PALACE – BUILDING – DISTINCTION

[Mr. M. GOVINDARAJAN]

Exemption to the Palace of a Ruler

Section 10 of the Income Tax Act, 1961 (‘Act’ for short) provides that in computing the total income of a previous year of any person, any income falling within the sub clauses of Section 10 shall not be included. Sub clause (19A) provides that the annual value of any one palace which is in occupation of a Ruler and whose annual value was exempt from income tax before the commencement of the Constitution (Twenty Sixth Amendment) by virtue of the provisions of the Merged States (Taxation Concessions) Order, 1949, or the Part B States (Taxation Concessions) Order, 1950 would be exempt from payment of income tax.

Paragraph 15(iii) grants exemption to the bona fide annual value of the residential palace of the Ruler of a State, which is declared by the Central Government to be the Ruler’s ancestral property from the payment of income tax.

Requirements for exemption

In order to claim exemption from payment of income tax on the residential palace of the Ruler under Section 10(19A) it is necessary for the Ruler to satisfy that-

• he owns the palace as his ancestral property;
• such palace is in his occupation as his residence;
• the palace is declared exempt from the payment of income tax under Paragraph 15 (iii) of the Order, 1950 by the Central Government.

Issue

The issue to be discussed in this article is where part of the residential palace is found to be in occupation of the tenant and remaining is in occupation of the Ruler for his residence, whether in such circumstances, the Ruler is entitled to claim exemption for the whole of the residential palace under Section 10(19A) or such exemption would confine only to that portion of the palace which is in his actual occupation, with reference to decided case laws.

Case laws

In ‘Commissioner of Income Tax V. Bhartatchandra Banjdeo’ – 1985 (1) TMI 38 - MADHYA PRADESH High Court the Revenue contended that if only a portion of the palace is in occupation, the exemption under Section 10(19A) would be available only for that part and not for the whole. The High Court held that the exemption has been limited only to one palace in occupation. If the Legislature intended a further splitting up, it would have been provided in Section 10(19A) that such portion of the palace in occupation is only exempted, but it appears that the language used by the Legislature did not contemplate a further splitting up.

The Revenue relied on the case in ‘Mohd. Ali Khan V. Commissioner of Wealth Tax’ – 1982 (11) TMI 48 - DELHI High Court in which the High Court held that if the palace which was declared to be an official residence had a number of buildings, as the exemption under the Wealth Tax is available only in respect of one building which is in occupation and, therefore, the assessee’s contention that the other buildings which may not be in occupation but declared to be an official residence should be exempted, was not accepted.

The High Court in this regard held that in Section 10(19A), in the place of ‘building’, the phrase employed is ‘one palace’ and so far as in the case in hand is concerned, it is not disputed that this official residential is only one palace and not more than one. Under these circumstances, Section 10(19A) could not be interpreted to mean that it contemplates further splitting up of portions of a palace. The language of Section 10(19A) does not justify it. It is settled that in cases of exemption, the language of the statute has to be liberally construed but even if this principle is not considered, there are no words, in Section 10(19A) from which an intention for splitting up of the palace into portions could be gathered.

In ‘Commissioner of Income Tax V. H.H. Maharao Bhim Singhji’ – 1982 (11) TMI 48 - DELHI High Court the High Court held that it is not possible to split up one palace into parts for granting exemption only to that part in self occupation of the ex-Ruler as his official residence and to deny the benefit of exemption to the other portion of the palace rented out by the Ruler, since the entire palace is declared as his Official residence. Even if only a part of the palace is in the self occupation of the former Ruler and the rest has been let out, the exemption available under Section 10(19A) will be available to the entire palace. In the case of a taxing statute, a plausible view in favor of the assessee should be preferred in these circumstances.

In ‘Maharao Bhim Singh of Kota V. Commissioner of Income Tax’ – 2016 (12) TMI 418 - SUPREME COURT the appellant was the Ruler of the princely State of Kota situated now at Rajasthan. He owned a palace using it as his residence. The Central Government issued a notification No.SRO 1619, dated 14.05.1954 declaring the appellant’s residence as his official residence. During the year 1976 the Ministry of Defence requisitioned portion of that palace amounting to 918.26 acres of the land including houses and other construction for their own use and realized ₹ 80,000 as rent. The lease period ended on 1993 though the land still continues to remain in the hands of Ministry of Defence.

