2019 (7) TMI 1510 - AT - Income Tax

Disallowance of exemption u/s 10(26) - income earned by two scheduled tribe persons jointly from a source situated in specified Tribal Area - HELD THAT - If one goes through the Chapter on Exemption it is seen that some for the clauses are meant for individuals some for non-residents some for companies some for local authorities and so forth. If the contention of the assessee is accepted incomes of even Companies and Trusts formed and owned exclusively by tribals who are residing in scheduled areas will be exempt from payment of tax. This will overstretch the exemption provision of the Act which in my considered view is not in consonance with the recent ruling of Hon ble Apex Court in the case of Dilip Kuamr and Co 2018 (7) TMI 1826 - SUPREME COURT . In view of assessee s pleadings and Revenue s contentions against and in support of the impugned disallowance of exemption u/s 10(26). It is clear from the CIT(A) above extracted findings that he has considered at length all the relevant facts as well as settled legal proposition as per various hon ble judicial forums at length that the impugned relief cannot be granted in such a case involving a tribe . We see no reason to interfere with the order of CIT(A) therefore. - Decided against assessee.

Summary

Issues Involved:
- Interpretation of provisions of section 10(26) of the Income Tax Act, 1961 regarding tax exemption for scheduled tribe members.
- Whether exemption under section 10(26) can be extended to a partnership firm formed by individual tribals.
- Application of legal principles and precedents in determining eligibility for tax exemption.
- Consideration of strict interpretation of exemption notifications and benefit of ambiguity in favor of revenue.

Analysis:

Issue 1: Interpretation of Section 10(26) of the Income Tax Act
The case involved a dispute regarding the denial of exemption under section 10(26) of the Income Tax Act to two assessees, M/s Hotel Centre Point and M/s Ri-Kynjal Serenity By The Lake, for assessment years 2013-14 to 2015-16. The appeals raised substantive grounds challenging the assessment orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals) regarding the denial of statutorily allowable exemption under section 10(26) of the Act.

Issue 2: Eligibility of Partnership Firm for Tax Exemption
The central issue revolved around whether the tax exemption available to individual tribals under section 10(26) could be extended to a partnership firm formed by such individuals. The Tribunal analyzed the distinct identity of a firm as a separate legal entity and the separate scheme of taxation applicable to firms under the Income Tax Act. It was argued that while individuals and bodies of individuals could qualify for exemption, firms, companies, and other entities could not be considered eligible for the same.

Issue 3: Application of Legal Principles and Precedents
The Tribunal extensively discussed the legal principles and precedents, including the interpretation of the term "person" under the Income Tax Act, the distinction between individuals and firms for taxation purposes, and the relevance of specific provisions such as section 4(1) and section 10(26) of the Act. Reference was made to the decision of the Hon'ble Gauhati High Court in the case of Mahari & Sons and the subsequent ruling of the Constitution Bench of the Supreme Court regarding the strict interpretation of exemption notifications.

Issue 4: Strict Interpretation of Exemption Notifications
The Tribunal emphasized the need for a strict interpretation of exemption notifications, placing the burden of proving applicability on the assessee and interpreting any ambiguity in favor of the revenue. The decision of the Constitution Bench of the Supreme Court in Commissioner of Customs vs. M/s Dilip Kumar and Company highlighted the importance of strict interpretation in cases of ambiguity, which was deemed applicable to the present appeal concerning the extension of tax exemption to a partnership firm formed by individual tribals.

In conclusion, the Tribunal dismissed the appeals of the assessees, upholding the decision of the Commissioner of Income Tax (Appeals) to deny tax exemption to the partnership firm constituted by tax-exempt individual tribals. The judgment highlighted the legal principles, statutory provisions, and precedents governing the eligibility for tax exemption under section 10(26) of the Income Tax Act, emphasizing the importance of strict interpretation and adherence to established legal principles.