Case ID: 3426

Judgment:
ivil Appeals Nos. 579 to 594 of 1975. Appeals by special leave from the judgment and order dated the 11 October 1974 of the High Court at Gauhati in Civil Rule Nos. 252	 293	 305	 640 and 730 of 1976	 and 24	 405	 507 & 510/71	 515 to 517 of 1972 and 165 166 of 1975. N. M. Lahiri with D. N. Mukherjee	 for the appellants. (in all the appeals) N. M. Lahiri with D. N. Mukherjee	 for respondents in CAs 579 & 583 586/75. section Chaudhuri for respondents in CAs 588 to 590/75 D. N. Mukherjee & R. P. Agarwala	 for respondents in CAs 587 590 N. M. Lahiri with D. N. Mukherjee & R. P. Agarwala for the respondents in CAs 591 592/75 N. M. Lahiri with D. N. Mukherjee for respondents in CAs 593 594 of 1975 Ex parte	 for respondents in CAs 580 582	 593 594 of 1975 The Judgment of the Court was delivered by SARKARIA	 J. These appeals directed against a judgment of the High Court of Judicature at Gauhati raise a common question in regard 415 to the interpretation and constitutional validity of sub clause (a) of A clause (26) of section 10 of the Income tax Act	 1961 (for short	 called the 1961 Act). The appeals will be disposed by a common judgment. R. Takin Roy Rymbai (respondent in Civil Appeal 579 of 	1975) belongs to Jaintia Scheduled Tribe and is a permanent resident of United Khasi Jaintia Hills Autonomous District under the Sixth Schedule of the Constitution within the State of Meghalaya. He joined service under the Government of Assam in 1941. In the previous year relevant to the assessment year 1970 71	 he was posted at Shillong as Secretary to the Government of Assam. The Assam Secretariat building and office	 which constitute his place of work was within that quarter of the town which is included in Shillong Municipality and is not a part of the area described in para 20 of the Sixth Schedule. C The Income tax officer took the view that the assessee 's income from salary in the relevant year arose in the non scheduled area and as such	 is not covered by the exemption provided under section 10(26) (a) of the Act. The assessee claimed that his income from salary had accrued or arisen within the specified area and	 as such	 he was entitled to the exemption. In the alternative	 he contended that this was not a valid condition for denying him the benefit of the exemption under section 10 (26). The Income tax officer over ruled these contentions and completed the assessment subjecting the assessee 's salary to tax. The assessee thereupon filed a petition under Article 226 of The Constitution in the High Court for impugning the assessment orders and the notices of demand for the assessment year 1970 1971	 on the ground that sub clause (a) of section 10(26) of the Act is invalid and ultra vires Article 14 of the Constitution. The writ petition was heard by a Bench of three learned Judges of the High Court	 which held that this exemption clause has been enacted for the benefit of the Scheduled Tribes residing in specified areas. The object of this exemption clause	 according to the High Court	 will be frustrated and made nugatory if the income of a member of the Scheduled Tribe residing in the specified areas	 is made subject to tax merely because the source of such an income is outside that area. In its view	 the classification between members of the Scheduled Tribes having income which accrues or arises to them from any source from the Tribal area or the specified territories on the one hand	 and the members of Scheduled Tribe having income which accrues or arises to them from any source outside the Tribal areas or specified territories on the other	 is not based on any intelligible differentia; the classification is artificial and is not based on any substantial distinction having a rational nexus to the purpose of the law. On the contrary	 the condition contained in sub clause (a) would defeat the very object of the exemption clause in section 10 (26). For this enunciation	 the High Court has sought support from this Court 's observations in section K. Dutta	 Income tax officer and ors. vs Lawrence Singh Ingty ( 1 ) . (1) [1968] 2 S.C.R.165. 416 On the above reasoning	 the High Court has struck down the aforesaid sub clause (a) as violative of Article 14 of the Constitution	 allowed the writ petition and quashed the impugned notices and the orders of assessment. The Department has now come in appeal before us after obtaining special leave under Article 136 of the Constitution. The provisions of section 10 of the 1961 Act are in the nature of exemptions. The various clauses of this section indicate the incomes which are to be excluded from computation of the total Income of a person under this Act. For a proper perspective	 it will be useful to have a look at the historical background of this provision. The Indian Income tax Act	 1922 did not contain any provision specifically exempting members of the Scheduled Tribes from the levy of income tax. It was the Finance Act 1955 that first incorporated in the Income tax Act	 1922 provisions for exemption of the Tribal people of the eastern region from payment of the tax. These provisions relating to such exemptions were further amended and recast by section 3 of the Finance Act 1958 as follows: "section 4(3) XXI. Any income of a member of a Scheduled Tribe defined in clause (25) of Article 366 of the Constitution	 residing in any area specified in Part A or Part of the Table appended to paragraph 