under the Act.  Under\nthe  Act<\/a>,  an individual is assessed to income\ttax  on\t the\nincome\tof the previous year at the rate or rates fixed\t for\nthe  year  by  the  annual  Finance  Act<\/a>.   If\tduring\t the\nassessment yew an individual is assessable to tax, the\tfact\nthat during the previous year\n2 97\nhe was not liable to tax at all because there was no  income\ntax  in the area to which the Act was extended, or  because,\nunder  an income-tax Act in force therein during  that\tyear\nhis  income was exempted from tax, or because, of any  other\nlaw  including international law he was so exempt from\ttax,\nwould  not be of any relevance.\t After the extension of\t the\nIndian Income-tax Act<\/a> to the Hyderabad State the charge\t was\nunder  the Act and not under the provisions of the  previous\nlaw.   Thereafter,  the\t charge as well\t as  the  manner  of\ncomputation  of income did not depend upon  the\t preexisting\nlaw,  but only upon the provisions of the Act.\t After\t26th\nJanuary\t 1950, the assessee ceased to be a ruling Chief\t and\nhe  was, therefore, liable to assessment under the Act.\t  If\nhe was assessable to tax, the statutory charge on his income\nduring\tthe  previous year was only traceable  to  the\tAct,\nwhich was retroactive in operation to that extent. [307 F-H;\n308 A-C]\n(iii)\t  The  assessee was not entitled to  any  exemptions\nunder  the Part B State (Taxation Concessions) Order,  1950.\n[309 G]\nIf  the assessee was not liable to pay tax under  the  State\nlaw,  his  non-liability  related  only\t to  the  domain  of\nexemption.   It\t would be incongruous to say that  a  person\nexempted  from\ttaxation was paying a nil rate and  on\tthat\nbasis contend that no tax was payable by him.  The Order was\nonly  intended to provide a machinery for scaling  down\t the\nrates of tax in relation to the rates prevailing in the Part\nB  State.   If there was a State law prescribing  rates,  it\nwould afford the criterion for scaling down the Indian\trate\nof  tax; if there was no State law prescribing the rate\t the\nschedule  of  rates annexed to the Order  would\t govern\t the\ntaxation. [309 E-G]\n     (iv) The  assessee was entitled to exemption  from\t tax\nboth under s.  8<\/a>, proviso (3) of the Income-tax Act<\/a>, as well\nas  under item 8 of the Notification dated 21st March  1922.\n[309 H; 311 F]\nIn the case of the income from securities s. 8<\/a> applies,\t and\nunder the 3rd proviso thereto the, income-tax payable on the\ninterest receivable on any security of the State  Government\nissued\tincome-tax  free  shall\t be  payable  by  the  State\nGovernment  and\t no tax on interest on such  securities\t was\npayable by the assessee.  The, proviso does not use the\t ex-\npression   \"Government\t securities\"   but   only   mentions\n\"securities of a State Government\".  Under cls. 58 and 60 of\ns. 3 of the General Clauses Act<\/a>, 1897, the expression \"State\nGovernment\" takes in the Government of Hyderabad State.\t  If\nso,  in terms of the proviso, the income tax payable on\t the\ninterest  receivable  on  the securities  of  the  Hyderabad\nGovernment, issued income-tax free, shall be payable by\t the\nState Government and the assessee was not liable.  Also,  as\nthe  assessee held the securities as his  private  property,\nunder  the  Notification,  the exemption  applied  both\t for\nincome-tax and super-tax [310 C, G; 311 B-D, F]\n(v)  In\t regard to the interest receivable by  the  assessee\nfrom the securities and loans of the two trusts, he was\t not\nliable to pay income-tax, but he was not exempt from payment\nof  super-tax  under item 8 of the Notification\t dated\t21st\nMarch 1922. [313 H]\nThe question had to be decided on a construction of s. 41<\/a> of\nthe  Act.  But it is only after ascertaining the income\t and\nafter  giving exemptions, that s. 41<\/a> of the Act\t comes\tinto\nplay, and the income-tax authority ha.-. the option under s.\n41<\/a>, to assess the beneficiary directly or, in respect of   the\nsame  income,  the  trustee on behalf  of  the\tbeneficiary.\nUnder s.  8<\/a> proviso (3) the assessee would not be liable  to\npay income-tax on   the\t interest from the  income-tax\tfree\nsecurities.  Since the interest on securities  in the  hands\nof the trustees does not become an income\n298\nother than such interest in the hands of the beneficiary, it\nretains\t its character as such interest whether the  assess-\nment  is made on the trustee or the beneficiary.   Therefore\nthe assessee would not be liable to pay income-tax, but\t his\nliability to pay super-tax is not transferred by the proviso\nto  the State Government.  Nor could the assessee claim\t the\nbenefit of the Notification for an exemption with respect to\nsuper-tax,  because,  under the trust deeds  the  Government\nloans ceased to be the private property of the assessee\t and\nafter  the ,execution of the trust deeds they were  held  by\nthe  trustees not on behalf of the assessee as\this  private\nproperty but for the purpose of discharging the\t obligations\nimposed\t on them under the trust deeds. [312 G; 313 E, F  G,\n314 A; 315 A-D]\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.  46-49  of
\n1964.\n<\/p>\n
Appeals\t by special leave from the judgment and order  dated
\nJuly  4,  1961\tof the Andhra Pradesh  High  Court  in\tCase
\nReferred No. 35 of 1959.\n<\/p>\n
A.   V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and
\nR. N. Sachthey, for the appellants.\n<\/p>\n
I. N. A. Palkhivala, Anwarula Pasha, J. B. Dadachanji,O.  C.
\nMathur and Ravinder Narain, for the respondent.
\nThe Judgment of the Court was delivered by
\nSubba  Rao, J. These four appeals by special  leave  granted
\nthis Court are preferred against the judgment of a  Division
\nBench  ,of the Andhra Pradesh High Court at Hyderabad  in  a
\ncase  referred to it by the Income-tax\tAppellate  Tribunal,
\nHyderabad  Bench,  under s. 66(1)<\/a> of the  Indian  Income-tax
\nAct,  1922,  hereinafter  ,called the  Act,  in\t respect  of
\nassessments  made on H.E.H. the Nizam of Hyderabad  for\t the
\nassessment years 1950-51 and 195152.\n<\/p>\n
The  Income-tax Officer, B. Ward, Hyderabad-Deccan,  by\t his
\n,orders\t dated\tFebruary  15,  1955,  and  March  31,  1956,
\nrejected the ,objections raised by the assessee and assessed
\nhim to income-tax for the said two years.  Against the\tsaid
\norders\tthe assessee filed two appeals before the  Appellate
\nAssistant  Commissioner, Hyderabad, who, by his orders\tgave
\nsome relief in respect of the said assessments.\t On  further
\nappeals by the assessee, the Income-tax Appellate  Tribunal,
\nHyderabad  Branch,  allowed the appeals of the\tassessee  in
\npart and ordered the assessments to be revised\taccordingly.
