The following three questions have been referred for determination to this court by the Commissioner of Income-tax under the Patiala Income-tax (No. V111 of Samvat 2001) :
'(i) Whether, on the facts and in the circumstances of the case, personal and private income of the assessee which has been brought to tax under the Patiala Income-tax Act, 2001 (Act No. V111 of 2001), was exempt because he was the Ruler of the former Faridkot State ?
(ii) whether, on the facts and in the circumstances of the case, the assessee was liable to pay income-tax on the amount of interest on Government securities amounting to Rs. 26,304 ?
(iii) Whether, on the facts and in the circumstances of the case, the income which accrued to the assessee outside Faridkot State from 13th April, 1948 to 19th August 1948, was liable to tax ?' An application has also been filed by the assessee under sub-section (3) of section 66 of the above Act for a direction to the Commissioner of Income-tax to refer the following question to this court :
'Whether, on the facts and in the circumstances of the case, the income in question of the assessee could have been taxed under the Patiala Income-tax Act (No. V111 of Samvat 2001), in the face of the Part B States Taxation Concessions) Order, 1950 ?'
This order would dispose of the reference as well as the application.
The assessee was till 15th August 1947, India became independent. By a convenient dated 5th May, 1948, the assessee along with the Rulers of certain other States entered into a convenient whereby the Patiala and East Punjab States Union (PEPSU) was formed. The actual Union came into existence on 20th August, 1948. The assessment year is Samvat 2006, i.e., 13th April, 1949. to 12th April, 1950, and the relevant previous year is Samvat 2005 which corresponds to 13th April, 1948 to 12th April, 1949. The assessee derived income from interest on Government securities, property and other sources. Part of the income was from sources within the Faridkot State and part from sources outside the State. The Income-tax Officer, in order to assess the income of the assessee for the assessment year 2006, issued a notice under section 34 of the Patiala Income-tax Act which was served on the assessee on 12th July, 1953. return was filed in response to that the notice issued to the assessee was somewhat defective and a fresh notice was issued to him on 22nd May, 1956. The previous notice issued to the assessee was cancelled. Return was filled by the assessee in response to the subsequent notice under protest.
It was argued on behalf of the assessee before the Income-tax Officer that being a sovereign he was not liable to tax. This contention was repelled by the Income-tax Officer and he assessed the assessee on 30th June, 1956, on a total income of Rs. 3,21,378. Appeal filed by the assessee was dismissed by the Appellate Assistant Commissioner further held that the income, which was sought to be taxed, was income earned by the assessee in his personal and private capacity. The following reliefs were, however, allowed by the Commissioner to the assessee :
(i) the income accruing to the assessee within the State of Faridkot, where he was the Ruler up to 19th August, 1948, was excluded fro, the total income.
(ii) The income from interest on securities earned up to 19th August, 1948, was held to be exempt from super-tax.
(iii) Allowance was also made for some loss in potato business.
On an application filed by the assessee, the three questions mentioned above were referred for determination to this court. As the Commissioner declined to refer the question mentioned in the application under section 66 (3) of the Patiala Income-tax Act to this court, the assessee has filed and application praying that the aforesaid question too may be referred to this court.
Before dealing with the three questions, which have been referred for determination by the Commissioner of Income-tax, it would be proper to deal with the application under section 66 (3) of the Act filed by the assessee. The Commissioner of Income-tax refused to refer the question was neither raised before the Commissioner nor it was considered by him in his order, After hearing Mr. Puri on behalf of the petitioner and Mr. Awasthy on behalf of the department, we are of the view that no direction should be issued for referring the question to this court. The law on the point has been laid down by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., wherein Venkatarama Aiyar J., who spoke for the majority, observed :
'The jurisdiction of a court a reference under section 66 is a special one, different from its ordinary jurisdiction as a civil court. The High Court, hearing a reference under that section, does not exercise any appellate or revisional of supervisory jurisdiction over the Tribunal. It acts purely in an advisory capacity, on a reference which properly comes before if under section 66 (1) and (2). It gives the Tribunal advice, but ultimately it is for them to give effect to that advice. It is of the essence of such a jurisdiction that the court can decide only questions which are referred to it and not any other question.'
It was further observed :
'If the true scope of the jurisdiction of the High Court is to give advice which it is sought by the Tribunal, it stands to reason that the Tribunal should have had an occasion to consider the question so that it may decide whether it should refer it for the decision of the court. How can it be said that the Tribunal should seek for advice on a question which it was not called upon to consider and in respect of which it had no opportunity of deciding whether the secession of the court should be sought ?'
The observations on the scope of the powers under section 66 (2) were as under :
'Thus, the power of the court to direct a reference under section 66 (2) is subject to two limitations - the question must be one which the Tribunal was bound to refer under section 66 (1) and the applicant must have required the Tribunal to refer it. R (T) is the form prescribed under rule 22a for an application under section 66 (1), and that shows that the applicant must set out the questions which he desires the Tribunal to refer and that further those questions must arise out of the order of the Tribunal. It is, therefore clear that under section 66 (2) the court direct the Tribunal to refer a question unless it is one which arises out of the order of the Tribunal and was specified by the applicant in his application under section 66 (1). Now, if we are to hold that the court can allow a new question to be raised on the reference, that would in effect give the applicant a right which is denied to him under section 66 (1) and (2), and enlarge the jurisdiction of the court so as to assimilate it to that of an ordinary civil court of appeal.' The position was thereafter summed up as under :
'(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.
