Hon'ble Dr. Satish Chandra,J.
[Delivered by Hon'ble Mr. Justice Devi Prasad Singh]
1.Instant appeal has been preferred by the Revenue under Section 260A of Income Tax Act, 1961.
2.We have heard on the following substantial question of law:
"Whether, on the facts and circumstances of the case, the assessee Corporation is "Local Authority" and entitled for benefit of exemption under Section 10 (20) of the Income Tax Act, 1961?"
3.The dispute relates to the assessment year 2002-2003. The U.P. Jal Nigam (in short Jal Nigam) assessee, is a statutory body, established under the Act of the State Legislature namely, the Uttar Pradesh Water Supply and Sewerage Act, 1975 (in short Act).
4.The assessee Jal Nigam filed its returned on 31.10.2003 claiming itself to be the 'local authority' hence sought exemption under Section 10 (20) of the Income Act Act, 1961(in short Income Tax Act), in respect of the income derived by it.
5.The assessee relied upon the order passed by the Income Tax Appellate Tribunal (ITAT), dated 24.3.1999 for the assessment year 1980-1981 where its status as local authority was admitted by the Assessing Officer. However, this fact has been found to be not correct by the Revenue. According to Revenue, the status has been taken as that of Company. It is stated the law is well settled that every assessment year is independent.
6.The Assessing Officer while recording the finding with regard to assessment year in question, observed that the Assessee Corporation is an statutory body performing the public duty on behalf of the State Government and ordinarily possesses three wings namely, Jal Nigam, Nalkoop Wing and Construction & Design Wing. The activities of Jal Nigam Wing includes the supply of water and to provide sewerage facilities to public and maintenance thereof whereas the activities of Construction and Design Wing is to construct the Government buildings and the designing thereof. The Nalkoop Wing is to construct, maintenance of tubewell and water supply system. The Assessing Officer treated the assessee as Company and assessed the income of Jal Nigam chargeable to tax which comes to Rs.2,93,01,389.00 from the Construction and Design Wing and Nalkoop Wing treating it as commercial activity and leaving from tax the income/deficit of Jal Nigam Wing. While observing thus the Assessing Officer completed the assessment of the Assessee Corporation on 21.3.2005 under the status of Company.
The relevant portion of the finding of the Assessing Officer, is reproduced as under:
"From the plain reading of Section 10 (20) of the Income Tax Act, 1961 and after going through the activities of the three wings of the Assessee Corporation it becomes clear that at the most the activities of the Jal Nigam wing are that of a local authority whereas the activities of the remaining two wings are not at all of a local authority. As per Income and Expenditure Account of Construction and Design Wing, surplus of this wing during the year was 2,20,25,523.00 whereas the net surplus of the Nalkoop wing was Rs.72,75,866.97.
In the Jal Nigam wing the assessee had a net deficit of Rs.2,03,55,000.00 during the year. As the activities of the Jal Nigam Wing appears to be that of a local authority, its income has been treated as exempt U/s 10 (20) of Income Tax Act, 1961. The income of the remaining two wings, is being assessed in the status of Company. Thus, the income of U.P. Jal Nigam, which is chargeable to tax comes to Rs.29301389.00."
Thus, the finding recorded by the Assessing Officer, at the face of records seems to be not conclusive and are flickering in nature with regard to treating the U.P. Jal Nigam as local authority under Section 10 (20) of the Income Tax Act, 1961. The Assessing Officer seems to be in dilemma and used the word, 'at the most' before the Jal Nigam. Thus, according to Assessing Officer, out of three wings, only one wing at the most may be the local authority, i.e., Jal Nigam Wing. It appears that the Assessing Officer failed to take notice of the fact that whole U.P. Jal Nigam, is a Body corporate and one return is filed with regard to earning and loss of the U.P. Jal Nigam.
7.The Commissioner of Income Tax (A) deleted the addition by holding the Assessee Corporation is a 'Local Authority' while placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. U.P. Forest Corporation, 230 ITR 945. The finding recorded by the CIT (A), has been reiterated by the Income Tax Appellate Tribunal (in short the Tribunal) and granted exemption under Section 10 (20) of the Income Tax Act to the Assessee Corporation.
8.While assailing the impugned order passed by the Tribunal, Sri D.D. Chopra, learned counsel for the appellant has also relied upon the judgment of Hon'ble Supreme Court reported in CIT Vs. U.P. Forest Corporation, 230 ITR 945, and would submit that the Assessee Corporation is a statutory body and not an authority under Section 10 (20) of Incoem Tax Act. He invited attention to different paras of the judgment of the Forest Corporation (supra) to submit that at no stretch of imagination, the Assessee Corporation may be treated as authority under Section 10 (20) of the Income Tax Act and hence no exemption can be granted.
9.On the other hand, Sri Mudit Agarwal also relied upon the CIT Vs. U.P. Forest Corporation, 230 ITR 945 (supra), and invited attention to the provisions of the 1975 Act and submitted that the Jal Nigam is a local authority. He relied upon Section 3 of the 1975 Act which declares that the Nigam shall for all purposes be deemed to be a 'Local Authority'.
The question involved is of public importance as to whether, Jal Nigam may be treated as local authority under Section 10 (20) of the Income Tax Act?
10.It is no more res integra that the Tribunal is last fact finding body, vide 1972 Vol.86 ITR 11 (SC) Aluminium Corporation of India Ltd. Vs. Commissioner of Income Tax.
The finding of fact recorded by the Assessing Authority, thereafter by the Commissioner of Income Tax and later on, before the Appellate Tribunal, are continuous process and doctrine of merger would apply and the finding of fact recorded by the Tribunal shall be conclusive and binding.
It is further settle proposition of law that while exercising power under Section 260-A of the Act, High Court lacks jurisdiction to re-appreciate the evidence on record, vide (2007) 291 ITR 278: CIT Vs. P. Mohan Kala.
In pursuance of power conferred by sub-section (3) (4) and (5) of Section 260-A of the Income Tax Act, 1961, High Court has to formulate the substantial question of law involved in a case and thereafter, decide the substantial question of law so formulated by it and deliver a judgment containing the grounds on which such decision is founded. High Court has been empowered to determine any issue which has not been determined by the Appellate Tribunal or has been wrongly determined by the Appellate Tribunal for reason of decision, on such question of law as referred in sub-section (1) of Section 260-A of the Income Tax Act, 1961. So far as the finding of fact is concerned, under the doctrine of merger, the finding recorded by the Assessing Officer and the Commissioner Income Tax (Appeal), shall merge in the Tribunal's judgment. The provision contained in Section 260-A of the Income Tax Act, 1961 are pari materia to the provisions under Section 100 of CPC and Hon'ble Supreme Court in the case reported in (2001) 251 ITR 84 (SC): Santosh Hazari. Vs. Purushottam Tiwari, has reiterated the test laid down by the Constitution Bench of the Hon'ble Supreme Court in Sir Chunilal V. Mehta and Sons Ltd. Vs. Century Spinning and Manufacturing Co. Ltd. AIR 1962 SC 1314, with regard to substantial question of law that is of general public importance or it directly or substantially affects the rights of the parties or it is an open question in the sense that it is not finally settled by the Supreme Court or it is not free from difficulty or it calls for discussion for alternative views.
STATUTORY-PROVISIONS
11.U.P. Jal Nigam is the creation of statute by the State Legislature under the 1975 Act. Sub-section (3) of Section 3 of the 1975 declares that the Nigam shall for all purposes be deemed to be a local authority. Section 4 of 1975 Act provides that the Nigam shall consist of Chairman appointed by the State Government besides the members specified in sub-section (2). According to sub-section (2) of Section 4 of the 1975 Act, the Managing Director, Finance Director, Secretary to the State Government in the Finance Department, Ex Officio; Secretary to the State Government in -charge of the Water Supply Department, Ex Officio, Secretary to the State Government in the Planning Department, Ex Officio; Director of Local Bodies, U.P., Ex Officio Director of Medical and Health Services U.P. Ex Officio and elected heads of the local bodies in the State, to be nominated by the State Government, shall be the member of the Jal Nigam Board. It shall be appropriate to reproduce Section 3 and 4 of 1975 Act as under:-
"3. Establishment of the Nigam-- (1) The State Government shall by notification in the Gazette and with effect from a date to be specified therein, constitute a corporation by the name of the Uttar Pradesh Jal Nigam.
1.The Uttar Pradesh Jal Nigam shall be a body corporate by the said name, having perpetual succession and a common seal, and shall sue and be sued by the said name and have the power to acquire, hold or dispose of property.
2.The Nigam shall for all purposes be deemed to be a local authority.
3.The Nigam shall have its head office at Lucknow and may have offices a such other places as it may consider necessary.
4. Constitution of the Nigam-- (1) The Nigam shall consist of Chairman appointed by the State Government besides the members specified in sub-section (2).
1.The member other than the Chairman shall be as follows, namely:--
(a) a Managing Director (to be appointed by the State Government), who shall be a qualified engineer having administrative experience and also the experience of water supply and sewerage works;
(b) a Finance Director (to be appointed by the State Government), who shall have experience of matters relating to finance and accounts;
(c) the Secretary to the State Government I n the Finance Department, ex officio;
(d) the Secretary to the State Government in-charge of the Water Supply Department, ex officio;
(dd) the Secretary to the State Government in the Planning Department, ex officio;)
(e) the Director of Local Bodies, Uttar Pradesh, ex officio;
(f) the Director of Medical and Health Services Uttar Pradesh, ex officio;
(g) [five] elected heads of local bodies in the State, to be nominated by the State Government;
2.The appointment of the Chairman and members other than ex officio members shall be notified in the Gazette.
3.Instead of attending a meeting of the Nigam himself, a member referred to [in clause (c) (d) or clause (dd)] of sub-section (2) may depute an officer not below the rank of Deputy Secretary in his department, a member referred to in clause (e) of that sub-section may depute an officer not below the rank of Deputy Director in his department and a member referred to in clause (f) of that sub-section may depute an officer not below the rank of Joint Director in his department, to attend the meeting. The officer so deputed shall have the right to take part in the proceedings of the meeting and shall also have the right to vote]."
12.The function and power of Jal Nigam has been provided under Section 14 and 15 of the Act which are reproduced as under:
"14. Functions of the Jal Nigam.--The functions of the Nigam shall be the following, namely:-
1.the preparation, execution, promotion and financing the schemes for the supply of water and for sewerage and sewage disposal;
2.to render all necessary services in regard to water supply and sewerage to the State Government and local bodies, on request to private institutions or individuals;
3.to prepare State plans for water supply, sewerage and drainage on the directions of the State Government;
4.to review and advise on the tariff, taxes and charges of water supply in the areas of Jal Sansthan and local bodies which have entered into an agreement with the Nigam under Section 46;
5.to assess the requirement for materials and arrange for their procurement and utilisation;
6.to establish State standards for water supply and sewerage services;
7.to perform all functions, not stated herein which were being performed by the Local Self-Government Engineering Department before the commencement of this Act;
8.to review annually the technical, financial, economic and other aspects of water supply and sewerage system of every Jal Sansthan or local bodies which have entered into an agreement with the Nigam under Section 46;
9.to establish and maintain a facility to review and appraise the technical, financial, economic and other pertinent aspect of every water supply and sewerage scheme in the State;
10.to operate, run and maintain any waterworks and sewerage system, if and when directed by the State Government;
11.to assess the requirement for manpower and training in relation to water supply and sewerage services in the State;
12.to carry out applied research for efficient discharge of the functions of the Nigam or a Jal Sansthan;
13.any other functions entrusted to the Nigam by or under this Act; and
14.such other functions as may be entrusted to the Nigam by the State Government by notification in the Gazette.
15. Powers of the Jal Nigam--(1) The Nigam shall, subject to the provisions of this Act have power to do anything which may be necessary or expedient for carrying out its functions under this Act.
