2025 (5) TMI 367 - HC - Income Tax

Entitlement to exemption provided under the provisions of Section 10 (26) - refund of the income tax deducted from the salary of the sole respondent - HELD THAT - Sole respondent herein belongs to a notified Scheduled Tribe community of the State of Rajasthan. The respondent during his service career had been posted out of the State of Rajasthan and had also rendered service in areas specified under the provisions of Section 10 (26) of the Income Tax Act 1961. Although appellants herein had earlier in the course of consideration of the present proceeding raised an issue as to whether the sole respondent herein would be entitled to claim such income tax exemption for the period he was posted at Silchar Assam; the said position was clarified sole respondent by contending that the respondent is not claiming income tax exemption for the period he was posted at Silchar Assam which is not a specified area under the provisions of Section 10 (26) of the Income Tax Act 1961 but the respondent herein is claiming income tax exemption relating to the period he was posted at Agartala Tripura which is a specified area under the provisions of Section 10 (26) of the Income Tax Act 1961. The said aspect of the matter was recorded by this Court in its order dated 20.02.2024 passed in the present proceeding. While being posted at Agartala Tripura; was so posted in a specified area in terms of the provisions of Section 10 (26) of the Income Tax Act 1961 it is to be held that he would be entitled to the benefits of exemption from income tax flowing from the provisions of Section 10 (26) of the Income Tax Act 1961. The above aspect of the matter is no longer res integra and has been laid to rest by the decision of the Full Bench of this Court in the case of Pradip Kr. Taye ors. 2009 (12) TMI 285 - GAUHATI HIGH COURT Thus conclusions drawn by the learned Single Judge in the order 2023 (3) TMI 217 - GAUHATI HIGH COURT to the effect that the respondent was entitled to the benefits accruing to him under the provisions of Section 10 (26) and that he would be entitled to the exemption from income tax flowing therefrom; we are of the considered view that given the facts and circumstances involved in the matter as well as the Scheduled Tribe status of the sole respondent herein the order would not mandate an interference from this Court. Accordingly the directions passed by the learned Single Judge for refund of the income tax deducted from the salary of the sole respondent herein cannot also be said to be erroneous.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

• Whether a member of a Scheduled Tribe recognized in one State (Rajasthan) but posted in a specified area under Section 10(26) of the Income Tax Act, 1961, is entitled to claim exemption from income tax on salary earned during such posting;
• Whether the provisions of Section 10(26) of the Income Tax Act, 1961, which exempt income of Scheduled Tribe members residing in specified areas, apply to government employees posted outside their place of origin but within specified areas;
• The correct interpretation of the phrase "residing in any area specified" under Section 10(26) of the Income Tax Act, 1961, particularly whether it restricts exemption only to Scheduled Tribes residing in their place of origin or extends to those posted or residing elsewhere within the specified areas;
• Whether the decision of the Full Bench in Pradip Kr. Taye & ors. v. Union of India & ors. (2010) is applicable and binding in the present case;
• Whether the income tax authorities erred in deducting income tax from the salary of the respondent and refusing refund, despite the claimed exemption under Section 10(26).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement of Scheduled Tribe member posted outside State of origin to exemption under Section 10(26)

Relevant legal framework and precedents: Section 10(26) of the Income Tax Act, 1961, exempts income of members of Scheduled Tribes residing in specified areas (notably North East and Jammu & Kashmir) from income tax. The Full Bench decision in Pradip Kr. Taye & ors. v. Union of India & ors. (2010) extensively interpreted this provision, particularly the phrase "residing in any area specified." The Supreme Court's ruling in S.K. Dutta invalidated exclusion of government employees from such exemption as violative of Article 14 (equality before law).

Court's interpretation and reasoning: The Court reiterated the Full Bench's reasoning that the phrase "residing in any area specified" must not be narrowly construed to restrict exemption only to Scheduled Tribes residing in their place of origin. The Court emphasized that the exemption was intended as a special provision for Scheduled Tribes in designated areas, and that government employees posted within these areas are entitled to the exemption. The Court rejected the revenue's argument that the exemption should be denied if the Scheduled Tribe member is posted outside his original State (Rajasthan) but within a specified area (e.g., Agartala, Tripura).

Key evidence and findings: The respondent belonged to the Meena community, a Scheduled Tribe in Rajasthan, and was posted in Agartala, Tripura, a specified area under Section 10(26). Tax exemption certificates issued by the department supported his claim. The respondent was not claiming exemption for periods posted in Silchar, Assam, which is not a specified area.

Application of law to facts: The Court applied the Full Bench's interpretation, holding that the respondent's posting in Agartala, a specified area, entitled him to exemption under Section 10(26) despite his Scheduled Tribe status being recognized originally in Rajasthan. The Court held that denying exemption based on posting location would lead to arbitrary and unreasonable results, violating Article 14.

Treatment of competing arguments: The appellants contended that the Scheduled Tribe status related only to Rajasthan and that Rajasthan was not a specified area under Section 10(26), thus no exemption was available. The Court rejected this, noting the respondent's posting in a specified area and reliance on the Full Bench ruling. The Court also dismissed the contention that the Full Bench decision was inapplicable.

Conclusions: The respondent is entitled to exemption under Section 10(26) for income earned while posted in specified areas, regardless of original State of Scheduled Tribe recognition.

Issue 2: Interpretation of "residing in any area specified" under Section 10(26)

Relevant legal framework and precedents: The Full Bench in Pradip Kr. Taye & ors. construed this phrase to avoid overly narrow or literal interpretations that would exclude Scheduled Tribes migrating within specified areas from exemption. The Court also referred to constitutional provisions (Article 366(25), Articles 330(3) and 332(1)) recognizing special treatment for Scheduled Tribes in specified regions.