(3) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it. Stating the position by the Tribunal that could be held to arise out of its order.'
Finally it was observed :
'Section 66 (1) speaks of a question of law that arises out of the order of the Tribunal. Now a question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that section 66 (1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question itself was under issue. there is no further limitation imposed by the section that the reference should be limited to those question which had been argued before the Tribunal. It will be an over-refinement of the position to hold that each aspect of a question itself a distinct question for the purpose of section 66 (1) of the Act.'
In the face of the above observations, the application of the assessee under section 66 (3) of the Act must be held to be without merit. There was no reference to paragraph 5 of that Part B States (Taxation Concessions) Order, 1950, in any of the orders of the Income-tax Officer, the Assistant Commissioner and the Commissioner, and no ground of exemption was advanced on that score. As this is essentially a new question of law, which was neither raised before the income-tax authorities nor considered by them, it cannot be held to be a question arising out of the orders of the income-tax authorities. As such, proposition (4) laid down in the case of Scindia Steam Navigation Co. Ltd. would get attracted according to which a question of laws neither raised before the Tribunal nor considered by it will nor be a question arising out of its order notwithstanding that it may arise on the findings given by the Tribunal. The above question can also not be deemed to be a new argument in support of an aspect of the question which has already been referred to this court, because, had that been so, the assessee would not have felt the necessity of filing an application under section 66 (3) of the Act. Moreover, the question is not so simple but is a complex one and trenches over an area which is not covered by matters dealt with by the income-tax authorities. We, therefore, find no justification for directing application under section 66 (3) to this court. The application is, consequently, dismissed.
So far as the first and third questions referred by the Commissioner of Income-tax are concerned, Mr. Puri has argued that the assessee during the assessment year in question, i.e., Samvat 2006 corresponding to 13th April, 1949, to 12th April, 1950, was a sovereign Ruler. It is considered that as sovereign Ruler the assessee was exempt from payment of income-tax. In this respect we find that the question as to whether the Rulers of different states, which merged into Pepsu, retained their sovereignty after the formation of the Patiala and East Punjab States Union from 20th August 1948, was considered by their Lordships of the Supreme Court in Lachhman Dass v. State of Punjab, and was answered by the minority in the negative. The head-note in this regard reads as under :
'When the new State of Pepsu was formed on August 20, 1948, in accordance with the covenant entered into by the Rulers of the merging States on May 5, 1948, the eight States which had merged into it ceased to exist as independent personae and there could be no question thereafter of sovereignty of such States or of its ex-Rulers. On the wording of the convenient there was a complete divestiture of all the sovereign rights of the Rulers, when the new State came into existence on August 20, 1948, and the Rulers cannot be said to have had any authority to enter into any supplementary convenient on April 9, 1949.'
In view of the above decision, the contention advanced on behalf assessee that he retained his sovereignty after the formation of Pepsu cannot be accepted. Reference has been made on behalf of the assessee to as a sovereign but in this respect we are of the opinion that the correct position must be taken to be stated by their Lordships of the Supreme court in the case of Lachhman Dass. The question of liability to income-tax of the Rulers of the erstwhile Part B States arose for determination in the case of Commissioner of Income-tax v. H. E. H. Mir Osman Ali Bahadur. The assessee in that case was, prior to January 26, 1950, that Nizam of Hyderabad. He claimed exemption from taxation under the Indian Income-tax Act for the assessment year 1950-51 on a number of grounds including the ground the previous year he was a sovereign under the international law. It was held :
'(ii) That the respondent as the Nizam of Hyderabad never acquired international personality under international law. The lapse of paramountcy or suzerainty of the Crown in regard to Hyderabad and the other Native Indian States under section 7 (1) (b) of the Indian Independence Act, 1947, or the breaking of ties with the British Crown did not ipso facto raise their status to that of an international personality under the international law and so its Ruler could not rely international law for claiming immunity from taxation of his personal properties.'
It was further held :
'If during the assessment year an individual is assessable to tax, the fact that during the previous year he was not liable to tax all because there was no Income-tax Act in the area to which the Act was extended or because under an Income-tax Act in force therein during that year his income was exempted from tax or because of any other tax, including international law, he was so exempt from tax, would not be of any relevance.'
In the face of the above observations, we find no force in the contentions advanced on behalf of the assessee in respect of the first and the third questions.
So far as the second question referred by the Commissioner of Income-tax is concerned, we find that there is no discussion either in the statement of reference or in the order of the Commissioner of the Income-tax as to how that question arises for determination. Mr. Puri, on behalf of the assessee, however, states that the assessee was not liable to pay income-tax on the amount of interest on Government securities because a notification granting exemption under the Indian Income-tax Act had been issued, It is, however, admitted that no such notification granting exemption was issued under the Patiala Income-tax Act under which the assessee was sought to be assessed. In the circumstances, the assessee could obviously claim no exemption from payment of tax in the proceedings before the income-tax authorities.
Consequently, we answer question No. (i) in the negative, and questions Nos. (ii) and (iii) in the affirmative. The parties, in the circumstances of the case, are left to bear their own costs.
FALSHAW C.J. - I agree