\nAt  the instance of the assessee, the  Income-tax  Appellate
\nTribunal  drew\tup  a statement of case\t and  referred\tfour
\nquestions  to  the  High Court of  Andhra  Pradesh  for\t its
\ndecision.  On July 4, 1961, the High Court answered some  of
\nthe  questions in favour of the assesses and others  against
\nhim.  The Commis-\n<\/p>\n
\t\t\t    299<\/span><\/p>\n
sioner of Income-tax filed two appeals to this Court,  being
\nCivil  Appeals Nos. 46 and 47 of 1964, insofar as  the\tHigh
\nCourt’s judgment went against the Revenue; and the  assessee
\nfiled  two  appeals, being Civil Appeals Nos. 48 and  49  of
\n1964  against that part of the High Court’s  judgment  which
\nrejected his contentions.\n<\/p>\n
To  avoid  prolixity  and  repetition  we  shall  state\t the
\nrelevant   facts  in  considering  each\t of  the   questions
\nreferred, to the High Court.\n<\/p>\n
Questions  1  and 3 may be considered  together.   The\tsaid
\nquestions read
\n\t      Question\t1. “Whether in the circumstances  of
\n\t      the  case and having regard  to  International
\n\t      Law and construction of Municipal Laws  and\/or
\n\t      the  covenant  dated  25-1-1950  between\t the
\n\t      Assessee\tand  the Government  of\t India,\t the
\n\t      Assessee\twas liable to tax under\t the  Indian
\n\t      Income-tax  Act<\/a>, 1922, in respect of any\tpart
\n\t      of his income.”\n<\/p>\n
\t      Question\t3.  “Whether,  in  any\tevent,\t the
\n\t      Assessee enjoyed immunity from taxation  under
\n\t      the Indian Income-tax Act<\/a>, 1922, in respect of
\n\t      income  which accrued or arose to him  or\t was
\n\t      received by him up to 26th January 1950.”\n<\/p>\n
These two questions raise the following points : (1) Whether
\nunder International Law the assessee is immune from taxation
\nin respect of the assessment year 1950-51; and (2)  whether,
\nhaving\tregard to the said Covenant dated January 25,  1950,
\nhe  was not liable to, tax under the Indian Income-tax\tAct<\/a>,
\n1922.  The High Court held that under the International Law,
\nthe  assessee being a sovereign up to January 25, 1950,\t his
\nincome\tup to that date was immune from taxation  and  that,
\nthe  Indian Income-tax Act<\/a> not having expressly amended\t the
\nInternational  Law in its application, to India, his  income
\ntill  that date was not liable to tax under the,  Income-tax
\nAct<\/a>.   As  a corollary from the said  conclusion,  the\tHigh
\nCourt  held  that as the assessee ceased to be\ta  sovereign
\nfrom January 26, 1950, the income accrued to him  thereafter
\nwas  liable to tax.  The High Court rejected the  contention
\nof  the assessee that he was exempted from the liability  to
\npay  income-tax under the Covenant entered into by him\twith
\nthe Government of India at the time of merger.
\nThe argument based upon the Covenant may easily be  disposed
\nof.  The relevant articles of the Covenant read as follows
\n\t      Article  3.<\/a> His Exalted Highness the Nizam  of
\n\t      Hyderabad and the members of his family  shall
\n\t      be en-\n<\/p>\n
\t      300<\/span><\/p>\n
\t      titled   to  all\tthe   personal\t privileges,
\n\t      dignities\t and titles enjoyed by them  whether
\n\t      within  or  outside  the\tterritories  of\t the
\n\t      Dominion before the 15th August 1947.\n<\/p>\n
\t      Article 4.<\/a> The Government of India  guarantees
\n\t      the  succession  according  to  the  laws\t and
\n\t      customs  of  the Gaddi of the  State  and\t the
\n\t      personal\trights,\t privileges,  dignities\t and
\n\t      titles  of His Exalted Highness the  Nizam  of
\n\t      Hyderabad.\n<\/p>\n
The argument was that the assessee’s immunity from  taxation
\nas  a sovereign was a privilege guaranteed to him under\t the
\nsaid  articles\tof  the covenant.  This\t question  need\t not
\ndetain us, as it was answered by this Court in Sri  Sudhansu
\nShekhar\t Singh Deo v. The State of Orissa<\/a>(1) in the  context
\nof the claim of exemption from agricultural income-tax by an
\nEx-Ruler of an Indian State based upon articles in a  merger
\nagreement,  similar to the one now in question.\t This  Court
\nheld that the privileges guaranteed by the relevant articles
\nof  merger  agreement were only personal privileges  of\t the
\nappellant  as an Ex-Ruler and that those privileges did\t not
\njustify his claim to immunity from taxation.  Following this
\ndecision we reject the contention of the assessee based upon
\nthe said articles of the Covenant.\n<\/p>\n
Now,  we shall take the first question, excluding that\tpart
\nof it which refers to the said Covenant, and question 3.
\nMr.  A.\t V.  Viswanatha\t Sastri,  learned  counsel  for\t the
\nRevenue,  contended  that  under  the  International  Law  a
\nforeign\t sovereign ,was not immune from taxation in  respect
\nof  his\t private properties :situated in the  taxing  State;
\neven  if there was such an immunity under the  International
\nLaw,  the  assessee,  being  under  the\t suzerainty  or\t the
\nparamountcy  of\t the British Crown, had\t never\tenjoyed\t the
\nstatus of a sovereign as understood in the International Law
\nand,  therefore, not governed by that law; and that, in\t any
\nevent,\tas  on\tJanuary 26, 1950, the date  when  he  became
\nliable to tax, he was no longer a sovereign and therefore he
\ncould not claim exemption under the International Law.
\nMr. Palkhiwala, learned counsel appearing for the  assessee,
\nwhile conceding that the assessee could not claim  exemption
\nunder International Law in respect of the assessment for the
\nyear 195152, argued that he was not liable to income-tax for
\nthe  assessment\t year 1950-51 on the ground that  under\t the
\nIndian\tIncome-tax  Act<\/a>,  income-tax  was  charged  on\t the
\nassessee’s  income received ,during the accounting year\t and
\nthat as during the accounting year
\n(1)  [1961] 1 S.C.R. 779.\n<\/p>\n
30 1
\nthe assessee was a ruling chief, he was exempt from taxation
\nunder  the  International  Law.\t He argued  that  under\t the
\nInternational  Law,  as\t understood  by\t English  Courts,  a
\nforeign\t sovereign was exempt from taxation, that  the\tsaid
\ninterpretation\tof  the\t law had become the  common  law  of
\nEngland\t and that the said common law was the law  of  India
\nbefore\tthe  Constitution  and it continued  to\t have  force
\nthereafter by reason of Art. 372.<\/a>\n<\/p>\n
The validity of Mr. Palkhivala’s contention depends upon our
\nacceptance  of four premises, namely (i) the English  Courts
\nhave finally accepted the view that under International\t Law
\na  sovereign  is  immune from taxation\tin  respect  of\t his
\nprivate\t property;  (ii) that it had become a  part  of\t the
\ncommon\tlaw  of\t England;  (iii)  that\tbefore\tthe   Indian
\nConstitution  came  into  force, the  said  common  law\t was
\naccepted and applied by the Indian Courts; and (iv) that the
\nsaid  common  law  so accepted as the  common  law  of\tthis
\ncountry\t continued to be in force by reason of Art.  372<\/a>  of
\nthe Constitution.\n<\/p>\n
International Law vis-a-vis the liability of a sovereign  to
\ntaxation in respect of his private property is in a  process
\nof  evolution.\tIt has not yet become crystallized.   It  is
\ntrue  that some of the textbooks on the subject and some  of
\nthe  decisions\tsupport the view that sovereign\t rulers\t are
\nexempt\tfrom taxation : see Halsbury’s Laws of England,\t 3rd
\nEdn.,  Vol. 20, p. 589; Oppenheim’s International  Law,\t 8th
\nEdn.,  Vol.  1, D. 759.\t But, even in England the  House  of
\nLords  in  Sultan of Johore v.\tAbubakar  Tunku\t Bendahar(1)
\nobserved :\n<\/p>\n
\t      “Their  Lordships do not consider\t that  there
\n\t      has     been    finally\t  established\t  in
\n\t      England……………….. any absolute\trule
\n\t      that a foreign independent sovereign cannot be
\n\t      impleaded in our courts in any circumstances.”\n<\/p><\/blockquote>\n
Interesting and instructive discussion on the question of  a
\nforeign sovereign’s immunity from taxation in respect of his
\nprivate\t properties  is\t found in the  American\t Journal  of
\nInternational  Law,  Vol. 46, at p. 239, under\tthe  heading
\n“Immunity  from Taxation of Foreign  State-owned  property”.
