IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE K.P.BALACHANDRAN THURSDAY, THE 7TH DECEMBER 2006 / 16TH AGRAHAYANA 1928 ITR.No. 66 of 2000() -------------------- AGAINST THE ORDER DATED 15/4/1998 IN ITA.483/COCH/94 IN RA.337/COCH/199/1998 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPLICANT: ----------- THE COMMISSIONER OF INCOME TAX (APPEALS), TRIVANDRUM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENTS: ------------ M.S.HAMEED, P/O.M/S.M.MOLHAMED KHAN AND BROS., CHALAI, TRIVANDRUM. BY ADV. SRI.D.S.SREEKUMARAN SMT.T.S.MAYA (THIYADIL) THIS TAX REFERENCE HAVING BEEN FINALLY HEARD ON 21/11/2006, THE COURT ON 07/12/2006 DELIVERED THE FOLLOWING: P.R.RAMAN & K.P.BALACHANDRAN,JJ. ---------------------------------------- I.T.R.NO.66 OF 2000 ---------------------------------------- Dated this the 7th day of December, 2006 O R D E R Raman,J. At the instance of the revenue the Income Tax Appellate Tribunal, Cochin Bench referred the following question of law for the opinion of this Court: "Whether on the facts and in the circumstance of the case and also in the light of Section 5 read with Section 2(24)(ix) of the Income Tax Act, 1961, the Tribunal is right in law and fact in holding that the winnings from the Sikkim lottery could not be brought to tax in the hands of the assessee for the assessment year 1987-88?" 2. The assessee is a Partner of M/s. M. Mohamed Khan and Bros., Chalai, Trivandrum -2- ITR.NO.66/2000 received a sum of Rs.4,50,000/- as winnings from lottery conducted by the Skimm Government. In the return of the income filed by him during the relevant year he included this amount also for the purpose of computation of the total income. But subsequently in the revised return filed on 27/2/1991 he excluded the winnings from Sikkim lottery from the computation of the total income. It was the claim of the assessee that the winnings from Sikkim lotteries were not includible in his taxable income, in view of the fact that Income Tax Act was made applicable to the State of Sikkim only from the assessment year 1990-91. The Assessing Officer Officer did not accept the contention, as he was of the view that the assessee being a resident in India any income which accrued or arose or deemed to accrue or arise to him was includible in the total income. The assessee -3- ITR.NO.66/2000 canvassed the correctness of the said decision in the appeal filed by him before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) held that the winning from Sikkim lottery was not includible in the assessment years prior to 1990-91 and placed reliance on the decision of the Tribunal, Delhi Bench in ITA. No.3334(Del)/ 87 dated 12/3/1990. Revenue appealed to the Tribunal. The Tribunal agreed with the view of the Commissioner of Income Tax (Appeals) and dismissed the appeal preferred by the revenue. The order of the Tribunal is produced as Annexure-C in this case. 3. While dismissing the appeal filed by the revenue, the Tribunal relied on the decision of the Delhi Bench of the Tribunal, wherein it is held that the income arising from Sikkim could not be brought to tax in the hands of the -4- ITR.NO.66/2000 assessee, as a resident in India. The same view was taken by the Madras Bench of the Tribunal in ITA.NO.258(Mds)/88 dated 6/10/1992. In the absence of any contra decision, the Tribunal agreed with the view expressed by the Co- ordinate Bench while dismissing the appeal. 4. Learned senior counsel, Sri P.K.Ravindranatha Menon apparing on behalf of the revenue contended that as per the provisions of the income tax Act, in the case of an ordinary resident in India not only his income received in India but also income from outside India are liable to be assessed. The mere fact that Income Tax Act was made applicable to the Sikkim State only with effect from the assessment year 1990-91 is of no consequence. It is also contended that Sikkim became a part of Indian Union with effect from 26/4/1975 and hence, his income received from -5- ITR.NO.66/2000 Sikkim lotteries being the income received in India, is assessable in the hands of the assessee under the Income Tax Act. He placed reliance on the decision in Alankar Commercial (P) Ltd. v. CIT ((2000) 243 ITR 626)(Sikkim) and also the decision reported in Alankar Commercial Pvt.Ltd. v. Assistant Commissioner of Income Tax New Delhi and others((2001) (9) SCC 380). He also placed reliance on some of the passages from the Law and Practice of Income Tax by Kanga (9th Edition) in support of his contention. The learned