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Mohd Ali Khan And Others v. Commissioner Of Wealth-Tax, New Delhi.
Factual and Procedural Background
This reference arises from the wealth-tax assessment for the assessment year 1961-62 of the former Ruler of Rampur (on the valuation date Nawab Sir Syed Raza Ali Khan was the Ruler; he later died and is represented by his legal heirs). The dispute concerns the Khas Bagh Palace at Rampur, which comprised a number of buildings. Some buildings were actually occupied by the Ruler while a number of other buildings (fourteen buildings are specifically noted in the Tribunal's order) were let out to various officers, departments and other tenants.
The assessee claimed exemption under section 5(1)(iii) of the Wealth-tax Act, 1957, for the entire Khas Bagh Palace on the basis that the palace was the officially notified residence of the Ruler. The wealth-tax officer (WTO) allowed exemption only for those portions actually in the occupation of the Ruler and estimated the market value of the let-out buildings at Rs. 3,55,000 (based on rental income), including that value in the assessee's taxable wealth. The WTO's conclusion was affirmed by the AAC and by the Appellate Tribunal. The matter was referred to the court on the question whether the Appellate Tribunal was justified in holding that the let-out buildings were not in the occupation of the assessee within the meaning of section 5(1)(iii) and were therefore includible in net wealth.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the buildings of the Khas Bagh Palace which were let out to different persons from whom rental income was received by the assessee were not in the occupation of the assessee within the meaning of Section 5(1)(iii) of the Wealth-tax Act, 1957, and hence whether the value thereof was includible in the net wealth of the assessee.
Arguments of the Parties
Assessee's (Applicant's) Arguments
- The entire Khas Bagh Palace should be treated as "one building" for the purposes of the Wealth-tax Act.
- Once the palace is treated as one building and it is conceded that it is substantially in the occupation of the Ruler, the exemption under s. 5(1)(iii) should extend to the whole palace; the exemption should not be denied simply because a small or insignificant portion is not occupied but let out on rent.
- The statute should be construed strictly in favour of the taxpayer and exemptions should be given full effect and not whittled down; reliance was placed on principles of strict construction of taxing statutes and on earlier authorities (cited in the opinion) to support not dissecting a building for the purposes of exemption.
- Specific authorities cited in support included CIT v. K.E. Sundaya Mudaliar; Rajendra Narayan Blianja Deo v. CIT; Raju v. CIT; and Agha Jajar Alt Khan v. Radha Kishen (the latter under the Rent Control Act).
Revenue / Lower Authorities' Position (as reflected in the record)
- The WTO, confirmed by the AAC and the Tribunal, held that where parts of the palace were let out and not in the occupation of the Ruler, those parts did not satisfy the occupation requirement of s. 5(1)(iii) and their market value should be included in the assessee's taxable wealth.
