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:
"After this merger H.E.H. will be paid annually a total sum of Rs. 1 crore distributed as follows:
(a) Rs.50 lacs as a privy purse,
(b) Rs.25 lacs in lieu of his previous income from the Sarf-e-khas, and
(c) Rs.25 lacs and for the upkeep of Palaces etc."
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.
The background of the facts and circumstances of the payment has to be kept in mind. The Nizam had certain income. He was being given three sums-one was the privy purse which was not commutable; the other was payment of Rs.25 lakhs for the upkeep of palaces etc. and the third of Rs.25 lakhs in lieu of his previous income from the Sarf-e- khas. Income is normally meant for expenditure. The Nizam had to incur various expenditures. Commutation is often made when one is not certain as to whether the source from which that income comes for example, when a man retires from service, he normally commutes in order to ensure for himself and after his death for his family a certain income which he can ensure by getting the commuted amount invested in his private bank or otherwise which he may not be sure because upon his death the pension will cease.
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.