Rent earned by ertswhile rulers from palaces not taxable, says Supreme Court

The Supreme Court of India has held that the income earned by erstwhile rulers by letting out portion of their residential palace to tenants, is not taxable and is exempted under Section 10(19A) of the Income Tax Act..A Bench of Justice Ranjan Gogoi and Justice Abhay Manohar Sapre made these observations in a tax dispute between Maharao Bhim Singh of Kota (through his legal heirs) and the Income-Tax Department. The case came to the apex court as an appeal against the decision of a full bench of the Rajasthan High Court. The Full Bench itself had to be constituted since there were differing opinions delivered by the High Court. .The question to be answered, as laid down in the judgment was,.“In other words, the question was as to whether the appellant is entitled to get full benefit of the exemption granted to him under Section 10 (19A) of the Income Tax Act 1961 (for short, “the I.T. Act”) from payment of income-tax or it is confined only to that portion of palace which is in his actual occupation as residence and the rest which is in occupation of the tenant would be subjected to payment of tax.”.The Full Bench held that as the assessee continued to remain in occupation of his official residential palace for his own use, he would be entitled to claim exemption available under Section 10(19A) of the IT Act, but when he is found to have let out any part of his official residence and at the same time is found to have retained its remaining portion for his own use, he becomes disentitled to claim benefit of exemption available under Section 10(19A) for the entire palace..This contention was supported by Senior Advocate YP Adhyaru, counsel for the Ministry of Finance, Revenue Division..On the other hand, Senior Advocate Gopal Subramaniam, who appeared for the assessee, contended that there was a significant departure in the wordings of Section 10(19A) and Section 23 of the I.T. Act..“Learned counsel pointed out that Section 10(19A) does not use the same expression which occurs in Section 23(2), namely, “annual value of such house or part of the house“.”.According to Subramaniam, an absence of these words in Section 10(19A) of the IT Act goes to show that the appellant is entitled to claim exemption applicable to the entire palace even though the part of palace is in occupation of tenant. It was urged that splitting of palace is not permissible under Section 10 (19A) of the IT Act though it is permissible in ‘house” as used in Section 23(2)..The Bench chose to agree with the assessee, taking the view that,.“In our considered opinion, if the Legislature intended to spilt the Palace in part(s), alike houses for taxing the subject, it would have said so by employing appropriate language in Section 10(19A) of the IT Act.”.Interestingly, and almost as a parting shot, the Bench also made certain comments which might not sit down too well with the Revenue. In a bid to discourage frivolous appeals, the Bench noted that,.“…in the absence of any valid and convincing reason, there was no justification on the part of the Revenue to have pursued the same issue again to higher Courts. There should be a finality attached to the issue once it stands decided by the higher Courts on merits.”.Read the judgment below.