# COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH v. H. E. H. MIR OSMAN ALI KHAN

- **Citation:** [1966] 2 S.C.R. 296
- **Court:** Supreme Court of India
- **Decided:** 1965-10-25
- **Case number:** Civil Appeals Nos. 46-49 of 1964
- **Bench:** K. SUBBA RAo, J. C. Shah, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-andhra-pradesh-v-h-e-h-mir-osman-ali-khan-3540
- **Pages:** 21

## Headnote

Income-tax Act (11 of 1922) s. 8 proviso 3-Scope of.
Part B Stales (Taxation Concessions) Order, 1950-Efject of.
Indian State-Status under International Law.
In respect of the assessments made on the Nizam of Hyderabad for
the assessment years 1950-51 and 1951-52 the following questions arose
in the High Court in a reference under s. 66(1) of the Income-tax Act,
1922 : (i) Whether having regard to the Covenant dated 25th January
1950 entered into by the assessee with. tb.e Oo..,,rnment of India at the
time of merger of the State or Hyderabad wun tlle LJominion of India,
the assessee was not liable to tax under the Income-tax Act; (ii) whether
undeo: International law, the assessee was immune from taxation in respect
of the assessment year 1950-51; (iii) Whether having regard to the provisions of Part B States (Taxation Concessions) Order, 1950 the assessee'a
income was totally exempt from tax; (iv) whether the interest received
by the assessee in respect of certain income-tax free loans issued by the
State Government was exempt from tax; and (v) whether the income
payable to the assessee under two trnsts-the Family Trust and the Miscellaneous Trust-arising from Government securities settled by the assessee
B
c
D
on the trusts, was exempt f'rom payment of tax.
E
The High Court imswered some of the questions in favour of the ·
assessee and others against him. The Commissioner of Income-tax and
the assessee appealed to this Court.
HELD : (i) The privileges guaranteed by the relevant articles of tb.e
merger agreement were only personal privileges of the assessee as an Bx·
Ruler, and those privileges did not justify his claim to immunity from
taxation. [300 DJ
Sri Sudhansu Sheklzar Singh Deo v. State of Orissa, [1961] I S.C.R.
779, followed.
(ii) Hyderabad State never acquired 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. From
1858, Hyderabad was under the suzerainty of the British Crown till the
Indian Independence Act of 1947 was passed, and thereafter, after nego·
tiations it acceded to the Indian Dominion. It was never
recognised
as an international
personality by the family
of nations. The
High
Court, therefore, erred in holding that the income received by the assessee
up to 26th January 1950, was not liable to tax under the Income-tax Act.
[302 E; 303 B; 304 F-G; 305 BJ
F
G
Further, the assessee's right to exemption if any, under International
Law, during the accounting year, was irrelevant to the qnestion of taxation
under the Act. Under
the Act, an individual is assessed to incomeH
tax on the income of the previous year at the rate or rates fixed f<li"
the year by the annual Finance Act. If during the assessment year
an individual is assessable to tax, the fact that during tb.e previous year
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B
C.I. T. V. MIR OSMAN
297
he. was not liable to tax at all because there was no income tax in the
area to which the Act was extended, or because, 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 Indian Income-tax Act to the Hyderabad State the charge was
under the Act and not under the provisions of the previous law. There·
after, the charge as well as the manner of computation of income did
not depend upon the pre-existing law, but only upon the provisions of
the Act. After 26th January 1950, the assessee ceased to be a ruling Chief
and he was, therefore, liable to assessment under the Act. If he• wa.
assessable to tax, the statutory charge• on his income during the previous year was only traceable to the Act, \Vhich vvas retroactive in operation to that extent. [307 F-H; 308 A-CJ
(iii) The assessee was not entitled to any :exemptions under the
C
Part B State (Taxation Concessions) Order, 1950. [309 G]
D
E
F
G
H
If

## Text

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COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH
A
v.
H. E. H. MIR OSMAN ALI KHAN
October 25, 1965
[K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI, JJ.]
