1969 (7) TMI 19 - HC - Income Tax

Court Rules in Favor of Assessee on Tax Exemption for Trusts

The court ruled in favor of the assessee on the exemption of interest from Nizam's Government promissory notes from tax, and on the tax liability under ... H.E.H. was the erstwhile Ruler of Hyderabad State prior to its integration with the Union of India, was the assessee - Whether the assessee was entitled to exemption from tax on the income under the terms of the agreement entered into with the Govt. of India - Held, yes Issues Involved:1. Exemption of interest from Nizam's Government promissory notes from tax.2. Liability of the assessee to tax under the Income-tax Act, 1922, considering international law, municipal law, and the covenant dated January 25, 1950.3. Exemption of interest from securities under various trusts from tax.4. Tax liability on the sum received from the trustees of Princess Niloufer Trust and exemption under the agreement dated October 8, 1949.Detailed Analysis:1. Exemption of Interest from Nizam's Government Promissory Notes from Tax:The court examined whether the interest from the Nizam's Government promissory notes received by the assessee was exempt from tax. The amounts in dispute were Rs. 10,873 for 1952-53, Rs. 19,504 for 1953-54, and Rs. 3,699 for 1954-55. The assessee claimed exemption under item 8 of the notification dated March 21, 1922, issued under section 60 of the Indian Income-tax Act, 1922. This issue had been previously decided in favor of the assessee by the Supreme Court, which held that the interest on these securities, held as private property, was entitled to exemption. Therefore, the court answered this question in the affirmative and in favor of the assessee.2. Liability of the Assessee to Tax under the Income-tax Act, 1922:The assessee contended that he was immune from taxation as a sovereign prince under international law and the covenant dated January 25, 1950. The Supreme Court had previously ruled that neither the erstwhile Hyderabad State nor the assessee acquired international personality, and thus, the assessee could not claim immunity from taxation on his personal properties. Additionally, it was held that from April 1, 1950, the assessee was an ordinary citizen of India and liable to income-tax under section 4 of the Indian Income-tax Act, 1922. The court followed this decision and answered the second question in the affirmative and against the assessee.3. Exemption of Interest from Securities under Various Trusts from Tax:The assessee sought exemption for interest received from securities under the Housing Accommodation Trust, Pilgrimage Money Trust, Family Trust, Jewellery for Family Trust, and Miscellaneous Trust. The court reframed the question to include exemption under the third proviso to section 8 of the Indian Income-tax Act, 1922, in addition to item 8 of the notification dated March 21, 1922. The Supreme Court had previously held that the income from the Family and Miscellaneous Trusts was exempt from income-tax but not super-tax. The court applied this ruling, granting exemption from income-tax for these two trusts but denying exemption for the other three trusts as their securities were not income-tax free. Thus, the court answered this question partially in favor of the assessee and partially against him.4. Tax Liability on the Sum Received from the Trustees of Princess Niloufer Trust:The court examined whether the sum of Rs. 1 lakh received annually by the assessee from the trustees of Princess Niloufer Trust was income and whether it was exempt from tax under the agreement dated October 8, 1949. The court upheld that these payments were income within the meaning of the Act, as they included interest and capital instalments. However, the court also found that the agreement provided for these payments to be free from income-tax, super-tax, and other taxes. The court rejected the revenue's contention that the exemption was a personal benefit limited to the original beneficiaries. Consequently, the court held that the assessee was entitled to exemption from tax on these payments under the terms of the agreement.Conclusion:The court answered the questions as follows:1. The interest from the Nizam's Government promissory notes is exempt from tax.2. The assessee is liable to tax under the Income-tax Act, 1922.3. The interest from the Family and Miscellaneous Trusts is exempt from income-tax but not super-tax; the interest from the other trusts is not exempt.4. The sum of Rs. 1 lakh received annually is income but is exempt from tax under the agreement dated October 8, 1949.No order as to costs was made, considering the mixed outcome for the assessee.