Income Tax Exemption Denied due to Wrong PAN Used by Sikkimese Proprietor: ITAT Allows Claim u/s 10(26AAA) [Read Order]

The Kolkata Bench of Income Tax Appellate Tribunal ( ITAT ) allowed the appeal of a Sikkim-based proprietor after finding that the exemption under Section 10(26AAA) of Income Tax Act,1961 was wrongly denied on account of the use of a Permanent Account Number (PAN) issued in the status of a firm

Chandra Sales Agency, appellant-assessee, was a proprietorship run by Mrs. Menuka Devi Agarwal, a Sikkim resident operating a petrol pump. The case was selected for scrutiny due to cash deposits of over Rs. 4 crore during FY 2016-17, including Rs. 28.34 lakh during the demonetization period, without filing a return of income.

In response to notices, the assessee later submitted documents showing Sikkim residency and claimed exemption under section 10(26AAA). However, the Assessing Officer(AO) noted that the PAN used was of a partnership firm, while the business was proprietary, and denied the exemption.

The AO estimated 8% profit on turnover of Rs. 14.60 crore, adding Rs. 1.16 crore to income. Another Rs. 7.24 crore was added based on a mismatch between bank credits and declared turnover. The assessment was completed under section 144.

The Commissioner of Income Tax(Appeals)[CIT(A)] upheld the AO’s order, ignoring the Supreme Court's decision in Association of Old Settlers of Sikkim vs. Union of India.

The two member bench comprising Pradip Kumar Choubey (Judicial Member) and Rajesh Kumar (Accountant Member) noted that the assessee was a genuine resident of Sikkim, settled there before 01.04.1975, and ran a petrol pump under the proprietorship Chandra Sales Agency.The case was selected for scrutiny due to large cash deposits during FY 2016-17, including the demonetization period, and no return was filed.

During the assessment, the assessee explained that she was a Sikkim resident and a member of the Association of Old Settlers of Sikkim, which had filed a petition before the Supreme Court.

The appellate tribunal referred to the Supreme Court’s decision, which held that all Indian citizens living in Sikkim as of 26.04.1975 were eligible for exemption under section 10(26AAA), including Sikkimese women married to non-Sikkimese men.

The AO had denied the exemption, citing theuse of a PAN issued in the name of a firm, though the business was a proprietorship. The CIT(A) upheld this view, ignoring the Supreme Court’s ruling.

The tribunal held that the assessee was eligible for the exemption and directed the AO to treat the income as exempt under section 10(26AAA).

Accordingly,the appeal was allowed.

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