The issue involved in the appellant’s case is whether the rental income received by the appellant from the Ministry of Defence is taxable in his hands or he would be entitled to full exemption from the income. The Commissioner of Income Tax (Appeals), Rajasthan – II held the case in favor of the appellant by holding that since the appellant was in occupation of part of his official residence during the assessment year in question, he was entitled to claim full benefit of the exemption for his official residence as provided under Section 10(19A) of the Act notwithstanding the fact that portion of the residence is let out to the Ministry of Defence.

The Revenue filed appeal before the Tribunal against the order of Commissioner (Appeals). The Tribunal dismissed the Revenue’s appeal. However, the Tribunal, on an application made by the Revenue under Section 256 (1) of the Act referred to the High Court of Rajasthan for answer to the question of law – Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the rental income from Umed Bhawan Palace was exempt under Section 10(19A) of the Income Tax Act, 1961? The High Court answered the question against the appellant and in favor of the Revenue. The High Court held that so long as the assessee continues to remain in occupation of his official residential palace for his own use, he would be entitled to claim exemption available under Section 10(19A) of the Act but when he is found to have let out any part of his official residence and at the same time is found to have retained its remaining portion for his own use, he becomes disentitled to claim benefit of exemption available under that section for the entire palace. He is required to pay income tax on the income derived by the appellant from the portion let out and the benefit of exemption remains available only to the extent of portion which he is in occupation of his residence.

The assessee filed the present appeal before the Supreme Court. The appellant contended the following before the Supreme Court-

• The question involved in this appeal was already decided in favor of the appellant in all previous assessment years by the Supreme Court, there was no justifiable reason for the Revenue to have pursued the same question again only for the assessment year in question (1978-79) to the High Court;
• In any event the High Court should have taken note of this fact and answered the reference in appellant’s favor;
• Since the issue involved pertains to grant of exemption to the assessee from payment of income tax under Section 10(19A) of the Act read with paragraph 15 of the Order, such provisions should be regarded as exception and construed liberally in appellant’s favor unlike the charging provisions, which are interpreted strictly;
• Section 5(iii) of the Wealth Ta Act and Section 23 of the Income Tax Act are neither in pari materia with each other and nor identically worded;
• The question involved in this appeal has already been answered by the Madhya Pradesh High Court in ‘Commissioner of Income Tax V. Bharatchandra Banjdeo’ – 1985 (1) TMI 38 - MADHYA PRADESH High Court; and therefore there was no justifiable reason for the High Court to have departed from the view taken by the MP High Court;
• Section 10(19A) does not use the same expression which occurs in Section 23(2), namely, ‘annual value of such house or part of the house’; absence of these words in Section 10(19A) goes to show that the appellant is entitled to claim exemption applicable to the entire palace even thought he part of palace is in occupation;
• Splitting of palace is not permissible under Section 10(19A) of the Act though it is permissible in ‘house’;

The Revenue supported the reasoning and the conclusion arrived at by the High Court and prayed for upholding of the order of High Court.

The High Court found that in Section 10(19A) the Legislature has used the expression ‘palace’ for considering the grant of exemption to the Ruler whereas on the same subject the Legislature has used different expression namely ‘any one building’ in Section 5(iii) of the Wealth Tax Act. The Court cannot ignore this distinction while interpreting Section 10(19A) which, in the view of High Court, is significant. In the considered opinion of the High Court, if the Legislature intended to split the palace in part (s), alike houses for taxing the subject, it would have said so by employing appropriate language in Section 10(19A). However the Court did not find such language employed in Section 10(19A). Section 23(2) and (3) uses the expression ‘house or part of a house’. Such expression does not find place in Section 10(19A). Likewise the Court did not find any such expression in section 23, specifically dealing the cases relating to ‘palace’. This significant departure of the words in Section 10(19A) and Section 23 also suggest that the Legislature did not intend to tax portion of the ‘palace’ by splitting it in parts. The High Court allowed the appeal filed by the appellant.