1976 (2) TMI 2 - SC - Income Tax

Interpretation and constitutional validity of sub-clause (a) of clause (26) of section 10 of the Income-tax Act, 1961 - exemption from tax between the income of the member of the scheduled tribe accruing or arising from any source in the area, State or Union Territories mentioned in s. 10(26) and income of such a person from a source outside such area, is not discriminatory - no violation of article 14 of Constitution of India

Summary

Issues Involved:
1. Interpretation and constitutional validity of sub-clause (a) of clause (26) of section 10 of the Income-tax Act, 1961.
2. Whether the classification made by sub-clause (a) for the purpose of the exemption under section 10(26) is constitutionally valid.

Issue-wise Detailed Analysis:

1. Interpretation and Constitutional Validity of Sub-clause (a) of Clause (26) of Section 10 of the Income-tax Act, 1961:

The core issue in these appeals is the interpretation and constitutional validity of sub-clause (a) of clause (26) of section 10 of the Income-tax Act, 1961. The respondent, a member of the Jaintia Scheduled Tribe and a permanent resident of the United Khasi-Jaintia Hills Autonomous District, claimed exemption on his income from salary under section 10(26)(a). The Income-tax Officer denied this exemption on the grounds that the income arose outside the scheduled area. The High Court held that the exemption clause was enacted for the benefit of Scheduled Tribes residing in specified areas and that the classification made by sub-clause (a) was artificial and not based on any substantial distinction having a rational nexus to the purpose of the law. Consequently, the High Court struck down sub-clause (a) as violative of article 14 of the Constitution.

2. Validity of the Classification Made by Sub-clause (a) for the Purpose of the Exemption under Section 10(26):

The Supreme Court analyzed whether the classification made by sub-clause (a) for the purpose of the exemption under section 10(26) is constitutionally valid. The Court noted that the exemption under section 10(26) requires three conditions to be met: (i) the individual must be a member of a Scheduled Tribe as defined in clause (25) of article 366 of the Constitution, (ii) the individual must reside in any area specified in Part I or Part II of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution, and (iii) the income must accrue or arise from a source within the specified areas or by way of dividend or interest on securities.

The Supreme Court disagreed with the High Court's reasoning, emphasizing that the classification based on the source of income is integral to the fundamental scheme of the Income-tax Act. The Court highlighted that the entire scheme of the 1961 Act is based on the classification of sources of income, which is a well-recognized pattern and not artificial. The classification aims to benefit the members of Scheduled Tribes residing in specified areas and to economically benefit those areas.

The Court also addressed the potential misuse of the exemption if the classification were removed, which could lead to tax evasion by non-tribal assessees entering into sham partnerships with tribal members. Additionally, the Court noted that the exemption, if unconditional, could result in unequal treatment between similarly situated individuals.

The Supreme Court concluded that the classification made by sub-clause (a) is based on intelligible differentia and has a rational nexus to the object sought to be achieved by the law. Therefore, the classification is constitutionally valid.

Conclusion:

The Supreme Court reversed the judgment of the High Court, holding that sub-clause (a) of clause (26) of section 10 of the Income-tax Act, 1961, is constitutionally valid. The appeals were allowed, but each party was directed to bear its own costs. The Court did not address the question of whether the source of the salary received by the assessee lay in the tribal areas, as this issue remained open and undetermined.