B.J. Divan, C.J.
1. Since the facts giving rise to both these references are the same and the point of law arising in both the matters is the same, we will dispose of both these matters by our common judgment. As a matter of fact, in the matter out of which Income-tax Reference No. 257 arises, the Tribunal followed its own earlier decision in the matter out of which Income-tax Reference No. 43 of 1976 arises and, hence, it would be convenient to dispose of both the matters by a common judgment. The assessee in Income-tax Reference No. 257 is the wife of the assessee in Income-tax Reference No. 43 of 1976. The assessment years under consideration are 1968-69, 1969-70 and 1970-71. The assessee in Reference No. 43 of 1976 was the adopted son of the Maharaja of Porbandar. During each of the relevant previous years relevant to the assessment years under consideration, the assessee received different sums from his adoptive father, the Maharaja of Porbandar. He received Rs. 24,000 in each of the first two years under consideration and Rs. 27,000 in the third year under consideration. These amounts were paid by the Maharaja to his adopted son from the time that the Maharaja started receiving the amounts of privy purse and he continued paying them till the abolition of the privy purse by th Central Government. The amounts varied from year to year and from time to time. The amounts were paid by the Maharaja to his adopted son from the amount of the privy purse that the Maharaja was receiving. Under the terms of the Covenant which was originally entered into by the Rulers of Kathiawar States for the formation of the United State of Kathiawar, which was subsequently known as the State of Saurashtra, the amounts of privy purses for the different rulers were fixed and as shown by the White Paper On Indian States, at page 239, and schedule to the Convenient, the Maharaja of Porbandar was entitled to receive a privy purse of Rs. 3,80,000 every year. Under art. 10 of the Covenant, the Ruler of each Covenanting State was to be entitled to receive from the revenue of United State of Kathiawar for his privy purse the amount specified against the Covenanting State in Sch.I. The said amount was intended to cover all expenses of the ruler and his family including the expenses on account of his personal staff, maintenance of his residences, marriages and other ceremonies and this amount was not to be increased nor reduced for any reason whatsoever. The Rajpramukh was to cause the said amount to be paid in four equal instalments at the beginning of each quarter in advance and this amount was to be free from all taxes whether imposed by the Government of the United State of Kathiawar or by the Government of India. This Covenant was entered into in 1948 and thereafter the privy purse used to be paid to the Maharaja and the different amounts used to be paid to the assessee in Reference No. 43 of 1976 by his adoptive father. As pointed out by the Tribunal in its order, payment to the assessee was started with the receipt by the Maharaja of the privy purse and ended with the abolition of the privy purse and further the amount of payment was not consistent or uniform all throughout but varied in different periods.
2. The ITO sought to subject these amounts received by the adopted son from his father, the Maharaja, to income-tax on the ground that this constituted income in his hands and the ITO rejected the assessee's claim that the amounts were not taxable. It was contended on behalf of the assessee before the ITO that the assessee had no legally enforceable right either in the form of custom or usage or statutory obligation against the Maharaja. The assessee took the matter in appeal before the AAC, but the appeals were dismissed and the finding of the ITO that the amounts in question were taxable was upheld by the AAC. The matter was taken in further appeal before the Tribunal by the assessee and the Tribunal accepted the contention of the assessee and reversed the orders of the authorities below, namely, the ITO and the AAC. The Tribunal found that no material was brought on the record to show that the payments were received by the assessee by virtue of any custom or usage or an enforceable customary usage or under any statutory obligation. The Tribunal held that the fact that the quantum of the amount paid during the various periods was not constant or uniform and varied substantially showed that it entirely depended upon the bounty or discretion of the Ruler. Under the circumstances, the Tribunal held that the amounts could not be regarded as income and, accordingly, were not liable to tax. Thereafter, at the instance of the revenue, the following question has been referred to us for our opinion:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the payments received by the assessee out of the privy purse paid to the Maharaja of Porbandar was not liable to be taxed on the hands of the assessee as his income ?'
3. In Income-tax Reference No. 257 of 1975, the assessee is the wife of the assessee in Income-tax Reference No. 43 of 1976. In her case also, the assessment years under consideration are assessment years 1968-69, 1969-70 and 1970-71. During each of the material previous year relevant to the assessment years in question the assessee received a sum of Rs. 18,000 in the first two years and Rs. 19,500 in the third year from her father-in-law, the Maharaja of Porbandar. These amounts were held to be taxable in her hands as income and the ITO rejected the assessee's claim that the amounts were not taxable because she had no legally enforceable right either in the form of custom or usage or statutory obligation. The matter was carried in appeal to the AAC and thereafter to the Tribunal and ultimately the Tribunal, following the reasoning in her husband's case, upheld her contention and set aside the orders of the ITO and the AAC. Thereafter, at the instance of the revenue, the following question has been referred:
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the payments received by the assessee from out of the privy purse paid to be Maharaja of Porbandar was not liable to be taxed in the hands of the assessee as her income ?'
