Supreme Court Refuses To Entertain Plea For Creamy Layer In Income-Tax Exemption For Scheduled Tribes In North-East States

A bench of CJI Surya Kant and Justice V. Mohana allowed petitioner Ashwini Upadhyay to withdraw the petition with the liberty to approach the Centre and the relevant Parliamentary Committee.

“It seems to us that the relief sought by the instant petition essentially involves formulation/revision/amendment of legislative/public policies. This court may not therefore be an appropriate platform for the aforesaid purpose at this stage. The petitioner may approach the Parliamentary Committee by way of a comprehensive petition. Similarly, the petition shall be at liberty to send the copy of the writ petition as a representation to all the respondents”, the Court observed.

The petition challenged Section 11 read with Schedule III, Serial No. 19 of the Income Tax Act, 2025, which exempts certain income earned by members of Scheduled Tribes residing in areas covered by the Sixth Schedule and States including Arunachal Pradesh, Manipur, Mizoram, Nagaland and Tripura.

When the matter was taken up, Upadhyay argued that the continued blanket exemption violated Articles 14, 19 and 27 of the Constitution.

He contended that the provision treated unequals equally by extending the same tax benefits to wealthy tribal individuals and economically weaker members of Scheduled Tribes. He also argued that the exemption created an unequal commercial environment because affluent tribal business owners were exempt from tax while similarly placed non-tribal traders paid income tax.

“Millionaires are taxed and billionaires are getting the tax exemption,” he submitted.

He further argued that many beneficiaries no longer followed tribal customs and traditions after converting to Christianity, yet continued to enjoy the exemption, violating Article 27 of the Constitution.

Upadhyay submitted that the exemption may have been justified when it was originally enacted under the Income Tax Act, 1961 because tribal communities were educationally and economically disadvantaged. However, he argued, that circumstances had changed substantially.

Referring to data placed in the petition, he submitted that literacy levels had increased significantly, educational infrastructure had expanded and affluent tribal individuals now owned large businesses, educational institutions, hospitals and hotels.

He also pointed to asset declarations of elected representatives from North-Eastern States and claimed that some beneficiaries possessed wealth running into hundreds of crores while continuing to receive complete income-tax exemption.

The bench, however, repeatedly indicated that the issues raised by the petitioner fell within the legislative domain.

Justice Kant said that the matter was a "purely legislative issue". He observed that elected representatives were fully aware of the relevant facts and were best placed to determine whether existing benefits required modification.

He noted that Parliament had constituted a Committee on Petitions before which citizens could seek enactment, amendment or repeal of laws. He said, “We are saying that what you are saying might be 100% correct, totally correct. But the problem is that only you are dialling wrong number. Go to the Parliament.”

Upadhyay also referred to reports annexed to the petition alleging that tax-exempt accounts in North-Eastern States had been used for laundering unaccounted money, including during demonetisation. He argued that the exemption had become a route for converting black money into legitimate funds.

The Court responded that if any individual or institution was engaging in illegal activity, proceedings could be initiated against such persons separately.

Responding to Upadhyay's allegations regarding misuse of the exemption, the CJI remarked, “Only because somebody has misused or abused the provision is no ground that even innocent and genuine people should be deprived of the benefit.”

At one stage, Upadhyay clarified that he was not seeking to strike down the provision itself but was primarily seeking implementation of a creamy layer exclusion similar to those applied in other contexts.

He argued that individuals owning large educational institutions, hospitals, hotels and businesses and earning hundreds of crores annually should not continue to receive the same tax benefits as economically weaker tribals.

The Court remained unconvinced and advised him to pursue the issue before Parliament's Committee on Petitions.

Disposing of the matter, the Court observed that the reliefs sought essentially involved legislative policy choices and that the Supreme Court was not an appropriate forum to examine such demands at this stage.

The court granted liberty to the petitioner to approach the Parliamentary Committee through a comprehensive representation. It also permitted him to forward copies of the petition to the Union Government and other respondents for consideration.

According to the petition, the exemption presently available under Section 11 read with Schedule III, Serial No. 19 is a reenactment of the exemption previously contained in Section 10(26) of the Income Tax Act, 1961.

The plea argued that the provision had become arbitrary because it continued to grant blanket tax exemptions without any income ceiling, asset-based exclusion or creamy layer mechanism despite significant economic development in the North-East.