counsel appearing on behalf of the assessee, on the other hand, contended that by virtue of Article 371F of the Constitution of India, the law that is applicable to the State of Sikkim is the law which was in force in that State before its joining the Indian Union and thus the Sikkim Income Tax Manual, 1948 alone is applicable to -6- ITR.NO.66/2000 the case and since the income has suffered tax as per the law in force in the territory of Sikkim the same amount cannot be taxed again in the hands of the assessee. According to him, the applicability of the law is to be decided with reference to the State from where the income was received. Reference was also made to the decision of Gauhati High Court in Ghisalal Agarwala v. CIT ((2001)165 CTR (Gau) 667). He also contended that by virtue of a circular issued by the Central Board of Direct Taxes dated 27th March, 2000, no appeal can be filed in cases where the tax effected exceeds the revised monetary benefits of Rs.2 lakhs. Copy of the said circular is also produced on record as Ext.R1(b) along with the counter affidavit filed in this case. 5. We have heard both sides. 6. Admittedly, Sikkim became a part of the -7- ITR.NO.66/2000 Indian Union from 26/4/1975. So however the Income Tax Act was extended to the State of Sikkim only from the assessment year 1990-91. The question that arises for consideration is as to whether the income received in Sikkim prior to the introduction of the Income Tax Act for the period in question is assessible in the hands of the assessee, as per the provisions of the Indian Income Tax Act. Article 371 F of the Constitution of India is a special provision applicable to the lotteries of Sikkim. Article 371F was inserted by the Constitution (thirty sixth amendment Act, 1975) with effect from 26/4/1975, which reads as follows: "371F. Special provisions with respect to the State of Sikkim.-- Notwithstanding anything in this Constitution, -- (a) xx xx xx xx (b) as from the date of commencement of the Constitution -8- ITR.NO.66/2000 (Thirty-sixth Amendment) Act, 1975 (hereafter in this article referred to as the appointed day)-- (i) the Assembly for Sikkim formed as a result of the elections held in Sikkim in April, 1974 with thirty-two members elected in the said elections (hereinafter referred to as the sitting members) shall be deemed to be the Legislative Assembly of the State of Sikkim duly constituted under this Constitution; (ii) the sitting members shall be deemed to be the members of the Legislative Assembly of the State of Sikkim duly elected under this Constitution; and (iii) the said Legislative Assembly of the State of Sikkim shall exercise the powers and perform the functions of the Legislative Assembly of a State under this Constitution; (c), (d) & (e) xx xx(Omitted as N.A.) (f) Parliament may, for the purpose of protecting the rights and interests of the different sections of the population of Sikkim make provision for the number of seats in the Legislative Assembly of the State of Sikkim which may be filled by candidates belonging to such sections -9- ITR.NO.66/2000 and for the delimitation of the Assembly constituencies from which candidates belonging to such sections alone may stand for election to the Legislative Assembly of the State of Sikkim; (g), (h), (i), (i) xx xx (omitted as N.A.) (k) all laws in force immediately before the appointed day in the territories comprised in the State of Sikkim or any part thereof shall continue to be in force therein until amended or repealed by a competent Legislature or other competent authority;" 7. Thus, all laws in force immediately before the appointed day continue to be the law that applied to the territories comprised in the State of Sikkim. Admittedly, the Income Tax Act, 1961 was extended to the territories of Sikkim with effect from 1st April, 1990 in relation to the assessment year 1990-91 and subsequent years. The law corresponding to the Income Tax Act, 1961 which immediately was -10- ITR.NO.66/2000 in force in the State of Sikkim was to continue to be in force for and upto the previous year beginning with 1st April, 1988 and ending on 31st March, 1989. Till then the law relating to the Income Tax which was in force was the Sikkim State Income Tax Manual, 1948. Hence, in the present case the income received within the territories of Sikkim would be governed by the provisions contained in the Sikkim Income Tax Manual, 1948. 