Commissioner of Income Tax vs Palace Fund (Individual)

K.A. Nayar, J.—At the instance of the Commissioner of Income Tax, Cochin, the Income Tax Appellate Tribunal referred the following two questions which are identical for all the assessment years and arising out of the common order of the Appellate Tribunal dated July 20, 1981, for the assessment years 1967-68 to 1971-72 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the income from the properties cannot be assessed in the hands of the Palace Fund ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in finding that the members of the Royal Family have only some right of permissive use and occupation in the properties involved in the assessment and that the income from the properties cannot be assessed in the hands of the Palace Fund ?"

The assessee, the Palace Fund, was originally assessed in the status of a Hindu undivided family for the years 1964-65 to 1973-74. The notional income from the buildings occupied by the members of the Royal family was assessed by the Income Tax Officer in the hands of the Palace Fund-Hindu undivided family. In the second appeal before the Tribunal, the Income Tax Appellate Tribunal, in I. T. A. Nos. 263 to 272/(Cochin) of 1974-75, by order dated November 25, 1975, held that the property did not belong to the Palace Fund and that the income from the property had to be excluded from assessment. The Income Tax Officer, thereafter, as a precautionary measure, assessed the notional income from the property in the hands of the Palace Fund in the status of an individual for the assessment years 1967-68 to 1971-72. In I. T. R. Nos. 172 to 176 of 1982, we are concerned with the assessment on the Palace Fund in the status of an individual as against a Hindu undivided family. The assessee went in appeal and the Appellate Assistant Commissioner accepted the contention of the assessee that the property occupied by the members of the Royal family did not belong to the Palace Fund, and, therefore, no notional income from this property can be assessed in the hands of the Palace Fund as individual. The Appellate Assistant Commissioner followed the earlier order of the Tribunal bated November 25, 1975, aforementioned and held that the properties reserved for the members of the royal family did not belong to the Palace Fund. It was also held that the members of the Royal family have only a permissive right of use and occupation and, therefore, income from those properties has to be excluded from the assessment for the years in question as well. The Appellate Assistant Commissioner held that the question of assessing the income from the properties reserved for members of the ruling family in the hands of the assessee either in the status of an individual or in any other status does not arise at all In that view of the matter, the Appellate Assistant Commissioner allowed the appeals. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue filed appeals before the Income Tax Appellate Tribunal. It was contended before the Tribunal by the Revenue that, in the absence of a definite finding by the Tribunal in the earlier order, the assessment in the status of an individual was in order. The Tribunal found that the income sought to be assessed in the hands of the assessee is the notional income from the property reserved for the members of the Royal family for their use at the time of the integration of the Princely State of Cochin with Travancore. In the earlier order of the Tribunal dated November 25, 1975, when the assessee was assessed in respect of the same income as Hindu undivided family, the Tribunal held that the income sought to be assessed is the notional income from the properties reserved for the members of the Royal family for their use at the time of the integration of the Princely State of Cochin with Travancore. These properties reserved for the members of the Royal family are for the use of the family as a whole and cannot be alienated or leased out. Further, when any of them is not required for the use of the members of the Royal family, it will automatically revert to the State. It was because of these special features that the Tribunal, on an earlier occasion, held that the properties do not belong to the Palace Fund and the members of the family had only a right of permissive use and occupation. In view of that, the Tribunal once again found that the income from the properties had to be excluded from assessment in the hands of the Palace Fund. The Tribunal found that the issue raised by the Revenue is covered by the earlier order of the Tribunal in I. T. A. Nos. 263 to 272/(Cochin) of 1974-75 dated November 25, 1975. It made no difference as to whether the status assigned to the assessee is that of an individual or that of a Hindu undivided family ; since whatever be the status, an individual or a Hindu undivided family or any other status, the income in respect of the property must first accrue to "the assessee" for it to be assessed to Income Tax in the hands of "the assessee".

Before the Tribunal, it was contended that, u/s 27(ii) of the Income Tax Act, 1961, since the Palace Fund is an impartible estate, the assessment can be made as an individual. But, the Tribunal found that the question does not arise at all, as the finding of the Appellate Assistant Commissioner as well as the Tribunal in the earlier case as also in the present case was that the properties had to be excluded from assessment. Dissatisfied with the decision of the Income Tax Appellate Tribunal, the Revenue filed a reference application u/s 256(1) of the Income Tax Act, 1961. It is in the above circumstances that the two questions of law as aforementioned were referred to us at the instance of the Revenue.