Court's interpretation and reasoning: The Court held that "residing in any area specified" should be understood contextually and synonymously with "in relation to any area specified." The expression is descriptive of the limited number of Scheduled Tribes resident in those areas, not restrictive of benefits to those physically residing only in their place of origin. The Court emphasized that the exemption is linked to income arising in specified areas and not to the place of origin alone.

Key evidence and findings: The Court cited paragraphs 28-30 of the Full Bench judgment, which elaborated on the legislative intent and constitutional context. It also considered the history of Section 10(26), including the Supreme Court's invalidation of exclusion of government servants.

Application of law to facts: The respondent's income arose while posted in a specified area. Hence, the exemption applies. The Court rejected the revenue's narrow interpretation that would exclude government employees posted outside their original Scheduled Tribe area.

Treatment of competing arguments: The revenue's argument for a narrow interpretation was dismissed as producing arbitrary results and inconsistent with constitutional guarantees and legislative intent.

Conclusions: The phrase "residing in any area specified" under Section 10(26) must be interpreted broadly to include Scheduled Tribe members posted or residing within specified areas, regardless of original domicile.

Issue 3: Applicability of Full Bench decision in Pradip Kr. Taye & ors.

Relevant legal framework and precedents: The Full Bench decision is binding on the Court and settles the interpretation of Section 10(26) in relation to Scheduled Tribes and government employees.

Court's interpretation and reasoning: The Court affirmed the applicability of the Full Bench decision to the facts of the present case. It rejected the appellants' contention that the decision was not applicable.

Key evidence and findings: The Court noted the Full Bench's detailed examination of the issue and its authoritative pronouncement.

Application of law to facts: The Court applied the Full Bench ruling to hold that the respondent was entitled to exemption.

Treatment of competing arguments: The appellants' attempt to distinguish or discredit the Full Bench decision was rejected.

Conclusions: The Full Bench decision governs the present case and supports the respondent's entitlement to exemption.

Issue 4: Legality of income tax deduction and refund claim

Relevant legal framework and precedents: Section 10(26) exempts income from tax; wrongful deduction requires refund. The writ petition challenged the failure to refund tax deducted from salary.

Court's interpretation and reasoning: The Court held that since the respondent was entitled to exemption, the income tax deducted was not permissible. The income tax authorities were directed to process refund expeditiously.

Key evidence and findings: Tax exemption certificates issued by the department and the respondent's service postings supported the claim.

Application of law to facts: The Court ordered refund of the deducted income tax.

Treatment of competing arguments: The appellants' refusal to refund was held erroneous.

Conclusions: The respondent is entitled to refund of wrongfully deducted income tax.

3. SIGNIFICANT HOLDINGS

"In terms of the provisions of this Section, any member of a Scheduled Tribe as defined in Clause (25) of Article 366 of the Constitution, residing in any of the areas prescribed under Section 10 (26), is exempted from payment of income tax. This Court in Pradip Kr. Taye (Supra) had elaborately dealt with this issue and had laid down the law and had held that the expression under Section 10 (26) 'residing in any area specified' cannot be given a narrow and restricted meaning to imply that the members of a Schedule Tribe migrating from their places of origin, which happens to fall in one of the areas specified in the said sub-section, to another area although once again falling within the areas specified in the sub-section, would not get the benefit of the exemption under Section 10 (26) for exemption from payment of income tax."

"If a literal meaning is to be given to the expression 'residing in any area specified', in our view, section 10 (26) is capable of producing a result that any member of a Scheduled Tribe irrespective of the fact whether such a Scheduled Tribe is a Scheduled Tribe, in relation to those territories specified in the said sub-section or not, is entitled to the benefit of the said subsection. It is not the case of either the petitioners or the revenue that the Parliament, while enacting section 10 (26) intended such result."

"Therefore, the expression 'residing in any area specified' must be interpreted in the context of the said sub-section. The context of the sub-section is that it is a special provision with reference to the specified areas of the country, that is, the areas comprising North East and Jammu & Kashmir of the country, which received a special treatment under the scheme of the Constitution in the various aspects of the application of the Constitution."

"Once it is held that such a classification of the government servants from the scope of section 10 (26) is violative of article 14 to say that a government servant or the employees of the 'State' (within the meaning of article 12) loses the benefit on the mere accident of his being posted out of his place of origin but within the areas specified under section 10 (26) and entitled to the benefit of the said section if by an accident, he is posted in the same area of his origin. Such an interpretation, in our view, which is dependent upon pure accident and exigencies of the service, would lead to wholly arbitrary results and undesirable consequences."

Core principles established include:

• The exemption under Section 10(26) applies to Scheduled Tribe members residing or posted within specified areas, regardless of their original State of recognition;
• The phrase "residing in any area specified" must be interpreted contextually and broadly, not narrowly or restrictively;
• Government employees cannot be excluded from the benefit of exemption on the basis of their posting location;
• Wrongful deduction of income tax from exempt income mandates refund;
• Legislative and constitutional intent require equality and non-arbitrariness in application of tax exemption provisions.

Final determinations:

• The respondent, a Scheduled Tribe member recognized in Rajasthan, is entitled to exemption under Section 10(26) for income earned while posted in Agartala, a specified area;
• The income tax deducted from the respondent's salary during such posting was not permissible and must be refunded forthwith;
• The decision of the learned Single Judge allowing the writ petition and directing refund is affirmed;
• The writ appeal challenging the Single Judge's order is dismissed for lack of merit.