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
I N A Palkhivala Anwarula Pasha J B DadachanjiO C 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 section 661 of the Indian Income tax Act 1922 hereinafter called the Act in respect of assessments made on HEH 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 two appeals before the Appellate Assistant Commissioner Hyderabad who by his orders gave some relief in respect of the said 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
On July 4 1961 the High Court answered some of the questions in favour of the assesses and others against him
The Commis 299 sioner of Income tax filed two appeals to this Court being Civil Appeals Nos 46 and 47 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 case and having regard to International Law and construction of Municipal Laws andor 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 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
 These two questions raise the following points  1 Whether under International Law the assessee is immune from taxation in respect of the assessment year 1950 51 and 2 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 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 application to 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 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 under the Covenant entered into by him with the Government of India at the time of merger
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 300 titled to all the personal privileges dignities and titles enjoyed 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 laws 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 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 Deo vs The State of Orissa1 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 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
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 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 Palkhiwala 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 195152 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 during the accounting year and that as during the accounting year 1  30 1 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 to have force thereafter by reason of article 372
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 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 article 372 of the Constitution
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 Laws of England 3rd Edn Vol 20 p 589 Oppenheim s International Law 8th Edn Vol 1 D 759
But even in England the House of Lords in Sultan of Johore vs Abubakar Tunku Bendahar1 observed  Their Lordships do not consider that there has been finally established in England    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 46 at p 239 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  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 1 343 302 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
 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 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 HEH 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 HEH the Nizam had never acquired international per sonality
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 According to Oppenheim all the said qualities constitute as a body the international personality of a State
Unless the State of Hyderabad had the said qualities its ruler could not claim any of the immunities sanctioned by International Law
A brief his 3 0 3 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 Com pany the administration of the entire territory of India
Thereafter while the British India was under the direct rule of the Crown 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 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 a 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 1 b of the Indian Independence Act of 1 947 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 up CI65 6 304 that date in or in relation to Indian States by treaty 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 until 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 in regard to Hyderabad and other States the preexisting agree ments with those States continued in respect of specified matters
The lapse of suzerainty or the breaking of ties with the British Crown did not ipso facto raise their status to that of international 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 nations
But after protracted negotiations the Nizam issued a proclamation on November 23 1949 accepting the Constitution 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 NS 6 p 369 and Basu s Commentary on the Constitution of India 4th Edn 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 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 relations whatever either between themselves or with foreign States
In Hall s International Law 8th Edn 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 vs Ameer Ruler Sadiz 30 5 Mohammad Abbasi Bahawalpur State1 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 ie 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 and subject to the provisions of the Act in respect of the total income of the previous year of every individual etc
Under section 2 of the Finance Act of 1950 Act 25 of 1950 subject to the provisions of sub sections
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 1 of the First Schedule under section 13 thereof
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 law 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 section 214A 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 provisions is that every individual was liable to income tax from April 1 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 section 4 of the Act in that 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 1 306 total income he received in the previous year in the merged territory
It cannot also be disputed that the said taxable total income would be computed after giving the necessary allowances and deductions in the manner Drescribed by Ch
III of the Act
But it is said that 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 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 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 Maharaja of Pithapuram vs Commissioner of Income tax Madras1 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 Bombay City vs A marchand N Shroff 2 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 be those that are provided under the Act
This aspect of the case has been brought out with clarity in The Union of India vs Madan Gopal Kabra3
The facts in that case were  the respondent 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 1  223
3 2 307 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 section 214A of the Income tax Act Rajasthan was to be deemed to be a taxable territory for the purpose of section 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 section 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 articles 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 to 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 308 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 preexisting 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 hold ing 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 section 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 make 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 power the Central Government issued Part B States Taxation Concession Order 1950 making exemptions reductions in the 309 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 Para 4iii Para 5 and Para 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 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 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 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 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 law
