1988 (12) TMI 77 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to exemption under Section 10(26)(a) of the Income-tax Act, 1961, for Scheduled Tribe members working outside specified scheduled areas.
2. Interpretation of "residing in" within the context of Section 10(26)(a).
3. Determination of "source of income" for the purpose of exemption under Section 10(26)(a).

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Section 10(26)(a) of the Income-tax Act, 1961:
The primary issue is whether Scheduled Tribe members are entitled to the benefits of exemption under Section 10(26)(a) of the Income-tax Act, 1961, even when they are working outside the specified scheduled areas. The petitioners, who are government servants and members of Scheduled Tribes from the North-Eastern States, claim that they should be entitled to the exemption as they are permanent residents of the specified scheduled areas, despite being posted outside these areas.

2. Interpretation of "Residing in":
The petitioners argued that the term "residing in" should be interpreted as "belonging to" the specified scheduled areas. They contended that the exemption should apply to them as permanent residents of these areas, irrespective of their physical location for work purposes. The Supreme Court's decision in S. K. Dutta, ITO v. Lawrence Singh Ingty and subsequent correspondence from the Central Board of Direct Taxes (CBDT) were examined to understand the interpretation of "residing in." The CBDT initially interpreted "residing" in a wider sense, meaning a person who belongs to and is a permanent resident of the tribal areas, even if temporarily residing outside for work. However, a later circular clarified that the source of income must be in the specified tribal area for the exemption to apply.

3. Determination of "Source of Income":
The court examined whether the income earned by the petitioners, who are posted outside the specified areas, qualifies for exemption under Section 10(26)(a). The Supreme Court in N. Takin Roy Rymbai and other cases emphasized that the source of income must be within the specified areas for the exemption to apply. The court noted that the classification between income accruing within and outside the specified areas is constitutionally valid and serves the purpose of benefiting both the members of the Scheduled Tribes and the specified areas economically. The court rejected the argument that the source of income could be where the money is paid from, rather than where the services are rendered.

Conclusion:
The court concluded that the exemption under Section 10(26)(a) is not available to Scheduled Tribe members working outside the specified scheduled areas, as the source of income must be within those areas. The rule was discharged, and no order as to costs was made. The court emphasized that the object of the exemption is to benefit both the members of the Scheduled Tribes and the specified areas economically.