Income-tax Act (11 of 1922) s. 8 proviso 3-Scope of.
Part B Stales (Taxation Concessions) Order, 1950-Efject of.
Indian State-Status under International Law.
In respect of the assessments made on the Nizam of Hyderabad for
the assessment years 1950-51 and 1951-52 the following questions arose
in the High Court in a reference under s. 66(1) of the Income-tax Act,
1922 : (i) Whether having regard to the Covenant dated 25th January
1950 entered into by the assessee with. tb.e Oo..,,rnment of India at the
time of merger of the State or Hyderabad wun tlle LJominion of India,
the assessee was not liable to tax under the Income-tax Act; (ii) whether
undeo: International law, the assessee was immune from taxation in respect
of the assessment year 1950-51; (iii) Whether having regard to the provisions of Part B States (Taxation Concessions) Order, 1950 the assessee'a
income was totally exempt from tax; (iv) whether the interest received
by the assessee in respect of certain income-tax free loans issued by the
State Government was exempt from tax; and (v) whether the income
payable to the assessee under two trnsts-the Family Trust and the Miscellaneous Trust-arising from Government securities settled by the assessee
B
c
D
on the trusts, was exempt f'rom payment of tax.
E
The High Court imswered some of the questions in favour of the ·
assessee and others against him. The Commissioner of Income-tax and
the assessee appealed to this Court.
HELD : (i) The privileges guaranteed by the relevant articles of tb.e
merger agreement were only personal privileges of the assessee as an Bx·
Ruler, and those privileges did not justify his claim to immunity from
taxation. [300 DJ
Sri Sudhansu Sheklzar Singh Deo v. State of Orissa, [1961] I S.C.R.
779, followed.
(ii) Hyderabad State never acquired 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. From
1858, Hyderabad was under the suzerainty of the British Crown till the
Indian Independence Act of 1947 was passed, and thereafter, after nego·
tiations it acceded to the Indian Dominion. It was never
recognised
as an international
personality by the family
of nations. The
High
Court, therefore, erred in holding that the income received by the assessee
up to 26th January 1950, was not liable to tax under the Income-tax Act.
[302 E; 303 B; 304 F-G; 305 BJ
F
G
Further, the assessee's right to exemption if any, under International
Law, during the accounting year, was irrelevant to the qnestion of taxation
under the Act. Under
the Act, an individual is assessed to incomeH
tax on the income of the previous year at the rate or rates fixed f<li"
the year by the annual Finance Act. If during the assessment year
an individual is assessable to tax, the fact that during tb.e previous year
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A
B
C.I. T. V. MIR OSMAN
297
he. was not liable to tax at all because there was no income tax in the
area to which the Act was extended, or because, 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 Indian Income-tax Act to the Hyderabad State the charge was
under the Act and not under the provisions of the previous law. There·
after, the charge as well as the manner of computation of income did
not depend upon the pre-existing law, but only upon the provisions of
the Act. After 26th January 1950, the assessee ceased to be a ruling Chief
and he was, therefore, liable to assessment under the Act. If he• wa.
assessable to tax, the statutory charge• on his income during the previous year was only traceable to the Act, \Vhich vvas retroactive in operation to that extent. [307 F-H; 308 A-CJ
(iii) The assessee was not entitled to any :exemptions under the
C
Part B State (Taxation Concessions) Order, 1950. [309 G]
D
E
F
G
H
If the assessee was not liable to pay tax undet the State law, bis
non-liability related only to the. domain of exemption. It would be in·
congruous to say that a person exempted from taxation was paying a nil
rate and on that basis contend that no tax was payable by him. The
Order was only intended to provide a machinery for scaling down the
rates of tax in relation to the rates prevailing in the ,Part B State. If
there was a State law prescribing rates, it would afford the criterion for
scaling down the Indian rate of tax; if there was no State law prescribing the rate the schedule of rates annexed to the Order would govern
the taxation. [309 E-G]
(iv) The assessee was entitled to exemption from tax both under
s. 8, proviso (3) of the Income-tax Act, as well as under item 8 of .the
Notification dated 21st March 1922. [309 H; 311 FJ
In the case of the income from securities s. 8 applies, and under the
3rd 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 nnd no tax on interest on such securities was payable by the assessee.
