Sing Killing vs Income Tax Officer and Others

Ranjan Gogoi, J.—A short but substantial question of law has been raised by the writ petitioner in the present proceeding. The facts necessary to unravel the dispute giving rise to the question that has arisen in the present proceeding may be capsuled as hereunder :

The petitioner was granted a lease of a forest area within the territory of Karbi Anglong Autonomous District Council some time in the year 1994. There was a demand from the authority for payment of a sum of Rs. 1,82,070 on account of royalty as well as payment of Income Tax to the extent of Rs. 17,205 in order to enable the writ petitioner to execute the lease. The petitioner who is admittedly a member of the Scheduled Tribe of the State of Nagaland applied to the jurisdictional Income Tax Officer for grant of an exemption certificate in view of the provisions of Section 10(26) of the Income Tax Act, 1961. The authority did grant a certificate to the petitioner certifying that the petitioner is not liable to pay Income Tax u/s 10(26) of the Act in respect of any income arising or accruing to him from any source in any area specified as a Sixth Schedule area under the aforesaid provisions of the Constitution of India or in terms of the relevant notification issued by the Governor of Assam in this regard. The jurisdictional officer, however, while granting the aforesaid certificate made it clear that the aforesaid exemption certificate will not be applicable in the case of deduction of tax from profits and gains from the business of trading in alcoholic liquor, forest produce and scrap u/s 206C of the Act. The authority on the basis of the aforesaid certificate having insisted on payment of Income Tax and/or having proceeded to collect tax at source from the petitioner, the instant approach has been made to this court seeking interference under article 226 of the Constitution.

Dr. A.K. Saraf, learned senior counsel appearing for the petitioner in a short and precise argument has contended that u/s 10(26) of the Act, the petitioner has been found eligible for exemption from payment of Income Tax in respect of any income accruing or arising to the petitioner from a Sixth Schedule area. The lease of the petitioner in respect of which the present controversy has arisen is admittedly in a Sixth Schedule area. According to learned counsel for the petitioner, if u/s 10(26), the petitioner is exempted from payment of Income Tax from all such income which would accrue to him from the lease in question, the stand of the authority as reflected in the exemption certificate certifying that the exemption to the petitioner would not extend to profits and gains of business of trading in forest produce u/s of the Act, is plainly contrary to Section 10(26) of the Act. Learned counsel has further submitted that when the transactions entered into by the petitioner in respect of the lease and income arising therefrom are exempted from payment of Income Tax, the question of collection of Income Tax at source under the provisions of Section 206C of the Act does not and cannot legitimately arise. Learned counsel has further submitted that the aforesaid restrictions contained in the exemption certificate, as noted hereinabove, have been so included by the jurisdictional Income Tax Officer on account of the provisions contained in the proviso to Section 206C of the Act. It is the contention of learned counsel that the aforesaid proviso will have no application in the case of an assessee who is otherwise covered u/s 10(26) of the Act. The effect of the provisions contained in Section 10(26) of the Act have been overlooked by the learned Income Tax Officer while issuing the exemption certificate, it is argued by Dr. Saraf. In support of his contentions, Dr. Saraf has relied on two decisions of this court in Utankamoni Chakma Vs. Income Tax Officer and Others, and Commissioner of Income Tax Vs. Smt. A.M. Marbaniang, . In respect of the proposition that if no Income Tax is payable by the assessee, the question of collection of Income Tax at source would not arise, reliance has been placed on a decision of the apex court in the case of Steel Authority of India Ltd. Vs. State of Orissa and Others etc. etc., .

Mr. U. Bhuyan, learned standing counsel appearing for the Revenue, by placing reliance on the affidavit filed by the jurisdictional Income Tax Officer, has submitted that at the stage of operation of the provisions of Section 206C, viz., collection of tax at source, it is not possible for the authority to ascertain whether the Income Tax in respect of which such collection is made at source has accrued or arisen from a Sixth Schedule area. Consequently, the applicability of Section 10(26) of the Act in the case of the petitioner, in respect of the transactions relating to the lease in question, would remain in doubt at the initial stage and such doubt can only be resolved in the course of the assessment proceeding. It is from this perspective that the Income Tax Officer, it is submitted, had issued the exemption certificate and had taken the stand that the collection at source be made in respect of the transactions entered into by the petitioner and if in the course of assessment proceeding, on the basis of returns submitted by the petitioner, it is found that the petitioner is entitled for exemption such amount as may be found to have been collected and deducted, will be refunded to him. On the aforesaid basis, learned counsel for the Revenue has submitted that there would be no occasion for this court to interfere with the order impugned in the present writ proceeding.

The submissions advanced by learned counsel for the parties have been duly taken note of. This court in the cases of Utankamoni Chakma Vs. Income Tax Officer and Others, and Commissioner of Income Tax Vs. Smt. A.M. Marbaniang, , had occasion to deal with the expressions "accrued" and "source" as appearing in Section 10(26) of the Act. A Division Bench of this court has clearly taken the view that income in respect of which exemption is claimed by virtue of Section 10(26) must originate from a Sixth Schedule area. Applying the ratio of the decision in the aforesaid case, it is crystal clear that regardless of the fact as to the place where payment in respect of timber sold or purchased out of the lease in question is received by the writ petitioner, such income must be held to have originated from the forest leased out to the petitioner, which admittedly is included in a Sixth Schedule area. The aforesaid fact needs hardly any investigation as it is apparent from the admitted stand of the respective parties. Viewed from the aforesaid perspective there is hardly any doubt to be entertained as to the entitlement of the writ petitioner to the benefit of Section 10(26) of the Act in respect of the transactions arising out of the lease in question. As already noted hereinabove, regardless of the place at which payments in respect of such transactions are received, such income must be deemed to have originated from a Sixth Schedule area and hence, Section 10(26) of the Act must be held to be applicable entitling the petitioner to the exemption as claimed in the instant case.

If the income to be generated by the writ petitioner from the lease in question has originated from a Sixth Schedule area and, therefore, the petitioner''s income is exempted u/s 10(26) of the Act, no question of applicability of Section 206C of the Act can legitimately arise. If the income itself is exempted, any deduction/collection, on account of Income Tax, at source, would be beyond the powers conferred by the provisions of the Act. The following passage from the judgment of the apex court in Bhawani Cotton Mills Ltd. Vs. State of Punjab and Another, though made in a somewhat different context may be usefully extracted here under ( 20 STC 330 ):

"If a person is not liable for payment of tax at all, at any time, the collection of a tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid; because, if particular sales or purchases are exempt from taxation altogether, they can never be taken into account, at any stage, for the purpose of calculating or arriving at the taxable turnover and for levying tax."

In view of the foregoing reasons and following the decisions of this court as well as the apex court, this court is of the considered view that this writ petition has to be allowed. Accordingly, the impugned action of the authorities as contained in the communication dated March 7, 1994 (annexure III), is hereby set aside. It must be clarified that the exemption certificate dated March 2,1994, issued by the Income Tax Officer, Dimapur, Nagaland, shall be understood to have conferred on the petitioner an entitlement to exemption from payment of Income Tax arising out of the profits and gains from the business of forest produce in respect of the lease in question, viz., Borlongphar D.C.R.F. lease.

With the above direction, the petition is allowed as indicated above.