8. But according to the learned counsel for the revenue, by virtue of the provisions contained in the Income Tax Act, if the income is otherwise assessable, the fact that the Income Tax Act was extended to the territories of Sikkim only from the assessment year 1990- 91 will be of no consequence. Reference was made to Section 5 of the Income Tax Act to contend that the total income of any previous -11- ITR.NO.66/2000 year of a person, who is a resident includes all income from whatever source derived which is received or is deem to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year; or accrues or arises to him from outside India during such year. This argument prima facie appears to have some force; but considered in the light of the special constitutional provisions contained in Article 371F and also considering the fact that the amount has already suffered tax under the Sikkim Income Tax Manual, 1948 and to include the same again for the purpose of taxation under the Income Tax Act, 1961 thereby resulting in double taxation, we find it difficult to accept the contention. When the income has already suffered tax as per the law of Income Tax -12- ITR.NO.66/2000 applicable to the State, from where the income is received, to bring the same income to tax under the Income Tax Act, 1961 will amount to double taxation. 9. The Apex Court in State of Sikkim v. Surendra Prasad Sharma (AIR 1994 SC 2342) considered the scope and effect of Article 371F of the Constitution of India and held that the said Article begins with a non- obstante clause which to the extent relevant and contextually permissible, applies all the provisions of the Constitution. The Article is a special provision relating to the state of Sikkim. It was further held that on a plain reading of this provision it becomes clear that all laws which were in force prior to 26th April, 1975 in the territories now falling within the State of Sikkim or any part thereof were intended to continue to be in -13- ITR.NO.66/2000 force until altered or repealed. Although the expression 'all laws in force' has not been defined the said expression must receive its ordinary, natural and grammatical meaning. The latter part of the clause --'until amended or repealed by a competent legislature or other competent authority'-- is indicative of the fact that the said expression was not intended to be confined to only legislative enactments but also laws which could be altered or amended or repealed by 'other competent authority', i.e. other than the legislature itself. This supplies a clear indication that the said expression is wide enough to include sub ordinate legislations, e.g. rules, regulations, orders etc. The expression 'existing law' is defined by Article 366(10) to include any rule, regulation, bye-law, etc., and the expression -14- ITR.NO.66/2000 'all laws in force' means all existing laws. It was made clear that the said expression is wide enough to include the Establishment Rules of 1974. A reference was also made in this connection to the decision of the Supreme Court in Edward Mills Co. Ltd. v. State of Ajmir (AIR 1955 SC 24 at 30-31) wherein a similar expression used in Article 372 was construed. The Apex Court held that "Thus Article 371F occupies a special position to cope with a special situation with a special historical backdrop. Article 371F is, as stated earlier, a special constitutional provision with respect to the State of Sikkim. The reason why it begins with a non-obstante clause obviously is that the matters referred to in the various clauses immediately following required a protective cover so that such matters are not struck down as -15- ITR.NO.66/2000 unconstitutional because they do not satisfy the constitutional requirement. Unless such immunity was granted, 'the laws in force' would have had to meet the test of Article 13 of the Constitution. This being the objective, the existing laws in force came to be protected by Clause (k) added to Article 371F. The said laws in force in the State of Sikkim were, therefore, protected, until amended or repealed, to ensure smooth transition from the Chogyal's rule to the democratic rule under the Constitution." Based on the above decision, the legal position that emerges thus is that until the Income Tax Act, 1961, was made applicable to the State of Sikkim (from the assessment year 1990-91 (previous year 1989-90) the Sikkim Income Tax Manual, 1948 continued to be in force. In Nirmala L. Mehta v. A. Balasubramanian, Commissioner of Income -16- ITR.NO.66/2000 Tax & Others ((2004) 269 ITR 1 (BOM.)) the Bombay High Court considered the similar