The, proviso does not use the expression "Government isecurities" but only mentions "securities of
a
State Government". Under els. 58 and 60 of s. 3 of the
General
Clauses Act, 1897, the expression "State Government" takes in the Government of Hyderabad State'. If so, in terms of the proviso, the income tax payable on the interest receivable on the securities of the·
Hyderabad Government, issued income"tax free, shall be payable by the
State Government and the assessee was not liable. Also, as the assessee
held the securities as his private property, under the Notification. the
exemption applied both for income-tax and super-tax [310 C G· 311 B-D
Fj
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.. (v) In regard to the interest receivable by tho assesse.e from the secunt1es and loans of the two trusts, he was not liable to pay income-tax,
but he was not exempt fr6m payment of super-tax under item 8 of the
N"!ification dated 21st March 1922.
[313 HJ
1:'1e. question had to be decided on a construction of s. 41 of the Act..
But It 1s only after ascertainii:g the income and . after giving exemptions,
that s. 41 of the Act comes mto play, and the mcome-tax authority has
the oplton un?er s. 41, to assess the beneficiary directly or, in respect
of the sai:ne mcome. the trustee on behalf of the beneficiary.
Under
s. 8 pr<;v1so (3) the ass~see would not be liable to pay income,tair
on the 1.n~ere~t from the mcome-tax free securities. Since the interest
on secur1!Ies m the hands of the trustees . .does not become an income
:298
SUPREME COURT REPORTS
[1966] 2 s.c.R.
-0ther
than
such
interest
in
the
hands
of
the
beneA
ficiary, it retains its character as such interest whether
the
asses,;.
ment is made on the trustee or the beneficiary.
Therefore the assessee
would not be liable to pay income-tax, but his liability to pay super-tax
is not transferred by the proviso to the State Government. Nor could
the assessee claim the benefit of the Notification for an exemption with
Tespect to super-tax, because, under the trust
deeds the
Government
loans ceased
to be the private property of the assessee and after the
execution of the, trust deeds they were held by the trustees not on behalf
B
of the assessee as his private property but for the purpose of discharging the obligations imposed on them under the trust deeds. [312 G; 313 E,
F, G; 314 A; 315 A-BJ
•
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 46-49
of 1964.
Appeals by special leave from the judgment and order dated
July 4, 1961 of the Andhra Pradesh High Court in Case Referred
No. 35 of 1959.
A. V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and
R. N. Sachthey, for the appellants.
c
N. A. Palkhivala, Anwarulla Pasha, !. B. Dadachanji, 0. C.
D
Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J,
These four appeals by special leave granted
this Court are preferred against the judgment of a Division Bench
of the Andhra Pradesh High Court at Hyderabad in a case referred
to it by the Income-tax Appellate Tribunal, Hyderabad Bench,
under s. 66(1) of the Indian Income-tax Act, 1922, hereinafter
called the Act, in respect of assessments made on H.E.H. the
Nizam of Hyderabad for the assessment years 1950-51 and 195152.
The Income-tax Officer, B. Ward, Hyderabad-Deccan, by his
orders dated February 15, 1955, and March 31, 1956, rejected the
objections raised by the assessee and assessed him to income-tax
for the said two years. Against the said orders the assessee filed
E
F
two appeals before the Appellate Assistant Commissioner, Hyderabad, who, by his orders gave some relief in respect of the said
G
assessments. On further appeals by the assessee, the Income-tax
Appellate Tribunal, Hyderabad Branch, allowed the appeals of
the assessee in part and ordered the assessments to be' revised
accordingly. At the instance of the assessee, the Income-tax Appellate Tribunal drew up a statement of case and referred four
questions to the High Court of Andhra Pradesh for its decision.