\nAfter an elaborate consideration of the relevant material on
\nthe subject, the learned author concludes thus, at p. 258 :\n<\/p>\n
\t      “Immunity\t from  taxation should be  the\trule
\n\t      when   the  activities  concerned\t are   those
\n\t      normally\t and   traditionally   regarded\t  as
\n\t      governmental in character; but when a  foreign
\n\t      state engages in trading operations of a
\n\t      (1)   L.R. [1952] A.C. 318,343.\n<\/p><\/blockquote>\n
\t      302<\/span><\/p>\n
\t      type  generally open to private persons  there
\n\t      seems  no\t need  to  better  its\t competitive
\n\t      position\tor  to shift tax burdens  to  others
\n\t      through giving it exemption from taxes.”
\n\t      In  dealing  with taxation  of  property,\t the
\n\t      learned author says, at p. 256, thus
\n\t      “The  use of these agreements,  combined\twith
\n\t      the  practice discussed above, appears  to  be
\n\t      bringing\tabout a situation in which  it\twill
\n\t      become generally recognized that International
\n\t      Law provides for the tax exemption of  foreign
\n\t      state-owned   property  used   for   functions
\n\t      generally accepted as public.”
\n\t      “It  is by no means clear, however,  that\t the
\n\t      same  result is either probable  or  desirable
\n\t      when  we\tare dealing with property  used\t for
\n\t      purposes\twhich  seem  more  commercial\tthan
\n\t      governmental.”\n<\/p><\/blockquote>\n
It  may also be noticed that in India there is\tno  absolute
\nprohibition against a ruler of a foreign state being sued in
\nIndia: see ss. 86 and 87 of the Code of Civil Procedure.  He
\ncan be sued with the consent of the Central Government.\t  It
\nis not necessary in this case to decide this question, as we
\nare  satisfied\tthat  H.E.H. the Nizam\thad  never  acquired
\ninternational personality under International Law.  We\thave
\nnoticed\t the  aforesaid\t facts only  to\t indicate  that\t the
\nquestion  is not free from difficulty and that\tit  requires
\nserious consideration when it directly arises for  decision.
\nWe shall, therefore, assume for the purpose of these appeals
\nthat  a foreign sovereign who has acquired an  international
\npersonality has such an immunity from taxation.
\nWe  shall  now proceed to consider the question why  in\t our
\nview H.E.H. the Nizam had never acquired international\tper-
\nsonality.  As a learned author puts it.\n<\/p>\n
\t      “Every  civilised State which is a  member  of
\n\t      the  family  of nations  is  an  International
\n\t      person.\tRecognition of a State as a,  member
\n\t      of the family of nations involves\t recognition
\n\t      of such State’s (1) equality, (2) dignity, (3)
\n\t      independence, and (4) territorial and personal
\n\t      supremacy.”\n<\/p><\/blockquote>\n
According  to Oppenheim, all the said qualities\t constitute,
\nas a body, the international personality of a State.  Unless
\nthe  State  of Hyderabad had the said qualities,  its  ruler
\ncould  not  claim  any\tof  the\t immunities  sanctioned\t  by
\nInternational Law.  A brief his-\n<\/p>\n
3 0 3
\ntory  of  the status of the Hyderabad  State  vis-a-vis\t the
\nBritish\t Crown\twould  help us to ascertain  its  status  in
\nInternational Law.\n<\/p>\n
In 1858 the British Crown took over from the East India Com-
\npany  the administration of the entire territory  of  India.
\nThereafter,  while  the British India was under\t the  direct
\nrule  of  the Crown, the Indian States\tremained  under\t the
\npersonal  rule of their Chiefs under the suzerainty  of\t the
\nCrown.\t In  the Pronouncement of Lord\tCanning\t he  clearly
\nstated
\nThe Crown in England stands forth the unquestioned ruler and
\nparamount power in all India.”\n<\/p>\n
This  concept of suzerainty by the Crown was also  described
\na&  “Paramountcy”.  The relationship between  the  paramount
\npower  and  the Indian States was described  in\t the  “White
\nPaper on Indian States”, at p. 32, thus
\n\t      “As  already  stated the\tparamountcy  of\t the
\n\t      British  Crown was not co-extensive  with\t the
\n\t      rights of the Crown flowing from the Treaties.
\n\t      It was based on Treaties, Engagements,  Sanads
\n\t      as supplemented by usage and sufferance and by
\n\t      decisions\t of the Government of India and\t the
\n\t      Secretary\t of  State  embodied  in   political
\n\t      practice.”\n<\/p>\n
\t      The  said White Paper further  discloses\tthat
\n\t      while  the States were responsible  for  their
\n\t      own   internal   administration,\t the   Crown
\n\t      accepted\tresponsibility\tfor  their  external
\n\t      relations and defence.  The Indian States\t had
\n\t      no  international\t status,  and  for  external
\n\t      purposes,\t they were practically in  the\tsame
\n\t      position as British India.  The Government  of
\n\t      India  Act,  1935, gave the Indian  States  an
\n\t      option  to  join\tthe  federation\t subject  to
\n\t      certain conditions; but that part of the\tsaid
\n\t      Act   was\t abandoned  in\t1939.\tThe   Indian
\n\t      Independence  Act of 1947 introduced a  change
\n\t      in the relationship between the Crown and\t the
\n\t      said States.  Section 7<\/a> (1) (b) of the  Indian
\n\t      Independence Act of 1 947, reads :\n<\/p>\n
\t      “As  from the appointed day the suzerainty  of
\n\t      His Majesty over the Indian States lapses, and
\n\t      with it, all treaties and agreements in  force
\n\t      at the date of the passing of this Act between
\n\t      His  Majesty and the rulers of Indian  States,
\n\t      all  functions exercisable by His\t Majasty  at
\n\t      that  date with respect to Indian States,\t all
\n\t      obligations  of His Majesty existing  at\tthat
\n\t      date  towards  Indian  States  or\t the  rulers
\n\t      thereof, and all powers, rights, authority, or
\n\t      jurisdiction exercisable by His Majesty at
\n\t      up CI\/65-6
\n\t      304<\/span>
\n\t      that  date in or in relation to Indian  States
\n\t      by   treaty,  grant,  usage,   sufferance\t  or
\n\t      otherwise; and
\n\t      Provided\tthat  notwithstanding  anything\t  in
\n\t      paragraph\t (b)……..  of  this\tsub-section,
\n\t      effect shall, as nearly as may be, continue to
\n\t      be  given\t to  the  provisions  of  any\tsuch
\n\t      agreement\t as  is therein\t referred  to  which