- The Tribunal treated the palace as one building for the purpose of the provision but held that exemption applies only to the extent the building (or parts thereof) is in the occupation of the Ruler; let-out portions are not in occupation and are therefore not exempt.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. K.E. Sundaya Mudaliar, [1950] 18 ITR 259 (Mad) | Cited for the general principle of strict construction of taxing statutes and that statutory exemptions should be given full effect and not be unduly narrowed. | The Court noted the principle but held that it did not assist the applicant because s. 5(1)(iii) specifically conditions exemption on occupation by the Ruler; thus the principle could not override the occupation requirement in the statute. |
| Rajendra Narayan Blianja Deo v. CIT, [1929] 4 ITC 15 (Pat) [FB] | Cited as authority under s. 2(1)(c) of the Indian Income-tax Act, 1922, where emphasis was on the nature of the building rather than the extent to which it was used for a particular purpose. | The Court explained that decisions under s. 2(1)(c) (and cases stressing the nature of the building) were not relevant here because s. 5(1)(iii) links exemption to occupation by the Ruler rather than solely to the nature of the building. |
| Raju v. CIT, [1967] 66 ITR 122 (AP) | Also cited as a decision under s. 2(1)(c) of the Indian IT Act, 1922, emphasizing analysis of the building's nature rather than partial use. | The Court held this principle inapplicable to the present provision, which requires occupation by the Ruler; therefore the “nature-of-building” approach does not determine entitlement to exemption under s. 5(1)(iii). |
| Agha Jajar Alt Khan v. Radha Kishen, AIR 1951 Punj 433 | Cited as a decision under the Rent Control Act addressing how to view the character or nature of a building in relation to statutory provisions. | The Court observed that Rent Control Act reasoning about the nature of a building did not assist interpretation of s. 5(1)(iii), which explicitly conditions exemption on occupation by the Ruler; accordingly the authority was not helpful to the applicant. |
Court's Reasoning and Analysis
The Court framed the dispute narrowly as a question of interpretation of s. 5(1)(iii) of the Wealth-tax Act, 1957. It observed that the Central Government notification under paragraph 13 of the Merged States (Taxation Concessions) Order, 1949, declared the Khas Bagh Palace as the Ruler's official residence. The Court analyzed the language of s. 5(1)(iii) and identified two conditions for exemption:
- The building must be notified as the Ruler's official residence under the relevant concession order (this condition was satisfied).
- The building must be in the occupation of the Ruler (the pivotal condition in dispute).
The Court accepted the Tribunal's reasoning that the phrase "any one building" in s. 5(1)(iii) was intended to limit exemption to one palace (so that, where a ruler had multiple notified residences, only one palace would be covered). The Tribunal was therefore correct to treat the entire Khas Bagh Palace as "one building" for the provision's purposes.
However, the Court emphasized that treating the palace as a single building does not eliminate the separate occupation requirement. If parts of that building (i.e., certain constituent buildings of the palace) are let out and are not in the occupation of the Ruler, those parts do not satisfy the occupation condition and cannot be exempted under s. 5(1)(iii). The Court rejected an extreme position that would deny any exemption if any portion of the palace were not occupied; equally, it accepted the Tribunal's moderate and liberal construction: exemption should apply to that part of the palace actually in the occupation of the Ruler and not to parts let out to outsiders.
The Court considered the precedents relied on by the applicant and explained why they were inapplicable. Decisions under s. 2(1)(c) of the 1922 I.T. Act and under the Rent Control Act focused on the nature of a building and held that once a building was of a particular nature it should not be dissected by extent of use. By contrast, s. 5(1)(iii) explicitly correlates exemption to occupation; therefore the "nature-of-building" approach and the "substantial occupation" argument were not relevant. The Court also noted there was no material before it to determine whether the let-out buildings constituted a substantial portion of the palace, but considered that such an inquiry would be irrelevant to the statutory occupation requirement.
On balance the Court found that the Tribunal's approach—construing the provision liberally to benefit the assessee but limiting exemption to those portions actually in occupation by the Ruler—was consistent with the purpose, language and intendment of the statute and did not reflect error or inequity.
Holding and Implications
The question was answered in the affirmative and in favour of the Revenue: the Tribunal was justified in holding that buildings of the Khas Bagh Palace which were let out and not in the occupation of the Ruler were not exempt under s. 5(1)(iii) and their value was includible in the assessee's net wealth.
Implications:
- Direct effect on the parties: Exemption under s. 5(1)(iii) applies only to that part of a notified official residence which is actually in the occupation of the Ruler; parts of a notified palace let out to third parties are not exempt and their value is taxable as part of net wealth.
- The Tribunal's solution—treat the palace as one building for the purpose of the provision but apply the occupation requirement so that only occupied portions are exempt—was upheld as a permissible, liberal construction consistent with the statute's objects.
- The opinion does not announce or rely upon a broader, novel principle beyond interpreting s. 5(1)(iii); no new expansive precedent was established beyond the application of the statute to the facts of this case.
- Costs: the Court directed that the parties should bear their own costs.