H
On July 4, 1961, the High Court answered some of the questions
in favour of the assessee and others against him. The Commis-
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A
B
C.I.T. v. MIR OSMAN (Subba Rao, !.)
29!r
sioner of Income-tax filed two appeals to this Court, being Civil
Appeals Nos. 46 and 4 7 of 1964, insofar 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 1 and 3 may be considered together. The said questions read:
Question 1. "Whether in the circumstances of the
c
case and having regard to International Law and construction of Municipal Laws and/ or the covenant dated
25-1-1950 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."
D
Question 3. "Whether, in any event, the Assessee
enjoyed immunity from taxation under the Indian
Income-tax Act,
1922, in respect of income which
accrued or arose to him or was received by him up to
26th January 1950."
E These two questions raise the following points : (1) Whether underInternational Law the assessee is immune from taxation in respect
of the assessment year 1950-51; and (Q.) whether, having regard to
the said Covenant dated January 25, 1950, he was not liable to
tax under the Indian Income-tax Act, 1922.
The High Court
held that under the International Law, the assessee being a
F
sovereign up to January 25, 1950, his income up to that date was
immune from taxation and that; the Indian Income-tax Act not
having expressly amended the International Law in its applicationto India, his income till that date was not liable to tax under the
Income-tax Act.
As a corollary from the said conclusion, the
High Court held that as the assessee ceased to be a sovereign from
G
January 26, 1950, the income accrued to him thereafter was liable
to tax.
The High Court rejected the contention of the assessee·
that he was exempted from the liability to pay income-tax underthe Covenant entered into by him with the Government of India
at the time of merger.
H
The argument based upon the Covenant may easily be disposed of. The relevant articles of the Covenant read as follows :.·
Article 3. His Exalted Highness the Nizam of
Hyderabad and the members of his family shall be en--
:JOO
SUPREME COURT REPORTS
[1966} 2 S.C.R.
titled to all the personal privileges, dignities and titles enA
joyed by them whether within or outside the territories
of the Dominion before the 15th August 1947.
Article 4. The Government of India guarantees the
succession according to the Jaws and customs of the
Gaddi of the State and the personal rights, privileges,
dignities and titles of His Exalted Highness the Nizam of
Hyderabad.
The argument was that the assessee's immunity from taxation as
B
a sovereign was a privilege guaranteed to him under the said
articles of the covenant. This question need not detain us, as it
was answered by this Court in Sri Sudhansu Shekhar Singh Dea v.
C
The State of Orissa(') in the context of the claim of exemption
from agricultural income-tax by an Ex-Ruler of an Indian State
·based upon articles in a merger agreement, similar to the one
now in question. This Court held that the privileges guaranteed
by the relevant articles of merger agreement were only personal
privileges of the appellant as an Ex-Ruler and that those privileges
D
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 3.
E
Mr. A. V. Viswanatha Sastri, learned counsel for the Revenue,
~ontended 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 suzeF
rainty or the paramountcy of the British Crown, had never enjoyed
the status of a sovereign as understood in the International Law
and, therefore, 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. Pa!khiwala, learned counsel appearing for the assessee,
while conceding that the assessee could not claim exemption under
International Law in respect of the assessment for the year 1951G
52, argued that he was not liable to income-tax for the assessment
year 1950-51 on the ground that under the Indian Income-tax
.Act, income-tax was charged on the assessee's income received
11
-during the accounting year and that as during the accounting year
(1) [196111 S.C.R. 779.
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C.I.T. v. MIR OSMAN (Subba Rao, I.)
301
A the assessee was a ruling chief, he was exempt from taxation under
the International Law.
He argued that under the International
Law, as understood by English Courts, a foreign sovereign was
exempt from taxation, that the said interpretation of the law had
become the common law of England and that the said common
law was the law of India before the Constitution and it continued
B to have force thereafter by reason of Art. 3 72.
