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TMI Blog1988 (12) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... nt residents of the specified scheduled areas, they should be entitled to the exemption under section 10(26)(a) of the Act of 1961, even when they are physically working outside the said areas. He further contended that the words "residing in" should be interpreted as "belonging to" the said areas and "income which accrues or arises from any source in the areas" should be given the widest possible meaning. In order to appreciate the contentions, it is necessary to examine the provisions of the Act, certain decisions of the courts and some correspondence with the income-tax authorities. The relevant provision in the Income-tax Act dealing with "incomes not included in total income" is contained in section 10 of the Act of 1961, and is as follows : "Section 10, In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-. . . (26) in the case of a member of a Scheduled Tribe as defined in clause (25) of article 366 of the Constitution, residing in any area specified in Part I or Part IT of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution or in the States of Nagaland, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, some of the members of that tribe could not be excluded unless they belonged to a well-defined class for the purpose of income-tax. The court came to the conclusion that there could be no distinction between income earned by a Government servant and that earned by person serving in a company or under a private individual or professional income. Consequently, it struck down the severable clause "who is not in the service of Government". Subsequently, these words were retrospectively deleted from section 10 (26) of the Act of 1961. This decision of the Supreme Court was given on November 7, 1967. On May 6, 1968, a letter was issued by the Under Secretary, Central Board of Direct Taxes, to the Director of Accounts, Cabinet Secretariat, to the following effect: "The Board consider that if a Government servant belonging to the Scheduled Tribe as defined in clause (25) of article 366 of the Constitution resides in any area specified in Part A or Part B of the sixth Schedule to the Constitution during the accounting period relevant to the assessment year involved and satisfied all the conditions laid down in section 10(26) of the Income-tax Act, 1961, exemption from payment of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than dividend and interest on securities) located outside the specified areas. (2) The Board have been advised that absence of notification by the Governor of Nagaland does not take the Nagas out of the purview of the exemption contemplated under section 10(26). The relevant extract of the note of the Ministry of Law in this connection is enclosed for your guidance. (3) The Supreme Court has, in categorical terms, held that section 10(26) of the new Act and the corresponding section of the old Act, in so far as they leave out the Government servants from the purview of the exemption, are invalid. The Board are of the view that no attempt should be made to restrict the period for which the tax collected from the Government servant will have to be refunded. If any Government servant who qualified for exemption as a result of the Supreme Court's judgment files his claim and proves that he had paid tax in the back years, he should be given the refund of the amount. Necessary instructions to this effect may be issued to the Income-tax Officer concerned." Thereafter on April 11, 1969, the Secretary, Central Board of Direct Taxes, wrote another letter to the Commissioner of Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of a Government servant is "at the place where the services are rendered" and if the office or place of work is situated in the specified tribal area, mere temporary residence outside the tribal area will not disentitle him to the exemption. In Dr. Curzon G. Momin v. I. S. Phukan [1973] 92 ITR 425, the Gauhati High Court had occasion to consider a question identical to the one before us. The petitioner there was a Resident Medical Officer in the T.B.Aid Society, Gauhati. As directed by the Income-tax Officer, income-tax was deducted at source from his salary on the basis that he was not entitled to the exemption under section 10(26) as his income accrued or arose outside the area mentioned in that clause. He filed a writ petition contending that section 10(26) was discriminatory as it made a difference between persons belonging to the same Scheduled Tribe without any rational basis whatsoever as he was made liable to income-tax for earning the particular income at Gauhati, while if he had earned it in Garo Hills, he would have been exempted. The argument basically was that the provision treats unequally persons equally circumstanced and placed. The court held that the sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructive of that object. In arriving at this proposition, the High Court relied on certain observations of the Supreme Court in Lawrence Singh Ingty's case [1968] 68 ITR 272. The learned judge observed that it was not possible to accept the reasoning of the High Court and he failed to see how the matter in controversy was "even obliquely in issue" before the Supreme Court in Lawrence Singh Ingty's case [1968] 68 ITR 272. It was pointed out that the ratio in that case that "within the members of the Scheduled Tribes residing in specified areas, selected by the State for the purpose of exemption, the mini classification between individuals who were Government servants deriving income from salary, and those who were not such Government servants, was not based on intelligible differentia". This vice of discrimination from which section 10(26) was then suffering, was removed when the Amending Act 42 of 1970 excised the obnoxious limb of the provisions. After referring to section 2(45) and section 5 of the Act of 1961, the court noted that chargeability of income is "dependent upon the locality of accrual or receipt of the income". The Act "abounds in instances whereby certain sources o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Clause (26A) reads as follows : "(26A) any income accruing or arising to any person from any source in the district of Ladakh or outside India in any previous year relevant to any assessment year commencing before the 1st day of April, 1989, where such person is resident in the said district in that previous year : Provided that this clause shall not apply in the case of any such person unless he was resident in that district in the previous year relevant to the assessment year commencing on the 1 st day of April, 1962. " His argument is that whereas the object of clause (26A) is to benefit the area, the object of clause (26) is to benefit the Tribe. In view of the decision of the Supreme Court in N. Takin Roy Rymbai [1976] 103 ITR 82, this argument is not tenable as the Supreme Court has held that the object of clause (26), sub-clause (a), is to benefit not (only the members of the Scheduled Tribes residing in the specified areas but also to benefit the areas economically. His next submission is that the Board's letter dated June 22, 1968, indicates that the word "residing" is to be given the widest possible meaning, but the last circular dated April 11, 1969, restricts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the Scheduled Tribes. All that a non-tribal assessee in India need do would be to enter into a sham partnership with a member, of the Scheduled Tribe residing in the specified area and ostensibly give him under the partnership a substantial share of the benefits of the business while, in reality, pay the tribal only a nominal amount. Moreover, but for the condition provided in sub-clause (a), the exemption granted under section 10(26) is likely to operate unequally and cause inequality of treatment between individuals similarly situated. A tribal residing in the scheduled areas, earning large income from business located outside the specified areas, would be totally exempt, while the non-tribal whose source of income is a share in the same business, would be taxed although, with reference to the source of the income, both were similarly situated". The Supreme Court further opined that they were (at page 91) "not persuaded to accept Mr. Lahiri's argument that the making of the exemption conditional upon the classification envisaged by sub-clause (a) would deter the members of the Scheduled Tribes from joining the mainstream of national life or would be inconsistent with the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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