Khanna, J. - (1.) The short question which arises for determination in these six civil appeals Nos. 1184 to 1186 and 1198 to 1200 of 1970 which have been filed on certificate by the Commissioner of Income-tax against the judgment of the Andhra Pradesh High Court is whether, on the facts of the case, the sum of Rs. 1,00,000/ received by the assessee from the Trustees of Princess Niloufer Trust constituted income under the Indian Income Tax Act 1922 (hereinafter referred to as the Act) and if so, whether the assessee was entitled to exemption from tax in respect of that income under the terms of the agreement entered into with the Government of India on October 8, 1949 The High Court to which the above question was referred under Section 66 (1) of the Act held that though the payments of Rs. 1,00000 per year was income in the hand of the assessee, he was entitled to exemption from tax thereon under the terms of agreement dated October 8, 1949.
(2.) The matter relates to the assessment of the income for the years 1952-53, 1953-54 and 1954-55 of Nizam Mir Osman Ali Khan Bahadur who was the Ruler of Hyderabad State prior to its integration with the Union of India. A large number of questions arose during the course of the assessment, but we are no longer concerned with them. Indeed, most of the questions were decided in the light of the decision of this Court in respect of the assessment of this very assessee for the previous years. The decision of this Court is reported in 59 ITR 666 .
(3.) We may now set out the facts giving rise to the question reproduced above. Prince Muazzam Jah Bahadur is the second son of the assessee. The prince was married to Princess Niloufer in Nice (France) on November 12, 1931 according to Muslim rites. On October 8, 1949 the assessee made a settlement of Rupees 30,00,000 by transferring that amount to a trust created on that day for the benefit of Princess Niloufer. The assessee, Sir Sultan Ahmed and Shavax Ardeshir Lal, a nominee of the Government of India, were the three trustees appointed under the Trust Deed. On the same day an agreement was entered into between the Government of India, the assessee, as the settlor of the trust, and the three trustees for the deposit of Rupees 30,00,000 with the Government of India. The amount deposited was to carry interest at the rate of 1 per cent per annum. Clauses 2, 3 and 4 of the agreement were as under: "2. The Government of India shall out of its revenue pay to the Trustees interest on the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) at the rate of one per cent per annum free of income-tax, super-tax and all other taxes, dues, duties and other assessments whatever from the date from which the said sum of Rupees 30,00,000 (Rupees Thirty Lacs) shall be deposited by the Trustees with the Government of India until the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) shall be wholly paid out by the Government of India in accordance with the provisions of these presents PROVIDED HOWEVER that if and when the Government of India shall pay to the Trustees any sum of money out of the corpus of the sum of Rs. 30,00,000 (Rupees thirty lace) in accordance with the provisions hereof interest shall cease to run on the sums so paid from the date on which the Government of India shall pay the same to the Trustees and thereupon interest shall run only upon the balance of the said sum of Rupees 30,00,000 (Rupees thirty lacs) for the time being remaining in the hands of the Government of India. 3. The Government of India shall out of the corpus of the said sum of Rs. 30,00,000 (Rupees thirty lacs) pay to the Trustees until the said corpus is exhausted such sum every year as together with the interest accrued due on the said sum of Rs. 30,00,000 (Rupees thirty lace) or on the balance thereof for the time being remaining with the Government of India will in all make up the sum of Rs. 1,00,000 (Rupees one lac) per annum, the first of such payments to be made on the 1st day of November 1949 and each of the subsequent payments to be made on the 1st day. of October of each and every year thereafter. 4. The Government of India hereby declares and agrees that the interest payable on the security of these presents shall be free from income-tax, super-tax and all other taxes, dues, duties and assessments and that accordingly the Government of India shall not at any time assess or levy on the Settlor or the Trustees or any of them or on any of the beneficiaries under the said Deed of trust any income-tax, super-tax or other taxes, dues, duties or assessments in respect of any income or corpus of the said sum of Rs. 30,00,000 (Rupees thirty lacs) so deposited or any part thereof shall not at any time be included in the income of the beneficiaries under the provisions of the Indian Income Tax Act or any other Act relating to taxation on