Sikkimese defined only for Income Tax purpose- Amendment to section 10(26AAA) of the Income-tax Act, 1961 by the Finance Act, 2023

PIB & KalimNews, New Delhi, 4 April 2023: The Union Government of India has made amendment in clause 26AAA of Section 10 of the Income Tax Act, 1961. It stated that the word Sikkimese in the clause is defined only for the purpose of the Income tax Act 1961. 

It states " Following the Hon’ble Supreme Court’s decision in Writ Petition (C) No. 59/2013 with 1283/2021, certain amendments have been made in clause (26AAA) of section 10 of the Income-tax Act, 1961 by the Finance Act, 2023".

It further clarifies, "For the purposes of removal of doubts, it is hereby clarified that the term “Sikkimese” defined for the purposes of the said clause, is only for the purposes of the Income-tax Act, 1961, and not for any other purpose."

It is reminded that Supreme Court in its judgment delivered on January 13, the apex court said that under the Sikkim Income Tax Manual, 1948, “all persons engaged in business were subjected to tax irrespective of their origin. Therefore, there was no difference made out between the original inhabitants of Sikkim, namely, the Bhutia-Lepchas, and the persons of foreign origin settled in Sikkim like the Nepalis or persons of Indian origin who had settled down in Sikkim generations back.”

Indian Express wrote in its news published on 4 February 2023, "The judgment also recorded the petitioner’s contention that migrants from other countries or erstwhile kingdoms like “Nepalese migrants”, who “migrated to and settled in Sikkim at the same time or even after migrants/settlers of Indian origin”, were benefiting from Section 10(26AAA) of the IT Act, 1961, “while arbitrarily excluding settlers of Indian origin such as the petitioners herein”.

On January 13, the Supreme Court held that the benefit of tax exemption provided in Section 10 (26AAA) shall be extended to all Sikkimese people. (Association of Old Settlers of Sikkim vs Union of India)

Before this judgment, the tax exemption excluded “old Indian settlers”, who had permanently settled in Sikkim before the merger of the state into the Indian union on April 26, 1975, even if their names were recorded in the register maintained under the Sikkim Subjects Regulations, 1961, read with the Sikkim Subject Rules, 1961 (also referred to as the “Register of Sikkim Subjects”).

A Bench of Justices M R Shah and B V Nagarathna directed the state to amend the Explanation to Section 10 (26AAA) to include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before April 26, 1975.

The court struck down the proviso (an article or clause that introduces a condition) to Section 10 (26AAA), which excluded Sikkimese women who had married non-Sikkimese men after April 1, 2008, from the benefit of tax exemption, as violative of Articles 14, 15, and 21 of the Constitution.

“This direction is being issued…so as to eliminate discrimination and disparity in respect of the aforesaid category of Sikkimese, who subsequently have become citizens of India w.e.f. 26th April 1975 and to save the Explanation from being rendered unconstitutional vis-à-vis such individuals who form a small percentage of Sikkimese,” the court said.

In a judgment written separately but concurring with Justice Shah’s, Justice Nagarathna observed: “When the Explanation refers to an ‘individual’, it includes both Sikkimese men and women, in fact, all genders; it cannot have a restrictive or myopic reference to only Sikkimese men and exclude those Sikkimese women covered under the proviso. A proviso cannot overarch a provision.”

The court also accepted the petitioner’s submission that a woman is not a chattel and has an identity of her own, which cannot be taken away by the mere factum of marriage, as the apex court has previously held in G. Sekar vs. Geetha & Ors (2009).

The objective behind Section 10 (26AAA) is to reduce the taxpayer’s burden by providing exemptions. This section describes the income that does not form a part of the total income while calculating the tax for an individual, also known as “exempted income”.

The petitioners challenged the proviso (applicable to married Sikkimese women) and Explanation to Section 10 (26AAA), which elaborated on the type of income falling under the category, along with a definition of ‘Sikkimese’.

Under the Explanation to Section 10 (26AAA), the definition of ‘Sikkimese’ is confined to (i) individuals “whose name is recorded in the register maintained under the Sikkim Subjects Regulation, 1961 read with the Sikkim Subject Rules, 1961, immediately before the 26th day of April 1975; (ii) the 73,000-odd individuals whose names were included in the Register of Sikkim Subjects by virtue of Government of India Orders of August 1990 and April 1991; and (iii) “any 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”

Section 10 (26AAA) was inserted into the IT Act, 1961 by the Finance Act, 2008 with retrospective effect from April 1, 1990, the date on which the IT Act was made applicable in Sikkim.

Before 1990, the Sikkim Income Tax Manual (SITM), promulgated by the Ruler of Sikkim or Chogya in 1948, was applicable. This implied that there was no discrimination between April 1, 1990, and April 1, 2008 — and that Sikkimese women who had the benefit of the exemption were deprived of the same with effect from April 1, 2008.

The Association of the Old Settlers of Sikkim challenged the constitutional validity of the definition of the term ‘Sikkimese’ under Section 10 (26AAA), as it excluded Indians who settled in Sikkim before April 26, 1975, the day Parliament approved the merger of Sikkim with India.

The newspaper also stated, "The SC verdict extended the benefit of income-tax exemption beyond the categories of Sikkimese defined in the Explanation to Section 10 (26AAA)."