J.

Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

Equivalent citations: ILR 1988 Delhi 522 b, 1989 177 ITR 24 Delhi Bench: A V Seth J. Lalhmingliana And Others vs Union Of India And Others on 5/12/1988 JUDGMENT Leila Seth, J. 1. The question in issue in this case is whether the petitioners, who are members of 'Scheduled Tribes', are entitled to the benefits of exemption under section 10(26)(a) of the Income-tax Act (hereinafter referred to as "the Act of 1961"), even when they are working outside the specified scheduled areas ? 2. The petitioners are admittedly government servants and members of Scheduled Tribes of the North-Eastern States. They are persons who draw salaries, etc., from the Government of India, State Governments or Union Territories of the Schedule area States, namely, Nagaland, Manipur Tripura Arunachal Pradesh and Mizoram, and are posted outside the specified scheduled areas. However, it is claimed that they are permanent residents of the said areas. 3. Mr. Harish Salve, learned counsel for the petitioner, has submitted that since the petitioners are permanent 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 accuses or arises from any source in the areas" should be given the widest possible meaning. 4. 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. 5. The relevant provisions 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 II of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution or in the States of Nagaland, Manipur and Tripura or in the Union Territories of Arunachal Pradesh and Mizoram or in the areas covered by notification No. TAD/R/35/50/109, dated the February 23, 1951 issued by the Governor of Assam under the proviso to sub paragraph (3) of the said paragraph 20 [as it stood immediately before the commencement of the North-Eastern Areas (Reorganisation Act, 1971 (18 of 1971)] any income which accrues or arises to him, (a) from any source in the areas, States or Union territories aforesaid or, (b) by way of dividend or interest on securities." 6. The limited point in issue is what is the meaning of the expression "any income which accrues or arises" to a member of a Scheduled Tribe residing in any areas specified "from any source" in the said areas, States or Union territories. 7. Since the Supreme Court and the Gauhati High Court have dealt with some aspects of this matter, we shall refer to them. In S. K. Dutta, ITO. V. Lawrence Singh Ingty [1968] 68 ITR 272 the Supreme Court considered
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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

the question whether exclusion of Government servants from the exemption given under section 4(3)(xxi) of the Indian Income-tax Act. 1922, and under section 10(26) of the Act of 1961 was violative of article 14 of the Constitution of India. The two provisions were similar and section 10(26) of the Act of 1961 as it stood at the relevant time was as follows: "In the case of a member of a Schedule Tribe as defined in clause (25) of article 366 of the Constitution, residing in any area specified in Part A of Part B of the Table appended to paragraph 20 of the Sixth Schedule to the constitution or in the Union Territories of Manipur and Tripura, who is not in the service of Government, any income which accuses or arises to him, (a) from any source in the area or Union Territories aforesaid, or (b) by way of dividend or interest on securities." 8. The Supreme Court observed that Government servants alone had been excluded from the benefits of the exemption given under the above quoted provision. It held that taxation laws had to pass the test of article 14. It observed that the State did not have to tax everything in order to tax something and it is allowed to pick and choose districts, object, persons, methods and even rates for taxation, if it does so reasonably. But since the exemption had been given on the basis of persons being members of a particular tribe, 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 a 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. 9. This decision of the Supreme Court was given on November 7, 1966. 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 of your letter No. Disb. Ba/4446-4447 dated March, 11 1968." 10. Thereafter on June 22, 1968 the Secretary, Central Board of Direct Taxes, wrote a letter to the Commissioner of Income-tax, Assam, Shillong, the letter was as follows: "Sub: Judgment of the Supreme Court in the case of S. K. Dutta, ITO and others v. Lawrence Singh Ingty Civil Appeal No. 809 of 1966 Implication of the judgment of other cases-Instructions regarding. Please refer to your letter No.SCA NO. 1/65-66.4005 dated January 19, 1964, on the above subject. The Board has considered the effect of the judgment of the Supreme Court in the case of Dutta (S. K.), ITO v. Lawrence Singh Ingty [1968] 68 ITR 272 in consultation with the Ministry of Law. The decisions taken by the Board on the points raised by you are as follows: (1) Both clause (xxi) of sub-section (3) of section 4 of the Indian Income-tax Act, 1923 and section 10(26) of the Income-tax Act, 1961, require that a member of a scheduled Tribe, to be entitled to the exemption available under these clauses. Should be residing in the specified area. If a Government servant belonging to this tribe happens to be posted outside the specified area, he would still be entitled to the exemption. The Board have been advised that the word 'residing' used in the section should be interpreted in a wider sense so
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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