The validity of Mr. Palkhivala's contention depends upon our
acceptance of four premises, namely (i) the English Courts have
'
finally accepted the view that under International Law a sovereign
is immune from taxation in respect of his private property; (ii)
.-
c that it had become a part of the common law of England; (iii)
that before the Indian Constitution came into force, the said
common law was accepted and applied by the Indian Courts; and
(iv) that the said common law so accepted as the common law of
this country continued to be in force by reason of Art. 372 of the
Constitution.
D
International Law vis-a-vis the liability of a sovereign to taxation in respect of his private property is in a process of evolution.
It has not yet become crystallized. It is true that some of the
textbooks on the subject and some of the decisions support the
view that sovereign rulers are exempt from taxation : see Halsbury's
11
Laws of England, 3rd Edn., Vol. 20, p. 589; Oppenheim's International Law, 8th Edn., Vol. I, p. 759. But, even in England
the House of Lords in Sultan of lohore v. Abubakar Tunku
Bendahar(1) observed :
"Their Lordships do not consider that there has been
finally established in England ................... .
F
any absolute rule that a foreign independent sovereign
cannot be impleaded in.our courts in any circumstances."
Interesting and instructive discussion on the question of a foreign
sovereign's immunity from taxation in respect of his private properties is found in the American Journal of International Law, Vol.
G
46, at p~ 23 9, under the heading "Immunity from Taxation of
Foreign State-owned property". After an elaborate consideration
of the relevant material on the subject, the learned author concludes thus, at p. 258 :
H
"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
(1) L.R. [1952] A.C. 318, 343.
302
SUPREME COURT REPORTS
[1966] 2 S.C.R.
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
p. 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."
A
B
c
It may also be noticed that in India there is no absolute proh.ibiD
tion against a ruler of a foreign state being sued in India: see ss. 86
and 87 of the Code of Civil Procedure. He can be sued with the
consent of the Central Government. It is not necessary in this
case to decide this question, as we are satisfied that H.E.H. the
Nizam had never acquired international personality under International Law. We have noticed the aforesaid facts only to indicate that the question is not free from difficulty and that it requires serious consideration when it directly arises for decision.
We shall, therefore, assume for the purpose of these appeals that
a foreign sovereign who has acquired an international personality
has such an immunity from taxation.
We shall now proceed to consider the question why in our
view H.E.H. the Nizam had never acquired international personality. As a learned author puts it.
"Every civilised State which is a member of the family of nations is an International person. Recognition of
a State as a member of the family of nations involves recognition of such State's (1) equality, (2) dignity, (3) independence, and (4)
territorial and personal supremacy."
E
F
G
According to Oppenheim, all the said qualities constitute, as a
body, the international personality of a State. Unless the State of H
Hyderabad had the said qualities, its ruler could not claim any of
the immunities sanctioned by International Law.
A brief his-
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C.I.T. I', MIR OSMAN (Suhba Rao, J.)
303
A tory of the status of the Hyderabad State vis-a-vis the British
Crown would help us to ascertain its status in International Law.
In 1858 the British Crown took over from the East India Company the administration of the entire territory of India.
Thereafter, while the British India was under the direct rule of the Crown,
B the Indian States remained under the personal rule of their Chiefs
under the suzerainty of the Crown. In the Pronouncement of Lord
Canning he clearly stated :
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"The Crown in England stands forth the unquestioned ruler and paramount power in all India."
This concept of suzerainty by the Crown was also described as
"Paramountcy". The relationship between the paramount power
and the Indian States was described in the "White Paper on Indian
States'', at p. 32, thus :
"As already stated the paramountcy of the British
Crown was not co-extensive with the rights
of the
Crown flowing
from
the Treaties.
It was based on
Treaties, Engagements, Sanads as supplemented by
usage and sufferance and by decisions of the Government of India and the Secretary 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(!)(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 Majasty
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 jurisdiction exercisable by His Majesty at
L2~up C 1/65 ~ 6
304
SUPREME
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REPORTS
[1966] 2 S.C.R.
that date in or in relation to Indian States by treaty,
A
grant,. usage, sufferance or otherwise; and
Provided that notwithstanding anything in paragraph (b) ........ of this sub-section, effect shall, as
nearly as may be, continue to be given to the provisions of any such agreement as is therein referred to
which relate to customs, transit and communications,
posts and telegraphs, or other like matters, uμtil the
provisions in question are denounced by the Ruler of
the Indian States . . . . . . . . on the one hand, or by
the Dominion or Province or other part thereof concerned on the other hand, or are superseded by subsequent agreements."