Income Tax Reference No. 15 of 1986 relates to the assessment year 1976-77 and it arises out of the order of the Appellate Tribunal in I. T. A. No. 316/(Cochin) of 1979. That relates to the assessment on the assessee as a Hindu undivided family and the Tribunal followed the earlier decision in I. T. A. Nos. 263 to 272/(Cochin) of 1974-75, which related to the assessment years 1964-65 to 1973-74. The questions referred for our opinion in I. T. R. No. 15 of 1986 are as follows :

"1. Whether the Tribunal, on the facts and in the circumstances of the case, was correct in coming to the conclusion that, in the light of the stand taken by both sides, they could proceed on the basis that the properties falling under category ''C'' were not properties coming within the definition of ''Palace Fund'' as contained in the proclamation issued by the then Highness of Cochin ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in avoiding a finding about the ownership of the properties assuming for the purpose of their order that ownership of the properties reserved for the members of the ruling family for their use did not devolve on the family, viz., the Palace Fund ?

Whether, on the facts and in the circumstances of the case, the finding of the Income Tax Appellate Tribunal that the assessee, the Palace Fund, is not the owner of the properties in question is not arbitrary, unreasonable and wrong in law, especially when it is in total disregard of the evidence and, namely, the letter dated April 7, 1972, from the Palace Administration Board to the Chief Minister of Kerala, wherein the Palace Administration Board has admitted that the properties belong to the Cochin royal family?

Whether, on the facts and in the circumstances of the case and on an interpretation of the letter dated February 19, 1954, from the Government of India to His Highness the Maharaja of Cochin and also the letter dated April 7, 1972, from the Palace Administration Board to the Chief Minister of Kerala, the Income Tax Appellate Tribunal is right in law in holding that the properties in question do not belong to the assessee and that, therefore, the income from the properties is not assess-able to Income Tax u/s 22 of the Income Tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the finding of the Income Tax Appellate Tribunal that the accessions, alterations, improvements and extensions and also the independent cottage type houses are not owned by the assessee and that, therefore, the income therefrom is not assessable to Income Tax u/s 22 of the Income Tax Act, 1961, is unreasonable and wrong in law, especially when the Tribunal has found that these are investments and assets of the assessee ?"

Thus, we are concerned in I. T. R. Nos. 172 to 176 of 1982 with the assessment on "the Palace Fund" for the years 1967-68 to 1971-72, as individual, on the notional income from the properties reserved for the members of the royal family for their use at the time of integration, and in I. T. R. No. 15 of 1986 with the assessment in respect of the income from the same properties in the hands of the assessee for the year 1976-77 as Hindu undivided family.

From the original order of the Tribunal in I. T. A. Nos. 263 to 272/ (Cochin) of 1974-75, a question was referred u/s 256(2) of the Act, viz. :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the members of the ruling family of Cochin had only a permissive right of use and occupation in the properties involved in the assessment of the Palace Fund and whether the income from these properties have to he excluded from the assessment for the assessment years concerned, viz., 1964-65 to 1973-74 ?"

A Division Bench of this court, in the judgment in I. T. R. Nos. 215 to 224 of 1979, dated August 14, 1984, examined the question and declined to answer the question referred. This court remanded the matter covered by the assessment for the years 1964-65 to 1973-74 to the Tribunal for disposal of the issue taking into account the scope of the two enactments mentioned therein. This court also set aside the finding that :

"the properties reserved for the members of the ruling family for their use under which category the properties in question before us fall do not belong to the Palace Fund, the members having only a permissive right of use and occupation, holding that the income from these properties have to be excluded from assessment for all these years."

The Revenue contended before the Division Bench that the scope of the Valiamma Thampuran Kovilakam Estate and the Palace Fund (Partition) Act, 1961 (Act 16 of 1961) (for short "the Palace Fund (Partition) Act"), and the Valiamma Thampuran Kovilakam Estate and the Palace Fund (Partition) and the Kerala Joint Hindu Family System (Abolition) Amendment Act, 1978 (Act 15 of 1978) (for short "the Palace Fund Partition (Amendment) Act), has not been considered by the Tribunal before arriving at its finding. The latter enactment, viz., Palace Fund Partition (Amendment) Act, had not been considered by the Tribunal and, in the light of the provisions contained therein, according to the Revenue, it would be erroneous to come to the conclusion that the assessee has only a permissive right of use and occupation in regard to the properties known as Valiamma Thampuram Kovilakan Estate and Palace Fund. The Division Bench accepted the contention of the Revenue and came to the conclusion that the non-consideration of the effect of the Palace Fund (Partition) Act has resulted in miscarriage of justice. This court also held that the Tribunal ought to have considered the scope of the said enactment and, in so far as the Tribunal has not considered the scope and impact of the said enactment, it has misdirected itself in law warranting interference with its finding. It is in the above circumstances that this court declined to answer the question and remanded the matter to the Tribunal to consider the scope of the Palace Fund (Partition) Act on the assessee for the assessment in question on the petitioner in the status of a Hindu undivided family for the assessment years 1964-65 to 1973-74.