20 of the Sixth Schedule 	 to the Constitution or in the Union Territories of Manipur and Tripura	 provided that such member is not in service of Government. " J The 1961 Act then re enacted this clause as under: "10 (26) In the case of a member of a Scheduled Tribe as deemed in clause (25) of Article 366 of the Constitution	 residing in any area specified in Part A or Part 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 accrues or arises to him. (a) from any source in the area or Union Territories aforesaid	 or (b) by wag of dividend or interest on securities. " The State of Nagaland (Adaptation of Laws on Union Subjects) order 1965 added with effect from the 1st December 1963	 the State of Nagaland also	 to the areas	 the Tribal people of which could claim this exemption. The validity of the exclusion of the Government servants from the exemption given under section 10(26)	 as it stood before the amendment of 1970	 came up for consideration before this Court in section K. Datta	 Income tax officer and ors. vs Lawrence Singh Ingty (supra). It was held that the classification of Tribals into Government servants 417 and others for purposes of this exemption was violative of Article 14 of the Constitution and	 as such	 invalid. Thereafter	 Parliament passed the Taxation Laws (Amendment) Act 42 of 1970 whereby the words "who is not in the service of the Government" appearing in section 10(26)	 were deleted. The North Eastern Areas (Reorganization) (Adaptation of Laws on Union Subjects)	 order 1974 amended this provision further with effect from January 25	 1972 so that it now reads as follows: "(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 supecified in Part A or Part of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution (or in the State 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 23rd February 1951	 issued by the Governor of Assam under the provisions to sub paragraph (3) of the said paragraph 20 (as it stood immediately before the commencement of the North Eastern Areas (Reorganization) Act 1971 (81 of 1971) any ' income which accrues or arises to him	 (a) from any source in the (area	 State or Union territories) aforesaid	 or (b) by way of dividend or interest	 on securities". An analysis of this provision shows that in order to entitle a person to the exemption	 three conditions must co exist: (i) He should be as member of a Scheduled Tribe as defined in Clause (25) of Article 366 of the Constitution; (ii) He should be residing in any area specified in Part A or Part of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution; or the State or Union Territories mentioned in this provision; (iii) The income in respect of which exemption is claimed must be an income which accrues or arises to him (a) from any source in the (area	 State or Union territories) aforesaid	 or. (b) by way of dividend or interest	 on securities". An analysis of this provision shows that in order to entitle a person to the exemption	 there conditions must co exist: (i) He should be a member of a Scheduled Tribe as defined in Clause (25) of Article 366 of the Constitution; (ii) He should be residing in any area specified in Part A or Part B of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution; or the State or Union Territories mentioned in this provision; (iii)The income in respect of which exemption is claimed must be an income which accrues or arises to him (a) from any source in the area	 State or Union territories mentioned in the provision or (b) by way of dividend or interest	 on securities". Article 366(25) of the Constitution provides: "Scheduled Tribes" means such tribes or tribal communities or parts of or groups within such tribes or tribal communities as are deemed under article 342 to be Scheduled Tribes for the purposes of this Constitution. " H Article 342 empowers the President with respect to any State or Union Territory	 and where it is a State	 after consultation with the 418 Governor thereof	 by public notification	 to specify Tribes or Tribal communities or parts of or groups within tribes of tribal communities which shall for the purpose of this Constitution be deemed to be Scheduled Tribes	 as the case may be. Clause (2) of this Article empowers the Parliament to exercise the some power by enacting a law The respondent belongs to Jaintia Scheduled Tribe which is one of the Scheduled Tribes notified under article 342(1). The first condition for applicability of section 10(26) was thus indubitably satisfied. Part II of the Table appended to paragraph 20 of the Sixth Schedule of the Constitution inter alia specifies the United Khasi Jaintia Hills District as one of the Tribal Areas. According to the averments in the writ petition	 the respondent is a permanent resident of the United Khasi Jaintia Hills autonomous District. This allegation has not been denied by the other side. Indeed	 in the petition for special leave to appeal filed by the appellant the fact that he is a resident of a Tribal area specified in Paragraph 20 of the Sixth Schedule to the Constitution	 is admitted. The first two conditions necessary for claiming exemption under section 10(26) existed in the present case. Whether on the facts of the case	 the third condition embodied in sub clause (a) was satisfied or not	 is a question which still remains to be determined. The High Court has advisedly left it open. The controversy has thus narrowed