\n\t      relate to customs, transit and communications,
\n\t      posts  and telegraphs, or other like  matters,
\n\t      until the provisions in question are denounced
\n\t      by  the Ruler of the Indian States……..  on
\n\t      the  one hand, or by the Dominion or  Province
\n\t      or  other part thereof concerned on the  other
\n\t      hand,   or   are\tsuperseded   by\t  subsequent
\n\t      agreements.\n<\/p>\n
Though under this Act the paramountcy of the Crown lapsed in
\nregard to Hyderabad and other States, the preexisting agree-
\nments  with those States continued in respect  of  specified
\nmatters.   The lapse of suzerainty or the breaking  of\tties
\nwith the British Crown did not ipso facto raise their status
\nto that of international personality.  It created a void and
\nthe  position  of the States was in a fluid  state.   No  de
\nfacto  or  de jure recognition was given  to  the  Hyderabad
\nState or to any other State by the family of nations.\tBut,
\nafter\tprotracted   negotiations,  the\t  Nizam\t  issued   a
\nproclamation   on   November   23,   1949,   accepting\t the
\nConstitution  of  India, shortly to be adopted,\t subject  to
\nratification  by the constituent assembly of  the  Hyderabad
\nState.\t The  said  constituent\t assembly  ratified  it\t and
\nthereafter the Hyderabad State was included in Part B of the
\nFirst Schedule to the Constitution : see Appendix LIV, White
\nPaper  on  Indian  States  (N.S.  6),  p.  369,\t and  Basu’s
\nCommentary  on the Constitution of India, 4th Edn., Vol.  4,
\npp.  32-34.   It  will be seen from the\t said  history\tthat
\nHyderabad was under the suzerainty of the British Crown till
\nthe  ,Indian  Independence Act of 1947 was passed  and\tthat
\nthereafter, after negotiations with the Indian Dominion,  it
\nfinally\t acceded  to  it.  It was  never  recognized  as  an
\ninternational personality by the family of nations.  It\t was
\nall  through a vassal of the British Crown.  Oppenheim\tsays
\nin his book on International Law, Vol. 1, 5th Edn., at\tpp.,
\n165-166,  that “the position of the Indian ‘States to  Great
\nBritain\t is  like  that of vassal of States  which  have  no
\ninternational  relations whatever either between  themselves
\nor  with foreign States”.  In Hall’s International Law,\t 8th
\nEdn., the learned author says that the States of the  Indian
\nEmpire of Great Britain were protected States and that\tthey
\nwere  not  subject to international law.  The,\tdecision  in
\nSayce v. Ameer Ruler Sadiz
\n30 5
\nMohammad  Abbasi Bahawalpur State(1) holding that the  Ameer
\nof Bahawalpur State was a foreign sovereign immune from\t the
\njurisdiction of the English Courts was solely based upon the
\ncertificate of the Commonwealth Relations Office and it does
\nnot help us in deciding the present case.\n<\/p>\n
It is, therefore, clear that Hyderabad State did not acquire
\ninternational personality under the International law and so
\nits ruler could not rely upon international law for claiming
\nimmunity from taxation of his personal properties.
\nThe  problem may be looked at from a different\tperspective,
\ni.e.,  on the basis of the provisions of the Indian  Income-
\ntax  Act.   The\t Indian Income-tax  Act<\/a>,  1922,\t hereinafter
\ncalled\tthe Act. admittedly applied to Hyderabad State\tfrom
\nJanuary\t 26, 1950 Under S. 3<\/a> of the Act, where\tany  Central
\nAct<\/a>  enacts that income-tax shall be charged in any area  at
\nany rate or rates, tax at that rate or those rates shall  be
\ncharged for that area in accordance with and subject to\t the
\nprovisions of the Act in respect of the total income of\t the
\nprevious  year of every individual etc.\t Under S. 2<\/a>  of\t the
\nFinance\t Act  of  1950\t(Act 25 of  1950),  subject  to\t the
\nprovisions  of\tsub-ss.\t (3),  (4)  and\t (5)  for  the\tyear
\nbeginning  on  1st day of April 1950,  income-tax  shall  be
\ncharged\t at  the  rates specified in Part  1  of  the  First
\nSchedule; under S. 13<\/a> thereof. if immediately before the 1st
\nday of April 1950, there was in force in any Part B  States,
\nother  than the States mentioned therein, any  law  relating
\nto,  income-tax\t or super-tax or profits of  business  etc.,
\nthat  law  shall cease to have effect for  the\tpurposes  of
\nassessment  under the Indian Income-tax Act<\/a>, 1922,  for\t the
\nyear  ending March 31, 1951, or any subsequent year.   Under
\ns. 2(14A), “taxable territories” shall be deemed to  include
\nthe merged territories as respects any period after the 31st
\nday  of March, 1949, for any of the purposes of the Act\t and
\nas  respects any period included in the previous  year,\t for
\nthe purpose of making any assessment for the year ending  on
\nthe  31st  day of March, 1950, or for any  subsequent  year.
\nThe effect of these provisions is that every individual\t was
\nliable\tto  income-tax\tfrom April 1,  1950,  at  the  rates
\nmentioned in the Finance Act<\/a> in respect of his total  income
\nof the previous year in the merged territories.\t It is\tnot,
\nand  it\t cannot\t be, disputed that on  April  1,  1950,\t the
\nassessee  was not a ruling chief but an ordinary citizen  of
\nIndian, residing, within the meaning of S. 4<\/a> of the Act,  in
\nthat  part of India which was a part of Hyderabad State\t and
\nso  he\twould be liable to income-tax on April 1,  1950,  in
\nrespect of the
\n(1)  [1952] 2 All E.R. 64
\n306<\/span>
\ntotal income he received in the previous year in the  merged
\nterritory.   It\t cannot\t also be  disputed  that  the,\tsaid
\ntaxable\t total\tincome would be computed  after\t giving\t the
\nnecessary allowances and deductions in the manner Drescribed
\nby Ch.\tIII of the Act.\t But it is said that as the assessee
\nwas  exempted under International Law from taxation  of\t his
\nincome\tof the previous year, the Act could not\t reach\tthat
\nincome.\t  That conclusion, according to the learned  counsel
\nfor the assessee, flows from the nature of the tax,  namely,
\nthat though the year of assessment is 1950-51, the charge is
\nnot  on\t the income of the year of assessment,\tbut  on\t the
\nincome of the previous year.  Decided cases no doubt support
\nthe  contention of the assessee that what is charged in\t the
\nassessment year or the tax year is the income earned  during
\nthe  accounting year or the earning year.  The Act<\/a>  of\t1918
