The second question set out before, which was question no. (v) before the High Court, has to be understood in the context of the facts of this case. The right of the assessee to get the amount in question i.e. Rs.25 lakhs a year, arose in the wake of accession of the Hyderabad State to the Union of India. Several communications followed between the Military Governor of Hyderabad,.Maj. Gen. Chaudhuri and the Nizam of Hyderabad as well as other officers. It has to be borne in mind that the assessee was a paramount ruler owning certain private properties called Sarf-e-khas. He surrendered his paramountcy and acceded to the Union of India. His private properties were taken over by the Government and it was agreed by the Government that in lieu of his income from the said properties, he would be paid Rs.25 lakhs in Osmania currency annually.
The communication between Major General Chaudhuri, the Military Governor and the Nizam about this particular sum in contained in the letter dated 1st February, 1949. It stated inter alia as follows:
The letter which appears in the Paper Book of this appeal from Military Governor of Hyderabad, Major General Chaudhuri to the Nizam of Hyderabad, states, inter alia, that Nizam's Sarf-e-khas estates should not continue as an entirely separate administration independent of the Diwani administrative structure. The Sarf-e-khas, it was stated in that letter, should therefore be completely taken over by the Diwani, its revenue and expenditure being merged with the revenues and expenditure of the State. Thereafter we have extracted the relevant portion of the letter which stipulated for the payment of Rs.25 lakhs. The other parts of the agreement contained in that letter are not relevant for the present purpose.
In this case, in view of the background of the terms of payment and the circumstances why the payment was made, there cannot be any doubt that Rs.25 lakhs annually was an 'annuity'. It was a fixed sum to be paid out of the property of the Government of India in lieu of the previous income of the assessee from Sarf-e-khas. Therefore, it was an annuity.
The only question that arises, was there any express provision which prevented commutation of this annuity into a lumpsum? Counsel for the revenue contended that there must be an express provision which must preclude commutation. In this case indeed there is no express provision from the document itself. The question is: can, from the circumstances of the case, such an express provision precluding commutation be inferred in the facts and circumstances of this case?
In this case this being an aggrement between erstwhile ruler and the Government of India, there is no such motivation and this payment of Rs.25 lakhs in lieu of the previous income of Sarf-e-khas must be read in conjunction with two other sums namely Rs.50 lakhs as privy purse and Rs.25 lakhs for upkeep of palaces. This bears the same character.
As privy purses were not commutable, we are of the opinion that from the circumstances and keeping in background of the payment, there was an express provision flowing from the circumstances precluding the commutation of this amount of Rs.25 lakhs. If that is the position, then, in our opinion, it was exempt under section 2(e) (iv) of the Act.