On the basis of nil tax under the State law the argument proceeded by applying the principles of the said Order 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 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 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 subvert the scheme of the Order to reach a desired result
We therefore hold agreeing with the 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 loan 1360 70 Fasli of the face value of Rs 145200 the 2 12 Nizam Government Income tax free development loan 1364 69 fasli of the face value of Rs 105 crores the 21 Nizam Government loan 1363 73 fasli of the face value of Rs 200 and the 21 Hyderabad Government loan 1384 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 income tax
The High Court held that they were exempt from income tax under section 8 of the Act
Under section 8 of the Act tax shall be payable by an assessee under the head interest on securities 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 State
This contention was sought to be sustained on the basis of the definition of Government securities in section 324 of the  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 to find out how that expression is defined in the 
The 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 
On the other hand the expression State Government is defined in cl
60 of section 3 of the and it reads   State Government a as respects anything done before the commencement of the Constitution 311 shall mean in a Part A State the Provincial Government of the corresponding Province in a Part B State the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State and in a Part C State the Central Government
 Clause 58 of section 3 of the defines State to mean as respects any period before the commencement of the Constitution Seventh Amendment Act 1956 a Part A State a Part B State or a Part C State
With the aid of the said definitions it will be clear that the expression State Government used in the proviso to section 8 of the Act takes in the Government of the Hyderabad State
If so in terms of that 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
Therefore there are no merits in the contention and the High Court rightly rejected it
In regard to the same securities the assessee claimed exemp tion from payment of income tax and super tax under item 8 of the Notification dated March 21 1922 issued by the Finance Department of the Government of India
It reads  The interest on Government securities held by or on behalf of Ruling Chiefs and Princes of India as their private property This exemption applies both for income tax and super tax
If the assessee was entitled to this exemption he would get a larger relief than he would under the third proviso to section 8 of the Act
The said securities were held by the assessee as his private property and therefore he was clearly entitled to this exemption
We therefore holdagreeing with the High Court that the assessee was entitled to the exemption under the said item in respect of the said securities
Then we come to questions 4ii and 4iii
They read Question 4ii Whether on the facts of the case 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 Family Trust was exempt from payment of tax in his hands Question 4iii Whether the interest in respect of securities of the Government of India or of the 312 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 HEH Nizam s Family Trust and the other dated August 6 1950 known as HEH Nizam s Miscellaneous Trust 
Under cl 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 cls
a to j of cl 2 of the said deed the trustees should pay the balance of the interest and income of the trust fund to the assessee for and during the term of his natural life
At this stage it is not necessary to notice the other recitals in the deeds
We shall have to consider the recitals in the said two deeds in greater detail at a later stage
The assessee claimed exemption in regard to the said interest on the ground that he was exempted under the third proviso to section 8 of the Act and under item No 8 of the notification issued by the Finance Department of Government of India on March 21 1922
The High Court held that after the execution of the trust deed the assessee was divested of his ownership of the securities and the trustees became their owners
On that basis it further held that though the income was interest on securities in the hands of the trustees it was in the hands of the assessee only the income which he got from the trustees
Briefly stated the High Court held that the character of the income namely interest on securities had changed when it reached the hands of the assessee
The question falls to be decided on a construction of section 41 of the Act
The relevant part of section 41 reads  1 In the case of income profits or gains chargeable under this Act which trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise are entitled to receive on behalf of any person the tax shall be levied upon and recoverable from such trustee or trustees in the like 313 manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income profits or gains are receivable and all the provisions of this Act shall apply accordingly 2 Nothing contained
in sub section 1 shalt prevent either the direct assessment of the person on whose behalf income profits or gains therein referred to are receivable or the recovery from such person of the tax payable in respect of such income profits or gains
 Under this section the Revenue has the option to levy or collect tax from the trustee or the beneficiary the tax can be levied upon and recoverable from the trustee in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income profits or gains are receivable
In short 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 Ch
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 Ahmedabad vs Balwantrai Jethalal Vaidya1
If that be the scope of the assessment under section 41 of the Act we find it difficult to appreciate the contention that the interest on securities in the hands of the trustee becomes an income other than such interest in the hands of the beneficiary
The interest retains its character whether the assessment is made on the trustee or the beneficiary
We cannot therefore accept the construction put upon section 41 of the Act by the High Court
This legal position only gives the assessee relief in regard  to income tax payable on the interest from securities but the third 1 314 proviso to section 8 of the Act  does not transfer the liability of the assessee to pay super tax to the State Government
The exemption from super tax was claimed under item 8 of the notification issued under section 60 of the Act
We have extracted that item earlier in another context
The interest mentioned in this item is exempt from both income tax and super tax
The short question therefore is whether the interest payable to the assessee was in respect of Government securities held by or on behalf of the assessee as his private property
The answer to this question depends upon the provisions of the said two trusts namely the Family Trust and the Miscellaneous Trust
The Family Trust was executed by the assessee on May 10 1950 in respect of the Government securities of aggregate face value of Rs 9 chores which were his private properties