down into the legal issue: whether the classification made by sub clause (a) for the purpose of the exemption under section 10(26) between the income of a member of a Scheduled Tribe accruing or arising from any source in the area	 State or Union Territories specified in the aforesaid Clause (26)	 and the income from a source outside such area	 State or Union Territories is constitutionally valid? In answering this question in the negative	 the High Court has propounded the proposition that the object of clause (26) of section 10 r is to grant a blanket exemption to members of Scheduled Tribes as a class residing in the specified areas	 and that the condition contained in sub clause (a) is destructive of that object. In propounding this proposition	 the learned Judges seem to have relied on certain observations of this Court in Lawrence Singh Ingty 's case (supra) Mr. Lahiri appearing for the respondent	 also	 reiterates the reasoning of the High Court that the exemption was given to the Tribal people as a class	 and not on the basis of their economic resources or sources of income. In this connection Counsel has cited a few sentences from this Court 's judgment in Lawrence Singh Ingty 's case 		 (supra) . With due respect to the learned Judges of the High Court	 we are unable to accept this reasoning. The matter now in controversy was	 not even obliquely in issue before this Court in Lawrence Singh Ingty 's case. Therein	 the only question for decision was	 whether the exclusion of the Government servants from the exemptions given in section 4(3) (XXI) of the Indian Income tax Act	 1922 and later on in section 10 (26) of the Income tax Act 1961. was violative of Article 14 of the Constitution 419 Although sub clause (a) was very much there	 its validity was not	 even indirectly questioned. The contention of the Revenue	 therein	 was that the exemption from income tax was given to members of certain Scheduled Tribes	 due to their economic and social backwardness; that it was not possible to consider Government servants as socially and economically backward and hence the exemption was justly denied to the assessee	 who was a Government servant having income from salary. It was further urged by the Revenue that once a Tribal becomes a Government servant	 he is lifted out of his social environment and assimmilated into forward sections of society and therefore he needs no more any crutch to lean on. These arguments were found to be irrelevant and unsustainable. In that context	 the Court observed: "The exemption in question was not given to individuals either on the basis of their social status or economic resources. It was given to a class. Hence individuals as individuals do not come into the picture. We fail to see in what manner the social status and economic resources of a government servant can be different from that of another holding a similar position in a corporation or that of a successful medical practitioner	 lawyer architect	 etc. To over paint the picture of a government servant as the embodiment of all power and prestige would sound ironical. Today his position in the society to put at the highest is no higher than that of others who in other walks of life have the same income. For the purpose of valid classification what is required is not some imaginary difference but a reasonable and substantial distinction having regard to the purpose of the law. " The sentences which have been underlined are the sheet anchor of the arguments advanced by Mr. Lahiri. In our opinion	 they cannot be torn out of the context and used for spelling out a proposition different from what was actually decided in that case. The ratio of that decision is 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. Since there was no rational whatever for this differentiation	 it was held that within the range of the selection	 the government servants had been unfairly discriminated against lawyers	 medical practitioners	 private servants	 businessmen	 etc. whose income was derived from non government sources	 and that the exclusion of government servants from the exemption under section 10(26) was bad and unconstitutional. This vice of discrimination from which section 10(26) was then suffering	 was removed when the Amending Act 42 of 1970 exercised the obnoxious limb of the provision. The decision in Lawrence Singh Ingty is thus no authority for the proposition that the exemption granted under section 10 (26) to the members of the Scheduled Tribes residing in the specified areas	 as a class	 420 could not be validly subjected to the condition contained in subclause (a) of the provision. While it is true that a taxation law	 cannot claim immunity from the equality clause in Article 14 of the Constitution	 and has to pass like any other law	 the equality test of that Article	 it must be remembered that the State has in view of the intrinsic complexity of fiscal adjustments of diverse elements	 a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence	 the legislature has ample freedom to select and classify persons	 districts	 goods	 properties	 incomes and objects which it would tax	 and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality	 it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others Nor the mere fact that tax falls more heavily on some in the same category	 is by itself a ground to render the law invalid. It is only when within the range of its selection	 the law operates unequally and cannot be justified on the basis of a valid classification	 that there would be a violation of Article 14. (See East India Tobacco Co. v State of Andhra Pradesh(l) Vivian joseph Ferriera vs Municipal Council of Greater Bombay;(2) Jaipur Hosiery Mills vs State of Rajasthan.