Judgment

KHANNA, J.: - The short question which arises for determination in these six civil appeals Nos. 1184 to 1186 and 1198 to 1200 of 1970 which have been filed on certificate by the Commissioner of Income-tax against the judgment of the Andhra Pradesh High Court is whether, on the facts of the case, the sum of Rs. 1,00,000/ received by the assessee from the Trustees of Princess Niloufer Trust constituted income under the Indian Income-tax Act 1922 (hereinafter referred to as the Act) and if so, whether the assessee was entitled to exemption from tax in respect of that income under the terms of the agreement entered into with the Government of India on October 8, 1949 The High Court to which the above question was referred under Section 66 (1) of the Act held that though the payments of Rs. 1,00000 per year was income in the hand of the assessee, he was entitled to exemption from tax thereon under the terms of agreement dated October 8, 1949.

2. The matter relates to the assessment of the income for the years 1952-53, 1953-54 and 1954-55 of Nizam Mir Osman Ali Khan Bahadur who was the Ruler of Hyderabad State prior to its integration with the Union of India. A large number of questions arose during the course of the assessment, but we are no longer concerned with them. Indeed, most of the questions were decided in the light of the decision of this Court in respect of the assessment of this very assessee for the previous years. The decision of this Court is reported in 59 ITR 666 .

3. We may now set out the facts giving rise to the question reproduced above. Prince Muazzam Jah Bahadur is the second son of the assessee. The prince was married to Princess Niloufer in Nice (France) on November 12, 1931 according to Muslim rites. On October 8, 1949 the assessee made a settlement of Rupees 30,00,000 by transferring that amount to a trust created on that day for the benefit of Princess Niloufer. The assessee, Sir Sultan Ahmed and Shavax Ardeshir Lal, a nominee of the Government of India, were the three trustees appointed under the Trust Deed. On the same day an agreement was entered into between the Government of India, the assessee, as the settlor of the trust, and the three trustees for the deposit of Rupees 30,00,000 with the Government of India. The amount deposited was to carry interest at the rate of 1 per cent per annum. Clauses 2, 3 and 4 of the agreement were as under:

"2. The Government of India shall out of its revenue pay to the Trustees interest on the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) at the rate of one per cent per annum free of income-tax, super-tax and all other taxes, dues, duties and other assessments whatever from the date from which the said sum of Rupees 30,00,000 (Rupees Thirty Lacs) shall be deposited by the Trustees with the Government of India until the said sum of Rs. 30,00,000 (Rupees Thirty Lacs) shall be wholly paid out by the Government of India in accordance with the provisions of these presents PROVIDED HOWEVER that if and when the Government of India shall pay to the Trustees any sum of money out of the corpus of the sum of Rs. 30,00,000 (Rupees thirty lace) in accordance with the provisions hereof interest shall cease to run on the sums so paid from the date on which the Government of India shall pay the same to the Trustees and thereupon interest shall run only upon the balance of the said sum of Rupees 30,00,000 (Rupees thirty lacs) for the time being remaining in the hands of the Government of India.

3. The Government of India shall out of the corpus of the said sum of Rs. 30,00,000 (Rupees thirty lacs) pay to the Trustees until the said corpus is exhausted such sum every year as together with the interest accrued due on the said sum of Rs. 30,00,000 (Rupees thirty lace) or on the balance thereof for the time being remaining with the Government of India will in all make up the sum of Rs. 1,00,000 (Rupees one lac) per annum, the first of such payments to be made on the 1st day of Novem