Under the deed of trust the trustees were appointed and the securities were handed over to them
The trustees so appointed were to collect and recover the interest and other income from the securities and were after meeting the overhead charges to pay the residue of the income of the trust fund to the assessee absolutely for and during the term of his natural life
After the death of the assessee the trustees should divide the trust fund and allot it to the innumerable relatives and others mentioned in the trust deed
The trust deed also gave various other directions to the trustees
In short
under the said trust deed the title to the securities was transferred to the trustees and they were under an obligation to pay the interest or to give the corpus in the manner prescribed thereunder during the life time of the assessee or thereafter
Under the trust deed the securities were not held by the trustees on behalf of the assessee as his private property  they were held by the trustees for carrying out the trust in terms of the trust deed
After the execution of 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 life time 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 Govern ment of India Loans
Under this trust deed trustees were appointed and the said amounts were transferred to them
Under the document the trustees wereunder 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 315 complicated provisions of this document
It would be enough to state that under this trust deed also the amounts representing them 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 mentioned therein and in the manner prescribed thereunder
The Government loans therefore ceased to be the private property of the assessee and after the execution of the trust deed they were held by the trustees not on behalf of the assessee as his private property but for the purpose of discharging the obligations imposed on them under the deed
We therefore hold that the income from the said two trusts did not earn the exemption under item 8 of the said notification
The result of our view is that in regard to the interest receivable by the assessee from the said securities and loans he was not liable to pay income tax but he was not exempt from payment of super tax under item 8 of the said notification
The next question as recast by the High Court reads Question 4 iv Whether on the facts of the case the interest at Rs 197180 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
 It was argued that the income sought to be taxed accrued in Hyderabad because the securities were effaced to be payable in Hyderabad and therefore chargeable only at the rate obtaining under the Hyderabad Income tax Act
The High Court negatived the contention
It held that the said interest accrued only in British India
Though the assessee raised the question of the correctness of the view expressed by the High Court in the special leave petition at the time of arguments the learned counsel for the assessee did not press this point Therefore the opinion expressed by the High Court in this regard stands
We should not be understood to have expressed our view one way or other
In the result we answer the questions as follows Question 1 in the affirmative
Question 2 in the negative
Question 3 in the negative
Question 4i  in the affirmative 316 lm15
Question 4ii  the assessee was exempt from payment of income tax but he was not exempt from payment of super tax
Question 4iii  the assessee was exempt from payment of income tax
but he was not exempt from payment of super tax
Question 4iv  in the negative
The aforesaid answers given by us to the 4 questions referred to the High Court by the Income tax Appellate Tribunal will be substituted in the place of those given by the High Court
We modify the order of the High Court accordingly in all the appeals
As the parties failed in part and succeeded in part they will bear their own costs here and in the High Court
Appeals allowed in part


Summary:
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 section 661 of the Income tax Act 1922  i Whether having regard to the Covenant dated 25th January 1950 entered into by the assessee with the Government of India at the time of merger of the State of Hyderabad with the Dominion of India the assessee was not liable to tax under the Income tax Act ii whether under International law the assessee was immune from taxation in respect of the assessment ear 1950 51 iii Whether having regard to the provisions of Part B States Taxation Concession order 1950 the assessee s 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 trusts the Family Trust and the Miscel laneous Trust arising from Government securities settled by the assesses on the trusts was exempt from payment of tax
The High Court answered 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 the merger agreement were only personal privileges of the assessee as an Ex Ruler and those privileges did not justify his claim to immunity from taxation
300 D Sri Sudhansu Shekhar Singh Deo vs State of Orissa   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 negotiations 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 B Further the assessee s right to exemption if any under International Law during the accounting year was irrelevant to the question of taxation under the Act
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
If during the assessment yew an individual is assessable to tax the fact that during the previous year 2 97 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
Thereafter the charge as well as the manner of computation of income did not depend upon the preexisting 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 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
307 F H 308 A C iii The assessee was not entitled to any exemptions under the Part B State Taxation Concessions Order 1950
309 G 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 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 section 8 proviso 3 of the Income tax Act as well as under item 8 of the Notification dated 21st March 1922
309 H 311 F In the case of the income from securities section 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 and no tax on interest on such securities was payable by the assessee
The proviso does not use the ex pression Government securities but only mentions securities of a State Government
Under cls
58 and 60 of section 3 of the  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 B D F v In regard to the interest receivable by the assessee from the securities and loans of the two trusts he was not liable to pay income tax but he was not exempt from payment of super tax under item 8 of the Notification dated 21st March 1922
313 H The question had to be decided on a construction of section 41 of the Act
But it is only after ascertaining the income and after giving exemptions that section 41 of the Act comes into play and the income tax authority ha 
the option under section 41 to assess the beneficiary directly or in respect of the same income the trustee on behalf of the beneficiary
Under section 8 proviso 3 the assessee would not be liable to pay income tax on the interest from the income tax free securities
Since the interest on securities in the hands of the trustees does not become an income 298 other than such interest in the hands of the beneficiary it retains its character as such interest whether the assess 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 respect 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 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 D