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Facts
The assessee, a sole proprietor of a petrol pump in Sikkim, claimed income exemption under Section 10(26AAA) as a bona fide resident settled before April 1, 1975. Her case was selected for scrutiny due to substantial cash deposits during demonetization, and she initially failed to file a return. The Assessing Officer denied the exemption, estimating profits and adding unexplained deposits, partly due to the assessee's use of a partnership PAN while being a proprietorship, a decision upheld by the Ld. CIT(A) despite a relevant Supreme Court ruling.
Held
The Tribunal determined that the assessee is a bona fide resident of Sikkim, settled before April 1, 1975, and thus entitled to income exemption under Section 10(26AAA), based on the Supreme Court's decision in Association of Old Settlers of Sikkim vs. Union of India. The order of the Ld. CIT(A) was set aside, and the Assessing Officer was directed to treat the assessee's income as exempt.
Key Issues
Whether the assessee, a Sikkimese resident operating a proprietorship, is entitled to income exemption under Section 10(26AAA) despite using a partnership PAN, and if the lower authorities correctly considered relevant Supreme Court pronouncements.
Sections Cited
144, 10(26AAA), 69A, 271AAC
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri Rajesh Kumar, AM & Shri Pradip Kumar Choubey, JM]
ORDER
Per Shri Rajesh Kumar, AM
The appeal filed by the assessee is against the order of Ld. CIT(A), NFAC, Delhi dated 06.12.2024 for AY 2017-18 arising out of assessment order passed u/s. 144 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) by ACIT, Circle-3(2), Gangtok dated 21.12.2019.
The issue raised in ground no. 1 is against the order of Ld. CIT(A) upholding the assessment order wherein the Assessing Officer assessed the income by applying @ 8% on the total turnover by rejecting the claim of the assessee u/s. 10(26AAA) of the Act.
The facts in brief are that the assessee is a sole proprietor under the name and style of M/s. Chandra Sales Agency with Mrs. Menuka Devi Agarwal who is resident of Sikkim and is engaged in the business of operating a petrol pump. Mrs Agarwal is a bona fide resident of Sikkim and is entitled to exemption u/s. 10(26AAA) of the Act in respect of her income which accrued to the assessee in the state of Sikkim. The case of the assessee was selected for scrutiny on the ground that the assessee has deposited substantial cash in banks during the demonetization period but has not filed any return of income. It was noted in the assessment order that assessee has deposited Rs.4,05,71,850/- in the bank accounts maintained by the assessee during the FY 2016-17 relevant to the AY 2017- 18 including cash deposit of Rs.28,34,500/- during demonetization period. Accordingly, notices were issued along with questionnaire. However, there was no compliance on the part of the assessee and accordingly, a show cause notice was issued to the assessee as to why the cash deposits in the bank accounts should not be treated as unexplained money u/s. 69A of the Act and proceeding u/s. 271AAC of the Act were also initiated. Thereafter, assessee vide letter dated 13.12.2019 submitted before the Assessing Officer that assessee is a Sikkimese resident and also furnished the trade license to that effect with other documents in respect of the cash deposits. The Assessing Officer also noted at para 11 that as per new clause 26AAA to section 10 which was inserted by Finance Act, 2018 with retrospective effect from AY 1981 in which the income arising or accruing to Sikkimese resident is exempt from tax. Thereafter, the Assessing Officer noted that assessee is a proprietorship concern though it used the PAN of partnership and cannot take the benefit of section 10(26AAA) of the Act and accordingly, estimated the net profit @ 8% on the total turnover as per VAT return of Rs.14,60,95,751/- thereby making an addition of Rs.1,16,87,660/- and also treated the difference between the total turnover and contra entries which aggregated to Rs.16,36,23,070/- and total credit entry in the bank account of Rs.23,60,94,580/- which comes to Rs.7,24,71,510/- and added the same to the income of the assessee in the assessment framed u/s. 144 of the Act dated 21.12.2019.