the income, gains and profits of any person in India PROVIDED HOWEVER that if notwithstanding the provisions therein above contained any such tax, dues, duties, or assessments shall be charged or levied on either the Settlor or the Trustees or the beneficiaries under the said Deed of Trust or any of them in respect of any income or corpus of the said sum of Rupees 30,00,000 (Rupees Thirty lace) so deposited or any part thereof or if any part of such income or corpus be included in the total income of any of them for computing his or her total income for the purpose of assessment of his or her income, gains or profits by virtue of the provisions of the Indian Income Tax Act or of any other enactment of law for the time being in force in that behalf in India, then the Government of India shall forthwith refund, reimburse and pay to such person the amount of such tax, dues, duties or assessments charged or levied on him or her and/or the amount of additional tax, dues, duties or assessments which shall have been charged or levied on him or her by reason of any part of the said income or corpus being included in the total income of such person for the purpose of assessing his or her total income, gains or profits under the provisions of the Indian Income Tax Act or any other law or enactment for the time being in force in that behalf in India." According to the trust deed, the settlor, who was possessed of a sum of Rs. 30,00,000, out of love and affection for his daughter-in-law Princess Niloufer was desirous of making a settlement of the said amount and for that purpose he had transferred and handed over the amount to the trustees. The trust deed referred to the agreement which had been on that day entered into with the Government of India. The trustees were required to deposit the said sum of Rs. 30,00,000 forthwith with the Government of India in accordance with the agreement with the Government. The trustees were to hold the trust fund in accordance with the directions contained in the different subclauses of clause 2 of the trust deed. Sub-clause (a) required the deposit of the amount with the Government of India in accordance with the agreement entered into on that day with the Government. Sub-clause (b) of the trust deed was as under: "(b) To pay the net interest of the Trust Fund or the balance thereof for the time being as and when recovered from the Government of India to the said Princess free of Income-tax, Super-tax and all other taxes whatsoever, until her death or remarriage, whichever event shall happen first PROVIDED THAT in the event of the said Prince divorcing the said Princess it shall be open to the Trustees to pay the net interest of the Trust Fund or of the balance thereof for the time being to said Princess until her death or remarriage, whichever event shall take place first, if the Trustees are of the opinion that the divorce was not due to any act or default on the part of the said Princess AND THE decision of the Trustees in this respect shall be final and binding, on all persons claiming under this clause and shall not be questioned in any Court of Law or otherwise howsoever." Sub-clause (c) required the trustees to recover and receive from the Government of India and to pay Princess Niloufer out of the corpus of the trust fund as long as the same was available such sum every year as together with the net interest of trust fund would in all make up the sum of Rs. 1,00,000 per annum. The first payment was to be made on November 1, 1949 and each of the subsequent payments were to be made on the first day of October in each year. The payment was to be made to the Princess free of income-tax, super-tax and all other taxes. The Princess was entitled to that sum even in the event of the Prince divorcing, the said Princess, provided the divorce in the opinion of the trustees was not due to any act or default on her part. The amount was to be paid to the Princess until her death or remarriage whichever event was to occur first. In no case was the Princess to receive any sum in excess of Rs. 1,00,000 in a year. Sub-clause (d) required that on the death of the Princess, the corpus of the trust fund was to be transferred to her issues from Prince Muazzam Jah Bahadur in accordance with the Muslim law of succession. Sub-clause (e) read as under: "(e) Subject to the provisions of fate-clauses (a), (b), (c) and (d) hereof on and after the death of the said Princess to transfer and hand over the corpus of the Trust Fund or the balance thereof then remaining in the hands of the Trustees, as, the case may be, to Settlor, if he be then living, and in the event of the Settlor predeceasing the said Princess, to transfer and hand over the corpus of the said Fund or the balance thereof then remaining in the hands of Trustees as the case may be to the Nizam of Hyderabad living at that time.";