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Issues Involved:
1. Validity of the notice dated 23rd February 1938 issued under Section 34 of the Indian Income-tax Act. 2. Classification of income from nazrana and zar-i-chaharum as 'agricultural income' under Section 2(1) of the Act. 3. Exemption of the late Maharaja of Benares from taxation under the Act due to his status as a Ruler of an Indian State. Issue-wise Detailed Analysis: 1. Validity of the Notice Dated 23rd February 1938 Issued Under Section 34 of the Indian Income-tax Act: The assessee contested the validity of the notice issued on 23rd February 1938 under Section 34 of the Indian Income-tax Act. The contention was that the notice was invalid, illegal, and ultra vires, not only based on the decision of the Calcutta High Court in the case of Messrs. Mahaliram Ramjidas [1938] 6 ITR 265 but also on other grounds. The Court noted that the Assistant Commissioner had considered the plea that the notice was invalid under Section 22 read with Section 34 but had limited the argument to the Calcutta High Court's decision. The Court decided to address the broader contention that the income had not escaped assessment and referenced the case of Rajendranath Mukherjee v. Commissioner of Income-tax, Bengal [1934] 61 Cal. 285; 2 ITR 71. The Court concluded that since no valid notice was issued to the Maharaja (who was not the assessee) and the return filed by the Maharaja was not a due return, the entire proceedings were void. Thus, the income had indeed escaped assessment, and the notice issued on 23rd February 1938 was valid under Section 34. The Court answered the first question in the affirmative. 2. Classification of Income from Nazrana and Zar-i-Chaharum as 'Agricultural Income' Under Section 2(1) of the Act: The assessee conceded that the income derived from zar-i-chaharum was not agricultural income. Zar-i-chaharum is one-fourth of the sale price of houses transferred by one person to another, and His Highness was entitled to this amount by custom. This income was not agricultural and thus not exempt. Regarding the nazrana, it was contended that this represented sums received from both building permissions and cultivatory tenants. However, it was not pleaded that the sum of Rs. 3,033 included nazrana from cultivatory tenants. The Assistant Commissioner and the Commissioner held that nazrana was a customary fee for building permissions. Thus, it did not qualify as agricultural income and was rightly taxed. The Court answered the second question in the negative. 3. Exemption of the Late Maharaja of Benares from Taxation Under the Act Due to His Status as a Ruler of an Indian State: The Court sought clarification on the Maharaja's status from the Political Department. It was confirmed that the Maharaja was recognized as a Ruler of the Indian State of Benares but was not considered independent. His status was that of a sovereign Ruler under the suzerainty of His Majesty, with various attributes of sovereignty, including internal sovereignty. However, he was not independent, and His Majesty's Government exercised certain rights over the state. The Court noted that the Maharaja could not claim immunity from taxation that an independent sovereign might claim. The Maharaja's income from properties in British India, assumed to be his personal property, was subject to taxation. The Court referenced Section 155 of the Government of India Act, which did not exempt personal property or income of a Ruler from federal taxation. The Court also noted that the Finance Department Notification did not exempt income derived from private property of Ruling Chiefs and Princes. Thus, the Court answered the third question in the negative.
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