(2) Without prejudice to the generality of the foregoing provision, such power shall include the power--
(2)to inspect all water supply and sewerage facilities in the State by whomsoever they are operated;
(3)to obtain such periodic or specific information from any local body and operating agency as it may deem necessary;
(4)to provide training for its own personnel as well as employees of the local bodies;
(5)to prepare and carry out schemes for water supply and sewerage;
(6)to lay down the schedule of fees for all services rendered by the Nigam to the State Government, local bodies, institutions or individuals;
(7)to enter into contract or agreement with any person, firm or institution, as the Nigam may deem necessary, for performing its functions under this Act;
(8)to adopt its own budget annually;
(9)to approve tariffs for water supply and sewerage services applicable to respective local areas comprised within the jurisdiction of Jal Sansthan and such local bodies as have entered into an agreement with the Nigam under Section 46;
(10)to borrow money, issue debentures to obtain subventions and grants and manage its own funds;
(11)to disburse loans to local bodies for their water supply and sewerage schemes;
(12)to incur expenditure and to grant loans and advances to such persons or authorities as the Nigam may deem necessary for performing the functions under this Act."
13.A plain reading of Section 14 and 15 (supra) shows that the functions of Jal Nigam shall be preparation, execution, promotion and financing the schemes for the supply of water and for sewerage and sewage disposal and shall render all necessary services in regard to water supply and sewerage to the State Government and local bodies, on request to private institutions or individuals along with the maintenance of related infrastructure. The Jal Nigam shall lay down the schedule of fees for all services rendered by the Nigam to the State Government, local bodies, institutions or individuals and shall also approve tariffs for water supply and sewerage services applicable to respective local areas comprised within the jurisdiction of Jal Sansthan.
14.The Jal Sansthan is also established under 1975 Act. According to sub-section (4) of Section 18 of the 1975 Act, the Jal Sansthan shall be a body corporate having perpetual succession and a common seal and shall sue and be sued by the name of ") short name of the area specified in the said notification) Jal Sansthan" and have the power to acquire, hold or dispose of property. Section 20 provides that Jal Sansthan is constituted to have jurisdiction over the local area of a Nagar Mahapalika and shall consist of a Chairman who shall be the Nagar Pramukh of the Nagar Mahapalika along with members likes General Manager appointed by the Nigam with the approval of the State Government and others are Joint Director of Medical and Health Services to be nominated by the Director of Medical and Health Services, U.P., three Sabhasads of the Nagar Mahapalika nominated by the State Government; two representatives of the Nigam; the Director of Local Bodies, U.P. and Mukhya Nagar Adhikari of the Nagar Mahapalika. For convenience, Section 18 and 20 of the Act are reproduced as under:
"18. Establishment of Jal Sansthans--(1) If in the opinion of the State Government, local conditions so require and it is considered necessary or expedient for the improvement of water supply and sewerage services in any area, it may constitute a body to be known as Jal Sansthan for that area.
1.A Jal Sansthan shall be constituted by notification in the Gazette and with effect from the date specified therein.
2.A Jal Sansthan [not being a Jal Sansthan referred to in sub-section (1) or sub-section (2) of Section 20] may be constituted under sub-section (1) to have jurisdiction over the local area or any part thereof, of one or more local bodies as the State Government may specify in the said notification.
3.A Jal Sansthan shall be a body corporate having perpetual succession and a common seal and shall sue and be sured by the name of (short name of the area specified I n the said notification) Jal Sansthan" and have the power to acquire, hold, or dispose of property.
4.Jal Sansthan shall for all purposes be deemed to be a local authority.
5.A Jal Sansthan shall have its head office at the place specified in the notification under sub-section (1).
6.A Jal Sansthan may also have sub-offices at such places within its jurisdiction as it may consider necessary.
7.The State Government may where it considers necessary or expedient in the public interest so to do, by notification in the Gazette, and with effect from the date specified I n the notification--
(a) include any area in or exclude any area from, the area of a Jal Sansthan specified in the notification under sub-section (1);
(b) divide the area of a Jal Sansthan specified in the notification under sub-section (1) into area of two or more separate Jal Sansthans;
(c) amalgamate the areas of two or more Jal Sansthans specified in the notification under sub-section (1) into the area of one Jal Sansthan; or
(d) declare that any part in the area of a Jal Sansthan specified in the notification under sub-section (1) shall cease to be such area.
20. Constitution of Jal Sansthan--(1) Jal Sansthan constituted to have jurisdiction over the local area of a Nagar Mahapalika shall consist of a Chairman who shall be the Nagar Pramukh of the Nagar Mahapalika (ex officio), and the following other members, namely--
(a) a General Manager, to be appointed by the Nigam with the approval of the State Government who shall be a qualified engineer having administrative experience and experience of water supply and sewerage works;
(b) a Joint Director of Medical and Health Services to be nominated by the Director of Medical and Health Services, Uttar Pradesh;
(c) three Sabhasads of the Nagar Mahapalika nominated by the State Government;
(d) two representatives of the Nigam;
(e) the Director of Local Bodies, Uttar Pradesh;
(f) the Mukhya Nagar Adhikari of the Nagar Mahapalika.
(2)A Jal Sansthan constituted to have jurisdiction over the local area of a Municipal Board shall consist of a Chairman who shall be the President of the Municipal Board (ex officio), and the following other members namely:-
1.a General Manager, to be appointed by the Nigam with the approval of the State Government who shall be a qualified engineer having administrative experience and experience of water supply and sewerage works;
2.an officer subordinate to the District Magistrate nominated by the latter;
3.two representatives of the Nigam;
4.Deputy Medical Officer (Health) of the District in which the head office of the Municipal Board is situate;
5.an officer nominated by the Director of Local Bodies, Uttar Pradesh;
6.two elected members of the Municipal Board, to be nominated by the State Government.
(3)Any other Jal Sansthan shall consist of a Chairman appointed by the State Government, and the following other members, namely--
1.the Collector of the District in which the head office of the Jal Sansthan is situate, ex officio;
2.the seniormost officer of the Community Development Department having his headquarter within the area of the Jal Sansthan;
3.a General Manager, [to be appointed by the State Government], who shall be a qualified engineer having administrative experience and experience of water supply and sewerage works;
4.two representatives of the Nigam;
5.one nominee of the State Government from amongst the elected heads or members of the local bodies of each district within the jurisdiction of the Jal Sansthan:
Provided that where the number of districts within the jurisdiction of the Jal Sansthan is less than five, the number of such nominees shall be five out of which at least one shall be from each district;
6.the Chief Medical Officer of the district in which the head office of the Jal Sansthan is situate.]"
15.It may be noted that under Section 19 of 1975 Act, the State Government by notification, may direct the Jal Nigam to exercise power of Jal Sansthan in specified area. For convenience, Section 19 of the 1975 is reproduced as under:
"19. [Jal Nigam as Jal Sansthan--The State Government may, by notification, direct that in such rural areas as are specified in the notification, for which no Jal Sansthan has been established under Section 18, all or any of the powers, duties and functions of a Jal Sansthan under any provisions of this Act shall be exercised, discharged or performed by the Jal Nigam; and thereupon for the purposes of exercising, discharging or performing such powers, duties or functions the Jal Nigam shall be deemed to be the Jal Sansthan and the date of such notification shall be deemed to be the date of constitution of the Jal Sansthan]."
16.Thus, over all reading of statutory provisions contained in 1975 Act reveals that broadly, the functions of Jal Nigam shall be the preparation, execution, promotion of plans with regard to supply of water established and maintenance of sewerage system on a decided fee for the services rendered by it. Under the 1975 Act, the working area of Jal Nigam including Jal Sansthan is whole of the State of U.P.
17.It is obvious from the aforesaid provisions that the power of Jal Nigam is to lay down the schedule of fees for the services rendered by it to the Government, local bodies and the areas notified. The tariff of water supply and sewerage services is to be approved by the Board of Jal Nigam. Thus, at no stretch of imagination, the Jal Nigam may impose or tax under the tariff for the services rendered by it.
18.The question cropped up is, whether Jal Nigam is a local authority under Section 10 (20 of the Income Tax Act. Under Section 10 of the Income Act, certain exemptions have been granted by the Parliament holding that the income under different items provided under the Act, shall not be included in total income. Section 10 (20) of the Act grants exemption to local authorities. For convenience Section 10 (20) of the Income Tax Act is reproduced as under:
"(20) The income of a local authority which is chargeable under the head[***] "Income from house property", "Capital gains", or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area;
[Explanation--For the purpose of this clause, the expression local authority means--
1.Panchayat as referred to in clause (d) of article 243 of the Constitution, or
2.Municipality as referred to in clause (e) of article 243P of the Constitution; or
3.Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or
4.Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);]"
19.The dictionary meaning of the word, 'local' is as under:
"LOCAL. Relating to place; expressive of place; belonging or confine to a particular place. Distinguished from "general," "personal," and "transitory."
...[Black's Law Dictionary].
20.Thus, Section 10 (20) shows that exemption has been granted to the local authorities where the income is derived from the head of house property , capital gains or income from other sources or from trade, business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.
21.The words, "within its own jurisdictional area", in the aforesaid provision was added by the Finance (No.2)Act, 1971 w.e.f. 1.4.1971 w.e.f. 1.4.1972 whereas, the explanation to this provision has been inserted by the Finance Act, 2002 giving effect from 1.4.2003.
22.The word, "authority" been defined as statutory body like LIC, Oil and Natural Gas Commission or different Corporation of Central and State Government created under the Statute ordinarily being instrumentalities of State fulfilling twin test as propounded by the Hon'ble Supreme Court in the case reported in AIR 1981 SC 487: Ajay Hasia etc. Vs. Khalid Mujib Sehravardi and others etc.; AIR 1979 SC 1628: R.D. Shetty Vs. The International Airport Authority of India; to be the authority being 'State' under Article 12 of the constitution. Even the companies which are not framed under any special statute, have been held to be an authority being fully managed, controlled and financed by the Government.
The Explanation added in Section 10 (20) of the Income Tax Act, removes the ambiguity or confusion if any for all time to come.
23.It may be taken into account that the word, 'authority', or, 'local', used in Article 12 of the Constitution of India, refers to instrumentalities of the State as settled by Hon'ble Supreme Court by catena of judgments. It is not necessary that an authority being the instrumentalities of the State, be involved in charitable activities and may claim exemption under Section 10 (20) of Income Tax Act, 1961. For exemption under Section 10 (20), the instrumentalities of the State must fulfil the necessary conditions provided under chapter-III of the Income Tax Act. Needless to say that substantial number of instrumentalities of the States. the authorities covered under Article 12 of the Constitution are involved in commercial activities Though they secure the public interest, there is demarcating line between the local authority discharging State obligations involved in commercial activities and the local authority created and established for charitable purpose and only latter may be entitled to exemption under Section 10 (20) of the Income Tax Act, 1961.
24.It appears that to remove anomalies, the legislature to their wisdom added explanation to Section 10 (20) of the Income Tax Act. The amendment have put different Government companies to bear the burden of tax. It appears that instead of restoring the exemption making provisions status quo anti, the Government added clause (xii) under Section 36 (1) of Income Tax Act, by allowing any expenditure not being the capital expenditure incurred by the body of Corporation or body corporate by whatsoever name or constituted or established by Central, State or provincial Act for the object and purpose authorised by the Act under which the Corporation, body corporate was constituted/established. The deduction was authorised from the date on which the exemption was withdrawn retrospectively by the Finance Act, 2003 with effect from 1.4.2003.
25.Thus, explanation added in Section 10 (20) of the Income Tax Act with effect from 1.4.2003 shows that the Parliament itself intended to define the word, "local authority" by the explanation of clause (20) of Section 10 of the Income Tax Act. It specifically provides that "local authority" means Panchayat referred in clause (d) of Article 243 of the Constitution, Municipality referred to in clause (e) of Article 243P, Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund, and Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924).
26.Panchayats, Municipalities and District Boards have got local fund, impose taxes, which is under their control and management and provide civil immunities to people falling within their statutory jurisdiction.
27.Part IX A of the Constitution of India was inserted by the Constitution (Seventy-fourth Amendment) Act, 1992 giving effect from 1.6.1993. Article 243P of the Constitution defines the Committee, District, Metropolitan are, Municipal area, Municipality, and Panchayat.
Part IX of the Constitution was added by the Seventy-third Amendment Act, 1992 giving effect from 24.4.1993, and deals with creation, establishment and election of Panchayats to function within their specified territorial area. Accordingly, for the purpose of explanation given in Section 10 (20) of the Income Tax Act, the area or jurisdiction of local authority shall be the area for which the Panchayat, Municipality or Municipal Committee or District Board, has been constituted.
28.The Cantonment Board constituted under the Cantonments Act, 1924, also discharges its public functions within the specified area constituted under the Act.