The Ld. CIT(A) also confirmed the said order of the AO by even ignoring the decision of the Hon’ble Apex Court in the case of Association of Old Settlers of Sikkim Vs. Union of India [2023] 146 taxmann.com 271 (SC).
4. After hearing the rival contentions and perusing the material available on record, we find that the assessee is a bona fide resident of Sikkim and is settled in Sikkim prior to 01.04.1975 as is apparent from the certificate issued by competent authority, which is undisputed position and assessee M/s. Chandra Sales Agency is a proprietorship concern owned by Smt. Menuka Devi Agarwal who is running and operating a petrol pump. The assessee did not file any return of income and the case was selected for scrutiny on the ground of huge cash deposit during demonetization period as well as non-demonetization period during the year. The assessee during the course of assessment submitted before the Assessing Officer that she is proprietor of M/s. Chandra Sales Agency and is a member of Association of Old Settler of Sikkim who had filed a Writ Petition (Civil) 59 of 2013 before the Hon’ble Supreme Court and the Hon’ble Apex Court has decided the issue in favour of the assessee that all the individuals who are settled in Sikkim prior to 1st April, 1975 was entitled to the exemption of income u/s. 10(26AAA) of the Act. The Assessing Officer denied the exemption on the ground that assessee is a proprietary concern but it is using the PAN of a firm and the same was upheld by the Ld. CIT(A) though it was specifically mentioned in the submission of the assessee that the PAN was wrongly allowed in the status of firm, however , the assessee is a proprietary concern. The assessee is in fact a proprietary concern owned by Smt. Menuka Devi Agarwal who settled in Sikkim prior to 1st April, 1975 as is apparent from the evidences filed before us in the form of license and other certificate issued by the Govt. The Ld. CIT(A) did not consider the issue of assessee being bona fide Sikkim of resident and upheld the order rejecting the claim to exemption u/s. 10(26AAA). In our opinion the order of Ld. CIT(A) has been passed without considering the decision of the Hon’ble Apex Court in the case of Association of Old Settlers of Sikkim (supra) wherein it has been held as under:
“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 1st 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. Now coming to the facts of the assessee it is submitted that the assessee is an Old Settler of Sikkim. The assessee is a member of Association of Old Settlers of Sikkim and they filed a Writ Petition (Civil) 59 of 2013 in the Supreme Court of India in which they have requested and granted. i. An ex parte stay of any assessment or recovery proceedings initiated or to be initiated against or to be initiated against those persons who are not exempted under the clause 26AAA of Section 10 of the IT Act, 1961 residing in the State of Sikkim. ii. Confirm the above order after notice and iii. Pass such orders as this Hon'ble Court may deem fit and proper in the interest of justice and in the facts and circumstances of the present case.
The Hon’ble Supreme Court of vide Interim order dated 11.02.2013 has ordered in the meanwhile no coercive steps shall be taken for recovery of amount pursuant to demand notice or insist for tax deducted at source (TDS) from the person referred to in para 6(a) of the stay application. The Supreme Court further ordered on the date 14.03.2016 that interim order, passed earlier shall continue.
On 13.01.2023, the Hon'ble Supreme Court of India in [2023] 146 Taxmann.com 271 (SC) in the case of Association of Old Settlers of Sikkim v. Union of India held that: a. All citizens of India having a domicile in Sikkim on day it merged with India i.e. 26.04.1975 must be covered under Explanation to section 10(26AAA) in order to avail benefit of exemption under section 10(26AAA). b. A Sikkimese Woman who marries a Non-Sikkimese after 01.04.2008 is also entitled to the benefit of exemption u/s 10(26AAA).”
Therefore, in view of the above decision, the assessee is apparently entitled to the exemption of income u/s. 10(26AAA) of the Act even in respect of petrol pump of which the assessee is a proprietor. Accordingly, we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to treat the income of the assessee as exempt u/s. 10(26AAA) of the Act. Accordingly, the appeal of the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 15th July, 2025