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TMI Blog1965 (10) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax in his bands ? Whether the interest in respect of securities of the Government of India or of the Government of Hyderabad (including Nizam Government Promissory Note), which became payable to the assessee under the trust created by him known as ' the miscellaneous trust ', was exempt from payment of tax in his hands ? " Whether, on the facts of the case, the interest at ₹ 1,97,180 on the Government of India securities should be regarded as having accrued in the Hyderabad State and therefore chargeable at the rate obtaining under the Hyderabad Income-tax Act? Held that:- Hyderabad State did not acquire international personality under the international law and so its Ruler could not rely upon international law for claiming immunity from taxation of his personal properties The High Court went wrong in holding that the income received by the assessee up to January 26, 1950, was not liable to tax under the Act. If the assessee was not liable to pay tax under the State law, his non-liability related only to the domain of exemption. It would be incongruous to say that a person exempted from taxation was paying a nil rate. This would be an obvious attempt to sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement of case and referred four questions to the High Court of Andhra Pradesh for its decision. On July 4, 1961, the High Court answered some of the questions in favour of the assessee and others against him. The Commissioner of Income-tax filed two appeals to this court, being Civil Appeals Nos. 46 and 47 of 1964, in so far as the High Court's judgment went against the revenue ; and the assessee filed two appeals, being Civil Appeals Nos. 48 and 49 of 1964, against that part of the High Court's judgment which rejected his contentions. To avoid prolixity and repetition, we shall state the relevant facts in considering each of the questions referred to the High Court. Questions Nos. 1 and 3 may be considered together. The said questions read : Question No. 1 : " Whether in the circumstances of the case and having regard to international law and construction of municipal laws and/or the covenant dated 25th January, 1950, between the assessee and the Government of India, the assessee was liable to tax under the Indian Income-tax Act, 1922, in respect of any part of his income ? " Question No. 3 : " Whether, in any event, the assessee enjoyed immunity from taxation unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as an ex-Ruler and that those privileges did not justify his claim to immunity from taxation. Following this decision we reject the contention of the assessee based upon the said articles of the covenant. Now, we shall take the first question, excluding that part of it which refers to the said covenant, and question No. 3. Mr. A. V. Viswanatha Sastri, learned counsel for the revenue, contended that under the international law a foreign sovereign was not immune from taxation in respect of his private properties situated in the taxing State ; even if there was such an immunity under the international law, the assessee, being under the suzerainty or the paramountcy of the British Crown, had never enjoyed the status of a sovereign as understood in the international law and, therefore, was not governed by that law ; and that, in any event, as on January 26, 1950, the date when he became liable to tax, he was no longer a sovereign and therefore he could not claim exemption under the international law. Mr. Palkhivala, learned counsel appearing for the assessee, while conceding that the assessee could not claim exemption under international law in respect of the assessment for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant material on the subject, the learned author concludes thus, at page 258 : " Immunity from taxation should be the rule when the activities concerned are those normally and traditionally regarded as governmental in character : but when a foreign State engages in trading operations of a type generally open to private persons, there seems no need to better its competitive position or to shift tax burdens to others through giving it exemption from taxes. " In dealing with taxation of property, the learned author says, at page 256, thus : " The use of these agreements, combined with the practice discussed above, appears to be bringing about a situation in which it will become generally recognized that international law provides for the tax exemption of foreign State-owned property used for functions generally accepted as public. It is by no means clear, however, that the same result is either probable or desirable when we are dealing with property used for purposes which seem more commercial than governmental. " It may also be noticed that in India there is no absolute prohibition against a ruler of a foreign State being sued in India : see sections 86 and 87 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of State embodied in political practice. " The said White Paper further discloses that while the States were responsible for their own internal administration, the Crown accepted responsibility for their external relations and defence. The Indian States had no international status ; and for external purposes, they were practically in the same position as British India. The Government of India Act, 1935, gave the Indian States an option to join the federation subject to certain conditions ; but that part of the said Act was abandoned in 1939. The Indian Independence Act of 1947 introduced a change in the relationship between the Crown and the said States. Section 7(1)(b) of the Indian Independence Act of 1947 reads : " As from the appointed day .... the suzerainty of His Majesty over the Indian States lapses, and with it, all treaties and agreements in force at the date of the passing of this Act between His Majesty and the rulers of Indian States, all functions exercisable by His Majesty at that date with respect to Indian States, all obligations of His Majesty existing at that date towards Indian States or the rulers thereof, and all powers, rights, authority, or jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational Law, 8th edition, the learned author says that the States of the Indian Empire of Great Britain were protected States and that they were not subject to international law. The decision in Sayce v. Ameer Ruler Dadig Mohammad Abbasi Bahavalpur State holding that the Ameer of Bahawalpur State was a foreign sovereign immune from the jurisdiction of the English courts was solely based upon the certificate of the Commonwealth Relations Office and it does not help us in deciding the present case. It is, therefore, clear that Hyderabad State did not acquire international personality under the international law and so its Ruler could not rely upon international law for claiming immunity from taxation of his personal properties. The problem may be looked at from a different perspective, i. e., on the basis of the provisions of the Indian Income-tax Act. The Indian Income-tax Act, 1922, hereinafter called the Act, admittedly applied to Hyderabad State from January 26, 1950. Under section 3 of the Act, where any Central Act enacts that income-tax shall be charged in any area at any rate or rates, tax at that rate or those rates shall be charged for that area in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the assessee that what is charged in the assessment year or the tax year is the income earned during the accounting year or the earning year. The Act of 1918 which followed the English Acts levied tax on the income of the year of assessment, taking the income of the previous years as a standard or as a measure. But by the Act of 1922 this principle was changed. Now under the Act, tax is assessed in the assessment year on the income of the previous year. The judicial Committee in Maharajah of Pithapuram v. Commissioner of Income-tax has brought out this distinction, when it said : " In the first place, it is clear to their Lordships that under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast to the English Income-Tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by a yardstick based on previous years. " This court in Commissioner of Income-tax v. Amarchand N. Shroff restated that principle with approval. Even so, the income of the assessee during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated thus : Under the Act an individual is assessed to income-tax on the income of the previous year at the rate or rates fixed for the year by the annual Finance Act. The total income of the assessee during the previous year is computed in accordance with the provisions of the Income-tax Act after giving the relevant allowances and deductions therefrom. If during the assessment year an individual is assessable to tax, the fact that during the previous year he was not liable to tax at all because there was no Income-tax Act in the area to which the Act was extended or because that under an Income-tax Act in force therein during that year his income was exempted from tax or because of any other law, including international law, he was so exempt from tax, would not be of any relevance. After the extension of the Act to the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charge as well as the manner of computation of income did not deperd upon the pre-existing law, but only upon the provisions of the Act. Applying the said principles to the instant case, it is manifest that after January 26, 1950, the assessee ceased to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying income-tax or super-tax in respect of income accrued to him in the Hyderabad State. A perusal of paragraphs 3(ii)(a), 3(iii), 3(iv), 3(v) and 3(vi), paragraph 4(iii), paragraph 5 and paragraph 6 of the Order shows that the Order was made mainly to give relief to assessees in Part B States where the rates of tax were less than the rates prescribed in the Act. " Indian rate of tax " was defined in paragraph 3(iii) and " State rate of tax " was defined in paragraph 3(v). Under the Explanation to paragraph 3(v), if there was no State law relating to charge of income-tax and super-tax, the Schedule annexed to the Order prescribed the rates. The tax on the basis of " Indian rate of tax " and the " State rate of tax " before the appointed day were calculated and the lesser rate was made payable : see paragraphs 5 and 6 of the Order. The entire scheme evolved a machinery to give a rebate on the difference of tax calculated on the