Law:

Section:

Section 18 of the Income-tax Act, 1961 [Corresponding to section 8 of the Indian Income-tax Act, 1922] - Interest on securities - Chargeable as - Assessment years 1955-56 to 1961-62 - State of Hyderabad applied for a loan - Nizam agreed to grant said loan free of all taxes under Hyderabad Income-tax Act - Whether interest paid on such loan had to be treated as being exempt under 1922 Act - Held, yes FACTS After the police action the Military Governor had applied to the Nizam for the loan on behalf of the State of Hyderabad, which was to be income-tax free. The Nizam agreed to grant the said loan at the rate of interest specified. Though, at some stage, he seemed to have said that it was free of all taxes, nonetheless, when the amount was in fact advanced by the Nizam and received by the State of Hyderabad, it was clearly stipulated that the interest would be income-tax free. The ITO, however, rejected the claim of the Nizam for exemption of income-tax under the 1962 Act on two grounds-firstly, that it was not a State Government security, and secondly, that even if it was not taxable, as at the time when it was granted, the income-tax that was in the contemplation of parties was the Hyderabad Income-tax Act, since the Indian Income-tax Act, subsequently became applicable, the said loan could not be free from income-tax unless there was notification published by the Government the assessee's contention that the loan was to the State Government, that it was a State Government security and that it was income-tax free was rejected not only by the ITO, but by the AAC as well as the Tribunal. On reference: HELD Following the decision of the Supreme Court in the case of CIT v. H.E.H. Mir Osman Ali Bahadur [1966] 59 ITR 666 , the department would not be justified in raising the matter once again on the basis that the assessee had not made out that the agreement to grant the loan was not subject to the condition that it was free of income-tax under the Act. Not only the decision of the Supreme Court deals with both the questions, one of which pertains to the grant of the identical loan free of Indian income-tax but also that, even on the perusal of the correspondence,…

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