as to mean a person who belongs to and is a permanent resident of the tribal areas even if he may be physically residing outside these areas temporarily for the purpose of service or work. The scope of the exemption available under section 4(3)(xxi) of the Indian Income-tax Act. 1922, was considerably wider than the scope under the corresponding section 10(26) of the Income-tax Act, 1961. Whereas under the old ACt, exemption of its nature under the new Act except for the dividend and interest on securities for the exemption to be available a necessary conditions is that the source of that income should be in the areas specified in the clauses. Thus, all the assessments framed on the Government servants under the old Act in respect of all sources of income are now rendered null and void. The assessments on the Government servants under the new Act are sustainable only in respect of source-full of income (income other 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 purviews 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, ar invalid, the Board are of the view that no attempt should be made to restrict the period for which the tax collected from XDA 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." 11. Thereafter, on April 11, 1969 the Secretary, Central Board of Direct Taxes, wrote another letter to the Commissioner of Income-tax Shillong. The letter is as follows: "Please refer to your letter No. SCA/1/65-66/22306 dated the August 27, 1968, on the above subject. (2) The matter has been examined in consultation with the Ministry of Law. The positions is that the source of incomes of the Government servant is at the place where the services are rendered. The place should be located in the tribal area in order that the employee may be eligible for exemption under section 10(26) of the Income-tax Act 1961, if the Government servant has his office or place of work in an excluded areas but resides in a tribal area, that will not entitle him to the said exemption. On the other hand, if the place of work and posting is situated in the specified tribal area, mere temporary residence outside the tribal area will not disentitled the person concerned from the exemption under section 10(26) of the Income-tax Act, 1961, the effect of the Supreme Court decision in the case of Lawrence Singh Ingty [1968] 68 ITR 272, is that for the purpose of considering the exemption available under section 10(26) the section would have to be read as if the words 'who is not in the service of he Government do not find a place therein. Consequently, Government servants will be entitled to the exemption only if they are otherwise eligible for the exemption. The cases pending with you may be disposed of accordingly." 12. It may be noticed that in the earlier letter dated June 22, 1968, the Board was of the view that if the Government servant belonging to a particular tribe. Happened to be posted outside the specified area, he would still be entitled to exemption. This was because they interpreted the word "residing" in a wider sense as meaning "a person who belongs to and is a permanent resident of the tribal area even if he may be physically residing outside those areas temporarily for the purpose of service or work". How ever, the difference in the Act of 1922 and the Act of 1961 was referred to in the said letter as, in the earlier Act, exemption was available in respect of all income wherever arising and irrespective of its nature, whereas, under the later Act. Exemption was available only if the source of income was in the areas specified, apart from dividend and interest on securities.
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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

13. On the question of source, the Board by its subsequent circular dated April 11, 1969, indicated that the source of income 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. 14. 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 Schedule 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 circumstances and placed. 15. The court held that the scheme and the pattern of the Income-tax Act is "to give relevance to a territorial nexus with the assessable income". After referring to the decision in CIT v. Chunilal B. Mehta [1938] 6 ITR 521 (PC) Chief Justice Goswami, speaking for the court, opined that the clear object of the exemption clause in section 10(26) of the Act of 1961 "is in the interest of the Schedule Tribe. As also in the interest of the area which that Tribe makes the lot to live in. By exempting the Scheduled Tribe in this behalf for earning income which accrues or arises in the area, not only the members of the Tribe are helped but also the interest of the area is adequately furthered". At page 429 he held as follows: "The members of the Scheduled Tribe earning income which accrues in the Tribal area as specified are a well defined class and there is a reasonable nexus for exempting this class from other members of the Schedule Tribe who may have income accruing to them in a place or area outside those Tribal areas. In view of the object of the provision, to which we have already adverted, the classification in this case is well-defined. The classification is founded on an intelligible differential and that differential has a rational nexus with the object sought to be achieved by the exemption has a rational nexus with the object sought to be achieved by the exemption clause. There can, therefore, be no legitimate grievance on the score of article 14 of the Constitution. The challenge to the validity of section 10(26) is therefore. Of no avail." 16. In ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82, the Supreme Court once again had occasion to consider the provisions of section 10(26) of the Act of 1961. The question in issue in the case was whether the classification made by sub-clause (a) for the purpose of exemption under section 10(26) between income of a member of a Scheduled Tribe accruing or arising from any source in the area, State or Union Territory specified in the aforesaid clause (26) and the income from a source outside such area,, state or Union Territory is constitutionally valid. 17. Sarkaria J., speaking for the court, noticed that the Gauhati High Court had answered the above question in the negative and had propounded the proposition that the object of clause (26) of section 10 is to grant a blanket exemption to the members of the Scheduled Tribes as a class residing in the specified areas, and the condition contained in sub clause (a) was destructive 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 accepted 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 was not based on intelligible differential". 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.
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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

