The Judgment of the Court was delivered by

S.K Mal Lodha, J.:— 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, onj 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.”

3. An application under section 256(1) of the Act was filed by the assessee and the Tribunal has referred the aforesaid question for our opinion.

4. 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.

5. 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.

6. 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.”

7. 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.

8. 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.”

Section 23 of the Act lays down the manner of determining the annual value. This has necessitated the examination of the meaning of the word “occupation”.

In Webster's Third New International Dictionary, the word “occupation”, amongst others, has been defined as the actual possession. The word “occupant” means a person who occupies a particular place or premises. In Black's Law Dictionary, “occupation” has been stated to mean control, use; the act or process by which real property is possessed and enjoyed; where a person exercises physical control over land.”

9. The word “occupation” has been defined in “Words and Phrases Legally Defined, Vol. 4” by John B. Saunders, at p. 11. According to it, an occupier is one who actually exercises the rights of an owner in possession. The primary element of occupation is possession, but includes something more, for mere legal possession cannot constitute an occupation. The owner of a vacant house is in possession, though not in occupation; but if he furnishes the house and keeps it ready for habitation, he is an occupier, though he may not have resided in it for a considerable time. In Oxford English Dictionary, Vol. VIII, the word “occupation” has been stated to mean actual holding or possession, esp. of a place or of land.

10. The words “owner” and “occupier”, as used in Coking Coal Mines (Nationalisation) Act (No. XXXVI of 1972), came up for consideration before their Lordships of the Supreme Court in Industrial Supplies Pvt. Ltd. v. Union of India, (1980) 4 SCC 341 : AIR 1980 SC 1858, and it was observed that in a legal sense, an occupier is a person in actual occupation.

11. Mohd. Ali Khan v. CWT, [1983] 140 ITR 948 (Delhi) is nearer to the case on hand. In that case, the question was whether the assessee is entitled to the exemption under section 5(1)(iii) of the Wealth-tax Act, 1957, in respect of his entire palace at Rampur known as “Khas Bagh Palace” consisting of a number of buildings, some of which were actually occupied by the Ruler, but quite a few of them were not so occupied and were let out to various tenants. Wealth-tax was not payable under section 5(1)(iii) of the Act on any one building in the occupation of the Ruler declared by the Central Government as his official residence under para 13 of the Merged States (Taxation Concessions) Order, 1949, or paragraph 15 of the Part B States (Taxation Concessions) Order, 1950. One of the conditions which is necessary to be fulfilled for claiming exemption from payment of wealth-tax under section 5(1)(iii) of the Wealth-tax Act is that the building should be in the occupation of the Ruler. It was held by the Delhi High Court in agreement with the Tribunal that where a number of buildings belonging to the palace have been let out to outsiders and are not in the occupation of the Ruler, the aforesaid condition cannot be said to have been fulfilled. The idea behind section 10(19A) of the Act is that the annual value of any one palace should not be included at the time of computation of the total income of the assessee when the Ruler continues to occupy that palace, i.e, it should be in his actual use or actual possession and he should exercise actual physical control over it.

12. When the portion of the palace in question, i.e, garage, godowns, quarters, etc., have been rented out to the tenants on rent at the rate of Rs. 9,322 per annum, we find it difficult to hold that the Ruler is in occupation of the entire palace in question. He cannot be said to be in actual possession or in actual use of the portion of the palace occupied by the tenants. It was never intended that the income of rent from the portion of the palace in the occupation of the Ruler should not be included in the total income of the assessee at the time of computation. What is exempted or excluded is the annual value of the entire palace or part of it, which is in the occupation of the Ruler and the implication of using the words “in occupation”, in our considered opinion, in view of section 10(19A) of the Act, is the actual occupation of the Ruler.

13. We entirely agree with the reasons given by the Tribunal in its order that in respect of the quarters, godowns and garage, which were let out to the tenants, the assessee could not be considered to be in the occupation of the said portion, for, the tenants, who are in possession have a legal right to remain in possession so long they are not evicted by due process of law. At the relevant time, the portion of the palace which was rented out to the tenants was thus not in the occupation of the Ruler and for this reason, the annual value of the portion, which was not in the occupation of the assessee, was rightly added to the total income of the assessee, as under section 10(19A) of the Act, such income cannot be excluded, for it is not exempt from payment of income-tax. The conclusion arrived at by the Tribunal is, therefore, correct.

14. For the reasons aforesaid, the question referred to us for our opinion, is answered in the; affirmative, i.e, in favour of the Revenue and against the assessee. There will be no order as to costs of this reference.

15. Let the Tribunal be informed of this order as required by section 260(1) of the Act.