Reference jurisdiction and former ruler tax immunity rejected; personal income and government securities interest remained taxable after merger.

Reference jurisdiction under section 66 was confined to questions raised before or dealt with by the income-tax authorities, so a new question based on the Part B States (Taxation Concessions) Order, 1950 could not be directed to be referred. The former ruler's claim that sovereign status survived the merger was rejected because merger divested sovereign rights, and that asserted status did not exempt personal income or income accruing outside the former State from tax. Interest on Government securities was also taxable because no exemption was shown under the Patiala Income-tax Act. The court declined to enlarge the reference and upheld taxability of the disputed incomes.

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Issues: (i) Whether a new question, not raised before or considered by the income-tax authorities, could be directed to be referred under section 66(3) of the Patiala Income-tax Act. (ii) Whether the assessee, as a former ruler, retained sovereignty so as to claim exemption from tax on personal and private income and income accrued outside the former State. (iii) Whether the assessee was liable to pay income-tax on interest on Government securities.

Issue (i): Whether a new question, not raised before or considered by the income-tax authorities, could be directed to be referred under section 66(3) of the Patiala Income-tax Act.

Analysis: The reference jurisdiction under the Act was confined to questions that arose out of the order of the Tribunal and had been raised before or dealt with by it. A question neither raised before nor considered by the income-tax authorities could not be treated as arising out of their orders merely because it might be capable of being argued on the findings recorded. The proposed question based on the Part B States (Taxation Concessions) Order, 1950, was therefore treated as a fresh question outside the permissible scope of reference.

Conclusion: The application for direction to refer the additional question was rejected.

Issue (ii): Whether the assessee, as a former ruler, retained sovereignty so as to claim exemption from tax on personal and private income and income accrued outside the former State.

Analysis: The merger of the States into the Patiala and East Punjab States Union brought about a complete divestiture of sovereign rights on the coming into existence of the Union. The former ruler could not claim continuing sovereignty after that date. The personal law or international law status asserted by the assessee did not confer immunity from taxation of his personal income during the relevant assessment period. The income that accrued outside the former State was therefore not exempt on the asserted ground of sovereignty.

Conclusion: The assessee was not exempt from tax on these incomes and the answer was against the assessee.

Issue (iii): Whether the assessee was liable to pay income-tax on interest on Government securities.

Analysis: The claimed exemption depended on a notification under the Indian Income-tax Act, but no corresponding exemption notification under the Patiala Income-tax Act was shown. In the absence of an exemption under the statute under which the assessment was made, the interest income remained taxable.

Conclusion: The assessee was liable to pay income-tax on the interest on Government securities and the answer was against the assessee.

Final Conclusion: The court declined to enlarge the reference, upheld the taxability of the assessee's disputed incomes, and left the parties to bear their own costs.

Ratio Decidendi: In a reference under section 66, only questions that were raised before or dealt with by the income-tax authorities can be referred, and a former ruler cannot claim tax immunity for personal income or interest income merely on an asserted sovereign status once sovereign rights have been divested by merger.

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