basis of the said two rates. The said scheme had nothing to do with exemptions either under the said Order or under the Act. It was argued that, as under the State law the assessee was immune from liability to tax, he was in effect liable to pay only nil t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be sustained on the basis of the definition of " Government securities in section 3(24) of the General Clauses Act, 1897, which reads : " ' Government securities ' shall mean securities of the Central Government or of any State Government, but in any Act or Regulation made before the commencement of the Constitution shall not include securities of the Government of any Part B State. " Relying upon this clause it was contended that the securities issued by the Government were not covered by the said proviso. There is an obvious fallacy in this argument. To ascertain the meaning of an expression in a Central Act, it is permissible to look into the General Clauses Act to find out how that expression is defined in the General Clauses Act. The General Clauses Act affords a dictionary for words used in the Central Acts to the extent provided thereunder. Proviso 3 to section 8 of the Act does not use the expression " Government securities ", but only mentions " securities of a State Government ". There is, therefore, no scope to ascertain the meaning of the latter expression with reference to the definition given to a different expression in section 3(24) of the General Clauses Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y him known as ' the family trust ' was exempt from payment of tax in his bands ? " Question 4(iii) : " Whether the interest in respect of securities of the Government of India or of the Government of Hyderabad (including Nizam Government Promissory Note), which became payable to the assessee under the trust created by him known as ' the miscellaneous trust ', was exempt from payment of tax in his hands ? " These two questions relate to Government securities settled by the assessee in trust, but the income whereof was payable to him under the provisions of the relevant deeds of trust. The assessee executed the two trusts --- one dated May 10, 1950, known as H. E. H. Nizam's " family trust " and the other dated August 6, 1950, known as H. E. H. Nizam's " miscellaneous trust ". Under clause 3 of the deed of trust relating to the family trust, the net income of the trust fund, after defraying the expenses and charges of collection, had to be paid by the trustees thereunder to the assessee for and during the term of his natural life. Under the miscellaneous trust, it was provided that subject to the provisions of sub-clauses (a) to (j) of clause 2 of the said deed, the trustees s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort, it imposes a vicarious liability on the trustee. The expression " all the provisions of this Act shall apply accordingly " indicates that there is no distinction in the matter of assessability of the income in the hands of a trustee or the beneficiary, as the case may be. Indeed, section 41 of the Act comes into play only after the income is computed in accordance with Chapter III of the Act. In the case of income from securities section 8 applies and under the second proviso thereto, the income-tax payable on the interest receivable on any security of the State Government issued income-tax free shall be payable by the State Government. No tax on interest on such securities is payable by the assessee. After ascertaining the income and after giving the exemptions, the income-tax authority has the option to assess the beneficiary directly or, in respect of the same income, the trustee on behalf of the beneficiary. This construction finds support in the decision of the Bombay High Court in Commissioner of Income-tax v. Balwantrai Jethalal Vaidya. If that be the scope of the assessment under section 41 of the Act, we find it difficult to appreciate the contention that the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust deed, the securities ceased to be the private property of the assessee and thereafter he would only be entitled to the interest on the securities during his lifetime in the manner prescribed thereunder. We cannot, therefore, hold that the securities were held by the trustees as private property of the assessee. The miscellaneous trust consisted of Hyderabad and Government of India Loans. Under this trust deed, trustees were appointed and the said amounts were transferred to them. Under the document the trustees were under an obligation to manage the said fund, recover interest and other income therefrom, and, after bearing the overhead charges, pay the income therefrom in different proportions to the relatives of the assessee and other persons mentioned therein. It is not necessary to consider the complicated provisions of this document. It would be enough to state that, under this trust deed also, the amounts representing the loans mentioned therein ceased to be the private property of the assessee and the trustees thereunder held the said property for discharging the various obligations imposed on them and for paying the income therefrom to the different persons ment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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