Though under this Act the paramountcy of the Crown lapsed
B
c
in regard to Hyderabad and other States, the pre-existing agreements with those States continued in respect of specified matters.
The lapse of suzerainty or the breaking of ties with the British
D
Crown did not ipso facto raise their status to that of internaiional
personality. It created a void and the position of the States was
in a fluid state. No de facto or de jure recognition was given
'.to the Hyderabad State or to any other State by the family of
Ulations.
But, after protracted negotiations, the Nizam issued a
proclamation on November 23, 1949, accepting the Constitution
E
of India, shortly to be adopted, subject to ratification by the
constituent assembly of the Hyderabad State.
The said constituent assembly ratified it and thereafter the Hyderabad State was
included in Part B of the First Schedule to the Constitution : see
Appendix LIV, White Paper on Indian States (N.S. 6), p. 369,
and Basu's Commentary on the Constitution of India, 4th Edn.,
F
Vol. 4, pp. 32-34. It will be seen from the said history that
Hyderabad was under the suzerainty of the British Crown till the
Indian Independence Act of 1947 was passed and that thereafter,
after negotiations with the Indian Dominion, it finally acceded
to it. It was never recognized as an international personality by
the family of nations. It was all through a vassal of the British
G
Crown.
Oppenheim says in his book on
International
Law,
Vol. 1, 5th Edn., at pp. 165-166, that "the position of the Indian
States to Great Britain is like that of vassal of States which have
no international relaNons whatever either between themselves or
with foreign States".
In Hall's International Law, 8th Edu., the
learned author says that the States of the Indian Empire of Great H
Britain were protected States and that they were not subject to .
international law.
The decision in Sayce v. Ameer Ruler Sadiz
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C.T.T. v. MIR OSMAN (Subba Rao, .f.)
305
A
Mohammad Abbasi Bahawalpur State ( 1) 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.
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The Indian Income-tax Act, 1922, hereinafter called the Act,
admittedly applied to Hyderabad State from January 26, 1950.
Under s. 3 of the Act, where any Central Act enacts that incometax 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 and subject to the provisions of the Act in respect of the
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total income of the previous year of every individual etc. Under
s. 2 of the Finance Act of 1950 (Act 25 of 1950), subject to
the provisions of sub-ss. (3), ( 4) and ( 5) for the year beginning
on 1st day of April 1950, income-tax shall be charged at the
rates specified in Part I of the First Schedule; under s. 13 thereof,
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if immediately before the 1st day of April 1950, there was in
force in any Part B States, other than the
States
mentioned
therein, any Jaw relating to income-tax or super-tax or profits of
business etc., that law shall cease to have effect for the purposes
of assessment under the Indian Income-tax Act, 1922, for the
year ending March 31, 1951, or any subsequent year.
Under
s. 2(14A), "taxable territories" shall be deemed to include the
merged territories as respects any period after the 31st day of
March, 1949, for any of the purposes of the Act and as respects
any period .included in the previous year, for the purpose of
making any assessment for the year ending on the 31st day of
March, 1950, or for any subsequent year.
The effect of these
G provisions is that every individual was liable to income-tax from
April· I, 1950, at the rates mentioned in the Finance Act in respect of his total income of the previous year in the merged territories.
It is not, and it cannot be, disputed that on April 1,
1950, the assessee was not a ruling chief but an ordinary citizen
of Indian, residing, within the meaning of s. 4 of the Act, in that
H part of India which was a part of Hyderabad State and so he
would be liable to income-tax on April 1, 1950, in respect of the
(I) [1952] 2 All E.R. 64
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SUPREME COURT REPORTS
[1966] 2 S.C.R.
total income he received in the previous year in the merged terriA
tory. It cannot also be disputed that the said taxable total income
would be computed after giving the necessary allowances and
lieductions in the manner prescribed by Ch. III of the Act.
