In the case of Association of old settlers of Sikkim and Ors (Taxpayers), the Taxpayers challenged the constitutional validity of the definition of “Sikkimese” under Section (S.) 10(26AAA) of the Income-tax Act 1961 (ITA) before the Supreme Court of India (SC) to the extent it excludes exemption to (a) Indians settled in the state of Sikkim prior to merger of Sikkim with India (i.e., 26 April 1975) and (b) Sikkimese woman who marries non-Sikkimese after 1 April 2008.
S.10(26AAA) introduced in the ITA by Finance Act 2008, with retrospective effect from tax year 1989-90, provides tax exemption to an individual being a “Sikkimese” in respect of any income which accrues or arises to him/her:
- from any source in the State of Sikkim; or
- by way of dividend or interest on securities
However, a proviso to the said section denies such exemption to a Sikkimese woman who, on or after 1 April 2008, marries an individual who is not a Sikkimese.
The provision defines “Sikkimese” to mean:
- an individual, whose name is recorded in the register maintained under the Sikkim Subjects Regulation, 1961 read with the Sikkim Subject Rules, 1961 ("Register of Sikkim Subjects"), immediately before 26 April 1975; or
- 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 7 August 1990 and Order of even number dated the 8 April 1991; or
- 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 (“close relatives”) has been recorded in that register.
While the above exemption covered 94.6% of the population of Sikkim, it left out one category of individuals comprising about 1% of the population of Sikkim viz. Indian citizens domiciled in Sikkim prior to 26 April 1975 whose names or names of their close relatives were not recorded in Register of Sikkim Subjects. The reason for non-inclusion was that such inclusion was conditional upon the individuals giving up their Indian citizenship, which such individuals chose not to give up. Post 26 April 1975, all individuals whose names appeared in Register of Sikkim Subjects were treated as Indian citizens. However, tax exemption under S.10(26AAA) did not extend to individuals whose names were not included in the said register.
Hence, the Taxpayers challenged the constitutional validity of S.10(26AAA) on the ground that it created discrimination between two categories of similarly placed individuals without any intelligible criteria which has a rational nexus to the object of exemption. The Taxpayers sought extension of exemption to individuals who were settled in Sikkim prior to 1 April 1975 but whose names were not included in the said register. Furthermore, the Taxpayers contended that the denial of exemption to Sikkimese woman who marries a non-Sikkimese on or after 1 April 2008 is also discriminatory and needs to be struck down.
The matter was adjudicated by a two- judge bench of the SC. Both the judges unanimously struck down denial of exemption to the Sikkimese women marrying non-Sikkimese after 1 April 2008 on the grounds that it created discrimination based on gender. The exemption was not denied to Sikkimese man marrying non-Sikkimese woman. It was also not denied to Sikkimese woman marrying non-Sikkimese man before 1 April 2008. Hence, it was arbitrary, discriminatory and violative of the constitutional protection of equality.
On denial of exemption to Indians who have settled in Sikkim prior to 26 April 1975 but whose names do not appear in Register of Sikkim Subjects, both judges held that the denial of exemption was discriminatory. However, the two judges delivered separate judgements on the scope of relief. Justice M.R. Shah granted the exemption by striking down S.10(26AAA) to the extent it denies exemption to the aforesaid category of individuals. On the other hand, Justice B V Nagarathna invoked Article 142 of the Constitution of India and directed the Union of India to add a further clause to S.10(26AAA) to grant exemption to the aforesaid category of individuals so as to eliminate the discrimination caused to them and save the provision from being rendered unconstitutional. She also directed that until such amendment is made, the aforesaid category of individuals shall be entitled to exemption under S.10(26AAA) .