Ranganathan, J.:— This reference arises out of the wealth-tax assessment of the former Ruler of Rampur. The proceedings relate to the assessment year 1961-62. On the relevant valuation date Nawab Sir Syed Raza Ali Khan was the Ruler. He died subsequently and is represented in these proceedings by the legal heirs.
2. The short question raised in this reference is whether the assessee is entitled to the exemption under s. 5(1)(iii) of the W.T Act, 1957, in respect of his entire palace at Rampur known as Khas Bagh Palace. It is common ground that the Khas Bagh Palace consisted of a number of buildings. Some of these buildings were actually occupied by the Ruler but quite a few of them were not so occupied and were let out to various tenants.
3. A list of fourteen such buildings which were let out to various officers, departments and other tenants has been set out in the order of the Tribunal. The assessee claimed that he was entitled to the exemption of the value of the entire Khas Bagh Palace including the above fourteen buildings under the provisions of s. 5(1)(iii) referred to above. That provision, at the relevant date, read as follows:
“5. (1) Wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee—….
(iii) any one building in the occupation of a Ruler declared by the Central Government as his official residence under paragraph 13 of the Merged States (Taxation Concessions) Order, 1949, or paragraph 15 of the Part B States (Taxation Concessions) Order, 1950.”
4. The WTO allowed the assessee exemption in respect of those portions of the Khas Bagh Palace which were in the occupation of the assessee. But he estimated the market value of those buildings which had been let out at Rs. 3,55,000 on the basis of the rental income derived by the assessee and held that the value of those buildings would be liable to be included in the taxable wealth of the assessee and was not exempt under s. 5(1)(iii). This conclusion of the WTO having been confirmed by the AAC and the Appellate Tribunal, the assessee has obtained a reference to this court on the following question:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the buildings of the Khas Bagh Palace which were let out to different persons from whom rental income was received by the assessee were not in the occupation of the assessee within the meaning of Section 5(1)(iii) of the Wealth-tax Act, 1957, and hence the value thereof was includible in the net wealth of the assessee?”
5. The question which falls for our consideration is a very narrow one regarding the interpretation of s. 5(1)(iii). It is admitted that under para. 13 of the Merged States (Taxation Concessions) Order, 1949, the Central Govt. declared Khas Bagh Palace, Rampur, as the official residence of the Ruler of Rampur. Learned counsel for the applicant submits that, since the Tribunal has accepted his contention that the entire palace should be treated as “one building” for the purposes of the W.T Act, the assessee was entitled to exemption in respect of the value of that building so long as it was substantially in the occupation of the Ruler. Learned counsel submits that the exemption granted to a Ruler in respect of his official residence cannot be denied merely because a small or insignificant portion of the palace might be not in the occupation of the Ruler but might even have been let out to outsiders on rent. It is contended that once the entire palace is treated as one building which has been declared as the official residence and once it is conceded that the palace is occupied by the Ruler to a substantial extent, it is not open to the Department to go further and to hold that the exemption should be restricted only to those portions of the property which are in the occupation of the Ruler. It is contended that the statutory provision is not so worded as to warrant dissection of the portions of the official residence actually in the occupation of the Ruler and the portions which are not. In support of his contentions, the learned counsel for the applicant relies on the general principle of strict construction of taxing statutes as well as the principle that where an exemption is granted by the statute it should be given full effect to and should not be whittled down by importing limitations inserted by the Legislature: vide CIT v. K.E Sundaya Mudaliar, [1950] 18 ITR 259 (Mad). He also sought to derive assistance from the decisions reported in Rajendra Narayan Blianja Deo v. CIT, [1929] 4 ITC 15 (Pat) [FB] and Raju v. CIT, [1967] 66 ITR 122 (AP), decided under the provisions of s. 2(1)(c) of the Indian I.T Act, 1922. Learned counsel also referred to a decision of the Punjab High Court in Agha Jajar Alt Khan v. Radha Kishen, AIR 1951 Punj 433, a case decided under the Rent Control Act.
