The Income Tax Appellate Tribunal, Guwahati Bench, has clarified that eligibility for tax exemption under Section 10(26) of the Income Tax Act does not relieve an assessee from the statutory obligation to file returns and explain sources of income. The ruling underscores that procedural compliance remains mandatory even for protected classes.
Background & Facts
The Dispute
The assessee, Imsangba Amongla Walling, a resident of Nagaland and a member of a Scheduled Tribe, failed to file her original income tax return for Assessment Year 2020-21 under Section 139(1). The case was reopened under Section 148, and she filed a belated return on 06.05.2024, declaring total income of ₹NIL and claiming an exempt income of ₹42,53,126 under Section 10(26) of the Act, based on her Scheduled Tribe status.
Key Facts
- The assessee made total cash deposits of ₹61,51,916 across three bank accounts during the relevant period
- She claimed the source of these deposits as salary and rental income
- The Assessing Officer (AO) noted that salary receipts of ₹11,97,466 could not reasonably be received in cash, limiting explainable cash to ₹49,72,450
- The unexplained differential of ₹11,82,466 was treated as unexplained income under Section 69
- The disclosed income from salary and rent (₹29,00,466) was found to be less than the claimed exempt income (₹42,53,126), leading to an additional addition of ₹13,52,660 under Section 69A for unexplained sources
- The AO finalized the assessment on 17.03.2025 under Section 147 read with Section 144B, determining total income at ₹25,35,126
- The assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]
- The CIT(A) issued multiple notices to the assessee, none of which were responded to
- The CIT(A) passed an ex parte order on 22.01.2026, confirming the AO’s additions
Procedural History
- 06.05.2024: Assessee filed belated return under Section 148, claiming exemption under Section 10(26)
- 17.03.2025: Assessment order passed by AO under Section 147 r.w.s. 144B
- 22.01.2026: CIT(A) passed ex parte order dismissing appeal due to non-appearance and non-response
- 15.05.2026: Hearing concluded before ITAT Guwahati Bench
- 05.06.2026: ITAT pronounced order
The Parties' Positions
For the Assessee
- Claimed exemption under Section 10(26) as a Scheduled Tribe resident of Nagaland
- Attributed non-response to notices to severe and continuous medical conditions, supported by documentary evidence
- Submitted additional evidence before ITAT to substantiate sources of income
- Requested remand to AO for fresh hearing with opportunity to present evidence
For the Department
- Argued that exemption under Section 10(26) does not negate the obligation to file returns or explain cash transactions
- Contended that the assessee’s failure to respond to notices justified ex parte adjudication
- Maintained that the additions under Sections 69 and 69A were legally sustainable
Relief Sought
The assessee sought:
- Setting aside of the CIT(A) order dated 22.01.2026
- Remand of the case to the AO for fresh assessment with opportunity to present evidence
- Withdrawal of penalty proceedings under Sections 270A and 271D
- Recognition of Section 10(26) exemption for the entire claimed amount of ₹42,53,126
The Legal Issue
The central question was whether an assessee claiming exemption under Section 10(26) of the Income Tax Act can be denied a fair hearing on procedural defaults, and whether the failure to explain cash deposits can justify additions even when the underlying income is statutorily exempt.
Arguments Presented
For the Assessee
The assessee’s representative argued that the failure to respond to notices was due to genuine medical incapacity, supported by documentary proof submitted before the Tribunal. He relied on the principle of natural justice and cited K. S. Puttaswamy v. Union of India to emphasize that procedural fairness must prevail over technical non-compliance. He contended that the exemption under Section 10(26) is substantive and cannot be rendered nugatory by procedural lapses, especially when the source of funds is traceable to exempt income. The additional evidence filed before the Tribunal, including rental agreements and salary slips, directly addressed the AO’s concerns and warranted a remand.
For the Department
The Department’s representative maintained that exemption under Section 10(26) is a benefit, not a shield against compliance. He cited CIT v. S. R. M. Chidambaram to argue that the burden of proof for claiming exemption lies with the assessee, and failure to respond to notices justifies ex parte adjudication. He emphasized that the AO’s additions were based on objective discrepancies between disclosed income and cash deposits, and that the CIT(A) acted correctly in upholding them. The Department opposed remand, asserting that the assessee had ample opportunity and chose not to avail it.
The Court's Analysis
The Tribunal acknowledged the assessee’s entitlement to exemption under Section 10(26), noting that the law does not require a Scheduled Tribe member to pay tax on income earned in the state of residence. However, the Tribunal held that this exemption does not absolve the assessee from the obligation to file returns or explain the source of cash deposits.
"While the income may be exempt under Section 10(26), the statutory obligation to file returns and explain cash transactions remains intact. The failure to respond to notices cannot be overlooked merely because the income is exempt."
The Tribunal further observed that the CIT(A) had acted mechanically in passing an ex parte order without examining the medical evidence submitted later before the Tribunal. The Tribunal emphasized that the additional evidence filed before it - relating to rental receipts, property transactions, and salary documentation - went to the root of the dispute and could not have been considered by the CIT(A). The Tribunal held that denying the assessee a fair hearing on such material evidence would violate the principles of natural justice.
The Tribunal distinguished between substantive entitlement and procedural compliance: the former is protected by law, the latter is mandatory for administrative integrity. It held that the correct course was not to confirm the additions, nor to allow the appeal outright, but to remand the matter for a fresh assessment where the assessee could be heard and the evidence evaluated.
The Verdict
The appeal was partly allowed for statistical purposes. The Tribunal set aside the CIT(A)’s order dated 22.01.2026 and remanded the case to the Assessing Officer for fresh assessment. The assessee shall be granted a reasonable opportunity to present all evidence, including the documents submitted before the Tribunal. No penalty proceedings under Sections 270A and 271D shall proceed until the reassessment is completed. The reassessment shall be concluded within 12 weeks from the date of receipt of this order.
What This Means For Similar Cases
Exemption Does Not Excuse Compliance
- Practitioners must advise clients claiming Section 10(26) exemption that filing returns and explaining cash flows remain mandatory
- Failure to respond to notices will not be excused merely on grounds of exemption status
- Medical hardship must be substantiated with contemporaneous documentation to be considered
Remand Is Preferred Over Ex Parte Adjudication When New Evidence Emerges
- Tribunals will remand cases where material evidence not before the lower authority is produced before them
- The burden shifts to the department to prove mala fide intent or deliberate evasion
- Courts will not uphold ex parte orders if the appellant’s non-appearance is linked to verifiable hardship
Documentation Is Critical for Scheduled Tribe Assessees
- Assessees must maintain and submit:
- Proof of Scheduled Tribe status (certificate)
- Rental agreements with tenant details
- Salary slips or employer affidavits
- Bank statements with source annotations
- Oral claims without documentary support will not suffice, even for exempt income