situation where the petitioner therein, who is a resident of Mumbai, won a lottery of the Government of Sikkim, having a prize money of Rs.6,30,000/-. The Government of Sikkim deducted income tax therefrom as per Sikkim tax laws from the prize money and the balance amount alone was paid. The petitioner claimed deduction of the amount by way of tax on the ground that the said sum was deducted as income tax at source while making the payment. The Income Tax Officer did not give credit for the said claim as the tax deducted from the prize money of the lottery by the Sikkim State Government was not paid to the Indian treasury and tax was not deducted as per Section 199 of the Income Tax Act, 1961. The petitioner approached the Commissioner of Income Tax, -17- ITR.NO.66/2000 Bombay City IV, in his revisional jurisdiction. The CIT, Bombay modified the order only to the limited extent. The question which was raised by way of additional ground regarding taxability under the Indian Income Tax Act, however was not permitted to be raised at the stage of hearing of the revision. It was held by the Bombay High Court that the prize money of the lottery of the Government of Sikkim won by the petitioner was not chargeable to tax under the Income Tax Act, 1961. It was also held that the Income Tax Act, 1961 was made applicable and came into force in the State of Sikkim from the Assessment Year 1990-91 (previous year 1989- 90). The President of India in exercise of his powers conferred under Clause (n) of Article 137F extended the Income Tax Act, 1961, for the first time for the assessment -18- ITR.NO.66/2000 year 1990-91, as the Income Tax Act, 1961 came into force in the State of Sikkim with effect from 1st April, 1990. Until then, all laws including the Income Tax Law in force before the State of Sikkim became a component State of the Indian Union were in operation and the Income Tax in Sikkim was governed by the Sikkim Income Tax Manual, 1948. Thus, for the assessment year 1988-89 (the previous year during which the petitioner won the lottery of the Sikkim Government), the said income was chargeable to tax under the Sikkim Income Tax Manual. The Income Tax Act, 1961 was not applicable at the relevant time in Sikkim. So long as the Income Tax Act, 1961 did not become applicable to the State of Sikkim, Income Tax Act, 1961 could not be applied to the income earned in Sikkim. In the circumstances, the prize money won by the -19- ITR.NO.66/2000 petitioner from the lottery of the Government of Sikkim could have been charged to tax only in accordance with the existing IT laws in the State of Sikkim and could not be charged to tax under the IT Act, 1961. The assessment orders were accordingly quashed. 10. The above decision squarely applies to the facts of this case. The contention by the learned counsel for the revenue that Sikkim Laws will apply only to the person, who is a resident of Sikkim, does not appeal to us. It is the place where the income accrued that is relevant to decide as to which law will apply. It is true that in the case of ordinary resident even the income received from a place of outside India is also includible for the purpose of assessment of Income Tax. But in this case after the Sikkim joined the Indian Union in 1975, by virtue of Article 371F (k) -20- ITR.NO.66/2000 of the Constitution, all laws then existing in the territories of Sikkim continued to be in force. As far as the Income Tax is concerned, it is governed by the provisions of the Sikkim Income Tax Manual, 1948, until the Income Tax Act, 1961 was made applicable to that State. Therefore, by virtue of the provisions contained in Article 371F as far as the State of Sikkim is concerned, the income received in that State is liable to pay tax only under the provisions contained in the Act as found applicable to that State. If the argument of the learned counsel for the revenue is accepted, the amount of income already assessed in the hands of the assessee under the provisions of the Sikkim laws, will again be assessed to tax under the Income Tax Act amounting to double taxation. 