Hon'ble Judges/Coram:
G.L. Oza, C.J. and B.M. Lal

JUDGMENT

G.L. Oza, C.J.

1. This is a reference made by the Income Tax Appellate Tribunal at the instance of the Revenue for answering the following question :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the entire income from the palace of the assessee, who is the former Ruler of Bastar, is exempt from Income Tax ?"

2. The facts stated by the Tribunal in the statement of the case are that this assessment pertains to an ex-Ruler of Bastar, a State which merged in the province of Central Provinces and Berar under the States Merger (Governor's Provinces) Order, 1949, and, according to Notification No. SRO 1620, dated May 14, 1954, in pursuance of para. 13 of the above Order of 1979 at item 39, the palace at Jagdalpur of the Ruler of Bastar had been declared as the official residence of the Ruler. It is stated that in the return of income, the income from house property was originally shown as Rs. 50,055 and Rs. 57,088 which was subsequently revised to Rs. 13,473 and Rs. 14,135 for the assessment years 1975-76 and 1976-77, respectively. In the course of the assessment proceedings, it was claimed that the palace at Jagdalpur is recognised as official residence and as such its rental value is exempted under the Act. The ITO negatived the claim on the ground that the entire palace at Jagdalpur is rented out leaving a small portion used for residence and that only the annual letting value of the residential portion in occupation of the assessee is exempt. The income from property has been assessed at Rs. 47,060 and Rs. 47,630 for the assessment years 1975-76 and 1976-77. The assessee preferred an appeal before the AAC, who confirmed the ITO's findings, holding that the income from property has been correctly computed. On further appeal before the Tribunal, the Tribunal took the view that the entire income from the palace of the assessee who is the former Ruler of Bastar is exempt from tax. The Tribunal took the view that if the palace is in occupation of the assessee and which is the official residence of the ex-Ruler, then it is exempt from tax as, according to the Tribunal, the law does not provide that if a portion only is occupied by the Ruler and the remaining is let out, the portion which is let out should be computed for purposes of Income Tax. Dissatisfied with the order of the Tribunal, the Commissioner submitted an application for making a reference and the Tribunal has made this reference.

3. It is not disputed that under the Merged States (Taxation Concessions) Order, 1949, this palace was declared to be an official residence and was exempt from tax. In this reference, we are concerned with the language of Section 10(19A) of the Income Tax Act, as amended by the Rulers of Indian States (Abolition of Privileges) Act, 1972. Section 10(19A) reads :

"(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 1, 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."

4. The significant words in this provision are "one palace in the occupation of a Ruler" and further that it should be a palace which under the Merged States (Taxation Concessions) Order, 1949, was declared to be an official residence. So far as the second test is concerned, this palac........