(3) The validity or otherwise of the classification of income envisaged by sub clause (a)	 with reference to the source of income	 for the purpose of the exemption under section 10(26) is to be judged in the light of the above principles. Classification for purposes of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income tax Act. Indeed	 the entire warp and woof of the 1961 Act has been woven on this pattern. Section 2(45) defines total income to mean "the total amount of income referred to in section 5 computed in the manner laid down in this Act". Section 5 makes the chargeability of income dependent upon the locality of accrual or receipt of the income. It defines the extent total income with reference to the residence of the assessee	 and thus makes the incidence of taxation dependent upon whether the assessee is a resident in India. It is the residence in India which entails liability to tax. A non resident is not liable in India to get his income assessed	 but if any part of his income accrues or arises whether directly or indirectly through any business connection in India or from any property in India	 the same would be assessable. An ordinary resident as defined in section 6	 does not attract additional chargeability but being "not ordinarily resident" entitles a person to partial exemption from (1)[1963] I S.C.R. 404. (2) [1972] I S.C.C. 70. (3) 421 chargeability as a resident	 to which exemption a person who is "ordinarily resident" is not entitled (see Kanga and Palkhivala Vol. I Income tax 6th Edn. p. 162). The 1961 Act abounds in instances whereby certain sources of income have been exempted from tax	 while others are assessable. Section 10 of the 1961 Act	 itself contains no less than 30 instances of such classification for the purpose of granting exemptions from tax. This is so	 in spite of the fact that another source of the same person 's income may be assessable. A person may have agricultural income apart from salary or business income. The income from the former source is not to be included in the total income of the assessee (vide section 10(1) ); while income from the latter source is not so exempted. Again	 interest realised from Scheduled banks on deposits upto a certain limit is exempt	 while interest realised from non banking concerns is assessable. Sections 80A to 80U further provide exemptions from tax to incomes derived from certain sources. A business man 's income is assessable	 but if it is from a newly established industrial undertaking or priority industry	 to that extent	 the same is exempted. Section 80H provides for deductions in cases of new industrial undertakings employing displaced persons etc. It is not necessary to multiply such instances. Suffice it to say that classification of sources of income is integral to the basic scheme of the 1961 Act. It is nobody 's case that the entire scheme of the Act is irrational and violative of Article 14 of the Constitution. Such an extravagant contention has not been canvassed before us. Thus the classification made by the aforesaid sub clause (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 the specified areas and the income accruing or received from a source outside such areas is to benefit not only the members of the Scheduled Tribes residing in the specified areas but also to benefit economically such areas. If the contention advanced by Mr. Lahiri is accepted and a member of the Scheduled 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 assessees who do not belong 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 profits 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. 422 We are 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 provide 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 brethern 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 situations	 the members of a particular Scheduled 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. In view of what has been said above	 we are of opinion that the learned Judges of the High Court were in error in holding that the classification contemplated by sub clause (a) of cl. (26) of section 10 of the 1961 Act is artificial and is not based on any intelligible differentia. We would therefore	 reverse the judgment of the High Court and hold that the aforesaid sub cause (a) is constitutionally valid Before we part with this judgment	 we may note that Mr. Lahiri made a detailed survey of the history of the Tribal areas of Assam and Scheduled Tribes residing in those 'autonomous ' areas. Counsel also argued that virtually the source of the salary received by the assessee lay in the Tribal areas forming the State of Meghalaya	 notwithstanding the fact that on account of the exigencies of service	 the office of the assessee was located in those Wards of Shillong which are not a part of the tribal areas. In our opinion	 it is not necessary to go into this question which	 as already noticed	 still remains open and undetermined. In the result we allow these appeals	 but in the circumstances ofthe case	 leave the parties to pay and bear their own costs. P.B.R. Appeals allowed.