6. Though the question raised in this reference is somewhat ticklish, we are of opinion that the Tribunal arrived at the correct conclusion on this issue. The difficulty has arisen because the notification under para. 13 of the Merged States (Taxation Concessions) Order, 1949, relates not to buildings but to palaces as such. Apparently the reasons for s. 5(1)(iii) using the words “any one building” is only to ensure that the exemption is confined to only one palace. For, in the case of certain Rulers more than one palace was notified as the official residence under the said Order, for example, in the case of the Ruler of Rampur himself not only the Khas Bagh Palace but also the Shahbad Castle was notified as the official residence (vide the notification extracted at pp. 1201 to 1206 of the Law and Practice of Income Tax by Kanga and Palkhivala, 3rd Edn.). The Tribunal, therefore, was correct in coming to the conclusion that s. 5(1)(iii) does not restrict the assessee's claim for exemption to only one of the buildings, comprised in the Khas Bagh Palace but that, for the purpose of the exemption, the entire Khas Bagh Palace should be treated as one building. But we do not think that from this conclusion, it can follow that the assessee would be entitled to exemption in respect of those buildings, comprised in the palace, which have been let out to outsiders and which are not in the occupation of the Ruler. Section 5(1)(iii) stipulates two conditions which have to be fulfilled before an assessee can be entitled to exempttion in respect of a building under s. 5(1)(iii). The first condition is that it should be notified as the official residence of the Ruler under the Merged States (Taxation Concessions) Order. This condition is fulfilled in the present case. The second condition, however, is that the building should be in the occupation of the Ruler. The idea is to grant an exemption to the former Rulers in respect of one of their palaces where they continue to reside or which they continue to occupy. In the present case, where a number of buildings belonging to the palace have been let out to outsiders and are not in the occupation of the Ruler this condition cannot clearly be said to be fulfilled. The insistence of the assessee's counsel that the entire palace should be treated as one building does not really help him. For, strictly speaking, it could be said that since the entire palace, which constitutes the building for our present purpose, is not in the occupation of the Ruler, he is not at all entitled to exemption in respect of the palace. This would be a very extreme position. Neither the officer nor the appellate authorities have taken this view. The Tribunal has placed a liberal construction on the provisions of the statute, consistent with its objects and intendment, and it has held that the assessee would be entitled to the exemption in respect of the palace to the extent it is occupied by the Ruler but will not be entitled to such exemption to the extent not so occupied. We see no error or inequity in this construction of the statute by the Tribunal.
7. We do not think that the cases relied on for the applicant are of any help in the present context. Section 2(1)(c) of the Indian I.T Act, 1922, spoke of a building which was required for certain purposes and the decisions held that once the Revenue came to the conclusion that a building was so required, it was not open to allow exemption only to the extent to which the building was used in connection with agricultural purposes. The decisions turned on the language of s. 2(1)(c). Both under the said provision as well as under the Rent Control Act, the emphasis is on the nature of the building and it was in that context that the courts held that one should judge the nature of the building as such and hot the extent to which it was used for a particular purpose. In our opinion those considerations are not relevant in the present context. Section 5(1)(iii) correlates the exemption to the occupation by the Ruler. In view of this the principle of substantial occupation put forward by the learned counsel does not appear to be relevant. Indeed there is also no material before us to ascertain whether the buildings let out by the assessee formed a substantial part of the palace or not. But, in our opinion, this examination is irrelevant for the purposes of s. 5(1)(iii). As we have already mentioned, that section can be interpreted either as completely denying any exemption to the assessee or as conferring on him a benefit of exemption to the extent of occupation of the building by the Ruler. In our opinion, the Tribunal, in adopting the second of these interpretation has construed the provision in a liberal manner, consistent with the objects of the statute and its intendment, and also given effect to its language in such a way as to benefit the assessee.
8. We are, therefore, of opinion that the conclusion arrived at by the Tribunal was correct. We, therefore answer the question referred to us in the affirmative and in favour of the Revenue. However, we think that this is a case in which the parties should be directed to bear their own costs.
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