But
it is. said th.at as the assessee was exempted under International
Law from taxation of his income of the previous year, the Act
could not reach that income.
That conclusion, according to the
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learned counsel for the assessee, flows from the nature of the tax,
namely, that though the year of assessment is 1950-51, the charge
is not on the income of the year of assessment, but on the income
of the previous year.
Decided cases no doubt support the contention of the assessee that what is charged in the assessment year
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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 I 922 this principle was changed. Now under
the Act, tax is assessed in the assessment year on the income of
0
the previous year.
The Judicial Committee in
Maharaja
of
Pithapuram v. Commissioner of lncome-ta:r;, Madras(') 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, I 922, the subject of charge is not the
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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."
F
This Court iu
Commissioner of Income-tax,
Bombay City v.
Amarchand N. Shroff(") restated that principle with approval.
Even so, the income of the assessee during the accounting
year has to be computed only in the manner prescribed by the
Act. Deductions and exemptions from the total income can only
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be those that are provided under the Act.
This aspect of the
case has been brought out with clarity in The Union of bidia v.
Marian Gopal Kabra( 3 ). The facts in that case were: the res.
pondent resided and carried on business in the District of Jodhpur
in Rajasthan which was one of the States specified in Part B
of the First Schedule to the Constitution of India, 1950. The
(I} (194~) 13 I.T.R. 221, 223.
(2) (1963) 48 I.T.R. 59.
(3) (1954) 25 I.T.R. 58.
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C.I.T. v. MIR OSMAN (Subba Rao, J.)
307
Constitution came into force on January 26, 1950. The Indian
Finance Act, 1950, amended the Indian Income-tax Act, 1922,
in certain respects and made it applicable to the whole of India,
except the State of Jammu and Kashmir.
In May 1950, the
respondent was required to file a return of his income for the year
ending March 31, 1950. It was contended by the respondent
that the income which accrued or arose to him or was received
by him prior to April 1, 1950, was not liable to tax on the ground
that such income was not liable to be charged under the provisions of any law validity in force in Rajasthan. This Court held
that under sub-cl. (1) of cl. (b) of s. 2(14A) of the Income-tax
Act, Rajasthan was to be deemed to be a taxable territory for
the purpose of s. 4A as respects any period before or after March
31, 1950.
On that fiction, as the respondent was a resident in
such territories within the meaning of s. 4A, the income accruing
or arising to him in Rajasthan during the year 1949-50 would be
taxable.
This Court further pointed out that Parliament under
Arts. 245 and 246 of the Constitution, read with entry No. 82
of List 1 of the Seventh Schedule thereof, can make laws with
respect to taxes on income for the whole of the territory of India
with retrospective effect.
The effect of the said decision is that
though by reason of the Finance Act of 1950 the assessee was
assessable to income-tax only from April 1, 1950, his income of
the previous year was taxable even though the said income was
not liable tq tax before the Indian Income-tax Act was made
applicable to Rajasthan.
To that limited extent it had retrospective operation. If so, we do not see how a person, who was exempted from tax before the Act was extended under the State
law or under the International Law, would be in a better
'
position.
The legal position as we apprehend may be stated 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
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SUPREME
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[1966] 2 S.C.R.
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 depend 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 be a ruling chief and he
was, therefore, liable to assessment under the Act. If he was
assessable to tax, the statutory charge on his income during the
previous year was only traceable to the Act, which was retroactive in operation to that extent.
His right to exemption, if
any, under International Law during the accounting year was
irrelevant to the question of taxation under the Act, as the said
law ceased to apply to him during the assessment year.
We, therefore, hold that 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.
The second question reads :
"Whether, having regard to the provisions of Part
B States (Taxation Concessions)
Order, 1950, the
assessee's income during the year of account was totally
exempt from tax."
The High Court answered the question against the assessee.
