Palace exemption under income tax law cannot be split between residence and let-out portions, with rent remaining exempt.

Section 10(19A) exempts one palace in the occupation of a Ruler, and the provision was read as covering the palace as a whole rather than permitting a split between self-occupied and let-out portions. The SC held that the statutory language does not support apportioning a palace into exempt and taxable parts, and that a different formulation in the Wealth Tax Act could not control this interpretation. As the exemption conditions were satisfied, rent from the portion let out was not separately taxable, and the full exemption for the palace could not be curtailed by tenancy.

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Issues: Whether the exemption under section 10(19A) of the Income-tax Act, 1961 in respect of one palace in the occupation of a Ruler extends to the entire palace even when a portion is let out, and whether the rental income from the let-out portion is taxable.

Analysis: The exemption provision in section 10(19A), read with paragraph 15(iii) of the Part B States (Taxation Concessions) Order, 1950, was held to use the expression "one palace" and not "part of a palace" or "house or part of a house". The Court held that the Legislature did not intend a further splitting of a palace into taxable and exempt portions. It also distinguished section 5(iii) of the Wealth Tax Act, 1957 on the ground that the wording of that provision is materially different and cannot control the interpretation of section 10(19A). Since exemption provisions are to be construed liberally once the statutory conditions are satisfied, the rental income from the portion let out could not be isolated for taxation where the palace remained the Ruler's official residence.

Conclusion: The exemption applies to the entire palace and the rent derived from the let-out portion is not separately taxable under section 10(19A).

Final Conclusion: The impugned High Court order was set aside and the reference was answered in favour of the assessee, holding that the full exemption for the palace could not be curtailed by apportioning it between self-occupation and tenancy.

Ratio Decidendi: Where a statute grants exemption for one palace in the occupation of a Ruler, the exemption cannot be artificially split into exempt and taxable portions in the absence of express legislative language permitting such apportionment.

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