Since, in both sets of cases, the Tribunal followed only the earlier order of the Tribunal which was set aside in I. T. R. Nos. 215 to 224 of 1979 and the matter was remanded, we would have followed the same decision in these cases also and remanded the cases for fresh disposal. But, counsel on behalf of the assessee submitted that the Tribunal disposed of the appeal after remand for the assessment years 1964-65 to 1973-74 by its order dated January 30, 1987, in which the scope and impact of the two enactments, viz., the Palace Fund (Partition) Act (Act 16 of 1961) and the Palace Fund Partition (Amendment) Act (Act 15 of 1978) have been considered. According to the Tribunal, the 1961 Act has only done away with the impartiality of the Palace Fund. It only enabled a partition of the Palace Fund and V. T.K. Estate subject to certain conditions, viz., request in writing of the majority of the major members and the satisfaction of the Maharaja of Cochin about the desirability of partition followed by his declaration to effect a partition. The 1978 Act made certain amendments to the provisions of the 1961 Act. By the 1978 Act, the power given in the 1961 Act to the Maharaja to order partition has shifted from the Maharaja to the seniormost male member of the ruling family. Therefore, these enactments were held to be not relevant to decide the issue whether the properties under consideration belonged to the State Government or to the Palace Fund. The Tribunal, therefore, held after consideration of the two enactments that the original order of the Tribunal stands and requires no modification.

Aggrieved by the said order of the Income Tax Appellate Tribunal, the Revenue sought reference of the following questions of law u/s 256(1) of the Act :

"1. Whether, on the facts and in the circumstances of the case, was the Tribunal justified in law in not considering the question whether the properties belonged to the assessee ?

Whether, on the facts and in the circumstances of the case, was the Tribunal right in law in finding that the enactment of Section 5(iii) of the Hindu Succession Act cannot be taken to mean that the properties under consideration belonged to the Palace Fund and not to the State ?

Whether, on the facts and in the circumstances of the case, was the Tribunal right in law in holding that the 1961 Act and the 1978 Act are not at all relevant to decide the issue whether the properties under consideration belonged to the State Government or the Palace Fund ?

Whether, on the facts and in the circumstances of the case, was the Tribunal right in law in finding that the original order of the Tribunal requires no modification ? "

But the Tribunal dismissed the reference application. Thereafter, the Revenue filed Original Petitions Nos. 4831 of 1988, 5275 of 1988, 4787 of 1988, 4278 of 1988, 5487 of 1988, 4536 of 1988, 5524 of 1988, 4535 of 1988, 4828 of 1988, 5194 of 1988, 5195 of 1988, 4743 of 1988, 5237 of 1988, 5488 of 1988, 4832 of 1988, 4610 of 1988, 5489 of 1988 and 4829 of 1988, seeking a direction to refer the questions of law aforementioned. Original Petition No. 8439 of 1988 relates to the assessment year 1974-75. There also, there is a prayer to compel the Income Tax Appellate Tribunal to refer similar questions of law. Since the assessee''s appeals were allowed and the appeals of the Revenue were dismissed for the assessment years 1964-65 to 1973-74, there are two original petitions filed by the Revenue for each year.

