Supreme Court Strikes Down Discriminatory Definition of “Sikkimese” in Income Tax Act: Association of Old Settlers of Sikkim vs. Union of India (2023)

Date of the Judgment: 13 January 2023

Citation: 2023 INSC 29

Judges: M.R. Shah, J. and B.V. Nagarathna, J. (Separate concurring opinion by B.V. Nagarathna, J.)

Can a tax law discriminate against long-term residents of a state based on their origin? The Supreme Court of India recently addressed this crucial question in a case concerning the definition of “Sikkimese” under the Income Tax Act, 1961. This judgment not only impacts the residents of Sikkim but also sets a precedent for how tax laws must adhere to constitutional principles of equality and non-discrimination. The Court examined the validity of Section 10(26AAA) of the Income Tax Act, 1961, which provides income tax exemptions to “Sikkimese” individuals, and its definition of “Sikkimese” which excluded certain long-term Indian settlers and Sikkimese women who married non-Sikkimese individuals after a specific date. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with Justice Nagarathna providing a separate concurring opinion.

Case Background

The Kingdom of Sikkim was an independent kingdom until its merger with India in 1975. The kingdom had a diverse population, including original inhabitants and settlers from neighboring regions. Over time, many Indians settled in Sikkim for trade, commerce, and government employment. The Sikkim Subject Regulations, 1961, were introduced to define “Sikkim Subject,” requiring individuals to relinquish other citizenships to be registered. However, many Indians did not surrender their citizenship and were not registered as “Sikkim Subjects.”

In 1975, Sikkim became a full-fledged state of India. The Income Tax Act, 1961, was extended to Sikkim in 1989. In 2008, Section 10(26AAA) was introduced, granting income tax exemptions to “Sikkimese” individuals. However, the definition of “Sikkimese” excluded long-term Indian settlers who were not registered as “Sikkim Subjects” and Sikkimese women who married non-Sikkimese men after April 1, 2008. This led to the present case challenging the discriminatory aspects of the provision.

Timeline

Legal Framework

The core legal provision at the heart of this case is Section 10(26AAA) of the Income Tax Act, 1961. This section provides an exemption from income tax for “Sikkimese” individuals. The provision states:

“[(26AAA) 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. Explanation.- For the purposes of this clause, “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 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 grand-father or brother from the same father has been recorded in that register;”

The definition of “Sikkimese” in the explanation is tied to the Sikkim Subjects Regulation, 1961, which determined who was considered a “Sikkim Subject” before Sikkim’s merger with India. The proviso excludes Sikkimese women who marry non-Sikkimese men after April 1, 2008, from the exemption.

Arguments

Petitioners’ Arguments:

• The definition of “Sikkimese” in Section 10(26AAA) of the Income Tax Act, 1961, is discriminatory and violates Articles 14 and 15 of the Constitution of India by excluding Indians who settled in Sikkim before the merger.
• The exclusion of long-term Indian settlers from the definition of “Sikkimese” is arbitrary and lacks a rational nexus to the object of granting income tax exemptions to residents of Sikkim.
• There is no reasonable classification between those registered as “Sikkim Subjects” and those who were not, as all residents of Sikkim became citizens of India after the merger.
• The proviso to Section 10(26AAA) is discriminatory against Sikkimese women, violating Articles 14, 15, and 21 of the Constitution, as it excludes them from the exemption if they marry a non-Sikkimese after April 1, 2008, while no such restriction applies to men.
• The word “means” in the definition of “Sikkimese” should be treated as an inclusive one and include Indian settlers within this fold.
• The petitioners relied on D.S. Nakara vs. Union of India, (1983) 1 SCC 305 to argue that classification must be reasonable and have a nexus with the object sought to be achieved.
• Reliance was placed on State of Rajasthan vs. Manohar Singhji, 1954 SCR 996 to argue that discrimination must be based on reasonable classification.
• Reliance was placed on Vishundas Hundumal vs. State of M.P., (1981) 2 SCC 410 to argue that the Court can remove discrimination and put the petitioners in the same class so as to do away with discrimination.
• Reliance was placed on Anuj Garg & Ors. vs. Hotel Association of India & Ors. (2008) 3 SCC 1 and G. Sekar vs. Geetha & Ors. (2009) 6 SCC 99 to argue that the Proviso to Section 10(26AAA) of the Income Tax Act is discriminatory and violative of Articles 14 and 21 of the Constitution of India.