4. It must be pointed out at the beginning that, apart from the immunity from tax set out in the article of the Covenant, art. 291 of the Constitution which came into force from January 26, 1950, granted immunity regarding privy purse and it was provided that the sums paid by way of privy purse to any ruler were to be exempt from all taxes on income. Even after November 1, 1956, when the article was amended, this exemption in respect of sums paid to any ruler by way of privy purse continued. In accordance with this provision in the Constitution, the provisions of the Indian I.T. Act, 1922, seem to have amended and s. 4(3)(x)(a) of the 1922 Act provided: 'Any income received by the Ruler of an Indian State as his privy purse under art. 291 of the Constitution was not to be included in the total income of the person receiving same.' Thus, so far as the Maharaja of Porbandar was concerned, the amount of the privy purse which he received from the Government of India was not liable to be included in his total income. A similar exemption was also incorporated in clause (19) of s. 10 of the I.T. Act, 1961. 'That clause also provided, reading the main words of s. 10: 'In computing the total income of previous year of any person, any income falling within any of the following clauses shall be included......' and clause (19) provided: 'Any amount received by the Ruler of an Indian State as privy purse under article 291 of the Constitution.' This clause was deleted by the Rulers of Indian States (Abolition of Privileges) Act, 1972, with effect from April 2, 1973. Thus, prior to the abolition of clause (19), any amount received by the Maharaja of Porbandar as privy purse was not to be included in the total income of the Maharaja for any previous year.
5. The question then arises whether this amount was taxable when it was paid by the Maharaja to his adopted son, the assessee in Reference No. 43 of 1976, or paid to his daughter-in-law, the wife of the adopted son, who is the assessee in Reference No. 257 of 1975.
6. It is obvious from what has been found by the Tribunal that there was no obligation either because of the directive from the Government of India or because of any document or any custom or usage or any statutory obligation on the Maharaja to pay any amount to his adopted son or to his daughter-in-law. It is true, as Mr. Raval for the CIT in these two references has pointed out, that the amount which was paid to the Maharaja was intended to cover all expenses of the Maharaja and his family including expenses on account of his personal staff, maintenance of residences, marriages and other ceremonies, etc. It is, therefore, clear that it was out of a sense of moral obligation or, at the most, a personal obligation, that the Maharaja was paying some amounts to his adopted son and to his daughter-in-law out of the moneys received by him as privy purse. A distinction has always been maintained in law between obligations under which amounts are paid because a person is bound to apply his money out of his income and obligations where an amount cannot be said to be a part of the income of the assessee. It was pointed out by the Supreme Court in CIT v. Sitaldas Tirathdas : [1961]41ITR367(SC)
'In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.'
7. This passage from the decision in Sitaldas Tirathdas' case : [1961]41ITR367(SC) was cited by the Supreme Court in V. Venugopala Varma Rajah v. Commr. of Agrl. IT : [1972]84ITR466(SC) . We may also point out that in CIT v. Tollygunge Club Ltd. : [1977]107ITR776(SC) , the same passage was again cited by the Supreme Court at page 781 and followed and in each of these two cases, V. Venugopala Varma Rajah's case : [1972]84ITR466(SC) and Tollygunge Club's case : [1977]107ITR776(SC) , it is the test laid down in Sitaldas Tirathdas' case : [1961]41ITR367(SC) that was applied by the Supreme Court and we can do no better than apply the same test in the present case. The question that we ask ourselves is, whether in the hands of the Maharaja of Porbandar, the entire amount of Rs. 3,80,000 which was the amount of privy purse which he was entitled to receive from the Government of India would have been liable to tax, if the exemption by virtue of the Covenant and art. 291 of the Constitution and the provisions of the I.T. Act, had not been available to him. It is obvious, in the light of the test laid down in Sitaldas Tirathdas' case : [1961]41ITR367(SC) that there was no diversion of any part of the amount of privy purse before it reached the Maharaja and, therefore, if the Maharaja had been liable to pay tax in respect of the privy purse, the entire amount of Rs. 3,80,000 would have been includible in his total income. Payments to different members of the family would be instances of application of the income after it reached the hands of the Maharaja. Therefore, so far as the persons who receive the money from the Maharaja were concerned, the said recipients would not be liable to payment of income-tax for the receipts by them because the money that they would be receiving was merely the instance of the application of the income of the Maharaja. Since these are mere instances of application of the money of the privy purse amount by the Maharaja and not instances of diversion of the amount of the privy purse before it reached the Maharaja, there would be no question of treating these amounts as income in the hands of the two assessees before us. In our opinion, this is the correct approach from the legal point of view to be made to this case. The fact that by virtue of the provisions of the Covenant, art. 291 of the Constitution and the provisions of the I.T. Acts of 1922 and 1961, the amount of the privy purse was not liable to be included in the total income of the Maharaja makes no difference whatsoever to the character of the payments which he made to his son and the daughter-in-law, namely, that they were payments made by way of application of the money that he received out of a personal or moral obligation to members of his family.
