1979 (2) TMI 101 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of payments received from privy purse by the adopted son.
2. Taxability of payments received from privy purse by the daughter-in-law.

Detailed Analysis:

1. Taxability of Payments Received from Privy Purse by the Adopted Son:
The primary issue was whether the payments received by the adopted son from the Maharaja of Porbandar's privy purse were taxable as income. The Income Tax Officer (ITO) sought to tax these amounts, but the assessee argued that there was no legally enforceable right to these payments. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, but the Tribunal reversed it, concluding that the payments were not taxable as they were not received by virtue of any custom, usage, or statutory obligation. The Tribunal emphasized that the payments varied and were dependent on the Maharaja's discretion, indicating they were not income but rather voluntary payments.

2. Taxability of Payments Received from Privy Purse by the Daughter-in-Law:
Similarly, the daughter-in-law received payments from the Maharaja, which were also sought to be taxed by the ITO. Her argument mirrored that of her husband, asserting no legally enforceable right to these payments. The AAC and ITO's decisions were overturned by the Tribunal, which followed the reasoning in the husband's case, ruling that these payments were also not taxable.

In-depth Details:

Legal Framework and Exemptions:
The judgment highlighted that under Article 291 of the Constitution and the Indian Income Tax Act, 1922, and 1961, privy purses were exempt from income tax. The Maharaja's privy purse was intended to cover all expenses of the ruler and his family. The key question was whether the payments made by the Maharaja to his adopted son and daughter-in-law were taxable in their hands.

Tribunal's Findings:
The Tribunal found no evidence of a legally enforceable right to the payments, and the varying amounts indicated they were at the Maharaja's discretion. The Supreme Court's decision in CIT v. Sitaldas Tirathdas was cited, distinguishing between income diverted before reaching the assessee and income applied after reaching the assessee. The payments were considered applications of income by the Maharaja, not diversions before reaching him.

Conclusion:
The High Court upheld the Tribunal's decision, ruling that the payments were not taxable as income in the hands of the adopted son and daughter-in-law. The payments were deemed voluntary and dependent on the Maharaja's discretion, thus not constituting income. The court emphasized that the exemption of the privy purse itself did not affect the character of the payments received by the assessees. The questions referred were answered in favor of the assessees, and the Commissioner was ordered to pay the costs.