Supreme Court income tax order on Sikkim

Political parties in Sikkim, including the ruling party, have been protesting against the Supreme Court’s observation that ‘Sikkimese Nepalis were immigrants’ while allowing exemption from income tax to all ‘old settlers ‘ cutting across ethnic lines.

• Before 1990, the Sikkim Income Tax Manual (SITM), was promulgated by the Ruler of Sikkim or Chogya in 1948, as applicable.
• This implied that there was no discrimination between April 1, 1990, and 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.

• Answering a review petition filed, 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.

• The Supreme Court held that the benefit of tax exemption provided in Section 10 (26AAA) shall be extended to all Sikkimese people.
• 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’.

What does the Section 10 (26AAA) say?

• 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:
  • 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;
  • 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
  • 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.

Sikkim and inclusion in India:

• The present erstwhile monarchy in Sikkim started in the year 1642 with the coronation of Phuntsog Namgyal as the Chogyal or king. The king was also a consecrated Buddhist priest.
• The country was frequently attacked by the Gorkha army of Nepal. Initially, the British establishment in India had good relations with Sikkim.
• Relations with the British deteriorated and finally in 1861, the British acquired the regions of Darjeeling and the Terai.
• The Treaty of Tumlong in 1861 made Sikkim a protectorate of the British.
• After India’s independence in 1947, the guarantees of independence that Sikkim had acquired from the British were transferred to the new Indian government.
• Sikkim was finally admitted to the Union of India on 16^thMay 1975 as the country’s 22^nd