29.The Parliament to its wisdom has used the word, 'local' as prefix to the word 'authority'. The word 'local' confines the jurisdiction or area of functions of the authority within specified limit under a statutory provision or Act possessing different features and functional activities provided under Part IX and IXA of the Constitution.
30.Article 243W contains power of authority and responsibility of municipalities and 243X empowers the municipalities to impose taxes and funds, Article 243ZA provides the provisions with regard to election of municipalities. Articles 243W, 243X and 243ZA are reproduced as under:
"243W. Powers, authority and responsibilities of Municipalities, etc.--Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow--
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein,with respect to--
1.the preparation of plans for economic development and social justice;
2.the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.
243X. Power to impose taxes by, and Funds of the Municipalities--The Legislature of a State may, by law--
(a) authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits;
(b) assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government for such purposes and subject to such conditions and limits;
(c) provide for making such grants-in-aid to the Municipalities from the Consolidated Fund of the State; and
(d) provide for constitution of such Funds for crediting all moneys received, respectively, by or on behalf of the Municipalities and also for the withdrawal of such moneys therefrom, as may be specified in the law.
243ZA. Elections to the Municipalities--(1) The superintendence, direction and control of the preparation of electoral rolls for, and the conduct of, all elections to the Municipalities shall be vested in the State Election Commission referred to in article 243K.
(2) Subject to the provisions of this Constitution, the Legislature of a State may, by law, make provision with respect to all matters relating to, or in connection with, elections to the Municipalities."
31.Article 243 P of the Constitution defines Municipal area, Municipality, Panchayats, Metropolitan area as under, to quote:-
"243P. Definitions.- In this Part, unless the context otherwise requires,-
(a) "Committee" means a Committee constituted under article 243S;
(b) "district" means a district in a State;
(c) "Metropolitan area" means an area having a population of ten lakhs or more, comprised in one or more districts and consisting of two or more Municipalities or Panchayats or other contiguous areas, specified by the Governor by public notification to be a Metropolitan area for the purposes of this Part;
(d) "Municipal area" means the territorial area of a Municipality as is notified by the Governor;
(e) "Municipality" means an institution of self-government constituted under article 243Q;
(f) "Panchayat" means a Panchayat constituted under article 243B;
(g) "population" means the population as ascertained at the last preceding census of which the relevant figures have been published."
32.Article 243 Q of the Constitution of India, defines Nagar Panchayats, Municipal Corporation and Article 243 U, specifies duration of municipalities, to quote:
"243Q. Constitution of Municipalities.- (1) There shall be constituted in every State,-
(a) a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area in transition from a rural area to an urban area;
(b) a Municipal Council for a smaller urban area; and
(c) a Municipal Corporation for a larger urban area, in accordance with the provisions of this Part:
Provided that a Municipality under this clause may not be constituted in such urban area or part thereof as the Governor may, having regard to the size of the area and the municipal services being provided or proposed to be provided by an industrial establishment in that area and such other factors as he may deem fit, by public notification, specify to be an industrial township.
(2) In this article, "a transitional area", "a smaller urban area" or "a larger urban area" means such area as the Governor may, having regard to the population of the area, the density of the population therein, the revenue generated for local administration, the percentage of employment in non-agricultural activities, the economic importance or such other factors as he may deem fit, specify by public notification for the purposes of this Part."
243U. Duration of Municipalities, etc.-
(1) Every Municipality, unless sooner dissolved under any law for the time being in force, shall continue for five years from the date appointed for its first meeting and no longer:
Provided that a Municipality, shall be given a reasonable opportunity of being heard before its dissolution.
(2) No amendment of any law for the time being in force shall have the effect of causing dissolution of a Municipality at any level,which is functioning immediately before such amendment, till the expiration of its duration specified in clause (1).
(3) An election to constitute a Municipality shall be completed,-
(a) before the expiry of its duration specified in clause (1);
(b) before the expiration of a period of six months from the date of its dissolution:
Provided that where the remainder of the period for which the dissolved Municipality would have continued is less than six months, it shall not be necessary to hold any election under this clause for constituting the Municipality for such period.
(4) A Municipality constituted upon the dissolution of a Municipality before the expiration of its duration shall continue only for the remainder of the period for which the dissolved Municipality would have continued under clause (1) had it not been so dissolved.".
33.Article 243 N protects the law relating to Panchayats of the State as existing before the constitutional amendment. The nature and work of Panchayats all over the country as well as in the State of U.P. is of different nature than other local bodies. In the State of U.P., the Panchayats are governed by the U.P. Panchayat Raj Act, 1947 which was later on, amended by the State Legislature making it in conformity with the Part-IX of the Constitution of India.
34.U.P. Jal Nigam in any case, cannot be treated as a local body at par with Panchayat defined under the Panchayat Raj Act, 1947. Every Panchayat is an elected body with different nature of the statutory responsibilities. The tenure of the Panchayat is co-extensive with the statutory elected period unless dissolved earlier on the ground given in the statute by the Government. Moreover, once the Constitution protects the law relating to Panchayats, the period cannot be extended for U.P. Jal Nigam or alike bodies.
35.On the other hand, Jal Nigam as well as Jal Sansthan are body corporate having life co-exitensive with the statutory provision, not for a specified period. It is not managed by elected body and established not for charitable purpose.. It is involved in commercial activities and profit and loss business as is evident from the return filed by it, though established for public purpose. The provisions contained in 1975 Act, must be interpreted keeping in view the interpretation given in Article 243, 243A, 243-P, 243-Q, and 243-U of the Constitution of India. Accordingly, the assessee does not seem to be local authority under Section 10 (20) of the Income Tax Act, more so when interpreted keeping in view the provision contained in Part IXA of the Constitution given effect from 1.6.1993 & section 3 (31) of the General Clauses Act, 1897.
36.The area of working of Jal Nigam extends to whole of U.P. under Section 1 of 1975 Act. The U.P. Jal Nigam has got no jurisdiction to impose tax except to charge fees under tariff schedule, by indulging into construction designing.
37.In the case reported in AIR 1963 SC 1890: Valjibhai Muljibhai Soneji and another. Vs. The State of Bombay, the Constitution Bench of Supreme Court while considering the question as to whether the State Transport Corporation is 'local authority' or not, after considering the provisions of General Clauses Act, held that though the State Transport Corporation is an 'authority' and is legally entitled to and entrusted by the Government with control and management of local fund but it cannot be regarded as local authority. It has further been held that an item falling in the Concurrent List of the Constitution (List-III) of Seventh Schedule of the Constitution of India, a State can legislate law but it shall not prevail against the meaning of expression of 'local authority' in the Central Act, to quote relevant portion of para-11, 12 and 13 are reproduced as under:
"(11). The expression "local authority" is not defined in the Land Acquisition Act but is defined in S. 3 (31) of General Clauses Act, 1897 as follows:
" 'local authority' shall mean a municipal committee, district board, body of port commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund:"
The definition given in the General Clauses Act, 1897 govern all Central Acts and Regulations made after the commencement of the Act. No doubt this Act was enacted later in point of time than the Land Acquisition Act; but this Act was a consolidating and amending Act and a definition given therein of the expression "local authority" is the same as that contained in the earlier Acts of 1868 and 1887. The definition given in S. 3 (31) will therefore, hold good for construing the expression "local authority" occurring in the Land Acquisition Act. We have already quoted the definition.
1.It will be clear from the definition that unless it is shown that the State Transport Corporation is an 'authority' and is legally entitled to or entrusted by the Government with control or management of a local fund it cannot be regarded as a local authority. No material has been placed before us from which it could be deduced that the funds of the Corporation can be regard as local funds. It was no doubt submitted by the learned Attorney General that the Corporation was furnished with funds by the Government for commencing for its business; but even if that were so, it is difficult to appreciate how that would make the funds of the Corporation local funds.
2.Learned Attorney General then relied upon the provisions of S. 29 of the Bombay State Road Transport Act, 1950 which provides that the Corporation shall for all purposes be deemed to be a local authority. No doubt, that is so. But the definition contained I n this Act cannot override the definition contained in the General Clauses Act of 1897 which alone must apply for construing the expression occurring in a Central Act like the Land Acquisition Act unless there is something repugnant in the subject or content. Though land acquisition is now in the concurrent list and, therefore, the State can legislate, the Bombay Act not having received the President's assent cannot prevail against the meaning of the expressions 'local authority' in that Act. No repugnancy is pointed out."
38.Another Constitution Bench of Hon'ble Supreme Court in the case reported in AIR 1975 SC 1331: Sukhdev Singh and others. Vs. Bhagatram Sardar Singh Raghuvanshi and another, was seized with the matter with regard to interpretation of "Authorities" provided in Article 12 of the Constitution. Their lordship held that the expression 'other authorities' in Art. 12 is wide enough to include within it every authority created by a statute and functioning within the territory of India or under the control of the Government of India. However, here controversy does not relate to statutory "local authority" created for charitable purpose. Relevant portion of para 36 of the aforesaid judgment is reproduced as under:
"36. This Court in Rajasthan State Electricity Board, Jaipur v. Mohan Lal, (1967) 3 SCR 377=(AIR 1967 SC 1857) said that an "authority" is a public administrative agency or corporation having quasi-governmental powers and authorised to administer a revenue-producing public enterprise. The expression "other authorities" in Article 12 has been held by this Court in the Rajasthan Electricity Board case to be wide enough to include within it every authority created by a statute and functioning within the territory of India, or under the control of the Government of India. This Court further said referring to earlier decisions that the expression "other authorities" in Art. 12 will include all constitutional or statutory authorities on whom powers are conferred by law. The State itself is envisaged under Article 298 as having the right to carry on trade and business. The State as defined in Article 12 is comprehended to include bodies created for the purpose of promoting economic interest of the people. The circumstance that the statutory body is required to carry on some activities of the nature of trade or commerce does not indicate that the Board must be excluded from the scope of the word "State". The Electricity Supply Act showed that the Board had power to give directions, the disobedience of which is punishable as a criminal offence. The power to issue directions and to enforce compliance is an important aspect."
It may be noted that the word, "authority", given in Article 12 has got vital expression and other word, "authority" given in Section 10 (20) of Income Tax Act, speaks for local authority with different nature.
39.In AIR 1981 SC 951: Union of India and others. v. R.C. Jain and others, Hon'ble Supreme Court while considering the status of Delhi Development authority held that it shall be the "local authority". There lordship held that Delhi Development Authority is an independent entity and elected by inhabitants of the area, possesses autonomy to decide for itself the question of policy affecting the area administered by it. It has been entrusted by the statute that governmental functions and duties as are usually entrusted to municipal bodies of inhabitants of locality like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. It has been entrusted for the purpose of civic duties and functions and also power to raise funds for the furtherance of its activities and the fulfilment of their project by levying taxes, reduce charges or fees which is in addition to moneys provided by the Government or obtained by borrowing or otherwise. The relevant portion of para 2 of the aforesaid judgment is reproduced as under:
"... First, the authorities must have separate legal existence as Corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next, they must enjoy a certain degree of autonom, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of the dependence may vary considerably but, an appreciable measure of autonomy there must be. Next, they must be entrusted by Statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. etc. Broadly we may say that they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority."
40.In the case of R.C. Jain (supra), Hon'ble Supreme Court has reiterated the ratio of its of earlier judgments, of the case of Valjibhai Muljibhai Soneji. Vs. State of Bombay (Now Gujarat) (1964) 3 SCR 686 and in the case reported in (1968) 3 SCR 251: Municipal Corporation of Delhi. Vs. Birla Cotton Spinning & Weaving Mills Delhi.
41.The question with regard to exemption under Section 10 (20) of the Income Tax Act, was considered by the Calcutta High Court and repelled the contention of the assessee and declined to grant exemption to treat the Calcutta Transport Corporation as "local authority" vide, Vol.108 (1977) Page 922: Calcutta State Transport Corporation. Vs. Commissioner of Income Tax Act West Bengal-IV. Feeling aggrieved with the judgment, the Calcutta State Transport Corporation preferred appeal. While upholding the judgment, relying upon the case of R.C. Jain (Supra), it has been held by Hon'ble Supreme Court that Calcutta Transport Corporation is not an authority within the meaning of Section 10 (20) of the Income Tax Act hence it shall not be entitled for exemption under the Income Tax Act.
