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A Supreme Court verdict passed in the 70s’ is all set to haunt the Income Tax department, which has all these years failed to act on it.

The verdict pronounced in 1976 set aside a Gauhati High Court judgment that had exempted one RT Rymbai from paying income tax.

The can of worms was opened in a case between the Meghalaya Cooperative Apex Bank (MCAB) and the IT department, which failed to return the tax deducted “illegally” from the bank.

Although the Supreme Court judgment provided arms for the IT department and its legal counsels to pursue its case of imposing income tax on tribals living in non-Scheduled areas, they have all along been ignoring the apex court order allegedly in order to cater to the sentiment of local public, a source pointed out.

The revelation about the Supreme Court judgment led to the recent order by the Meghalaya High Court asking the IT department to find out under what law the tribals living in municipal areas are exempted from paying income tax.

As per the practice, if not law, no indigenous tribal living or serving in any part of Meghalaya have to pay income tax. They are said to be exempted under the section 10 (26) of the Income Tax Act 1961.

As per the clause 26 of Section 10, which lists “incomes not included in total income”, a person is exempted from paying income tax provided – a) he or she is a member of a Scheduled Tribe, b) resides in the Scheduled area and c) the income concerned is generated from any source in the Scheduled areas or by way of dividend or interest on securities.

In the case of RT Rymbai, an Assam Civil Service (ACS) officer of 1941, the Gauhati High Court termed the Section 10 (26) “discriminatory” as the Section warrants a tribal staying in a non-Scheduled area within the state to pay income tax.

Rymbai had approached the high court when income tax was imposed on him during his posting in Shillong as a secretary to the government of Assam in 1970-71.

He had argued that the Section 10 (26) is discriminatory as his colleagues serving a few kilometers away in the non-Scheduled area within Shillong are exempted.

He got relief from the Gauhati High Court which termed the clause “discriminatory”, but it was subsequently set aside by the Supreme Court in 1976 as the IT department challenged the HC order.

But, the legal counsels of the IT department had never in all subsequent cases after RT Rymbai’s referred to the Supreme Court verdict while defending the department against individuals or entities.

Meanwhile, a source pointed out, a lot of things changed in terms of number of employees in the government departments after creation of the state in 1972.

“There were more and more tribal employees in the government offices and their people were also engaged in business, supply and building contracts and most of the people resided in the municipal areas of Shillong,” the source said adding, “A strict implementation of the Section 10 (26) would have meant an uprising against the government then.”

“Moreover, in the IT department itself a lot of tribal employees joined and thus vested interests cropped up,” the source added.

Meanwhile, the case between the IT department and MCAB is set to be delayed with the fresh High Court order to the department to find out the legal ground under which tribals, including wealthy ones, are exempted from paying the income tax.

MCAB’s counsel VK Jindal already appealed to the High Court to separate his matter related to the bank from the other issues the court laid stress upon.

The MCAB had sued the IT department seeking refund of the entire income tax it deducted “at source” besides the interest upon it for the past 10 years.

The department had deducted the tax amounting to around Rs 3 crore from the interest the bank earned from investments made by some financial institutions in 2002.

“All cooperative banks are exempted from paying income tax. However, the IT department argued that the bank is located in a non-Scheduled area (European Ward) in Shillong and so is liable to pay income tax,” advocate Jindal told The Meghalaya Guardian.

The bank had already been refunded part of the tax, but the former filed the lawsuit seeking the entire amount and interest for the delay of over 10 years.

(Published as lead story in The Meghalaya Guardian on July 3, 2015)