- (1.) These two Appeals are by Special Leave against the Judgment of the Punjab and Haryana High Court answering the Reference under Section 66 (1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act') against the assessee the Appellant. The Appellant who was admittedly a Ruler of the erstwhile Faridkot State challenged the assessments made against him for the years 1946-47 and 1947-48 with respect to which the accounting years were Vikram year 2002 and 2003 corresponding to the period 13th April 1945 to 12th April 1946, and 13th April 1946 to 12th April 1947 respectively. The assessment in each of these years was made under Section 34 read with Section 23 of the Act, as the assessee's income from dividends and interest and capital gains earned by the assessee during the relevant accounting year in what was then British India had not been brought to tax. The assessee objected to these proceedings and contended before the Income-tax Officer that he being a Ruler of the Faridkot State was immune from taxation on every source of income. He could not therefore, by virtue of his sovereignty be treated as an assessee for any purpose under the Act. It was also contended that the notices under Section 34 were time barred. The Income-tax Officer however, rejected those objections and held that though under the International Law the Rulers of Indian States were sovereigns and immune from Municipal Laws of other countries, there was no exemption as far as the personal incomes of the Rulers are concerned from being taxed under the Act. In that view he held that notices under Section 34 were valid and accordingly made an assessment. The Appeal to the Appellate Assistant Commissioner was without success, though similar contentions were raised before him with particular reference to the privileges which the Rulers enjoyed under International Law both in respect of civil and criminal matters. The assessee appealed against this order to the Income-tax Appellate Tribunal where, however, there was a divergence of view between the two Members and therefore the matter was referred to the President of the Tribunal. After considering the decisions in regard to the exemption of the sovereign from all Civil and Criminal Laws of another State, the Judicial Member held that no assessment could be made on the assessee under the Act as he was the Ruler of a sovereign State during the assessment years under consideration. In this view he did not express any opinion on the question of the legality of the proceedings under Section 34 of the Act. The Accountant Member however, after considering the various provisions in the Act whereby exemption was granted to the Rulers in regard to certain types of income and the various decisions held that the assessee was liable to assessment in respect of his personal income arising or accruing to him from British India from his private properties. He also held that the proceedings under Section 34 of the Act were perfectly legal and valid. In view of the difference of opinion, the matter was referred to the President of the Tribunal under Section 5A (7) of the Act on the following question: "Whether on the facts and in the circumstances of the case the assessee was immune from tax under the Indian Income-tax Act on his private income viz., dividends and interest income as also the Capital Gains earned in British India". The President of the Tribunal held in favour of the assessee by relying on a decision of the Andhra Pradesh High Court in the case of Mr. Osman Ali Khan Bahadur v. Commr. of Income Tax, Case Refd. No. 35 of 1959 (Andh. Pra.) where it was stated thus: "Indisputably, a sovereign ruler enjoys immunity from taxation under International Law and it is only in cases where this rule is superseded by express words that this should be denied to him. If a legislature wants to depart from these principles and bring such ruler to tax, there must be clear indication in the enactment itself. In the absence of such express words, the statute must be interpret in conformity with International Law. Simply because the Municipal Law did not provide for such an exemption, the principles of International Law should not be regarded as having been superseded". In the aforesaid view the Andhra Pradesh High Court had held that notwithstanding the fact that His Exalted Highness the Nizam had lost the character of a sovereign ruler after 25-10-1950, he is still immune from taxation in respect of the Income derived by him prior to that date.
(2.) Following this decision the President held that the assessee was immune from taxation under the Act on his private income. In view of this decision on an application by the Revenue under Section 66 (1) of the Act the following question was referred to the High Court:- "Whether on the facts and circumstances of the case, the assessee was not liable to tax under the Indian Income-tax Act, 1922, in respect of his personal income accruing or arising to him in British India in the two assessment years 1946-47 and 1947-48".
(3.) The High Court relying upon the decision of this Court in Commissioner of Income-tax, Andhra Pradesh v. H.E.H. Mir Osman Ali Bahadur, 59 ITR 666 = (AIR 1966 SC 1260), which reversed the decision of the Andhra Pradesh High Court referred to and relied upon by the President of the Tribunal held against the assessee. It is contended before us that the facts and circumstances in the Nizam's case are totally different and the decision of this Court is clearly distinguishable. The learned Advocate contends that in that case the assessments related to the assessment years 1950-51 and 1951-52, the corresponding accounting year for which was the period between 1st April 1949 and 31st March 1950, and 1st April 1950 and 31st March 1951 respectively, which years being after the inauguration of the Constitution on 26th January 1950, clearly make the Act which was made applicable from 1st April 1950 to all the Part B States, applicable to the assessee. But, it is submitted that in the case before us there could be no question of Act being made applicable to Faridkot State as the assessment years and the accounting years are prior to the inauguration of the Constitution and the application of the Act. The learned Advocate cited a large number of decisions in support of his contention that the Native States in India had International personality and their Rulers had immunity similar to those that were accorded to any other Head of a State under International Law. It was also argued that though these princely States in India may have been 'protected States'; it was not necessary for the recognition of the privileges and immunities of the Rulers of such States to possess all the attributes of sovereignty and complete independence in support of which the decisions of Mighell v. Sultan of Jahora, 1894-1 QB 149, Duff Development Co. Ltd. v. Govt. of Kelantan, 1924 AC 797, Statham v. Statham and Gaekwar of Baroda, 1912 PD 92, were referred to. It was therefore contended that in this Country also the position was the same as that recognised by the Common Law of England for which proposition, decisions were referred to from Punjab Recorder onwards. A reference was also made to several cases pertaining more specifically to the immunity enjoyed by the Rulers from payment of Income-tax on the basis of their status under International Law. These are: The Patiala State Bank v. Commissioner of Income-tax, Bombay, 11 ITR 617 = (AIR 1943 PC 181); Rani Amrit Kunwar v. Commissioner of Income-tax C.P. and U. P., 14 ITR 561 = (AIR 1946 All 306) (FB); The Accountant General, Baroda State v. Commr. of Income-tax, Bombay City, 16 ITR 78 = (AIR 1948 Bom 409); A. H. Wadia v. Commr. of Income-tax, Bombay, 17 ITR 63 = (AIR 1949 FC 18) and Bikram Kishore v. Province of Assam, (1949) 17 ITR 220 (Cal).;