The Supreme Court (SC) on 5 December 2016 held that the income earned by erstwhile rulers of a princely state or by their heirs by renting out a portion of the residential palace is not taxable.
Moreover, the court also smacked the Income Tax department for registering such case despite their income being exempted under Section 10(19A) of the IT Act, 1961.
The ruling was made by a bench of Justices Ranjan Gogoi and Abhay Manohar Sapre.
The court was hearing a plea of the ruler of the former princely state of Kota, now a part of Rajasthan, challenging the high court order for bringing his income from rent in the Income Tax net. The ruler owns two residential palaces known as Umed Bhawan Palace and the City Palace.
The ruler is using Umed Bhawan Palace for his residence and a portion of it was rented out to the Ministry of Defence in 1976.
- In 1950, the Union Government declared residential palace of an erstwhile ruler as his inalienable ancestral property to be exempted from levy of income tax. But in 1984, the IT department initiated proceedings for assessment of income earned from renting out a portion of the palace.
- The IT department contended that IT exemption was given for personal use and income earned from the rent was taxable. However, the Commissioner of Income Tax and Income Tax Appellate Tribunal turned down the plea of the IT department which later moved the Rajasthan High Court.
- The High Court ruled that as long as the ruler continued to remain in occupation of his official palace for his own use, he will be entitled to claim exemption but if he let out any part of his palace, he becomes disentitled to claim benefit of exemption.
- Quashing the HC order, the Supreme Court held that Section 10(19A) uses the term 'palace' for considering the grant of exemption to the ruler and income earned from renting out a portion of the palace was also exempted.
- The government incorporated Section 10(19A) in the IT Act to give exemption to former rulers.