\nwhich followed the English Act<\/a>s levied tax on the income  of
\nthe  year of assessment, taking the income of  the  previous
\nyears as a standard or as a measure.  But by the Act of 1922
\nthis  principle\t was  changed.\tNow under the  Act,  tax  is
\nassessed  in  the  assessment  year on\tthe  income  of\t the
\nprevious  year.\t  ‘The\tJudicial Committee  in\tMaharaja  of
\nPithapuram  v.\tCommissioner of\t Income-tax,  Madras<\/a>(1)\t has
\nbrought out this distinction when it said :\n<\/p>\n
\t      “In  the\tfirst place, it is  clear  to  their
\n\t      Lordships\t that  under the  express  terms  of
\n\t      Section 3<\/a> of the Indian Income-tax Act,  1922,
\n\t      the subject of charge is not the income of the
\n\t      year  of\tassessment, but the  income  of\t the
\n\t      previous year.  This is in direct contrast  to
\n\t      the  English Income-tax Acts, under which\t the
\n\t      subject  of  assessment is the income  of\t the
\n\t      year  of\tassessment,  though  the  amount  is
\n\t      measured\tby  a yardstick\t based\ton  previous
\n\t      years.”\n<\/p><\/blockquote>\n
This  Court in Commissioner of Income-tax, Bombay City v.  A<\/a>
\nmarchand   N.  Shroff  (2)  restated  that  principle\twith
\napproval.\n<\/p>\n
Even  so, the income of the assessee during  the  accounting
\nYear has to be computed only in the manner prescribed by the
\nAct.   Deductions and exemptions from the total\t income\t can
\nonly be those that are provided under the Act.\tThis  aspect
\nof  the case has been brought out with clarity in The  Union
\nof  India v. Madan Gopal Kabra<\/a>(3).  The facts in  that\tcase
\nwere : the respondent resided and carried on business in the
\nDistrict of Jodhpur in Rajasthan which was one of the States
\nspecified   in\tPart  B.  of  the  First  Schedule  to\t the
\nConstitution of India, 1950.  The
\n(1)  (1945) 13 I.T.R. 221, 223.\n<\/p>\n
(3) (1954) 25 L.T.R. 58.\n<\/p>\n
(2) (1963) 48 I.T.R. 59.\n<\/p>\n
\t\t\t    307<\/span><\/p>\n
Constitution  came  into  force on January  26,\t 1950.\t The
\nIndian Finance Act<\/a>, 1950, amended the Indian Income-tax Act<\/a>,
\n1922,  in  certain respects and made it\t applicable  to\t the
\nwhole  of India, except the State of Jammu and Kashmir.\t  In
\nMay  1950, the respondent was required to file a  return  of
\nhis  income  for  the year ending March 31,  1950.   It\t was
\ncontended by the respondent that the income which accrued or
\narose to him or was received by him prior to April 1,  1950,
\nwas not liable to tax on the ground that such income was not
\nliable\tto  be\tcharged\t under the  provisions\tof  any\t law
\nvalidity in force in: Rajasthan.  This Court held that under
\nsub-cl.\t (1) of cl. (b) of s. 2(14A)<\/a> of the Income-tax\tAct,
\nRajasthan was to be deemed to be a taxable territory for the
\npurpose\t of  s. 4A<\/a> as respects any period  before  or  after
\nMarch  31, 1950.  On that fiction, as the respondent  was  a
\nresident  in such territories within the meaning of  s.\t 4A<\/a>,
\nthe  income accruing or arising to him in  Rajasthan  during
\nthe  year  1949-50  would be taxable.\tThis  Court  further
\npointed\t out that Parliament under Arts. 245 and 246 of\t the
\nConstitution,  read  with  entry No. 82 of  List  1  of\t the
\nSeventh\t Schedule  thereof, can make laws  with\t respect  to
\ntaxes on income for the whole of the territory of India with
\nretrospective  effect.\tThe effect of the said\tdecision  is
\nthat  though  by  reason  of the Finance  Act<\/a>  of  1950\t the
\nassessee  was  assessable to income-tax only from  April  1,
\n1950,  his  income  of the previous year  was  taxable\teven
\nthough\tthe  said income was not liable to  tax\t before\t the
\nIndian Income-tax Act<\/a> was made applicable to Rajasthan.\t  To
\nthat limited extent it had retrospective operation.  If\t so,
\nwe do not see how a person, who was exempted from tax before
\nthe  Act  was  extended under the State\t law  or  under\t the
\nInternational Law, would be in a better position.
\nThe legal position as we apprehend may be stated thus  Under
\nthe  Act<\/a>  an  individual is assessed to\t income-tax  on\t the
\nincome\tof the previous year at the rate or rates fixed\t for
\nthe year by the annual Finance Act<\/a>.  The total income of the
\nassessee during the previous year is computed in  accordance
\nwith  the provisions of the Income-tax Act<\/a> after giving\t the
\nrelevant allowances and deductions therefrom.  If during the
\nassessment year an individual is assessable to tax, the fact
\nthat  during the previous year he was not liable to  tax  at
\nall because there was no income-tax Act in the area to which
\nthe Act was extended or because that under an Income-tax Act<\/a>
\nin  force therein during that year his income  was  exempted
\nfrom   tax   or\t because  of  any   other   law,   including
\nInternational  Law, he was so exempt from tax, would not  be
\nof any relevance.  After the extension of the Act to the
\n308<\/span>
\nHyderabad  State the charge was under the Act and not  under
\nthe provisions of the previous law.  Thereafter, the  charge
\nas  well  as  the manner of computation of  income  did\t not
\ndepend\t upon  the  preexisting\t law,  but  only  upon\t the
\nprovisions of the Act.\tApplying the said principles to\t the
\ninstant\t case, it is manifest that after January  26,  1950,
\nthe  assessee  ceased  to  be a ruling\tchief  and  he\twas,
\ntherefore,  liable to assessment under the Act.\t If  he\t was
\nassessable to tax, the statutory charge on his income during
\nthe  previous year was only traceable to the Act, which\t was
\nretroactive  in\t operation to that ‘extent.   His  right  to
\nexemption,  if\tany,  under  International  Law\t during\t the
\naccounting  year was irrelevant to the question of  taxation
\nunder  the  Act,,  as the said law ceased to  apply  to\t him
\nduring the assessment year.\n<\/p>\n
We, therefore, hold that the High Court went wrong in  hold-
\ning  that the income received by the assessee up to  January
\n26, 1950, was not liable to tax under the Act.
\nThe second question reads :\n<\/p>\n
\t      “Whether,\t having regard to the provisions  of
\n\t      Part  B States (Taxation\tConcessions)  Order,
\n\t      1950, the assessee’s income during the year of
\n\t      account was totally exempt from tax.”\n<\/p><\/blockquote>\n
The  High Court answered the question against the  assessee.