Respondents’ Arguments:

• The classification of “Sikkim Subjects” is a conscious decision by the legislature to grant exemptions only to those registered under the Sikkim Subjects Regulations, 1961.
• The classification is based on maintaining peace and harmony within Sikkimese society.
• Those who did not register as “Sikkim Subjects” made a conscious choice and cannot claim parity now.
• The proviso to Section 10(26AAA) is based on customary laws of Sikkim, where descent is through the father, and privileges continue until marriage.

Submissions of Parties

Issues Framed by the Supreme Court

1. Whether the definition of “Sikkimese” in Section 10(26AAA) to the extent it excludes the Indians, who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 is valid?
2. Whether the Proviso to Section 10(26AAA) insofar as it excludes from the exempted category “a Sikkimese woman, who marries a non-Sikkimese after 01.04.2008” is valid?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court ruled in favor of the petitioners, striking down the discriminatory aspects of Section 10(26AAA) of the Income Tax Act, 1961.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• D.S. Nakara vs. Union of India, (1983) 1 SCC 305: *Cited to emphasize that classification must be reasonable and have a nexus with the object sought to be achieved.*
• State of Rajasthan vs. Manohar Singhji, 1954 SCR 996: *Cited to highlight that discrimination must be based on reasonable classification.*
• Vishundas Hundumal vs. State of M.P., (1981) 2 SCC 410: *Cited to support the argument that the Court can remove discrimination and put the petitioners in the same class.*
• Anuj Garg & Ors. vs. Hotel Association of India & Ors. (2008) 3 SCC 1: *Cited to support the argument that the Proviso to Section 10(26AAA) of the Income Tax Act is discriminatory and violative of Articles 14 and 21 of the Constitution of India.*
• G. Sekar vs. Geetha & Ors. (2009) 6 SCC 99: *Cited to support the argument that the Proviso to Section 10(26AAA) of the Income Tax Act is discriminatory and violative of Articles 14 and 21 of the Constitution of India.*
• Sikkim Subjects Regulation, 1961: *Cited to understand the historical context of the definition of “Sikkimese” and the criteria for registration as a Sikkim Subject.*
• Sikkim Subject Rules, 1961: *Cited to understand the historical context of the definition of “Sikkimese” and the rules for registration as a Sikkim Subject.*
• Government of India Order No.26030/36/90-I.C.I., dated the 7th August, 1990: *Cited to understand the inclusion of individuals in the Register of Sikkim Subjects.*
• Government of India Order of even number dated the 8th April, 1991: *Cited to understand the inclusion of individuals in the Register of Sikkim Subjects.*

The Court reasoned that:

• Excluding long-term Indian settlers from the definition of “Sikkimese” was arbitrary and discriminatory, as they are similarly situated with those registered as “Sikkim Subjects,” and all are now citizens of India.
• The proviso excluding Sikkimese women who marry non-Sikkimese men after April 1, 2008, was a clear case of gender discrimination, violating constitutional rights.
• The classification based on the date of marriage was arbitrary and lacked a rational nexus to the object of the provision.

The Court held that:

• The definition of “Sikkimese” in Section 10(26AAA) must include all Indians who permanently settled in Sikkim before the merger on April 26, 1975, regardless of whether their names were recorded in the Sikkim Subjects Register.
• The proviso to Section 10(26AAA), which excluded Sikkimese women who married non-Sikkimese after April 1, 2008, is unconstitutional and struck down.

“The definition of “Sikkimese” in Section 10(26AAA) of the Income Tax Act shall also include all Indians, who have permanently settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 irrespective of the fact that whether their names have been recorded in the register maintained under the Sikkim Subjects Regulations, 1961 or not.”

