Apex Court: Rental income received by former rulers or their legal heirs by leasing out a portion of their presidential palace is exempted from tax

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A division bench of Justices Ranjan Gogoi and Abhay Manohar Sapre of the apex court, rebuked the income tax authorities for taxing the rental income of former rulers of princely states, by leasing out a portion of their palace premises. The tax authorities had taxed the rental income of the petitioner, despite the income being non taxable under section 10 (19A) of the income tax act. As per section 10 (19A) properties of previous rulers were ancestral properties and were exempted from tax through the section 10 (19A) incorporated by the central government in the act.

The petitioner had filed a petition before the apex court for setting aside the order of the High Court, which had directed the tax authorities to tax the rental income from the leased out property. The petitioner had been residing in a portion of the property and had leased out another portion of it to the Defense Ministry in the year 1976.
The income tax authorities in their petition contended that if the property was used for residential purposes then it would be exempted from tax, but if it was leased out then the rental income obtained from the property would be taxable. 

The tax authorities approached the high court after their contention was dismissed by the Income Tax Appellate Tribunal & the Commissioner of Income Tax. The high court ruled in favor of the tax authority and held that if the property was leased out, the petitioners would not be able to secure the protection under section 10 (19A) of the tax act. 

The  Apex court set aside this ruling of the high court and held that the petitioner was entitled to the benefit under section 10 (19A) of the income tax act.
The court observed that "We cannot ignore this distinction while interpreting Section 10(19A) which, in our view, is significant. 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. We, however, do not find such language employed in the section." 

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