\nThe  facts  relevant to the question are as  follows  :\t The
\nassessee was assessed to income-tax in respect of his income
\narising in Hyderabad in connection with the assessment years
\n1950-51 and 1951-52, having regard to the provisions of Part
\nB   States  (Taxation  Concession)  Order,  1950.   It\t was
\ncontended that the assessee was immune from liability to tax
\nunder the law of income-tax of Hyderabad and, therefore, the
\nrate payable by him in terms of the order would be nil; with
\nthe  result  that he would not be liable to  any  tax.\t The
\nquestion  turns\t upon the relevant provisions  of  the\tsaid
\nOrder.\tThe said Order was issued by the Central  Government
\nin  exercise of the power conferred on it under S.  60-A<\/a>  of
\nthe Act.  Under that section, the Central Government has the
\npower,\tif it considers necessary or expedient so to do,  to
\navoid  any hardship or anomaly, or removing any\t difficulty,
\nthat  may arise as a result of the extension of the  Act  to
\nthe merged territories, by general or special law to make an
\nexemption,  reduction  in  rate\t or  other  modification  in
\nrespect\t of income-tax in favour of any class of income,  or
\nin  regard  to the whole or any part of the, income  of\t any
\nperson\tor  class of persons.  Pursuant to  that  power\t the
\nCentral\t  Government   issued  Part   B\t  States   (Taxation
\nConcession)  Order, 1950, making exemptions,  reductions  in
\nthe
\n309<\/span>
\nrate  of tax and modifications specified in that Order.\t  At
\nthe  outset  it\t may be noticed that  under  this  Order  no
\nexemption was given to an Ex-Ruler from paying income-tax or
\nsuper-tax  in  respect\tof  income accrued  to\thim  in\t the
\nHyderabad  State.   A perusal of paragraphs 3  (ii)  (a),  3\n<\/p>\n
(iii),\t3  (iv), 3 (v) and 3 (vi), Para 4(iii), Para  5\t and
\nPara 6 of the Order shows that the Order was made mainly  to
\ngive relief to assessees in Part B States where the rates of
\ntax were less than the rates prescribed in the Act.  “Indian
\nrate of tax” was defined in Para 3 (iii) and “State rate  of
\ntax”  was defined in Para 3 (v).  Under the  Explanation  to
\nPara 3 (v), if there was no State law relating to charge  of
\nincome-tax and super-tax, the Schedule annexed to the  Order
\nprescribed the rates.  The tax on the basis of “Indian\trate
\nof tax” and the “State rate of tax before the appointed\t day
\nwere  calculated and the lesser rate was made payable :\t see
\nparas  5  and 6 of the Order.  The entire scheme  evolved  a
\nmachinery  to  give  a\trebate\ton  the\t difference  of\t tax
\ncalculated  on\tthe basis of the said two rates.   The\tsaid
\nscheme\thad nothing to do with exemptions either  under\t the
\nsaid  Order or under the Act.  It was argued that, as  under
\nthe State law the assessee was immune from liability to tax,
\nhe was in effect liable to pay only nil tax under the  State
\nlaw.   On  the\tbasis of nil tax under the  State  law,\t the
\nargument  proceeded, by applying the principles of the\tsaid
\nOrder,\tno tax would be payable by the assessee.  We  cannot
\naccept\tthis  argument.\t  The Order  was  only\tintended  to
\nprovide\t a  machinery for scaling down the rates of  tax  in
\nrelation  to  the  State rates.\t If there was  a  State\t law
\nprescribing rates, it would afford the criterion for scaling
\ndown  the  Indian  rate of tax; if there was  no  State\t law
\nprescribing  the rate, the schedule of rates annexed to\t the
\nOrder  would govern the taxation.  If the assessee  was\t not
\nliable\tto  pay tax under the State law,  his  non-liability
\nrelated\t only  to  the domain of  exemption.   It  would  be
\nincongruous to say that a person exempted from taxation\t was
\npaying\ta  nil rate.  This would be an\tobvious\t attempt  to
\nsubvert\t the scheme of the Order to reach a desired  result.
\nWe, therefore, hold, agreeing with the High Court, that\t the
\nassessee  was not entitled to any exemptions under the\tsaid
\nOrder.\n<\/p>\n
We  shall  now take up the first part of  the  4th  question
\nwhich reads :\n<\/p>\n
\t      “Whether on the facts of the case the interest
\n\t      received\tby  the Assessee in  respect  of  3%
\n\t      Nizam Government Income-tax free loan, 1360-70
\n\t      Fasli of the face value of Rs. 1,45,200, the 2
\n\t      1\/2% Nizam
\n\t      Government  Income-tax free development  loan,
\n\t      1364-69  fasli of the face value of  Rs.\t1.05
\n\t      crores, the 21% Nizam Government loan, 1363-73
\n\t      fasli  of the face value of Rs. 200,  and\t the
\n\t      21%  Hyderabad Government loan, 1384 fasli  of
\n\t      the face value of Rs. 8 crores was exempt from
\n\t      tax.”\n<\/p><\/blockquote>\n
This  question relates only to the assessment year  1951-52.
\nThe securities were issued by the Hyderabad State free\tfrom
\nincome-tax.  The High Court held that they were exempt\tfrom
\nincome-tax  under S. 8<\/a> of the Act.  Under S. 8<\/a> of  the\tAct,
\ntax shall be payable by an assessee under the head “interest
\non securities” in respect of the interest receivable by\t him
\non  any\t of the securities of the  State  Government.\tBut,
\nunder  the third proviso thereto, the income-tax payable  on
\nthe  interest  receivable  on the securities  of  the  State
\nGovernment  issued income-tax free shall be payable  by\t the
\nState  Government.  It was argued for the Revenue  that\t the
\nexpression “securities of a State Government” in the proviso
\ndoes  not  include the securities issued  by  the  Hyderabad
\nState.\t This contention was sought to be sustained  on\t the
\nbasis  of  the definition of “Government securities”  in  s.
\n3(24)<\/a> of the General Clauses Act, 1897, which reads :\n<\/p>\n
\t      “Government securities” shall mean  securities
\n\t      of  the  Central Government or  of  any  State
\n\t      Government, but in any Act or Regulation\tmade
\n\t      before  the commencement of  the\tConstitution
\n\t      shall not include securities of the Government
\n\t      of any Part B State.”\n<\/p><\/blockquote>\n
Relying\t  upon\tthis  clause  it  was  contended  that\t the
\nsecurities issued by the Government were not covered by\t the
\nsaid proviso.  There is an obvious fallacy in this argument.
\nTo ascertain the ,meaning of an expression in a Central Act<\/a>,
\nit  is permissible to look into the General Clauses  Act<\/a>  to
\nfind  out  how\tthat expression is defined  in\tthe  General
\nClauses\t Act<\/a>.  The General Clauses Act<\/a> affords a  dictionary
\nfor  words used in the Central Act<\/a>s to the  extent  provided
\nthereunder.   Proviso 3 to s. 8<\/a> of the Act does not use\t the
\nexpression   “Government  securities”,\tbut  only   mentions
\n‘.’securities” of a State Government.  There is,  therefore,
\nno  scope to ascertain the meaning of the latter  expression
\nwith  reference\t to  the definition  given  to\ta  different
\nexpression in s. 3<\/a> (24) of the General Clauses Act<\/a>.  On\t the
\nother hand, the ,expression “State Government” is defined in
\ncl. (60) of s. 3<\/a> of the General Clauses Act and it reads :\n<\/p>\n
\t      ” “State Government”,-(a) as respects anything
\n\t      done   before   the   commencement   of\t the
\n\t      Constitution,
\n\t\t\t\t   311<\/span>
\n\t      shall mean, in a Part A State, the  Provincial
\n\t      Government of the corresponding, Province,  in
\n\t      a\t Part  B  State,  the  authority  or  person
\n\t      authorised  at the relevant date\tto  exercise
\n\t      executive\t government  in\t the   corresponding
\n\t      Acceding\tState,\tand in a Part C\t State,\t the
\n\t      Central Government.”\n<\/p><\/blockquote>\n
Clause\t(58)  of  S. 3<\/a> of the General  Clauses\tAct  defines
\n“State”\t  to  mean  as\trespects  any  period\tbefore\t the
\ncommencement  of the Constitution (Seventh  Amendment)\tAct,
\n1956,  a  Part A State, a Part B State or a  Part  C  State.
\nWith  the aid of the said definitions it will be clear\tthat
\nthe expression “State Government” used in the proviso to  s.
\n8<\/a> of the Act takes in the Government of the Hyderabad State.
\nIf  so, in terms of that proviso, the income-tax payable  on
\nthe  interest receivable on the securities of the  Hyderabad
\nGovernment  issued income-tax free shall be payable  by\t the
\nState  Government.   Therefore, there are no merits  in\t the
\ncontention and the High Court rightly rejected it.