8. The authorities of the department have tried to justify the inclusion of the amounts received by the adopted son on the footing that he was receiving the moneys by virtue of his office as Yuvraj. In our opinion, these amounts were paid to him and his wife not because of any office held by him but because of the moral or personal obligation of the Maharaja to maintain the members of his family out of the amount of privy purse that was being paid to the Maharaja. As we have pointed out from the wording of the covenant, the amount of privy purse was paid to the Maharaja with the intention that the amount of the privy purse should be utilised by the Maharaja for himself and for the members of his family and for his personal expenses-to use the words of the covenant.'The said amount is intended to cover all the expenses of the Ruler and his family, including expenses on account of his personal staff, maintenance of his residences, marriages and other ceremonies, etc.' It is out of that obligation which was in the sense of personal or moral obligation, without any statutory or customary obligation or obligations imposed by any usage that the Maharaja was paying the amounts to his son and daughter-in-law. To put it in the words used by the Bombay High Court in H. H. Maharani Vijaykuverba Saheb of Morvi v. CIT : [1963]49ITR594(Bom) , these voluntary payments which were made entirely without consideration and were not traceable to any source which a practical man might regard as a real source of his income but depended entirely on the whim of the donor, could not fall in the category of income, so far as recipients were concerned. In CIT v. Shaw Wallace and Co. , the Privy Council pointed out the true character of income under the Indian I.T. Act. At page 212 of the (I. A. ) report, their Lordships observed (p. 280 of Comp Cas):
'The object of the Indian Act is to tax 'income' a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall.'
9. We may point out that though there is difference between the law of income-tax in England and India, the wordings of what was said by Lord Thankerton in Stedeford (H. M. Inspector of Taxes) v. Beloe [1932] 16 TC 505, 522 (HL), is very apposite to the facts before us.'It was a mere donation, given each year with no certioration that it would be repeated the year following.' Whether the money would be paid in the subsequent years or what amount would be paid in the subsequent years depended upon the discretion of the Maharaja of Porbandar. To adopt the language of the Supreme Court in Sitaldas Tirathdas' case : [1961]41ITR367(SC) , to the facts of the present case, the present is the case of application of a portion of income to discharge a personal obligation and is not a case in which, by an overriding charge, the Maharaja became only the collector of another's income. Under these circumstances, looking to the factors which were emphasised by the Tribunal in the case of the adopted son, the amounts received were paid to the son and the daughter-in-law out of the privy purse of the Maharaja of Porbandar and though payments to the assessee started with the receipt by the Maharaja of the privy purse and ended with the abolition of the privy purse, the amount of the payment was not constant or uniform throughout but varied in different periods and that there was no material on record to show that the payments received by the two assessees were by virtue of any custom or usage or an enforceable custom or usage or by virtue of any statutory obligation. The Tribunal came to the conclusion that the fact that the quantum of the amount paid during the various years was not constant showed that it entirely depended upon the bounty or discretion of the ruler.
10. Since the payment depended upon the discretion of the ruler and was not in the nature of an obligation, the application of the amount of privy purse by the Ruler-merely a personal obligation that he felt himself bound to discharge towards the members of his family, cannot be said, in the hands of the recipients, to be income which was liable to tax. The fact that the amount of the privy purse itself was exempt from tax makes no difference to the character of the receipt by the two assessee before us. Under the circumstances, we hold that the conclusion of the Tribunal was correct.
11. For the reasons that we are stating in this order, we answer the question referred to us in each of the two cases in the affirmative, that is, in favour of the assessee and against the revenue. The Commissioner will pay the costs of the assessee in each of the two matters.