42.In the case reported in Vol.230 (1998) page 945: Commissioner of Income Tax. Vs. U.P. Forest Corporation, Hon'ble Supreme Court was seized with the power under Section 10 (20) of the Income Tax Act. The Division Bench Judgment of Allahabad High Court had allowed the exemption holding the U.P. Forest Corporation as a "local authority". Hon'ble Supreme Court set aside the judgment and held that U.P. Forest Corporation is not an authority though under Section 3 (3) of the U.P. Forest Corporation Act, 1974, it is provided that for all purposes it shall be the local authority. Their lordship has relied upon the ratio of R.C. Jian's case (supra) while reversing the judgment of Allahabad High Court, to quote relevant portion as under:-
"..In the case of the respondent-corporation, the Act does not enable it to levy any tax, cess or fee. It is the income from the sale of the forest produce which goes to augment its funds. It has no power under the Act of compulsory exaction such as taxes, fees, rates or charges. Like any commercial organisation it makes profit from sale of forest produce and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 17 of the U.P. Forest Corporation Act states that the fund of the corporation "shall be a local fund" that would not make it a local fund as contemplated by section 3 (31) of the General Clauses Act.
In our opinion, therefore, the High Court was not correct in coming to the conclusion that the respondent was a "local authority" and entitled to exemption under section 10 (20) of the Act.
Coming to the question whether the income of the respondent is held for charitable purposes and, therefore, exempt from tax by virtue of section 11 (1) of the Act, we find no such contention was raised by the respondent before the income-tax authorities. In order to take advantage of the provisions of section 11 of the Act, a trust or institution has to get itself registered..."
43.Thus, to hold statutory body as an "authority", it shall be necessary that the authority must have 'local fund' which shall be spent for providing civic amenities and also shall have right to generate fund by imposing taxes within the statutory jurisdiction, managed by elected body. Merely because a corporation has local fund, does not mean that it shall be the "local authority" as contemplated under Section 3 (31) of the General Clauses Act.
That apart, for the purpose of exemption of tax, it shall be necessary to hold that the authority is for the charitable purpose. By virtue of exemption under Section 11 of the Act to avail the benefit or advantage of Section 11 of the Act, a trust or institution has to get itself registered which seems to be not a case with regard to case of the U.P. Jal Nigam.
44.In the case reported in (2006) 5 SCC 100: Adityapur Industrial Area Development Authority. Vs. Union of India and others, Hon'ble Supreme Court held that Bihar Industrial Area Development Authority a statutory body though is a body corporate having legal personality different from the State and has its own income and generate its own fund which is not that of State though not carrying trade or business but shall not be an authority in view of the subsequent amendment done to Section 10 (20-A) and Section 10 (20) of Income Tax Act. Their lordships have considered the explanation added to amendment with effect from 1.4.2003 in para-5 of the judgment, which has been enforced from 1.4.2003 and held that since it does not include authority such as Adityapur Industrial Area Development Authority it shall not be entitled for exemption. The judgment of High Court was upheld by the Hon'ble Supreme Court, to reproduce relevant portion of para 7 and 13 as under:-
"7. The High Court by its impugned judgment and order held that in view of the fact that Section 10 (20-A) was omitted and an Explanation was added to Section 10 (20) enumerating the "local authorities" contemplated by Section 10 (20), the appellant Authority could not claim any benefit under those provisions after 1-4-2003. It further held that the exemption under Article 289 (1) was also not available to the appellant Authority as it was a distinct legal entity, and its income could not be said to be the income of the State so as to be exempt from Union taxation. The said decision of the High Court is impugned in this appeal.
13. Applying the above test to the facts of the present case it is clear that the benefit, conferred by Section 10 (20-A) of the Income Tax Act, 1961 on the assessee herein, has been expressly taken away. Moreover, the Explanation added to Section 10 (20) enumerates the "local authorities" which do not cover the assessee herein. Therefore, we do not find any merit in the submission advanced on behalf of the assessee."
45.In the case reported in (2007) 14 SCC 704: Commissioner of Income Tax. Vs. Gujarat Maritime Board, Section 10 (20) was the subject matter of interpretation by Hon'ble Supreme Court. Their lordships had interpreted the word, "charitable purpose" and held that where the purpose is advancement of any object, benefit to public or section of public except with all objects which promote the welfare of general public may be charitable purpose. In case primary purposes of predominant object are to promote the welfare to general public the purpose will be charitable purpose. However, explanation added by amendment to Section 10 (20) was not the subject matter of interpretation in the case.
46.In the case reported in (2008) 9 SCC 434: Agricultural Produce Market Committee, Narela, Delhi. Vs. Commissioner of Income Tax and another, the provision of Section 10 (20) along with explanation was subject matter for interpretation. Hon'ble Supreme Court held that prior to Finance Act, 2002, the word, "local authority", was not defined in the Income Tax Act, 1961. It was for the first time defined in Finance Act, 2002. It has been held that to remove ambiguity under the Finance Act, 2002, the word, "local authority", has been defined by the Legislature themselves hence Court cannot travel beyond definition given therein. Hon'ble Supreme Court held that Agricultural Produce Market Committee shall not be a local authority and shall not be entitled for exemption, to reproduced relevant para 35, 36, 37, 38, 39, 40 and 41 as under:-
"35. One more aspect needs to be mentioned. In the case of R.C. Jain the test of "like nature" was adopted as the words "other authority" came after the words "Municipal Committee, District Board, Body of Port Commissioners". Therefore, the words "other authority" in Section 3(31) took colour from the earlier words, namely, "Municipal Committee, District Board or Body of Port commissioners". This is how the functional test is evolved in the case of R.C. Jain. However, as stated, earlier Parliament in its legislative wisdom has omitted the words "other authority" from the said Explanation to Section 10(20) of the 1961 Act. The said Explanation to Section 10(20) provides a definition to the word "local authority". It is an exhaustive definition. It is not an inclusive definition. The words "other authority" do not find place in the said Explanation. Even, according to the appellant(s), AMC(s) is neither a Municipal Committee nor a District Board nor a Municipal Committee nor a panchayat. Therefore, in our view functional test and the test of incorporation as laid down in the case of R.C. Jain is no more applicable to the Explanation to Section 10(20) of the 1961 Act. Therefore, in our view the judgment of this Court in the case of R.C. Jain followed by judgments of various High Courts on the status and character of AMC(s) is no more applicable to the provisions of Section 10(20) after the insertion of the Explanation/definition clause to that sub-section vide Finance Act, 2002.
i.The question still remains as to why Parliament has used the words "Municipal Committee" and "District Board" in Item (iii) of the said Explanation. In our view, Parliament has defined "legal authority" to mean - a Panchayat as referred to in clause (d) of Article 243 of the Constitution of India, Municipality as referred to in clause (e) of Article 243P of the Constitution of India. However, there is no reference to the Article 243 after the words "Municipal Committee" and "District Board". In our view, the Municipal Committee and District Board in the said Explanation are used out of abundant caution.
ii.In 1897 when General Clauses Act was enacted there existed in India Municipal Committees and District Boards. They continued even thereafter. In some remote place it is possible that there exists a Municipal Committee or a District Board. Therefore, in our view, apart from a Panchayat and Municipality, Parliament in its wisdom decided to give exemption to Municipal Committee and District Board. Earlier there were District Board Acts in various States. Most of the States had repealed those Acts. However, it is quite possible that in some remote place District Board may still exists. Therefore, Parliament decided to give exemption to such Municipal Committees and District Boards. Therefore, in our view, advisedly Parliament has retained exemption for Municipal Committee and District Board apart from Panchayat and Municipality.
iii.Our view finds support from the provisions contained in Part IX of the Constitution of India. Article 243N provides for continuance of existing laws and Panchayats. It states, inter alia, that notwithstanding anything in Part IX, any law relating to Panchayats in a State immediately before commencement of the Constitution (Seventy-third Amendment) Act, 1992, which is inconsistent with the provisions of Part IX, shall continue to be in force until repealed by a competent Legislature.
iv.Similarly, under Part IXA there is Article 243ZF which refers to the "Municipalities". This Article, inter alia, states that notwithstanding anything in Part IXA, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of Part IXA, shall continue to be in force until amended or repealed by a competent Legislature. In our view, Article 243N and Article 243ZF indicates that there could be enactments which still retain the entities like Municipal Committees and District Boards and if they exist, Parliament intends to give exemption to their income under Section 10 (20) of the 1961 Act.
v.Before concluding we quote hereinbelow an important principle of law enunciated by this Court in the case of R.C. Jain (supra) which reads as under:
"...it is not a sound rule of interpretation to seek the meaning of words used in an Act, in the definition clause of other statutes."
vi.Since we are of the view that AMC(s) is neither a Municipal Committee nor a District Board under the said Explanation to Section 10(20) of the 1961 Act, we refrain from going into the question : whether the AMC(s) is legally entitled to the control of the local fund, namely, Market Fund, under the said 1998 Act. There is one more reason why we do not wish to express any opinion on the said question. Vide Finance Act, 2008, income of AMC(s) is exempt. Sub-section 26AAB of Section 10 comes into force with effect from 1.4.2009. Therefore, we do not wish to express any opinion on the question as to whether AMC(s) is legally entitled to the control of the local fund."
PARI MATERIA PROVISION
47.There is one other reason as to why the U.P. Jal Nigam may not be held as "local authority". The provisions of Section 3 of U.P. Forest Corporation Act, 1974 is parimateria to Section 3 of the U.P. Water Supply and Sewerage Act, 1975 with regard to U.P. Jal Nigam, to reproduce Section 3 of U.P. Forest Corporation Act, 1974 as under:
"3. Establishment of the corporation--(1) The State Government shall by notification in the Gazette and with effect from a date to be specified therein, constitute a corporation by the name of the Uttar Pradesh Forest Corporation.
(2)The Corporation shall be a body corporate having perpetual succession and a common seal and may sue and be sued in its corporate name and shall have the power to acquire, hold and dispose of property for the purposes of this Act.
(3)The Corporation shall for all purposes be a local authority.
(4)The Corporation shall have its head office at Lucknow and may have offices at such other places as it may consider necessary."
Identical/pari materia provisions also exists in U.P. Water Supply and Sewerage Act, 1975, under Section 3, 40, and 41.
48.Section 14 of the U.P. Forest Corporation Act Act, 1974 provides the function of the Forest Corporation, is to exploit the forest resources entrusted to it by the State Government, to prepare projects relating to forestry within the State, to undertake research programmes relating to forests and forest products and render technical advice to State Government on matters relating to forestry, to manage, maintain and develop such forest as are transferred or entrusted to it by the State Government and to perform such functions as the State Government may, from time to time, require. Corporation is also engaged in auction and sale of forest produce through its depots.
49.Section 17 of the U.P. Forest Corporation Act, 1974 provides that the Corporation shall have its own fund and Section 27 provides that local bodies to assist the Corporation. For convenience, Section 17 and 27 of the Act are reproduced as under:
"17. Fund of the Corporation--(1) The Corporation shall have its own fund which shall be a local fund and to which shall be credited all moneys received by or on behalf of the Corporation.
i.The fund shall be applied towards meeting expenses incurred by the Corporation in the discharge of its functions under this Act and for no other purpose.
ii.The money of the Fund shall be kept in the State Bank of India or in the Utrtar Pradesh Co-operative Bank or in any Scheduled Bank:
Provided that nothing in this sub-section shall be deemed to preclude the Corporation from retaining such balances in cash as may be necessary for current payment or from investing any portion of the fund not required for immediate expenditure in any of the securities described in Section 20 of the India Trusts Act, 1882.
27. Local bodies to assist the Corporation--(1) Every local body shall render such assistance and furnish such information to the Corporation and make available for its inspection and examination such records, maps, plans and other documents as it may require in connection with the performance of its functions under this Act.
(2) Notwithstanding anything contained in any other law for the time being in force, the State Government may give to any local body such directions as in its opinion are necessary or expedient for enabling the Corporation to perform its functions under this Act and thereupon it shall be the duty of the local body to comply with such directions."
Hon'ble Supreme Court in spite of all these provisions keeping in view earlier Constitution Bench judgment (supra) and other judgments held that U.P. Forest Corporation, is not a 'local authority' within the meaning of Section 10 (20) of the Income Tax Act, 1961.
50.Hon'ble Supreme Court in the case reported in (2001) 5 SCC 375: Babu Khan. Vs. Nazim Khan, ruled that the courts while construing a provision of an enactment often follow the decisions by the courts construing similar provision of an enactment in pari materia. The object is to avoid contradiction between the two statutes dealing with the same subject.