Summary:
Section 10(26)(a)	 Income tax Act	 1961 provides that a person is entitled to exemption from income tax if (1) he is a member of a Scheduled Tribe as defined in article 366(25) of the Constitution	 (2) he is residing in any area specified in Part A or Part of the Table appended to paragraph 20 of the Sixth Schedule to the Constitution	 or the State or Union Territories mentioned in section 10(26)(a). and (3) the income in respect of which exemption is claimed is income which accrues or arises to him from any source in the area	 State or Union Territories mentioned in the section. The assessee belonged to the Jaintia Scheduled Tribe and was a permanent resident of the United Khasi Jaintia Hills Autonomous District referred to in para 20 of the Sixth Schedule to the Constitution. He was employed in the Secretariat of the Assam Government	 and his place of work was within the Shillong Municipality	 and was not a part of the area described in para 20 of the Sixth Schedule to the Constitution. The Income tax officer held that . the income of the assessee from his salary arose in the non scheduled area and was not covered by the tax exemption provided under section 10(26) (a). In a writ petition under article 226 the assessee challenged the validity of 8. 10(26) (a) on the ground that the classification of members of Scheduled Tribes into those having income from a source within the specified areas and those having income from the source outside the areas was arbitrary. The High Court struck it down as violative of article 14 on the ground that the exemption clause which was enacted for the benefit of the Scheduled Tribes would be frustrated if the income of such person was made subject to tax merely because the source of that income was outside that area. Allowing the appeals of the Department	 ^ HELD: The High Court was in error in holding that the classification contemplated by section 10(26)(a)	 Income Tax Act	 1961	 was artificial and was not based on any intelligible differentia. [422D] 1 (a) . A taxation law	 like any other law. has to pass the equality test of article 14	 but given the legislative competence	 the legislature has ample freedom to select and classify persons	 incomes and objects which it would or would not tax. The mere fact that a tax falls more heavily on some in the same category	 is not by itself a ground to render the law invalid. It is only when	 within the range of its selection. the law operates unequally and cannot be justified on the basis of a valid classification	 that there would be a violation of article 14. [420B D] " East India Tobacco Co. vs State of Andhra Pradesh	 [1963] I S.C.R. 404; Vivan Joseph Ferriera vs Municipal Council of Greater Bombay	 ; and Jaipur Hosiery Mills vs State of Rajasthan	 	 followed. (b) Classification for the purpose of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income Tax Act. The classification made by sub cl. (a) for the purpose of exemption is not unreal or unknown but conforms to a well recognised pattern and is based on intelligible differentia. The object of this differentiation between income accruing or received from a source in the specified areas and 12 522SCI/76 414 the income accruing or received from a source outside such areas IS to benefit not only the members of the Scheduled Tribes residing in the specified areas but also to benefit such areas economically. [420F; 421E F] (c) If it is held that a member of the Scheduled Tribe residing in a specified area was entitled to the exemption irrespective of whether the source of his income lay within or outside such area	 it may lead to mischievous results. A non Tribal assessee in India may enter into a sham partnership with a member of the Scheduled Tribe residing in the specified area and ostensibly give him a substantial share of the profits of the business but really give him only a nominal amount and thus evade tax. Also a tribal residing in the scheduled areas. earning large profits from business located outside the specified areas would be totally exempt while a non tribal whose source of income is a share in the same business would be taxed and thus the exemption is likely to operate unequally between individuals similarly situated. [421G H] (2) The decision in section K. Datta. Income Tax officer and or$. vs Lawrence Singh Ingty; 	 	 on which the High Court had relied is no authority for the proposition that the exemption granted under section 10(26) to the members of the Scheduled Tribes residing in the specified area	 as a class	 could not be validly subjected to the condition contained in sub cl. (a) of that provision. The sentence that "the exemption in question was not given to individuals either on the basis of their social status or economic resources. it was given to a class" occurring in that case could not be torn out of the contest and used for spelling out a proposition different from what was actually decided in that case. [419H; F] (3) The State is the best judge to formulate its policies and to decide how far and for what period and in what situations	 the members of a particular Scheduled 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 embodied in article 46 of the Constitution. [422C]