Exclusion Of 'Old Indian Settlers' From Definition Of Sikkimese In Section 10(26AAA) Income Tax Act Unconstitutional: Supreme Court

The Supreme court held that the exclusion of old Indian settlers, who have permanently settled in Sikkim prior to merger of Sikkim with India on 26.04.1975 from the definition of “Sikkimese” in Section 10(26AAA) of Income Tax Act is unconstitutional .

The bench of Justices M R Shah and B V Nagarathna held that these old indian settlers, irrespective of whether his/her name is recorded in the register maintained under the Sikkim Subjects Regulations, 1961 read with Sikkim Subject Rules, 1961 or not, are entitled to the said exemption.

Section 10 (26AAA) IT Act

Section 10 of the Income Tax Act describes incomes not included in total income. Section 10 (26AAA) reads as follows: 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—....in case of an individual, being a Sikkimese, any income which accrues or arises to him- (a) from any source in the State of Sikkim; or (b) by way of dividend or interest on securities: Provided that nothing contained in this clause shall apply to a Sikkimese woman who, on or after the 1st day of April, 2008, marries an individual who is not a Sikkimese.

As per the explanation to this provision, "Sikkimese" shall mean-

(i) an individual, whose name is recorded in the register maintained under the Sikkim Subjects Regulation, 1961 read with the Sikkim Subject 2 Rules, 1961 (hereinafter referred to as the "Register of Sikkim Subjects”), immediately before the 26th day of April, 1975; or

(ii) an individual, whose name is included in the Register of Sikkim Subjects by virtue of the Government of India Order No.26030/36/90-I.C.I., dated the 7th August, 1990 and Order of even number dated the 8th April, 1991; or

(iii) any other individual, whose name does not appear in the Register of Sikkim Subjects, but it is established beyond doubt that the name of such individual's father or husband or paternal grandfather or brother from the same father has been recorded in that register..

Writ Petition

Association of Old Settlers of Sikkim challenged the constitutional validity of the definition of “Sikkimese” in Section 10 (26AAA) to the extent it excludes Indians who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975. They also sought to striked down proviso to this provision insofar as it excludes from the exempted category, “Sikkimese women” who marries a non-Sikkimese after 01.04.2008.

The contended that the exemption which has been granted to 'Sikkimese" people residing in Sikkim essentially exempts 95% of the residents of Sikkim while taxing only a handful of persons including the 1% / 2% old Indian settlers. There is no reasonable classification between the residents/origins of Sikkim whose names were registered as “Sikkim Subjects” under the Sikkim Subjects Regulations, 1961 and those Indian old Sikkim settlers, whose names could not be registered as “Sikkim Subjects” as their forefathers did not surrender the Indian citizenship, they contended.

While allowing the writ petition, Justice M R Shah, who authored the judgment, observed:

Exclusion of old Indian settlers discriminatory

It is to be noted that as such the purpose of Section 10(26AAA) is to grant exemption to the residents of Sikkim from payment of income tax under the Income Tax Act. Therefore, all such Indians/citizens, who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 are to be treated at par and they form the same group/class and are entitled to the exemption under Section 10(26AAA) of the Income Tax Act. As such, there is no difference and/or distinction between those “Sikkim Subjects”, whose names are recorded in the register maintained under the Sikkim Subjects Regulations, 1961 and those Indians, who have settled in Sikkim prior to the merger of Sikkim, but whose names were not recorded as “Sikkim Subjects” in the register maintained under the Sikkim Subjects Regulations, 1961. All are “Sikkimese”. Merely because at the relevant time and when the Sikkim Subjects Regulations, 1961 was enacted, the Indians settled in Sikkim did not surrender their Indian citizenship or their fathers/forefathers’ names were not entered into the register maintained under the Sikkim Subjects Regulations, 1961, by itself, it cannot be said that they cease to be the “Sikkimese”. All of them are similarly situated with those “Sikkimese” / “Sikkim Subjects”, who all have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975. As observed above, the object and purpose of Section 10(26AAA) is to grant benefit of exemption from payment of income tax under the Income Tax Act to the residents of Sikkim. 

No nexus sought to be achieved

The court added that, there is no nexus sought to be achieved in excluding the Indians, who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 but their names are not recorded as “Sikkim Subjects”.

"The Union of India has failed to satisfy any reasonable classification and/or nexus to exclude such class of Indians, who, in fact, have settled in Sikkim prior to 26.04.1975. Therefore, exclusion of old Indian settlers, who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 from the definition of “Sikkimese” in Section 10(26AAA) is arbitrary, discriminatory and violative of Article 14 of the Constitution of India. ", the bench observed.