51.In the case reported in (2004) 6 SCC 254: Kusum Ingots & Alloys Ltd. Vs. Union of India, Hon'ble Supreme Court held that interpretation of statute in pari materia provisions by Supreme Court shall apply to identical statutes.
The aforesaid principle with regard to pari materia statutes has been upheld in (2004) 3 SCC SCC 488: Commr. Of Customs. Vs. Indian Oil Corpn. Ltd.,
52.In a case reported in (2005) 7 SCC 234: Shin-Etsu Chemical Co. Ltd. Vs. Aksh Optifibre Ltd., their lordhsips held that when words in an earlier statute have received an authoritative exposition by the superior court use of the same words in a similar context in a later Act will give rise to a strong presumption that Parliament intends that the same interpretation should also be followed for construction of these words in the later statute. Relevant portion of para 33 of the aforesaid judgment is reproduced as under:-
"33. The question is: did Parliament intend differently while using the terminology in Section 45 as it did? When words in an earlier statute have received an authoritative exposition by the superior court (interpretation of Section 3 in Renusagar case), use of the same words in a similar context in a later Act will give rise to a strong presumption that Parliament intends that the same interpretation should also be followed for construction of these words in the later statute:
"D' Emden v. Pedder, CLR at p. 100 per Griffiths, CJ.: 'When a particular form of legislative enactment which has received authoritative interpretation, whether by judicial decision or by a long course of practice, is adopted in the framing of a later statute, it is a sound rule of construction to hold that the words so adopted were intended by the legislature to bear the meaning which had been so put upon them.' "
"According to Lord Macmillian, 'if an Act of Parliament referring to the same subject, and passed with the same purpose, and for the same object, the safe and well-known rule of construction is to assume that the legislature when using well-known words upon which there have been well-known decisions uses those words in the sense which the decisions have attached to them'."
53.The aforesaid proposition has again been reiterated in the case reported in (2009) 12 SCC 419: CCE. Vs. Shree Baidyanath Ayurved Bhavan Ltd., and (2010) 5 SCC 349: Union of India. Vs. Alok Kumar. In the case of Alok Kumar, Hon'ble Supreme court held that court should examine every word of a statute in its context while keeping in mind preamble and other provisions thereof,pari materia statutes, if any.
54.Though, the aim and object of U.P. Jal Nigam as well as the U.P. Forest Corporation possess elements of public service in their own way, but both are involved in commercial activities and may not be treated as "local authority" under Section 10 (20) of the Income Tax Act, 1961 in view of catena of judgment of Hon'ble Supreme court (supra) particularly, the case of U.P. Forest Corporation (supra), the provisions contained in U.P. Forest Corporation Act is pari materia to statute constituting U.P. Jal Nigam.
55.Treating the assessee as local authority, means to travel beyond the interpretation of word 'local authority' by Hon'ble Supreme Court (supra) as well as explanation given in Section 10 (20) of the Income Tax Act itself. Once the Legislature themselves have provided by using the word, "purpose of this clause" defining the local authority co-relating it to Panchayat, Municipality, Municipal Committee, District Board and Cantonment Board, then under the interpretative procedure, the Courts may not add something which has not been provided in the Act. An addition of any body, establishment, corporation, company in the list given in explanation of clause (20) of Section 10 of the Income Tax Act will amount to supply causus omisus or principles of reading down construing the provisions which seems to be not permissible.
INTERPRETATION
56.Hon'ble Supreme Court in the case reported in (2003) 8 SCC 498: P.T. Rajan. Vs. T.P. M. Sahir, held that court cannot supply casus omisus in case the language of the statute is clear.
57.In the case reported in (2003) 2 SCC 659: Shiv Shakti Coop. Housing Society Vs. Swaraj Developers, Hon'ble Supreme Court held that casus omisus cannot be readily inferred by court except in the case of clear necessity and when reason for it found in the four corners of the statutes itself.
58.In the case reported in (2004) 11 SCC 625: Delhi Finance Corpn. Vs. Rajiv Anand, Hon'ble Supreme court held that legislature is presumed to have made no mistake and that it intended to say what it said assuming that there is a defect or an omission in the words used by the legislature, the court cannot correct or make up the deficiency especially when a literal reading thereof, produces an intelligible result- the court is not authorised to alter words or provide a casus omisus.
59.In the case reported in 2006 (2) SCC 670, Vemareddy Kumaraswamy Reddy and another VS. State of A.P, Hon'ble Supreme Court held that by the language, a statute is clear and unambiguous, the court cannot make any addition or substitution of words unless otherwise, the provisions appears meaningless or are of doubtful meaning.
60.In the case reported in (2004) 6 SCC 672: Maulvavi Hussain Haji Abraham Umar Ji. Vs. State of Gujrat and another, Hon'ble Supreme Court held that a casus omisus ought not to be created by interpretation, save in some case of strong necessity.
61.In the case reported in (2006) 2 SCC 670: Vemareddy Kumarswamy Reddy and another. Vs. State of A.P., Hon'ble Supreme Court held that where the language of the statute is clear and unambiguous, court cannot make any addition or substitution of words, unless otherwise the provision appears meaningless or of doubtful meaning.
62.The relevant portion from to Maxwell on the Interpretation of Statutes (12th edition page 36) is reproduced as under:-
"A construction which would leave without effect any part of the language of a statute will normally be rejected. Thus, where an Act plainly gave an appeal from one quarter sessions to another, it was observed that such a provision, though extraordinary and perhaps an oversight, could not be eliminated."
63.It is settled law that while interpreting the statutory provisions contained in an Act or statute, any one should not be read in isolation but it should be read in reference to context. According to Maxwell, a construction which would leave without effect any part of the language of a statute will normally be rejected. Hon'ble Supreme Court by catena of judgment held that while interpreting any section of a statute, every word and provision should be looked into in context to which it is used and not in isolation vide 2002 (4) SCC 297 Grasim Industries Limited v. Collector of Customs; 2003 SCC (1) 410 Easland Combines v. CCE; 2006 (5) SCC 745 A. N. Roy v. Suresh Sham Singh and 2007 (10) SCC 528 Deewan Singh v. Rajendra Prasad Ardevi.
Hon'ble the Supreme Court while considering the principles regarding the construction of exemption provisions in AIR 1991 SC 2049, Union of India vs. Wood Papers Ltd., held as under:-
"Literally exemption is freedom from liability, tax or duty. Fiscally it may assume varying shapes, specially in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective, etc. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact an exemption provision is like an exception and on normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended to augment State revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly."
64.By catena of judgments Hon'ble Supreme Court from time to time ruled that when language is clear or unambiguous, it should be construed literally without any addition or substraction.
65.In a case reported in 2004 (1) SCC 201, State of West Bengal VS. Kesoram Industries Ltd., Hon'ble Supreme Court held that taxing statute should be strictly construed. If the person sought to be taxed comes within the letter of the law he must be taxed, however, in case he does not fall in the taxing category not tax can be imposed. There is no room for any intendment. There is no equity about the tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied.
66.In a case reported in 2009 (27) LCD 161, Lipton India Ltd. Gaziabad Vs. State of U.P. and others, a Division Bench of this Court while pronouncing the judgment by one of use (Hon'ble Mr. Justice Devi Prasad Singh), held that while interpreting taxing provisions, a provision should not be read in isolation but it should be read in reference to context.
In the present case, provisions contained under Section 10 (20) of the Income Tax Act, 1961, should not be read in isolation but it must be read keeping in view the provisions contained in Chapter-III of the Income Tax Act, 1961. An over all scheme provided therein with regard to tax exemption or the income, do not conform part of total income.
67.Subject to aforesaid broader principle with regard to principle of reading down or supply of causus omisus, Section 10 (20) of the Income Tax Act is construed independently or under the explanation confining the exemption only to the specified local authority or local bodies, the language being clear and unambiguous, literal interpretation is to be given to Section 10 (20) of the Income Tax Act, 1961.
68.In view of the above, while considering the explanation, court cannot substitute the words, 'purpose', of this clause which confines the benefit under clause (20) of Section 10 of the Income Tax Act, 1961 to four types of local bodies given therein and not to others. The language being clear and unambiguous, the literal interpretation should be applied, which debars the Jal Nigam to claim any exemption of tax.
69.In AIR 1989 SC 644, Collector of Central Excise, Bombay vs. Parle Exports (P) Ltd., the Supreme Court held that while interpreting the notification for exemption, courts should understood the language employed therein bearing in mind the context in which the expressions occur. Once a notification is issued in pursuance to power conferred by the Act, it has got statutory force. The relevant portion is reproduced as under:
"The expressions in the Schedule and in the notification for exemption should be understood by the language employed therein bearing in mind the context in which the expression occur. The words used in the provision, imposition taxes or granting exemption should be understood in the same way in which these are understood in ordinary parlance in the area in which the law is in force or by the people who ordinarily deal with them..... The notification must be read as a whole in the context of the relevant provisions. When a notification is issued in accordance with power conferred by the statute, it has statutory force and validity and, therefore, the exemption under the notification is, as if it were contained in the Act itself".
70.Accordingly, Section 10 (20) should be read in reference to context alone with Section 11 and 12 of Section 12A and 12AA of the Income Tax (Part-III) and not in isolation.
LEGISLATION
71.One other aspect of the matter requires consideration. The Income Tax Act, 1961, has been legislated by the Union of India in pursuance of powers conferred by Article 246 of the Constitution read with Entry 82 List 1 of Schedule VII of the Constitution. Under Entry 82, the Union of India has right to legislate the law for taxes in income other than agricultural income, whereas, the State has got power to impose tax on agriculture income under Entry 46 List II of Schedule VII of the Constitution.
72.Applying the aforesaid principle, the State Government cannot exercise power to an 'item' meant for the Central Government. The local authority should be defined keeping in view the provisions contained in Part IX and IXA of the Constitution and Section 10 (20) of the Income Tax Act read with Chapter-III of the Income Tax Act, 1961. Merely because the State legislature has used the word, 'local authority' in sub-section (3) of Section 3 of the 1975 Act, it shall not entitled the U.P. Jal Nigam to claim exemption unless Income Tax Act itself provide.
REPUGNANCY
73.In view of the Article 254 of the Constitution to the extent of repugnancy, the Central Act shall prevail and the provision contained in Section 10 (20) of the Income Tax Act 1961, shall prevail over and above the U.P. Water Supply and Sewerage Act, 1975. The provisions of the 1975 Act may not be construed in the manner which may make the provisions contained in the Income Tax Act, redundant or expanded. Even by applying the principle of pith and substance the provisions contained in 1975 Act shall not make the U.P. Jal Nigam a "local authority" under Section 10 (20) of the Income Tax Act 1961.
74.In the event of conflict between central and state legislature the central legislature shall prevail. The State as well as the Central Government have right to exercise their legislative power within the jurisdiction conferred by Schedule I,II and III of the Constitution vide Meghraj -vs- Allah Rakhia: AIR 1942, FC, 27; (Zaver Bhai-vs-State of Bombay (1955, 1 SCR page 799; Teekaramji-vs- State of U.P. (1956, SCR page 393; Om Prakash Gupta-vs- State of U.P. (1957 SCR page 423); Deepchand-vs-Union of India (1959 Supp. 2 SCR page 8); T.S. Balliah-vs- T.S. Rangachari (1969, 3 SCR page 65); M. Karunanidhi-vs-Union of India (1979 Vol-3 SCC page 431); Ishwari Khetan Sugar Mills-vs-State of U.P. (1980, 4 SCC page 136); Synthetic & Chemical Ltd.-vs- State of U.P. (1990 Vol-I SCC page 109); ITC Ltd.-vs-Agricultural Produce Marketing Committee (2002 (9) SCC 232; Prem Chandra Jain -vs- R.K. Chhabra (1984 (2) SCC page 302); Hoechst Pharmaceuticals -vs- State of Bihar (1983 (4) SCC page 45 and Vijay Kumar Sharma -vs- State of Karnataka (1990 (2) SCC page 562).
Accordingly the provisions of 1975 Act should be read within the four corners of Chapter-III of the Income Tax Act, 1961 and not independently. The work and obligations of Jal Nigam in discharging public duty shall be decisive to the provided exemption under Section 10 (20) of the Income Tax Act, 1961.
