Merger agreement did not preserve income-tax immunity; statutory reference could still be answered despite Article 363.

Article 363 did not bar the High Court from answering a statutory reference under the Income-tax Act because the court was only giving an advisory opinion on legal questions, not adjudicating the underlying covenant dispute. The former ruler also had no immunity from income-tax under international law after the lapse of paramountcy, as the State lacked international personality and the claimed sovereign immunity was not established. The merger agreement likewise did not continue any income-tax immunity, since it preserved only personal rights, privileges, immunities, dignities and titles and could not displace the charging provisions of the Act without a clear statutory exemption.

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Issues: (i) Whether Article 363 of the Constitution barred the High Court from answering the reference under the Income-tax Act; (ii) Whether the assessee, as former ruler, enjoyed immunity from income-tax before the merger of the State under international law; (iii) Whether any such immunity was continued by the merger agreement so as to exclude the assessee's personal income from tax.

Issue (i): Whether Article 363 of the Constitution barred the High Court from answering the reference under the Income-tax Act.

Analysis: The jurisdiction under Section 66(5) of the Indian Income-tax Act, 1922 is confined to answering questions of law referred by the Tribunal and is distinct from deciding the underlying dispute between the parties. Article 363 bars jurisdiction in disputes arising out of pre-Constitution covenants and agreements, but the Court treated the reference as one on abstract legal questions, not as an adjudication of the whole dispute. The bar was held inapplicable to the High Court's advisory function in the reference.

Conclusion: Article 363 did not bar the Court from answering the referred question.

Issue (ii): Whether the assessee, as former ruler, enjoyed immunity from income-tax before the merger of the State under international law.

Analysis: The Court held that the erstwhile State had no international personality after the lapse of paramountcy and that the ruler did not thereby acquire immunity from taxation under international law. The personal income earned outside the State remained liable under the Indian income-tax law, and the claimed sovereign immunity was not established.

Conclusion: The assessee did not possess immunity from income-tax under international law before the merger.

Issue (iii): Whether any such immunity was continued by the merger agreement so as to exclude the assessee's personal income from tax.

Analysis: Article 2 of the merger agreement preserved only personal rights, privileges, immunities, dignities and titles. The Court held that the protection did not extend to immunity from income-tax, especially as the Rampur income-tax exemption had already ceased and no surviving tax immunity subsisted on the date of the agreement. The agreement could not override the charging provisions of the Income-tax Act in the absence of a statutory exemption.

Conclusion: No immunity from income-tax was continued by the merger agreement.

Final Conclusion: The assessee's claim to exemption failed both on jurisdictional and substantive grounds, and his personal income remained taxable under the Indian Income-tax Act.

Ratio Decidendi: A pre-Constitution merger agreement does not confer immunity from income-tax unless the immunity exists on the date of the agreement and is clearly preserved; a court answering a statutory reference may determine the legal effect of such an agreement without being barred by Article 363 where it is not adjudicating the underlying dispute itself.

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