18. 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 of income have been exempted from tax, while others are assessable". Suffice it to say "that classification of sources of income is integral to the basic scheme of the 1961 Act", It then opined that the classification made by section 10(26)(a) for purposes of exemption "is not unreal or unknown. It conforms to a well recognised pattern. It is based on intelligible differentia. The object of this differentiation between income accruing or received from a source in he specified areas and the benefit not only the members of the Scheduled Tribes residing in the specified areas but also to benefit economically such areas". Consequently, the Supreme Court allowed the appeals holding that the High Court was in error in coming to the conclusion that the classification was artificial and not based on an intelligible differential and upheld the validity of sub-clause (a) of clause (26) of section 10. 19. In ITO v. Hubert Osrick Under [1976] 105 ITR 795, a Bench of three judges of the Supreme Court, Mr. Justice H. R. Khanna, Mr. Justice V. R. Krishna Iyer and Mr. Justice N. L.Untwalia followed the decision in N .Takin Roy Rymbai holding that clause (a) of section 10(26) of the Income-tax Act is not discriminatory and does not offend article 14 of the Constitution of India. 20. It is in the light of these decision that the submission of Mr. Salve, learned counsel for the petitioners, have to be examined. He said that he was not giving up the question of discrimination under article 14 of the Constitution, but he was not urging it independently in view of the decision in N. Takin Roy Rymbai . 21. His contention is that the words "residing in" as mentioned in the Board's first letter, above mentioned, mean "belong to or is a permanent resident of the tribal area". Consequently, he urges that the concept or "residing in" is to test the identity of the class or persons and is not a precondition for the grant of exemption. Accordingly to him, the purpose of section 10(26) of the Act of 1961 is to benefit a tribe and a person belonging to that tribe irrespective of whether he is physically residing in the specified locality or not. He sought to highlight this aspect by pointing out the different in the provisions of clauses (26) and (26A) of section 10 of the Act of 1961. 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 day of April 1, 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 day of April 1, 1962." 22. 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 Schedule Tribes residing in the specified areas but also to benefit the areas economically. 23. 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 the meaning of source and, consequently, the scope of the provisions, and is therefore, illegal and void, according to him, "source" has no definite legal connotation and is susceptible of different meaning depending on the context. In the present context and the scope of section 10(26) of the Act of 1961, it should be interpreted to mean where the money comes from, irrespective of where the work is performed. He relied on Rhodesia Metals Ltd.(Liquidator v. Commissioner of Taxes [1941] 9 ITR (Suppl.) 45 (PC) and CIT v. Lady Kanchanbai to submit that source was not "a legal concept but something which a practical man would regard as a real source
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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

of income". According to him, relying on the decision in Phra Phraison Salarak v. CIT [1928] 3 ITC 237 (Rang) the real source of income of State Government employees of the State of Tripura, Manipur, Nagaland, etc., was in the specified areas as that is where the moneys could be demanded. In the case of the Union Territories of Arunachal Pradesh and Mizoram he urged that the immediate source was Arunachal Pradesh and Mizoram as the payment was made from the Consolidated Fund of India on the basis of funds allocated to Arunachal Pradesh and Mizoram. He therefore, contended that the source could be either where one worked or where one was paid, with regard to the Central Government employees, he urged that the nexus was established, as the monies for the Consolidated Fund of India came form all over India including the scheduled specified Scheduled Tribes posted in Manipur would be entitled to the benefit but when transferred to Uttar Pradesh, would lose the exemption especially when the source of income is the same i.e., salary from the Government of India. 24. In the case of N. Takin Roy Rymbai similar arguments were made by Mr. Lahiri, counsel for the assesses. The supreme Court noted (at page 90) if "the contention advanced by Mr. Lahiri is accepted and a member of the Schedule Tribe residing in a specified area is held entitled to the exemption irrespective of whether the source of his income lies within or outside such areas, it will lead to potentially mischievous results and evasion of tax by assessed who do not belong to the Scheduled Tribes. All that a non tribal assessed 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 benefit 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, 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." 25. The Supreme Court further opinioned 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 directive principle embodied in article 46. This article contains a directive principle of State policy for promotion of educational and economic interests of the weaker sections of the people particularly the Scheduled Castes and Scheduled Tribes. Its primary objective is to provided protection to the 'weaker sections' of society. Members of the Scheduled Tribes who are enterprising and resourceful enough to move out of the seclusion of the tribal areas and successfully compete with their Indian brethren outside those areas and rise to remunerative positions in service or business, cease to be 'weaker sections. In any case, the State is the best judge to formulate its policies and to decide how far and for what period and in what situation the members of a particular Schedule Tribe residing in a particular tribal area should be afforded the protection and benefit in the matter of promotion of their educational and economic interests." 26. Consequently, it is not open to Mr. Salve to contend that the object of the exemption is to benefit only the Tribe and not the area. His other sub-mission that, factually the source of the income received by the petitioners was within the specified scheduled areas as the Consolidated Fund of India from which the payments were made had a direct nexus with the said areas, cannot be examined as it would depend on facts and no particulars pertaining to this aspect have been asserted in the writ petition. 27. Mr. B. Gupta, learned counsel for the Revenue, urged that "source" in income-tax parlance means a "head" of income and the question of the sites of the Consolidated Fund of India in the particular case is a factual one regarding which there are no pleadings.

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J. Lalhmingliana And Others vs Union Of India And Others on 5 December, 1988

28. It is correct that no facts have been pleaded on this aspect and in any case it appears to us, that a factual controversy would be outside the scope of a petition under article 226 of the Constitution of India. 29. In the result, the rule is discharged, However, in the circumstances of the case, we make no order as to costs. 30. Rule discharged.

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