75.The 1975 Act, does empower the State Government or the Jal Nigam to claim exemption from taxes only because the word, 'local authority' has been used in sub-section (3) of Section 3 of the 1975 Act. Virtually this broader principle has been upheld by the Hon'ble Supreme Court in the case of CIT Vs. U.P. Forest Corporation, 230 ITR 945 (supra) while declining to treat it 'local authority' under the Act. The provisions contained in the Section 10 (20) of the Income Tax Act, shall prevail over and above the U.P. Water Supply and Sewerage Act, 1975.
76.After a close scrutiny of 1975 Act, the law settled by Hon'ble Supreme Court in the cases of Valjibhai Muljibhai Soneji (supra), R.C. Jain (supra), Commissioner of Income Tax. Vs. U.P. Forest Corporation (supra), Agricultural Produce Market Committee, Narela, Delhi (supra), read with Part IX and IXA of the Constitution and Section 3 (31) of General Clauses Act, the U.P. Jal Nigam does not seem to be the 'local authority' under Section 10 (20) of the Income Tax Act, 1961 even prior to Finance Act, 2002. The word, "local authority" has been defined in the Section 3 (31) of the General Clauses Act, 1897, an old Central Act, which has been interpreted by the Hon'ble Supreme court by catena of judgments (supra).
77.Right from the Assessing Authority to the Tribunal, all the three forums have failed to discharge their statutory obligation. None of them have considered various pronouncements of Hon'ble Supreme Court (supra) read with Section 3 (31) of General Clauses Act, 1897 and the constitutional provisions contained in Part-IX and IXA of the Constitution, read with explanation added to in Section 10 (20) of the Income Tax Act, 1961 and have proceeded mechanically to decide the issue and even, the case of U.P. Forest Corporation (supra) has not been considered in its real perspective.
78.In view of the above, the appeal deserves to be allowed. The impugned order passed by the Tribunal is set aside. The question is answered in favour of the Revenue and against the assessee. However, the affect of the judgment shall be prospective.
[Justice Devi Prasad Singh] Order Date :- 22.9.2011 Rajneesh AR-PS) Being in disagreement on the substantial question of law between us, as to whether, the U.P. Jal Nigam is 'Local Authority', and is entitled for benefit of exemption under Section 10 (20) of Income Tax Act, 1961, let record be produced before Hon'ble the Chief Justice/Hon'ble the Senior Judge, under Chapter VIII Section-B, Rule 3 of Allahabad High Court Rules.
[Justice Dr. Satish Chandra] [Justice Devi Prasad Singh] Order Date :- 22.9.2011 Rajneesh AR-PS) Reserved Case :- INCOME TAX APPEAL No. - 128 of 2008 (Assessment Year 2002-03) Petitioner :- Commissioner Of Income Tax-I Respondent :- M/S U.P. Jal Nigam Petitioner Counsel :- D.D.Chopra ******** Hon'ble Devi Prasad Singh,J.
Hon'ble Dr. Satish Chandra,J.
(Delivered by Hon'ble Dr. Satish Chandra, J) I have carefully gone through the judgment prepared by Hon'ble Mr. Justice Devi Prasad Singh, sitting as Senior Judge with me in the Bench. However, respectfully, I disagree with certain aspects. Therefore, I am writing herewith a separate judgment.
Present appeal under Section 260-A of the Income Tax Act, 1961 has been filed by the department against the judgment and order dated 25.01.2008 passed by the Income Tax Appellate Tribunal, Lucknow in ITA No. 404/Luc/2006 for the assessment year 2002-03.
Heard Sri D. D. Chopra, learned counsel for the department-appellant who relied on the order of the A.O. On the other hand, Sri Mudit Agarwal, learned counsel for the respondent-assessee supported the orders passed by the CIT (A) as well as Tribunal. The sole dispute is whether the U.P. Jal Nigam - assessee is a "Local Authority" or not.
The brief facts of the case are that in the year 1894-95, a small Sanitary Engineering Branch with its headquarters of Allahabad was established under the administrative control of U.P. Public works Department. A few technical assistants were deployed in the branch and this unit was entrusted with the job of preparation of projects of water supply which were to be executed by the contractors or large engineering companies. The first sanitary division was established with skeleton staff in the year 1913-14 at Saharanpur. Promulgating of U.P. Municipalities act in the year 1916 bestowed come powers in local bodies. Creation of local bodies in towns ushered in pressure building to provide better amenities especially drinking water. Royal sanitary commission constituted by the Government visited the entire state to take stock of drinking water & sanitation facilities and submitted its report towards end of the year 1920. Consequently, in the year 1927, the then existing Sanitary Engineering Branch was enlarged & given status of a full fledged department. This new department was named as Public Health Engineering Department (PHED) and was headed by an offices of the rank of Superintending Engineering. It was entrusted with the responsibility of performing all the works related to Public Health Engineering including works related to sewerage and water supply. In the year 1946, State of United Province created a department known as Local Self Government Engineering Department [hereinafter referred to as 'LSGED'], which was the converted form of PHED and in this department, all the engineering works of Local Self Government were entrusted.
In the year 1975, U.P. Jal Nigam was constituted vide Notification dated 18.6.1975 issued by the State Government under Section 3 of the Uttar Pradesh Water Supply and Sewerage Act, 1975 [hereinafter referred to as the 'Act' for the sake of brevity] and the status of the Nigam is a "local authority" under sub-Section (3) of Section 3 of the Act.
For the assessment year under consideration, the A.O. has mentioned in his order that the assessee is consisting of three wings namely; (i) Jal Nigam Wing; (ii) Nalkoop Wing; and (iii) Construction & Design Wing. The A.O. in his order dated 21.03.2005 has observed that at the most activities of Jal Nigam Wing are that of a local authority whereas the activities of the remaining two wings are not at all of a 'local authority'. Finally, he observed that as the activities of Jal Nigam Wing appears to be that of a local authority, its income has been treated as exempt under section 10 (20) of the Income Tax Act, 1961. In First appeal, the CIT (A) has partly upheld the order by observing that all the three wings are covered by Section 10 (20) of the Income Tax Act and accordingly deleted the addition. Being aggrieved, the department has filed an appeal before the Tribunal, who vide its impugned order dated 25.01.2008 observed that the A.O. has treated that the assessee as "local authority" in respect of income accruing to it from the activities of Jal Nigam Wing. Therefore, the status of the assessee was that of "local authority." Regarding the remaining two wings namely-Nalkoop Wing and Construction & Design Wing, the Tribunal observed that these wings were also exempted under Section 10(20) of the Income Tax Act. So, as a whole, assessee is a "Local Authority" as was held in the previous assessment years. Being aggrieved, the department has filed the present appeal.
This Court vide order dated 18.08.2011 has admitted the appeal on the following substantial question of law:
"Whether, on the facts and circumstances of the case, the assessee Corporation is "Local Authority" and entitled for benefit of exemption under Section 10(20) of the Income Tax Act, 1961?"
It may be mentioned that the 'local authority' or the Authority has not been defined in the Income Tax Act. The word "Authority" has been used in different contest. The meaning of the word "Authority " given in Webster's Third International Dictionary is that 'authority' is a public administrative agency or corporation having quasi-governmental powers and authorised to administer revenue producing public enterprises. The view of the term 'authority' has been accepted by the Supreme Court in Rajasthan State Electricity Board v. Mohan Lal; AIR 1967 SC 1857 in the context of the meaning of the term 'other authorities' occurring in Article 12 of the Constitution.
Article 12 of the Constitution defining the State which would include "such authorities within the territory of India or under the control of the Central or State Governmental". Since modern governments perform a large number of functions through autonomous bodies serving as instrumentalities of the State having considerable authority under the statutes, which creates them, the word 'authority' has been understood in a wider sense, so that the law applicable under the Constitution would apply for income tax purposes as well. In Sukhdev v. Bhagatram; AIR 1975 SC 1331, it was observed that the reason for adopting a proper view of Article 12 is that the Constitution should wherever possible be so construed so as to avoid arbitrary application of power against individuals by centers of power. The emerging principle appears to be that a public corporation being a creation of the State is a subject matter to the Constitutional limitation as the State itself. Further, the governing power wherever located must be subject to the fundamental constitutional limitations.
It is in such a view, it was found that statutory bodies like Life Insurance Corporation of India; and Oil and Natural Gas Commission were the "authorities" since these corporations do have independent personality in the eye of law and they serve as instrumentalities of the Government, though they may be subject to control of the Government. In Ramana D. Shetty v. International Airport Authority; AIR 1979 SC 1628, a statutory body was held to be 'an authority' wherein the concept of instrumentality or agency was regarded as the touchstones for the inference. A society registered under the Societies Registration Act with substantial Government control and funding as in the case of Indian Council of Scientific Research was found to be an authority as held in the case of Sabhaji Tevary v. Union of India; AIR 1975 SC 1329. Even a company, which was not formed under any special statute, was held to be an authority and therefore a State from the functional point of view, because of the brooding presence of the State behind the operations of the company so that it could be called semi-statutory and semi-non-statutory though non-statutory in origin but having statutory flavour in its operations and functions, so that it was in effect an alter ego of the Central Government having been formed as a Government company by transferring a Government undertaking as pointed out in Som Prakash v. Union of India; AIR 1981 SC 212. In Ajay Hasia v. Khalid Mujib; AIR 1981 SC 487, the Hon'ble Supreme Court laid down the following tests for the inference whether a body is instrumentality of the Government and therefore an authority or not:
3."If the entire share capital of the body is held by the Government, it goes a long way towards indicating that a body is an instrumentality of the Government.
4.Where the financial assistance given by the government is so large as to meet almost entire expenditure of the body, it may indicate that the body is impregnated with governmental character.
5.It is a relevant factor if the body enjoys monopoly status which is conferred or protected by the state.
6.Existence of deep and pervasive state control may afford an indication that the body is a state instrumentality.
7.If the functions performed by the body are of public importance and closely related to governmental functions, it a relevant factor to treat the body as an instrumentality of the government."
However, the words "local" or "local authority" have not been defined in the Act, though, they are exempted from the clutches of tax by virtue of Section 10(20) of the Income Tax Act, 1961, which is reproduced as hereinunder:
Section 10 (20) "The income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area :
For the purposes of this clause, the expression "local authority" means -
vii.Panchayat as referred to in clause (d) of article 243 of the Constitution; or viii.Municipality as referred to in clause (e) of article 243P of the Constitution; or ix.Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or x.Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);] From the above, it is clear that the income of the "local authority" arising from its supply of a commodity or service, such as, supply of electricity or water, for domestic or industrial purposes, within its own jurisdictional area, is exempt. The reason for exempting income of a "local authority" arising from its activities within its jurisdictional area is that the money collected in the name of water, sewerage tax or fee from the inhabitants of local area is utilized on behalf of the inhabitants. The habitants consider themselves for a public purpose for their comfort or well being and in doing so, they cannot be said to have in view the making of any profit. The income derived by "local authority" from its activities outside its area was chargeable to income tax by amendment Finance (No.2) Act, 1997 w.e.f. 01.04.1997. The income outside the municipal limits from water or electricity, is exempted.
Even after the amendment to Section 10(20), the assessee is covered by item (iii) of the said Explanation as it is a "local authority" performing municipal functions and as it is legally entitled to the control of local fund, namely, Market Fund. In this connection, it may be pointed out that the assessee has no power and authority to levy and collect fees called "Water Fees" directly, and in fact, it levies and collects "Water/Sewerage Fees" through the local bodies like municipalities, and the fact that the Government exercises control, does not take away the statutory power of the assessee.
However, as mentioned earlier that no definition of "local authority" is designed in the Income Tax Act, so the definition of "local authority" is to be borrowed from Section 3 (31) of the General Clauses, Act, 1897 which is as follows:
"Local Authority shall mean a municipal committee, district board, body of court commissioner, or other authorities legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund."