\nIn regard to the same securities the assessee claimed exemp-
\ntion  from payment of income-tax and super-tax under item  8
\nof  the\t Notification dated March 21, 1922,  issued  by\t the
\nFinance Department of the Government of India.\tIt reads :-\n<\/p>\n
\t      “The  interest on Government  securities\theld
\n\t      by, or on behalf of, Ruling Chiefs and Princes
\n\t      of India as their private property.”\n<\/p><\/blockquote>\n
This  exemption applies both for income-tax  and  super-tax.
\nIf the assessee was entitled to this exemption, he would get
\na larger relief than he would under the third proviso to  s.
\n8<\/a> of the Act.  The said securities were held by the assessee
\nas  his\t private  property and, therefore,  he\twas  clearly
\nentitled  to this exemption.  We,  therefore,  hold,agreeing
\nwith  the High Court, that the assessee was entitled to\t the
\nexemption  under  the  said  item in  respect  of  the\tsaid
\nsecurities.\n<\/p>\n
Then we come to questions 4(ii) and 4(iii).  They read
\n\t      Question\t4(ii) “Whether on the facts  of\t the
\n\t      case the interest in respect of securities  of
\n\t      the  Government of India or of the  Government
\n\t      of   Hyderabad  (including  Nizam\t  Government
\n\t      Promissory Note), which became payable to\t the
\n\t      Assessee under the trust created by him  known
\n\t      as “the Family Trust”, was exempt from payment
\n\t      of tax in his hands.”\n<\/p>\n
\t      Question\t4(iii)\t“Whether  the  interest\t  in
\n\t      respect  of  securities of the  Government  of
\n\t      India or of the
\n\t      312<\/span>
\n\t      Government   of  Hyderabad  (including   Nizam
\n\t      Government  Promissory  Note,)  which   became
\n\t      payable\tto  the\t Assessee  under  the  trust
\n\t      created  by  him known as\t “the  Miscellaneous
\n\t      Trust’  was exempt from payment of tax in\t his
\n\t      hands.”\n<\/p>\n
These two questions relate to Government securities  settled
\nby the assessee in trust, but the income whereof was payable
\nto him under the provisions of the relevant deeds of  trust.
\nThe  assessee  executed the two trusts–one  dated  May\t 10,
\n1950,  known as H.E.H. Nizam’s “Family Trust” and the  other
\ndated August 6, 1950, known as H.E.H. Nizam’s “Miscellaneous
\nTrust’.\t  Under cl. 3 of the deed of trust relating, to\t the
\nFamily\tTrust,\tthe  net income of  the\t trust\tfund,  after
\ndefraying the expenses and charges of collection, had to  be
\npaid  by  the trustees thereunder to the  assessee  for\t and
\nduring\t the   term  of\t his  natural\tlife.\t Under\t the
\nMiscellaneous  Trust  it was provided that  subject  to\t the
\nprovisions of sub-cls. (a) to (j) of cl. 2 of the said deed,
\nthe  trustees  should pay the balance of  the  interest\t and
\nincome of the trust fund to the assessee for and during\t the
\nterm of his natural life.  At this stage it is not necessary
\nto notice the other recitals in the deeds.  We shall have to\n<\/p>\n
-consider  the\trecitals in the said two  deeds\t in  greater
\ndetail at a later stage.  The assessee claimed exemption  in
\nregard\tto  the\t said interest on the  ground  that  he\t was
\nexempted  under\t the third proviso to S. 8<\/a> of  the  Act\t and
\nunder  item No. 8 of the notification issued by the  Finance
\nDepartment  of Government of India on March 21,\t 1922.\t The
\nHigh Court held that after the execution of the trust  deed,
\nthe assessee was divested of his ownership of the securities
\nand  the  trustees became their owners.\t On that  basis,  it
\nfurther\t held  that,  though  the  income  was\tinterest  on
\nsecurities in the hands of the trustees, it was in the hands
\nof  the\t assessee  only the income which  he  got  from\t the
\ntrustees.   Briefly  stated, the High Court  held  that\t the
\ncharacter of the income, namely, interest on securities, had
\nchanged when it reached the hands of the assessee.
\nThe question falls to be decided on a construction of s.  41<\/a>
\nof the Act.  The relevant part of s. 41<\/a> reads :\n<\/p>\n
\t      “(1)  In the case of income, profits or  gains
\n\t      chargeable  under\t this Act which\t trustee  or
\n\t      trustees appointed under a trust declared by a
\n\t      duly  executed instrument in  writing  whether
\n\t      testamentary  or\totherwise  are\tentitled  to
\n\t      receive on behalf of any person, the tax shall
\n\t      be  levied  upon\tand  recoverable  from\tsuch
\n\t      trustee or trustees, in the like
\n\t      313<\/span>
\n\t      manner  and to the same amount as it would  be
\n\t      leviable upon and recoverable from the  person
\n\t      on whose behalf such income, profits or  gains
\n\t      are receivable, and all the provisions of this
\n\t      Act shall apply accordingly
\n\t      (2)   Nothing  contained. in  sub-section\t (1)
\n\t      shalt prevent either the direct assessment  of
\n\t      the person on whose behalf income, profits  or
\n\t      gains  therein referred to are receivable,  or
\n\t      the  recovery  from  such person\tof  the\t tax
\n\t      payable in respect of such income, profits  or
\n\t      gains.”\n<\/p><\/blockquote>\n
Under  this  section the Revenue has the option to  levy  or
\ncollect tax from the trustee or the beneficiary; the tax can
\nbe levied upon and recoverable from the trustee in the\tlike
\nmanner\tand to the same amount as it would be leviable\tupon
\nand  recoverable  from`\t the person  on\t whose\tbehalf\tsuch
\nincome,\t profits  or  gains are receivable.   In  short,  it
\nimposes\t  a  vicarious\tliability  on  the   trustee.\t The
\nexpression  “all  the  provisions of this  Act\tshall  apply
\naccordingly”  indicates that there is no distinction in\t the
\nmatter\tof  assessability of the income in the\thands  of  a
\ntrustee or the beneficiary, as the case may be.\t Indeed,  s.
\n41<\/a>  of\tthe  Act comes into play only after  the  income  is
\ncomputed in accordance with Ch. III of the Act.\t In the case
\nof income from securities s. 8<\/a> applies, and under the second
\nproviso\t thereto,  the income-tax payable  on  the  interest
\nreceivable  on any security of the State  Government  issued
\nincome-tax  free shall be payable by the  State\t Government.
\nNo  tax\t on interest on such securities is  payable  by\t the
\nassessee.   After ascertaining the income and  after  giving
\nthe  exemptions, the income-tax authority has the option  to
\nassess\tthe beneficiary directly or, in respect of the\tsame
\nincome,\t the,  trustee on behalf of the\t beneficiary.\tThis
\nconstruction  finds  support in the decision of\t the  Bombay
\nHigh  Court  in Commissioner  of  Income-tax,  Ahmedabad  v.