A brief sketch of the family law of Cochin royally has been made by the Supreme Court in two decisions Rama Varma Bharathan Thampuram Vs. State of Kerala and Others, and Palace Administration Board v. Rama Varma Bharathan Thampuran : AIR 1980 SC 1187:[1980] Supp. SCC 234 . After independence, when princely States were sought to be integrated into India, the independent States of Cochin and Travancore first integrated themselves into the Travancore-Cochin State with effect from July 1, 1949. Two days before the constitutional merger, the Maharaja of Cochin issued a proclamation to provide for the impartibility, administration and preservation of the Royal Estate and the Palace Fund through a board of trustees. This was by a Royal Proclamation of 1124. That proclamation made the Palace Fund an impartible estate. An inroad into this was made by the Palace Fund (Partition) Act by which the impartiality was abolished conditionally. If a request in writing was made by a majority of the major members and the Maharaja of Cochin was satisfied that, in the interest of the family, it would be desirable to partition the estate among the members, he might declare his decision to effect a partition under his supervision and control. The decision of the Maharaja of Cochin was to be published by the Board in the Gazette in English and Malayalam. Even though the Royalty thus became partible, the same was not automatic, but depended on the Maharaja''s decision. The number of members entitled to a share on division would naturally be determined by the date of a division in the status of the family. Section 3 of the Palace Fund (Partition) Act makes the partition contingent on the Maharaja''s declaration. Once such a declaration is made, the Supreme Court held that, instantaneously, a division in status takes place entitling each member to an equal share in the estate and Palace Fund which shall be his separate property. Even a child who is in the womb on the date of the publication of the decision u/s 3 was entitled to a share. But, the Maharaja never made a statutory declaration. In the meantime, the Kerala Joint Hindu Family System (Abolition) Act, 1975 (Act 30 of 197G), was promulgated. By this Act, the joint family system among Hindus in the State of Kerala was converted into tenancy-in-common as if a partition had taken place among all members. The effect of this Act is that a partition is deemed to have taken place from December 1, 1976, onwards. Section 7 of the said Act repeals certain enactments. But the proclamation of 1124 and the Palace Fund (Partition) Act (Act 16 of 1961) were not repealed. Therefore, the Cochin Kovilakam was not affected by the Kerala Joint Hindu Family System (Abolition) Act of 1975. Thereafter, the Palace Fund Partition (Amendment) Act, 1978, was passed. According to the Supreme Court, the effect of the Amendment Act is that every member was entitled to an equal share and all the properties should be available for partition. Act 15 of 1978 was preceded by an ordinance promulgated on January 6, 1978. Section 3 of the Act gave power to the seniormost male member of the family within 60 days from the date of commencement of the Valiamma Thampuran Kovilakam Estate and the Palace Fund (Partition) and the Kerala Joint Hindu Family System (Abolition) Ordinance, 1978, to direct partition of the Palace Fund among all the members entitled to a share of the Estate and Palace Fund u/s 4 of the Kerala Joint Hindu Family System (Abolition) Act, 1975, and such direction should be published by the Board in the Gazette. Sub-section (2) of Section 3 provided that, if the seniormost male member fails to direct the Board as required by Sub-section (1), the Board shall, on the expiry of the period specified in that sub-section, proceed to effect the partition of the Estate and the Palace Fund among the members referred to in Sub-section (1) and the partition so effected shall be valid notwithstanding anything contained in Section 17 of the Proclamation. The effect of this amendment is that the Board has to effect the partition with effect from December 1, 1976. The cumulative effect of the two decisions of the Supreme Court aforementioned is to explain that the Palace Fund has become partible on satisfying certain conditions under the 1961 Act and the division has taken place under the 1978 Act with effect from December 1, 1976.

But the question to be considered here in these cases is, what are the house properties that can be notionally taxed in the hands of the Palace Fund. For the assessment years 1964 65 to 1973-74, which was the subject-matter of the first decision of the Tribunal in I. T. A. Nos. 263 to 272/(Cochin) of 1974-75 dated November 25, 1975, the Palace Fund was assessed in respect of the properties occupied by the members of the royal family in the status of a Hindu undivided family. On appeal, the Appellate Assistant Commissioner held that the assessment had to be made in the status of an individual and not in the status of a Hindu undivided family. Accordingly, the Appellate Assistant Commissioner directed assessment for all the years in the status of an individual, The assessee and the Revenue filed appeals. It is in those appeals, viz., I. T. A. Nos. 263 to 272/(Cochin) of 1974-75, that the Tribunal held that the properties reserved for the members of the ruling family for their use are not owned by the Palace Fund. The Tribunal examined the question whether the ownership of those properties vest in the Palace Fund and whether the house properties belong to the assessee. The Tribunal found that the properties do not belong to the Palace Fund, the members of the ruling family cannot alienate or lease out the property, and that they have only a right of permissive use and occupation. The Tribunal also found that whenever the properties are not required for the use of the members, they will revert to the State Government. The Tribunal reached this conclusion based on the admission by both sides that there was nothing on record to show that the properties fell within the categories of properties mentioned in the definition of "Palace Fund". The independent consideration made by the Tribunal also resulted in the same conclusion. Therefore, the Tribunal directed that the income from the house property has to be excluded from assessment for all the ten years involved in that case. This order was passed on appeals filed by the assessee. The Revenue took up the matter u/s 256(2) of the Act and got the question, viz. :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the members of the ruling family of Cochin had only a permissive right of use and occupation in the properties involved in the assessment of the Palace Fund and whether the income from these properties has to be excluded from the assessment for the assessment years concerned, viz., 1964-65 to 1973-74 ?"

referred to this court. Examining the case in I. T. R. Nos. 215 to 224 of 1979, as already stated, this court refused to answer the question. But, by setting aside the finding of the Tribunal, remitted the matter to the Tribunal for fresh disposal of the issue taking into account the scope and effect of the two enactments mentioned above. No other invalidity was pointed out by this court.