Even though section 3 (3) of the U.P. Jal Nigam regards itself as being a "local authority" but for the purposes of the Income Tax Act, the meaning of expression "local authority" as contained in the General Clauses Act, which is a Central Act, has to be seen. Merely, because the U.P. Jal Nigam regards itself as a local authority, that would not, in law, make it a "local authority" for the purpose of Section 10(20) of the Income Tax Act. The test for determining whether a body is a "local authority" had been laid down by the Hon'ble Supreme Court in R. C. Jain's case, AIR 1981 SC 951; [1981] 2 SCR 854. The Hon'ble Supreme Court while considering the status of Delhi Development authority held that it shall be the "local authority". There lordship held that Delhi Development Authority is an independent entity and elected by inhabitants of the area, possesses autonomy to decide for itself the question of policy affecting the area administered by it. It has been entrusted by the statute that governmental functions and duties as are usually entrusted to municipal bodies of inhabitants of locality like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. It has been entrusted for the purpose of civic duties and functions and also power to raise funds for the furtherance of its activities and the fulfilment of their project by levying taxes, reduce charges or fees which is in addition to moneys provided by the Government or obtained by borrowing or otherwise. The relevant portion of para 2 of the aforesaid judgment is reproduced as under:
"... First, the authorities must have separate legal existence as Corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next, they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of the dependence may vary considerably but, an appreciable measure of autonomy there must be. Next, they must be entrusted by Statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. Broadly we may say that they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates, charges, or fees. This may be in addition to moneys provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority."
A proper and careful scrutiny of the language of section 3 (31), General Clauses Act suggests that an authority in order to be a "local authority", must be of like nature and character as a municipal committee, district board or body of port commissioners, possessing, therefore, many, if not all, of the distinctive attributes and characteristics of a municipal committee, district board, or body of port commissioners, but possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with, the Control and management of a municipal or local fund. What then are the distinctive attributes and characteristic, all or many of which a municipal committee, district board or body of port commissioners share with any other "local authority"? First, the authorities must have separate legal existence as corporate bodies. They must not be mere governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next, they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of dependence may vary considerably but there must be an appreciable measure of the autonomy. Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. Broadly they may be entrusted with the performance of civic duties and functions, which would otherwise be Governmental duties, and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates charges, or fees. This may be in addition to money provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the "local authority". In the context of applicability of the Bonus Act, 1965, the question that arose whether the Delhi Development Authority was a "local authority" or not, in construing the meaning of the expression "local authority" as defined in Section 3 (31) of the General Clauses Act.
The Hon'ble Supreme Court then examined the provisions of the Delhi Development Act and came to the conclusion that the said authority had above mentioned attributes of a "local authority" as defined by section 3 (31) of the General Clauses Act.
The decision in R. C. Jain's case, AIR 1981 SC 951 was then followed in Calcutta State Transport Corporation's case, [1996]219 ITR 515 (SC) where the corporation had contended though it was a "local authority" but it was observed that the definition of Corporation was not similar to the definition of the Delhi Development Act, so it was not a "Local authority."
However, after the insertion of the Explanation, vide Finance Act, 2002 whereby "local authority" stood defined exhaustively, it was not necessary to invoke Section 3(31) of the 1897 Act. The Notes on Clauses in the Finance Bill, 2002, shows that Parliament intended to restrict the exemption to Panchayat and Municipality, as referred to in Article 243(d) and Article 243P(e) of the Constitution of India, Municipal Committees and District Boards, legally entitled to or entrusted by the Government with the control or management of a local fund as well as Cantonment Boards as defined under Section 3 of the Cantonment Act, 1924. In this connection, the assessee i.e. U.P. Jal Nigam is not mentioned in the Explanation. Therefore, it would not be proper to read U.P. Jal Nigam into the Explanation particularly when Section 10(20) of the 1961 Act is an exemption provision.
Applying the ratio of the aforesaid decisions to the facts of the present case, it appears that it is not possible to hold that the U.P. Jal Nigam is a "local authority" within the meaning of that expression as contained in Section 3(31) of the General Clauses Act, 1897. In R.C. Jain's case, AIR 1981 SC 951, it has been held that the "local authority" must have the nature and character of a municipal committee, district board, body of port commissioners. The principle of ejusdem generis is not applicable because there is no distinct genus or category running through the bodies named earlier. The local authorities which are specifically mentioned in Section 3(31) of the General Clauses Act clearly can be regarded as local bodies, which are intended to carry on self-government. It is for this reason that this definition states that such an authority must have control or management of a municipal or local fund. Municipal committee, district board, body of port commissioners are entitles which carry on Government affairs in local areas and they would give colour to the words "local authorities" occurring in Section 3(31) of the General Clauses Act, 1897. To put it differently, "local authority" referred to in Section 3(31) must be similar or akin to municipal committee, district board or body of port commissioners. In R.C. Jain's case, AIR 1981 SC 951, at least five attributes or characteristics of an authority falling under Section 3(31) of the General Clauses Act have been mentioned. At least three of the five attributes mentioned in the passage quoted above from R.C. Jain's case (supra), are absent here.
Firstly, the members of the assessee are not wholly or partly, directly or indirectly, elected by the inhabitants of the area. According to Section 4 of the U.P. Jal Nigam, the Nigam consisted of a chairman and seven members. The Chairman is nominated by the State Government. The General Manager appointed by the Nigam with the approval of State Government must be belonging to the category, who in the Government's opinion, possess administrative experience in matters relating to water supply and sewerage works. The expression "local fund" occurring in Section 3(31) of the General Clauses Act would mean the fund of a local self-government. In R.C. Jain's case (supra) for deciding whether the Delhi Development Authority was a local authority, as already mentioned, the Court had examined as to whether its fund consisted of any funds flowed directly from any taxing power vested in the D.D.A.
In the case of the assessee i.e. U.P. Jai Nigam, it is the income from the construction & maintenance of water purification & treatment plants, which goes to augment its funds. Like any commercial organization, it makes profit from trading activities and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 40 of the U.P. Jal Nigam states that the fund of the Nigam "shall be a local fund" which would be deemed to be "Nigam Fund" that would not make it a local fund as contemplated by section 3(51) of the General Clauses Act.
Thus, in the light of aforesaid discussion and the amended provisions pertaining to "local authority" as per Income Tax Act, 1961, any income earned by Uttar Pradesh Jal Nigam which is chargeable under the head "Income from House Property", "Capital Gains", "Income from other sources" or from trade or business carried on by it which accrues or arises from the supply of water or electricity within or outside its own jurisdictional area is not exempt u/s 10(20). Therefore, it is incorrect in coming to the conclusion that U.P. Jal Nigam is a "local authority" and entitled to exemption under Section 10(20) of the Income Tax Act.
The attention may also be drawn to Section 3 (3) of U.P. Water Supply and Sewerage Act, 1975 (hereinafter referred to as U.P. Act No. 1975), which reads as under:
Section 3 (3) "The Nigam shall for all purposes be deemed to be a local authority and not a company or a corporation owned by the State Government having shares and share-holders."
By considering the arguments advanced by the counsel for the parties, it appears that in the U.P. Forest Corporation Act, 1974, Section 3(3) provides that for all purposes, it shall be the "local Authority". Similar words are used in the U.P. Act No. 1975. In the case of CIT v. U.P. Forest Corporation; 230 ITR 945, the Hon'ble Supreme Court has discussed the provisions pertaining to Section 10 (20) of the Income Tax Act. The Division Bench Judgment of Allahabad High Court had allowed the exemption holding the U.P. Forest Corporation as a "local authority". But Hon'ble Supreme Court set aside the judgment and held that U.P. Forest Corporation is not a "local authority" though under Section 3 (3) of the U.P. Forest Corporation Act, 1974, it is provided that for all purposes it shall be the local authority. Their lordship has relied upon the ratio of R.C. Jain's case (supra) while reversing the judgment of Allahabad High Court, to quote relevant portion is as under:-
"..In the case of the respondent-corporation, the Act does not enable it to levy any tax, cess or fee. It is the income from the sale of the forest produce which goes to augment its funds. It has no power under the Act of compulsory exaction such as taxes, fees, rates or charges. Like any commercial organization it makes profit from sale of forest produce and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 17 of the U.P. Forest Corporation Act states that the fund of the corporation "shall be a local fund" that would not make it a local fund as contemplated by section 3 (31) of the General Clauses Act.
In our opinion, therefore, the High Court was not correct in coming to the conclusion that the respondent was a "local authority" and entitled to exemption under section 10 (20) of the Act.
Coming to the question whether the income of the respondent is held for charitable purposes and, therefore, exempt from tax by virtue of section 11 (1) of the Act, we find no such contention was raised by the respondent before the income-tax authorities. In order to take advantage of the provisions of section 11 of the Act, a trust or institution has to get itself registered..."
Further, Hon'ble Apex Court held that the U.P. Forest Corporation is not an authority, though, under section 3(3) of the U.P. Forest Corporation Act, 1974 it is provided that for all purposes, it shall be the 'local authority'. Hence, on the similar analogy, provisions of Section 3 (3) of U.P. Act no. 1975 is of no use to the assessee.
Thus, to hold statutory body as an "authority", it shall be necessary that the authority must have 'local fund' which shall be spent for providing civic amenities and also shall have right to generate fund by imposing taxes within the statutory jurisdiction, managed by elected body. Merely because a corporation has local fund, does not mean that it shall be the "local authority" as contemplated under Section 3 (31) of the General Clauses Act.
At the cost of repetition, it may be mentioned that in the instant case, the assessee has three wings namely; (i) Jal Nigam Wing; (ii) Nalkoop Wing; and (iii) Construction & Design Wing. In the case of R. C. Jain; AIR 1981 (SC) 951, it was observed that the "local authority" must be entrusted by statute with such governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. Broadly, it may say that they may be entrusted with the performance of civic duties and functions which would otherwise be governmental duties and function. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates, charges, or fees. This may be in addition to money provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.
Another reason is that Article 254 of the Constitution provides the inconsistency between the laws made by the Parliament and laws made by the legislatures of State. Article 254 is reproduced as under:
Article 254:
(1) if any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.
(2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his assent, prevail in that State:
Provided that nothing in this clause shall prevent Parliament from enacting at any time any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the Legislature of the State.
The Test of repugnancy was laid down in the case of Viswanathiah Co. V. State of Karnataka; (1991)3 SCC 358 where it was observed that the test of 'pith and substance' has been applied to determine whether the State law has substantially transgressed on the field occupied by the law of Parliament. There is no 'repugnance' where the encroachment is not substantial or the subject matter of the legislation is not the same.
Accordingly, the union law is to prevail where the state law is repugnant to it. In the case of Deep Chand v. State of U.P.; AIR 1959 SC 648, it was observed that when there is a direct conflict between the provisions, the State law may be repugnant. In the case of Zaverbhai Amaidas v. State of Bombay; 1955 (1) SCR 799, it was observed that where one law cannot be obeyed without disobeying the other law, then the State law may be repugnant. In the case of Sita Ram and brothers v. State of Rajasthan; 1995 (1) SCC 257 (para-4), it was observed that even when the Central law is not exhaustive, repugnancy may arise if it occupies the same field as the State Act. The test of 'pith and substance' has been applied to determine whether the State law has substantially transgressed on the field occupied by the law of Parliament as observed in the case of Vijay Kumar Sharma v. State of Kaarnataka; AIR 1990 SC 2072.
The same is also applicable when the constitutionality of a taxing law is impeached as per the ratio laid down in the case of State of Bombay v. United Motors (1953) SCR 1069, and reversibility in this context would include re-probability in the enforcement of the taxing statute.
By applying the above mentioned test, it is crystal clear that Income Tax Act is self contained code, which is passed by the Parliament and it will prevail over the State Act namely U.P. Water Supply and Sewerage Act, 1975. However, there is an exception provided in Article 254 (2) of the Constitution that if the President assents to a State law, it will prevail over the central law, if both laws dealing with a concurrent list. But this is not the case with "local authority" viz-a-viz exemption under Income Tax. Thus, the provision made in Section 3 (3) of the Act is of no use to the assessee.