“Proviso to Section 10(26AAA) inasmuch as it excludes from the provision of exemption a Sikkimese woman merely because she marries a non-Sikkimese after 01.04.2008 is totally discriminatory and violative of Articles 14, 15 and 21 of the Constitution of India, which requires to be struck down.”

“Therefore, it is held that the “Sikkimese” like the petitioners, who are old Indian settlers and who have settled in Sikkim prior to the merger of Sikkim with India on 26.04.1975 shall also be entitled to the exemption under Section 10(26AAA) of the Income Tax Act, 1961.”

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principles of equality and non-discrimination enshrined in the Constitution. The Court emphasized that:

• Arbitrariness: The exclusion of long-term Indian settlers was deemed arbitrary, lacking a rational basis and violating Article 14.
• Gender Discrimination: The proviso targeting Sikkimese women was a clear instance of gender discrimination, violating Articles 14, 15, and 21.
• Constitutional Mandate: The Court prioritized the constitutional mandate of equality over legislative classifications that lacked a reasonable nexus to the object of the law.
• Historical Context: The Court considered the historical context of Sikkim’s merger with India and the subsequent citizenship of its residents.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning

Issue 1: Definition of “Sikkimese”

Issue 2: Proviso Excluding Sikkimese Women

Key Takeaways

• The Supreme Court’s decision ensures that all long-term Indian settlers in Sikkim who were domiciled before the merger are treated equally with those registered as “Sikkim Subjects” for income tax purposes.
• The judgment eliminates gender discrimination in the tax law, ensuring that Sikkimese women are not penalized for marrying non-Sikkimese individuals.
• The decision upholds the constitutional principles of equality and non-discrimination in tax legislation.
• The judgment sets a precedent for how tax laws must adhere to constitutional principles of equality and non-discrimination.
• The court has directed the Union of India to amend the Explanation to Section 10(26AAA) of the I.T. Act, 1961, to include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before 26th April, 1975.
• Till such amendment is made by the Parliament, any individual whose name does not appear in the Register of Sikkim Subjects but it is established that such individual was domiciled in Sikkim on or before 26th April, 1975, shall be entitled to the benefit of exemption.

Directions

The Supreme Court directed that:

• The Union of India shall make an amendment to Explanation to Section 10 (26AAA) of I.T. Act, 1961, so as to suitably include a clause to extend the exemption from payment of income tax to all Indian citizens domiciled in Sikkim on or before 26th April, 1975.
• Till such amendment is made by the Parliament to the Explanation to Section 10 (26AAA) of I.T. Act, 1961, any individual whose name does not appear in the Register of Sikkim Subjects but it is established that such individual was domiciled in Sikkim on or before 26th April, 1975, shall be entitled to the benefit of exemption.

Development of Law

The ratio decidendi of the case is that the definition of “Sikkimese” in Section 10(26AAA) of the Income Tax Act, 1961, must include all Indians who permanently settled in Sikkim before the merger on April 26, 1975, regardless of whether their names were recorded in the Sikkim Subjects Register and that the proviso to Section 10(26AAA), which excluded Sikkimese women who married non-Sikkimese after April 1, 2008, is unconstitutional. The judgment has changed the previous position of law by ensuring that all long-term Indian settlers in Sikkim who were domiciled before the merger are treated equally with those registered as “Sikkim Subjects” for income tax purposes and that Sikkimese women are not penalized for marrying non-Sikkimese individuals.

Conclusion

The Supreme Court’s judgment in Association of Old Settlers of Sikkim vs. Union of India is a landmark decision that upholds the principles of equality and non-discrimination. TheCourt struck down the discriminatory definition of “Sikkimese” in Section 10(26AAA) of the Income Tax Act, 1961, ensuring that long-term Indian settlers and Sikkimese women are not unfairly excluded from income tax exemptions. This decision not only provides relief to the affected individuals but also reinforces the constitutional mandate of equal treatment under the law.