As already stated, the two enactments had only affected the question of the status of the assessee. They cannot have any bearing on the question whether the income from the house properties in the possession and occupation of the members of the royal family is liable to be assessed in the hands of the assessee-Palace Fund.

Income Tax shall be charged in respect of the total income of the previous year of every person. "Person" shall include, u/s 2(31) of the Act, Hindu undivided family as well. If any impartible estate is owned by a joint Hindu family, u/s 27(ii) of the Act, the holder of the impartible estate can be deemed to be an individual owner of the properties comprised in the estate. Therefore, to fasten liability on the assessee, the Department has to prove that the Palace Fund is the owner of the Estate in question. Section 14 of the Income Tax Act, 1961, classifies chargeable income under several heads. One such head is income from house property. So, the Revenue has to prove that, in respect of the property in the possession of the members of the royal family, the Palace Fund is the owner to be assessed in the status of a Hindu undivided family or an individual. It is well-known that a subject cannot be taxed unless he comes within the letter of the law. The assessee is the Palace Fund. The assessee-Palace Fund came into existence by virtue of Proclamation No. 9 of 1124. Clause 2(c) therein defines "Palace Fund" as follows :

"(c) ''Palace Fund'' means the Special Palace Fund now in existence and the payments made from time to time by Government towards the maintenance of the junior members of our family and shall include properties earned out of such fund and any property owned in common by our family except the Palliyara Muthalpidi Estate."

The buildings occupied by the members of the royal family will not be considered as "Special Palace Fund now in existence" or properties earned out of the Palace Fund or any property owned in common by the family. Clause 22 of the Proclamation also makes the Palace Fund impartible. The letter of the Joint Secretary to the Government of India, Ministry of State, to the Premier, United State of Travancore-Cochin, dated July 20, 1949, states that the properties intended for the use of the members of the ruling family, which have been described as items Nos. 1 to 12, 14, 15 and 21 to 34 in the list attached thereto which was reserved for the use of the family members cannot be alienated or leased out and, if any of them is not required for the use of the members of the ruling family, it will revert to the State. In the proceedings of the United State of Travancore-Cochin dated November 24, 1949, there is a direction that the officers in charge of the buildings (viz., items Nos. 1 to 12, 14, 15 and 21 to 34) will hand over possession of the same to the Palace Administration Board, Tripunithura, and they will be treated as private properties for the use of the members of the ruling family as a whole and cannot be alienated or leased out. It is repeated therein that when any of them is not required for the use of the members of the ruling family, it will revert to the State. The assessments in question, it is admitted, relate to the deemed income from the abovesaid items.

The assessee is the Palace Fund and the Palace Fund gets possession of the property with the above direction. Further, by the order of the Government of Kerala dated June 24, 1964, it was ordered after examining the matter that the local and municipal tax on the buildings under the control of the Palace Administration Board is a charge on the State revenues and, therefore, directed that the property tax demanded by the municipalities and panchayats in respect of the Palace under the control of the Palace Administration Board, Tripunithura, Cochin, be paid by the State Government. It is true that the President of the Palace Administration Board, in his memorandum to the Chief Minister of Kerala, dated April 7, 1972, requested for a declaration that these properties should be considered as belonging to the junior members of the Cochin royal family. But no such declaration had been made. Therefore, the fact remains that the Palace Fund as defined in the proclamation cannot be considered to be the owner of the items of properties given to the Palace Fund for enjoyment of the family members of the Cochin Royalty.

The doomed income is proposed to bo taxed in the hands of the assessee under the head "Income from house property". u/s 22 of the Income Tax Act, 1961, such income is chargeable if the annual value of the property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to Income Tax. Therefore, the prerequisite of charging under the head "Income from house property" is ownership of the buildings which has not been established in this case.

In the light of the above discussion, our answer to question No. 1 in I. T. R. Nos. 172 to 176 of 1982 is in the affirmative, in favour of the assessee and against the Revenue. Our answer to question No. 2 is also in the affirmative, in favour of the assessee and against the Department. All the questions referred in I. T. R. No. 15 of 1986 also are answered in favour of the assessee and against the Department.

In view of the above, we are of the opinion that no referable question arises for consideration in all the original petitions mentioned above.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.