The facts relevant to the question are as follows : The assessee
was assessed to income-tax in respect of his income arising in
Hyderabad in connection with the assessment years 1950-51 and
1951-52, having regard to the provisions of Part B States (Taxation Concession) Order, 1950. It was contended that the assessee
was immune from liability to tax under the law of income-tax of
Hyderabad and, therefore, the rate payable by him in terms of
the order would be nil; with the result that he would not be liable
to any tax:
The question turns upon the relevant provisions of
the said Order.
The said Order was issued by the Central Government in exercise of the power conferred on it under s. 60-A
of the Act.
Under that section, the Central Government has the
power, if it considers necessary or expedient so to do, to avoid
any hardship or anomaly, or removing any difficulty, that may
arise as a result of the extension of the Act to the merged territories, by general or special law to niake an exemption, reduction
in rate or other modification in respect of income-tax in favour
of any class of income, or in regard to the whole or any part of
the income of any person or class of persons. Pursuant to that
poweL the Central Government issued Part B States
(Taxation
Concession) Order, 1950, making exemptions, reductions in the
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C.I.T. v. MIR OSMAN (Subba Rao, !.)
309
A rate of tax and modifications specified in that Order.
At the
outset it may be noticed that under this Order no exemption was
given to an Ex-Ruler from 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),
B
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para 4 (iii), para 5 and para 6 of tbe Order shows that tbe
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 para 3 (iii) and
"State rate of tax" was defined in para 3(v). Under the Explanation to para 3 ( v), if there was no State Jaw 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 paras
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
D 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 tax under
the State Jaw.
On the basis of nil tax under the State Jaw, the
argument proceeded, by applying the principles of the said Order,
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no tax would be payable by the assessee., We cannot accept this
argument. The Order was only intended to provide a machinery
for scaling down the rates of tax in relation to the State rates.
If there was a State law prescribing rates, it would afford the
criterion for scaling down the Indian rate of tax; if there was no
State law prescribing the rate, the schedule of rates annexed to
F the Order would govern the taxation. If the assessee was not
liable to pay tax under the State law, his non-liability related only
to the do1nain 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 subvert the scheme of the Order
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to reach a desired result.
We, therefore, hold, agreeing with
tbe High Court, that the assessee was not entitled to any exemptions under the said Order.
We shall now take up the first part of the 4th question which
reads :
"Whether on the facts of the case the interest received by the Assessee in
respect of
3%
Nizam
Government Income-tax free loa-n, 1360-70 Fasli of the
face
value
of Rs.
1,45,200,
the 2t%
Nizam
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SUPREME COURT
REPORTS
[1966] 2 S.C.R.
Government
Income-tax free
development loan
/I.
1364-69 fasli of the face value of Rs. 1.05 crores, th~
2t% Nizam Government loan, 1363-73 fasli of the
face value of Rs. 200, and the 2t% Hyderabad Government loan, B 84 fasli of the face value of Rs. 8
crores was exempt from tax."
This question relates only to the assessment year 1951-52. The
securities were issued by the Hyderabad State free from incometax.
The High Court held that they were exempt from incometax under s. 8 of the Act.
Under s. 8 of the Act, tax shall
be payable by an assessee under the head "interest on securities"
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in respect of the interest receivable by him on any of the securities of the State Government.
But, under the third proviso
thereto, the income-tax payable on the interest receivable on the
securities of the State Government issued income-tax free shall be
payable by the State Government. It was argued for the Revenue
that the expression "securities of a State Government" in the
proviso does not include the securities issued by the Hyderabad D
State.
This contention was sought to be sustained on the basis
of the definition of "GovernmeAf securities" in s. 3(24) of the
General Clauses Act, 1897, which reads :
c
"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 Goverrunent 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 s. 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
s. 3 ( 24) of the General Clauses Act On the other hand, the
expression "State Government" is defined in cl. (60) of s. 3 of
the General Clauses Act and it reads :
" "State Government",-( a) as respects anything
done before the commencement of the Constitution,
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