\nBalwantrai Jethalal Vaidya<\/a>(1).\tIf that be the scope of\t the
\nassessment  under s. 41<\/a> of the Act, we find it difficult  to
\nappreciate the contention that the interest on securities in
\nthe  hands of the trustee becomes an income other than\tsuch
\ninterest  in  the hands of the\tbeneficiary.   The  interest
\nretains its character whether the assessment is made on\t the
\ntrustee\t or the beneficiary.  We cannot,  therefore,  accept
\nthe  construction  put\tupon s. 41<\/a> of the Act  by  the\tHigh
\nCourt.\n<\/p>\n
This  legal  position  only gives  the\tassessee  relief  in
\nregard’\t  to  income-tax  payable  on  the   interest\tfrom
\nsecurities; but the third
\n(1)  (1958) 34 I.T.R. 187.\n<\/p>\n
314<\/span><\/p>\n
proviso to s. 8<\/a> of the Act’ does not transfer the  liability
\nof  the assessee to pay super-tax to the  State\t Government.
\nThe exemption from super-tax was claimed under item 8 of the
\nnotification  issued  under  s.\t 60<\/a> of\tthe  Act.   We\thave
\nextracted  that\t item  earlier\tin  another  context.\t The
\ninterest mentioned in this item is exempt from both  income-
\ntax  and  super-tax.   The  short  question,  therefore,  is
\nwhether the interest payable to the assessee was in  respect
\nof  Government\tsecurities  held  by or\t on  behalf  of\t the
\nassessee  as  his  private property.   The  answer  to\tthis
\nquestion depends upon the provisions of the said two trusts,
\nnamely,\t the Family Trust and the Miscellaneous Trust.\t The
\nFamily\tTrust was executed by the assessee on May 10,  1950,
\nin  respect of the Government securities of  aggregate\tface
\nvalue  of  Rs. 9 chores which were his\tprivate\t properties.
\nUnder the deed of trust, the trustees were appointed and the
\nsecurities  were  handed  over to  them.   The\ttrustees  so
\nappointed were to collect and recover the interest and other
\nincome\tfrom  the  securities and were,\t after\tmeeting\t the
\noverhead  charges, to pay the residue of the income  of\t the
\ntrust  fund  to the assessee absolutely for and\t during\t the
\nterm of his natural life.  After the death of the  assessee,
\nthe  trustees should divide the trust fund and allot  it  to
\nthe innumerable relatives and others mentioned in the  trust
\ndeed.  The trust deed also gave various other directions  to
\nthe trustees.  In short. under the said trust deed the title
\nto  the securities was transferred to the trustees and\tthey
\nwere under an obligation to pay the interest or to give\t the
\ncorpus\tin the manner prescribed thereunder during the\tlife
\ntime  of the assessee or thereafter.  Under the\t trust\tdeed
\nthe  securities were not held by the trustees on  behalf  of
\nthe assessee as his private property : they were held by the
\ntrustees  for carrying out the trust in terms of  the  trust
\ndeed.  After the execution of the trust deed, the securities
\nceased\tto  be\tthe private property  of  the  assessee\t and
\nthereafter he would only be entitled to the interest on\t the
\nsecurities  during  his life time in the  manner  prescribed
\nthereunder.  We cannot, therefore, hold that the  securities
\nwere  held  by\tthe trustees as\t private  property  ;of\t the
\nassessee.\n<\/p>\n
The  Miscellaneous Trust consisted of Hyderabad and  Govern-
\nment  of India Loans.  Under this trust deed, trustees\twere
\nappointed  and\tthe said amounts were transferred  to  them.
\nUnder  the document the trustees wereunder an obligation  to
\nmanage\tthe  said fund, recover interest  and  other  income
\ntherefrom, and, after bearing the overhead charges, pay\t the
\nincome\ttherefrom in different proportions to the  relatives
\nof the assessee and other persons mentioned therein.  It  is
\nnot necessary to consider the
\n315<\/span>
\ncomplicated provisions of this document.  It would be enough
\nto  state  that\t under\tthis trust  deed  also\tthe  amounts
\nrepresenting  them loans mentioned therein ceased to be\t the
\nprivate\t  property  of\tthe,  assessee\tand   the   trustees
\nthereunder  held  the  said  property  for  discharging\t the
\nvarious\t obligations  imposed  on them and  for\t paying\t the
\nincome therefrom to the different persons mentioned  therein
\nand  in\t the manner prescribed thereunder.   The  Government
\nloans,\ttherefore, ceased to be the private property of\t the
\nassessee and after the execution of the trust deed they were
\nheld  by the trustees not on behalf of the assessee  as\t his
\nprivate\t property,  but for the purpose of  discharging\t the
\nobligations imposed on,\t      them under the deed.
\nWe, therefore, hold that the income from the said two trusts
\ndid  not  earn\tthe  exemption under  item  8  of  the\tsaid
\nnotification.\n<\/p>\n
\t  The  result of our view is that in regard  to\t the
\ninterest receivable by the assessee from the said securities
\nand  loans, he was not liable to pay income-tax, but he\t was
\nnot  exempt  from payment of super-tax under item 8  of\t the
\nsaid notification.\n<\/p>\n
The  next  question,  as recast by  the\t High  Court,  reads
\nQuestion 4 (iv) “Whether on the facts of the case,     the
\ninterest at Rs. 1,97,180\/- on the Government of\t       India
\nsecurities should be regarded as having accrued\t       in
\nthe Hyderabad State and therefore chargeable at the    rate
\nobtaining under the Hyderabad Income-tax Act<\/a>.”
\nIt was argued that the income sought to be taxed accrued in
\n\t  Hyderabad, because the securities were effaced  to
\nbe payable in\t    Hyderabad  and,  therefore,\t  chargeable
\nonly at the rate obtaining\t   under    the\t   Hyderabad
\nIncome-tax Act<\/a>. The High Court negatived the contention.  It
\nheld that the said interest accrued only\t  in British
\nIndia. Though the assessee raised the question of the
\ncorrectness  of the view expressed by the High Court in\t the
\nspecial leave petition, at the time of arguments the learned
\ncounsel for\t    the\t assessee did not press this  point,
\nTherefore,  the opinion expressed by the High Court in\tthis
\nregard stands. We should not  be    understood\t  to\thave
\nexpressed  our\tview  one way or other. In  the\t result,  we
\nanswer the questions as follows
\nQuestion 1  in the   affirmative.\n<\/p>\n
Question 2  in the negative.\n<\/p>\n
Question 3  in the negative.\n<\/p>\n
Question 4(i) : in the affirmative
\n316<\/span>
\n.lm15
\nQuestion  4(ii)\t : the assessee was exempt from\t payment  of
\nincome-tax, but he was not exempt from payment of super-tax.
\nQuestion  4(iii) : the assessee was exempt from\t payment  of
\nincome-tax. but he was not exempt from payment of super-tax.
\nQuestion 4(iv) : in the negative.\n<\/p>\n
The  aforesaid\tanswers\t given\tby us  to  the\t4  questions
\nreferred  to  the  High Court by  the  Income-tax  Appellate
\nTribunal will be substituted in the place of those given  by
\nthe  High  Court.   We modify the order of  the\t High  Court
\naccordingly  in all the appeals.  As the parties  failed  in
\npart  and succeeded in part, they will bear their own  costs
\nhere and in the High Court.\n<\/p>\n
Appeals allowed in part.\n<\/p>\n
317<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax, … vs H. E. H. Mir Osman Ali Khan on 25 October, 1965 Equivalent citations: 1966 AIR 1260, 1966 SCR (2) 296 Author: K Subbarao Bench: Subbarao, K. PETITIONER: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH Vs. RESPONDENT: H. E. H. MIR OSMAN ALI KHAN DATE OF JUDGMENT: 25\/10\/1965 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-253197","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax, ... vs H. E. H. 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