S.K. Mal Lodha, J. - (1.) AT the instance of the assessee the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur ("the Tribunal" herein), has referred the following question of law arising out of its order dated July 21, 1978: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the rental income of part of Udaivilas Palace of the appellant, claimed as exempt under Clause (19A) of Section 10 of the Income-tax Act, 1961, is taxable under the Income-tax Act, 1961 ?"
(2.) THE assessee is an individual. THE assessment year involved is 1975-76. THE previous year relevant to the assessment year 1975-76 ended on September 30, 1974. THE return for the previous year in question was filed on August 16, 1975, declaring a total income of Rs. 17,328. During the assessment proceedings, it was noticed by the Income-tax Officer that the assessee has rented out quarters, garage and godowns on rent at the rate of Rs. 9,322 per annum. THE assessee disclosed this income. In view of Section 10(19A) of the. Income-tax Act, 1961 (No. XLIII of 1961) (for short "the Act"), the annual value of any one palace of the Ruler was exempt. THE Income-tax Officer, vide order (annexure A) dated October 31, 1977, did not accept the contention of the assessee holding that in the previous year in question, the entire palace was not occupied by the assessee and, as such, the value of that portion of the palace, which was not inoccupation of the Ruler, was not exempt. He, therefore, made an addition of Rs. 9,322. An appeal was filed by the assessee. Before the Appellate Assistant Commissioner a contention was raised on behalf of the assessee that under Section 10(19A) of the Act, even if some portion of the palace was let out, there was blanket exemption under the aforesaid provision and, therefore, no part of the annual value could be taxed. It was submitted that the addition of the rental value made by the Income-tax Officer was not justified. The Appellate Assistant Commissioner concurred with the finding of the Income-tax Officer in his order dated April 6, 1978. A further appeal was taken to the Tribunal by the assessee. The appeal was dismissed on July 21, 1978. It will be useful to excerpt the following from the order of the Tribunal: "In my opinion, the contention of the assessee could hardly be accepted. It is not correct to say that even when the quarters, godowns and garage were let out to tenants, the assessee could be deemed to be in possession of the said portion. The said portions were let out to tenants. The tenants have acquired a legal right to remain in possession of the portions which were let out to them. They have right to remain in possession so long they were not evicted in due course of law. So, the tenants were in occupation of the quarters, godowns and garage in the previous year relevant to the assessment year under consideration. It may be stated here that Clause (19A) was inserted by the Rulers of Indian States (Abolition of Privileges) Act, 1972, with effect from December 28, 1971. So, at the relevant time, the portion of the palace was not in the occupation of the Ruler and, as such, the annual value of the palace, which is not in occupation of the assessee, could not be exempt from tax in view of Section 10(19A) of the Income-tax Act, 1961. Thus, in my opinion, the finding of the learned Appellate Assistant Commissioner is quite correct and no interference is called for." An application under Section 256(1) of the Act was filed by the asses-see and the Tribunal has referred the aforesaid question for our opinion. Having heard the learned counsel for the assessee and the learned counsel for the Revenue, we have reached the conclusion that the order dated July 21, 1978, of the Tribunal rendered in the appeal is correct. The entire palace of the assessee consisted of a main building, garage, quarters, godowns, etc. The assessee has let out the garage, godowns and quarters on rent at the rate of Rs. 9,322 per annum. The Income-tax Officer added the aforesaid amount in respect ofthe aforesaid assessment year 1975-76 in the total income of the assessee and that addition has been maintained by the Tribunal. The question that is before us is undoubtedly of vital importance, viz., whether the exemption permissible under Section 10(19A) of the Act will extend to the annual value of the entire palace of the assessee, although part of it, i.e., garage, godowns, quarters, etc., were rented out by him.
(3.) IT will be relevant to refer to Section 7 of the Rulers of Indian States (Abolition of Privileges) Act, 1972. (Act No. 54 of 1972) (for short "the Act of 1972"), by which certain amendments were made in the Act. According to Section 7 of the Act of 1972, before Clause (20) in Section 10, Clause (19A), which is as under, was inserted and deemed to have been inserted with effect from December 28, 1971 : "(19A) the annual value of any one palace in the occupation of a Ruler, being a palace, the annual value whereof was exempt from income-tax before the commencement of the Constitution (Twenty-sixth Amendment) Act, 1971, by virtue of the provisions of the Merged States (Taxation Concessions) Order, 1949, or the Part B States (Taxation Concessions) Order, 1950, or, as the case may be, the Jammu and Kashmir (Taxation Concessions) Order, 1958 : Provided that for the assessment year commencing on the 1st day of April, 1972, the annual value of every such palace in the occupation of such Ruler during the relevant previous year shall be exempt from income-tax." Section 10 deals with the income not included in the total income. It lays down that in computing the total income of a previous year of any person, any income falling within any of the clauses mentioned in Section 10 shall not be included. Clause (19A) finds mention in Section 10. It was urged by the learned counsel for the assessee that the annual value of the whole palace, despite that some portion of it has been rented out, will be exempt from payment of income-tax under Section 10(19A) of the Act, as in computing the income of the assessee the rents realised by the assessee from the tenants of the palace, rented out, cannot be included. On the other hand, learned counsel for the Revenue pressed for our consideration that the annual value of the palace, which is in the occupation of the assessee, will not be included in computing the total income of the assessee, i.e., if any rents are realised from the portion of the palace by the assessee, it is not exempt for the purpose of payment of income-tax and in computing the total income of the assessee, amounts of rent so realised will be included. The expression used in Section 10(19A) is "annual value of any one palace in the occupation". The term "annual value" has been defined in Section 2(2) of the Act as under : "'annual value' in relation to any property means its annual value as determined under Section 23." ;