ITAT set aside order and remits case to examine claim of exemption u/s 10(26)

ITAT remits case to examine claim of exemption u/s 10(26) for assessee being a Scheduled Tribe and residing in Meghalaya

In a recent judgment, ITAT Guwahati set aside the order of the CIT(A) and remitted the case for examination of claim of exemption u/s 10(26) of the Income Tax Act, 1961 (the Act) as the assessee was residing in Meghalaya being specified State and was a member of Scheduled Tribe as defined in the Constitution of India.

ABCAUS Case Law Citation:
4592 (2025) (06) abcaus.in ITAT

The appellant assessee was a resident of Meghalaya and by profession was a contractor for both government and private clients.

As per the information available with the department, the appellant had made a time deposit of Rs. 68,00,000 in the previous year with bank.

The assessment order was passed u/s 147 r.w.s. 144B of the Act as no return of income was filed and the return was filed after the issue of notice u/s 148 of the Act. Although the AO admittedly appreciated the same that bank transactions had occurred and arises within the Sixth Schedule Areas i.e. within the State of Meghalaya. However, the AO made the several additions i.e. amount invested in FDRs was treated as unexplained investment u/s 69, estimated business income from contract, cash expenditure were also added as no source was explained and as the assessee failed to justify the allowability of the said expenses in view of the provisions of section 40A(3), 40(i)(ia) and 37(1) of the Act and a further sum was also added as income from other sources.

Before the CIT(A) the assessee submitted that he was a member of a Scheduled Tribe as defined in clause (25) of Article 36 of the Constitution of India and his residence was in a District specified in the Sixth Schedule to the Constitution of India.

It was submitted that therefore any sources of income which accrues or arises to the assessee were from within the Khasi Hills and Jaintia Hills District/Tribal Areas or by way of dividend and interest on securities is exempt from Income Tax under section 10(26) of the Income Tax Act, 1961.

Thus, it was submitted that the assessee was not in any manner whatsoever liable to any kind of income tax as the income that had accrues and arises does not form part of the total income.

It was further submitted that he was not much educated and was unaware of the procedure about filing income tax return or how to respond to income tax notices issued to him or how upload the documents which were available with him.

However, the CIT(A) partly allowed the appeal and deleted addition towards interest received on bank deposit since the AO had not given any adverse comment on the certificate claiming to belong to an eligible Tribe. Since the AO had estimated the income of appellant from business, addition u/s 40A(3) or 40(a)(ia) were also deleted. However, CIT(A) denied the exemption under section 10(26) towards the contract income and the deposit made in bank.

Before the Tribunal, the assessee submitted that CIT(A) did not examine the explanation given.

The assessee further submitted that he had invested in the Fixed deposits out of income earned in this Schedule Area and encased Principal and interest from time to time as above credited in the same Bank Account.

It was further submitted that the Assessing Officer did not give any adverse comments in response to Remand Report furnished by him before the Commissioner of Income Tax (Appeals) regarding the appellant assessee was a Member of Scheduled Tribe of belonging to Tribe, residing in Meghalaya and had earned income within this Scheduled Area which is exempted under section 10(26) of the Act. It was therefore requested to delete the addition made to business income.  With respect to estimation of income also the assessee claimed exemption under section 10(26) of the Act.

The Tribunal noted that as per the provisions of clause (26) of Section 10 of the Act, in computing the total income of a previous year of any person, any income falling within any specified area shall not be included which accrues or arises – (a) from any source in the specified areas or States or (b) by way of dividend or interest on securities.

Considering the submissions made, the Tribunal opined that adequate opportunity of being heard needed to be provided to the assessee to explain the claim of exemption before the CIT(A).

Therefore, the order of the CIT(A) was set aside and the appeal was restored to him to be decided afresh after considering the submission of the assessee and after providing a reasonable opportunity of being heard to the AO as per Rule 46A of the Rules.

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