11. In this connection, we may refer to -21- ITR.NO.66/2000 the decision of the Gauhati High Court in Ghisalal Agarwala v. Commissioner of Income Tax ((2001) 248 ITR 506). There is also an identical question arose regarding the chargeability of the income winning from Sikkim Lottery and the tax was deducted at source from the lottery prize under the Sikkim State Income Tax Manual, 1948. It was held that there is no provision in the Income Tax Act, 1961 for including such income as assessee's total income under the Income Tax Act. In Jain Brothers v. Union of India ((1979) 77 ITR 107 (SC)) it was held las follows: "It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax (vide Channell J. in Stevens v. Durban Roodepoort Gold Mining -22- ITR.NO.66/2000 Co.Ltd.). The Constitution does not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of S.23(5) by the Act of 1956. Nor is there any other enactment which interdicts such taxation. It is true that S.3 is the general charging Section. Even if S.23(5) provides for the machinery for collection and recovery of the tax, once the legislature has, in clear terms, indicated that the income of the firm can be taxed in accordance with the Finance Act of 1956 as also the income in the hands of the partners, the distinction a charging and a machinery section is of no consequence. Both the sections have to be read together and construed harmoniously. It is significant that similar provisions have also been enacted in the Act of 1961. Secs.182 and 183 correspond substantially to S.23(5) except that the old section did not have a provision similar to Sub Section (4) of S.182. After 1956, therefore, so far as registered firms are concerned the tax payable by the firm itself has to be assessed and the share of each partner in the income of the firm has to be included in his total income and assessed to tax accordingly. If any double taxation is involved, the -23- ITR.NO.66/2000 legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over." 12. Thus double taxation is permissible provided specific provision has been made by the legislature. In the absence of any provision in the Income Tax Act, 1961 for including the income received from Sikkim lottery and subjected to tax under the Sikkim Income Tax Manual, 1948, the assessee cannot be burdened to pay tax twice over the same income, as it will amount to double taxation. 13. Alankar Commercial Pvt. Ltd. v. Assistant Commissioner of Income Taxl and others ((2000) 243 ITR 626) was a case where though the company registered in Sikkim was carrying on business activities and earning income outside Sikkim but within India. The question that arose for consideration before -24- ITR.NO.66/2000 the Sikkim High Court was as to whether the income accrued or received outside Sikkim is liable to tax under the Indian Income Tax Act. In those circumstances, it was held that if income which accrued or was received outside Sikkim was liable to tax under the Indian Income Tax Act, it cannot be said that the same would not be liable to tax under that Act, merely because of the provisions of Clause 1(k) of Article 317F. There can be no doubt that the Sikkim State Income Tax Manual, being a State law cannot have its operation beyond the limits of Sikkim. If the petitioner had carried on its business activities or otherwise earned or received income outside the State of Sikkim but within India, the same would be liable to tax under the Indian Income Tax Act. It was this decision which was challenged before the Apex -25- ITR.NO.66/2000 Court. 14. The decision of the Apex Court is reported in Alankar Commercial Pvt.Ltd.'s case ((2001)9 SCC 380). The Apex Court dismissed the Special Leave Petition. It was contended before the Apex Court that Sikkim was not a part of India at the relevant point of time the Income Tax Act is not applicable in respect of the assessment year for which notice was served. Though the assessee relied on the decision in State of Sikkim v. Surendra Prasad Sharma ((1994) 5 SCC 282), in the said decision the question of applicability of the Income Tax Act did not arise. That was also a case where the question was whether the Indian Law applied or not. 15. Thus in the above case, the Apex Court held that the income received was admittedly from a business carried on in a place outside -26- ITR.NO.66/2000 Sikkim and such income is liable to be assessed under the Income Tax Act, 1961. Per contra, in the present case, the income was received by winning the lottery in Sikkim, which is already subjected to tax at source as per the Sikkim Income Tax Manual, 1948 and hence the decision cited supra has no application to the factual situation of this case. On the other hand, the above decision lay support to the argument of the respondent that the law that is to apply depends on the place where the income was received. 16. The assessee having won the lottery of Sikkim, which is a part of Indian Union