The question still remains as to why Parliament has used the words "Municipal Committee" and "District Board" in Item (iii) of the said Explanation to Section 10(20) of the Income Tax Act. It appears that Parliament has defined "local authority" to mean - a Panchayat as referred to in clause (d) of Article 243 of the Constitution of India, Municipality as referred to in clause (e) of Article 243P of the Constitution of India. However, there is no reference regarding "local authority" in the Article 243 after the words "Municipal Committee" and "District Board". It appears that the Municipal Committee and District Board in the said Explanation are used out of abundant caution. In 1897, when General Clauses Act was enacted, Municipal Committees and District Boards were already existed in India. They continued even thereafter. In some remote place, it is possible that there exists a Municipal Committee or a District Board. Therefore, apart from a Panchayat and Municipality, Parliament in its wisdom decided to give exemption to Municipal Committee and District Board. Earlier, there were District Board Acts in various States. Most of the States had repealed those Acts. However, it is quite possible that in some remote place District Board may still exists. Therefore, Parliament decided to give exemption to such Municipal Committees and District Boards. Hence, Parliament has retained exemption for Municipal Committee and District Board apart from Panchayat and Municipality. This view finds support from the provisions contained in Part IX of the Constitution of India. Article 243N provides for continuance of existing laws and Panchayats. It states, inter alia, that notwithstanding anything in Part IX, any law relating to Panchayats in a State immediately before commencement of the Constitution (Seventy-third Amendment) Act, 1992, which is inconsistent with the provisions of Part IX, shall continue to be in force until repealed by a competent Legislature. Similarly, under Part IXA there is Article 243ZF which refers to the "Municipalities". This Article, inter alia, states that notwithstanding anything in Part IXA, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of Part IXA, shall continue to be in force until amended or repealed by a competent Legislature. It appears that Article 243N and Article 243ZF indicates that there could be enactments which still retain the entities like Municipal Committees and District Boards, if they exist, Parliament intends to give exemption to their income under Section 10 (20) of the Income Tax Act, 1961.
Moreover, the Parliament to its wisdom has used the word, 'local' as prefix to the word 'authority'. The word 'local' confines the jurisdiction or area of functions of the authority within specified limit under a statutory provision or Act possessing different features and functional activities provided under Part IXA of the Constitution.
Article 243W contains power of authority and responsibility of municipalities and 243X empowers the municipalities to impose taxes and funds, Article 243ZA provides the provisions with regard to election of municipalities. Articles 243W, 243X and 243ZA are reproduced as under:
"243W. Powers, authority and responsibilities of Municipalities, etc.--Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow--
(a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein,with respect to--
(a)the preparation of plans for economic development and social justice;
(b)the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule;
(b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule.
243X. Power to impose taxes by, and Funds of the Municipalities--The Legislature of a State may, by law--
(a) authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits;
(b) assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government for such purposes and subject to such conditions and limits;
(c) provide for making such grants-in-aid to the Municipalities from the Consolidated Fund of the State; and
(d) provide for constitution of such Funds for crediting all moneys received, respectively, by or on behalf of the Municipalities and also for the withdrawal of such moneys therefrom, as may be specified in the law.
243ZA. Elections to the Municipalities--(1) The superintendence, direction and control of the preparation of electoral rolls for, and the conduct of, all elections to the Municipalities shall be vested in the State Election Commission referred to in article 243K.
(2) Subject to the provisions of this Constitution, the Legislature of a State may, by law, make provision with respect to all matters relating to, or in connection with, elections to the Municipalities."
In the instant case, fact remains that Jal Sansthan is a body corporation and Jal Nigam is also a corporate and the area of it extends to whole of U.P. under Section 1 of the 1975 Act. Jal Nigam has got no jurisdiction to impose tax except to charge fees under tariff schedule, by indulging into construction designing. They seem to be engaged in commercial activities. Accordingly, the assessee does not seem to be local authority under Section 10 (20) of the Income Tax Act, more so when interpreted keeping in view the provision contained in Part IXA of the Constitution given effect from 1.6.2003 as well as section 3 (31) of the General Clauses Act, 1897.
Now let us also examine whether claim of exemption under Article 289 of the Constitution of India is tenable with respect of income of U.P. Jal Nigam after loosing the status of "local authority" w.e.f. 01.04.2003.
The provisions of Article 289(1) are as follows:
(1) The property and Income of a State shall be exempt from Union taxation.
(5)Nothing in clause (1) shall prevent the Union from imposing or authorizing the imposition of any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.
(6)Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament by law declares to be incidental to the ordinary functions of Government.
As per Section 3(58) of General Clauses Act, 1897, definition of the "State" has been defined. On a combined reading, it appears that Articles 285 and 289 provide for the immunity of the property of the Union and the State from mutual taxation, according to the federal principle. Article 289(1) provides exemption from Union taxation any income of a State, whether it is derived from governmental or non-governmental activities. But no exemption can be claimed under this clause, if the income in question is of some authority other than State e.g. a statutory corporation, which is a separate juristic entity, even though its shares are owned by the State itself, or the authority/corporation is State controlled as per the ratio laid down in A.P.S.R.T.C. vs. ITO; AIR 1964 SC 1486. Further, a business carried on by a State is not exempted from Union Taxation unless parliament has declared such business to be incidental to the functions of government under Article 289(3) of the Constitution, as was held in the case of New Delhi Municipal Council v. State of Punjab; AIR 1997 SC 2847. Hence, the Income of a Corporation/Nigam is not the Income of State under Article 289(1).
Hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corporation vs. Income Tax Officer, 52 ITR 524, has clearly maintained that the Income derived by corporation was not the income of state under Article 289(1) by observing that :
"If a trade or business is carried on by the State departmentally and is income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by issuing a notification under the relevant provisions of the Act. The Corporation though statutory, has a personality of its own and this personality is distinct from that of a State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately: and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the Corporation."
Similarly, in the case of Vidarbha Housing Board vs. ITO (1973) 92 ITR 430 (Bom.), it was held that :
"It was clear, therefore, that the income and property of the board could not be regarded as the income and property of the State Government with the result that the immunity claimed by petitioner board under Article 289(1) of the Constitution was clearly not available to the petitioner board."
"Having considered as to whether the assessee-Gujrat Industrial Development Corporation, Ahmedabad is entitled or is not entitled to exclude its income from liability under the Indian I.T. Act, we are clearly of the opinion that from their total income, no exclusion could be made on the ground that it is a State as contemplated by the Article 289(1) of the Constitution of India. The State is entirely different from the Corporations which are created by laws which are enacted either by Parliament or by State Legislatures for different and distinct purposes. They are separate entities in law. They sue and are sued in their own capacities and for any contractual liability of the corporation; no person can sue the State because every corporation in itself is not the State but a separate legal entity. Under these circumstances, our opinion on the first question would be in the affirmative, and we hold that the decision of the Tribunal is right. Therefore, this point is decided in favour of the Revenue and against the assessee."
In the judgment on this subject, dated 03.05.2006, in civil Appeal (Civil) 6382 of 2003 (Adityapur Industrial Area Development Authority vs. Union of India & Ors.) Hon'ble Apex Court reiterated the same principle by observing that :
"Having regard to the provisions of the Bihar Industrial Area Development Authority Act, 1974, particularly Section 17 thereof, we have no manner of doubt that the income of the appellant/authority constituted under the said Act is its own income of the appellant/authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of Clause (2) of Article 289, it still is an authority constituted under an Act of the Legislature of the State having a distinct legal personality, being a body corporate, as distinct from the State.
Having considered all aspect of the matter, it is crystal clear that the U.P. Jal Nigam could not claim exemption from union taxation under Article 289(1) of the Constitution of India.
That apart, for the purpose of exemption of tax, it shall also be necessary to examine whether the income of the authority is for the charitable purpose or not. By virtue of exemption under Section 11 of the Income Tax Act to avail the benefit or advantage of Section 11 of the Act, a trust or institution has to get itself registered which seems to be not a case with regard to the U.P. Jal Nigam. Section 2(15) of the Income Tax Act, defines "Charitable Purpose" which includes relief to the poor, education, medical relief, and the advancement of any other object of general public utility.
Subject to the provisions of Section 60 to 63 of the Act, the following income shall not be included in the total income of the previous year of the person in receipt of the income, derived from property held under trust wholly for charitable or religious purpose, to the extent to which such income is applied to such purpose in India:
The conditions to be fulfilled for getting exemption from taxation of the income u/s 11 are:
iii.The property is held under trust wholly for charitable or religious purposes, iv.Where the income that could not be applied for such purposes is not accumulated or set apart in excess of ascertain limit as provided in the section, which is 15% of the income from such property.
v.From 10B is submitted before filling the return if any income could not be applied as it was not received or for any other reason, vi.The Registration u/s 12A is granted by the Commissioner and vii.The conditions provided u/s 13 are satisfied.
Coming to the question whether the income of the U.P. Jal Nigam is held for charitable purposes and, therefore, exempt from tax by virtue of Section 11(1) of the Act, no such contention was ever raised by the assessee before the income-tax authorities. But it has academic value.
Though U.P. Jal Nigam has never moved any application for the purpose of getting registration u/s 12AA of the Income Tax Act, 1961 or has never claimed its income to be exempt u/s 11 of the Income Tax Act, 1961, even after the amendment of the section 10(20) of the Income Tax Act, 1961 w.e.f. 01.04.2003. In the backdrops of the facts, let us also examine that if U.P. Jal Nigam would have applied for the registration u/s 12AA of the Income Tax Act, 1961 and had they have obtained requisite registration as aforesaid, whether such registration would entitle U.P. Jal Nigam to claim exemption u/s 11 of the said Act. It may be mentioned that granting registration u/s 12AA of the Act does not give blanket exemption to the assessee u/s 11 of the Act. The Institution-assessee may be registered u/s 12AA still they may not be eligible for exemption u/s 11 of the Act.
Further, after examining the provisions, it is evident that the benefit cannot be extended to the assessee as it is not a trust/institution having charitable nature . So, its income cannot be exempted under section 11.
After discussing the legal matrix pertaining to the "local authority", the position is that Jal Nigam-assessee cannot be considered as a "local authority". But fact remains that assessee has three wings and in the case of first wing i.e. Jal Nigam Wing, it is evident that it is providing the essential services namely water and sewerage. Hence, its activities can be considered under the definition of 'local authority', specially, when the A.O. himself for the assessment year under consideration has mentioned in its order that the activities of Jal Nigam Wing are that of "local authority" whereas the activities of remaining two wings are not at all a "local authority". So, the tax authorities have suo-moto granted the exemption under Section 10(20) of the Income Tax Act only to the First Wing i.e. Jal Nigam Wing.
Needless to mention that this appeal is filed by the Department and the assessee is not in appeal. So, we cannot travel beyond the orders of the authorities below including the order impugn. Hence, the order passed by the A.O. in this regard is hereby upheld.
Regarding the remaining two wings of the assessee namely; Nalkoop Wing; and Construction & Design Wing, there is no reason to disagree with the observations made by the A.O. who has rightly upheld that these activities are not the activities of the "local authority". Hence, the income of these two wings is subject to tax. The order of the A.O. in this regard can be upheld. But fact remains that w.e.f. 01.04.2002, by the Finance Act, 2002, the benefit of Section 10 (20-A) and 10 (29) were dropped but the amendment have put many government companies/corporations/undertakings in an unenviable plight that these are victims with considerable liability. These entities were putting pressure on the Government for restoration of the exemption specially Port Trust and various other Government agencies who claimed that they were victims of these changes. Therefore, instead of restoring the exemption, at least, for state undertaking, the Parliament did the next best thing by practically restoring the exemption indirectly by inserting Clause (xii) under Section 36(1) by allowing any expenditure not being a capital expenditure incurred by a corporation or body corporate by whatever name called, constituted or established by a Central, State or provincial Act for the objects and the purpose authorized by the Act under which the corporation or body corporate was constituted or established. The deduction was authorized from the date on which the exemption was withdraw retrospectively by the Finance Act, 2003 w.e.f. 01.04.2002.
Needless to mention that in the instant case, the annual accounts of the Nigam were kept in three parts- Jal Nigam; Construction & Design Services; and Nalkoop Wing. Consolidation of Financial Statements of all the three wings have been done from the financial year 2002-03 and henceforth have been maintained on the same pattern. For the assessment year under consideration (2002-03), the indirect benefit was provided by the then Section 36 (1)(xii) of the Income Tax Act, which reads as under:
(xii)"any expenditure(not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorised by the Act under which such corporation or body corporate was constituted or established."
The same is applicable in the assessee's case for the assessment year 2002-03.
It may be mentioned that the above provision was substituted by the Finance Act, 2007 w.e.f. 01.04.2008. The substituted provision is as under:
Section 36 (1) (xii) "any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, if, -
(a) it is constituted or established by a Central, State or Provincial Act;
(b) such corporation or body corporate, having regard to the objects and purposes of the Act referred to in sub-clause (a), is notified by the Central Government in the Official Gazette for the purposes of this clause; and
(c) the expenditure is incurred for the objects and purposes authorised by the Act under which it is constituted or established;
But fact remains that the substituted provision is applicable w.e.f. 01.04.2008. So, the same is not applicable in the assessee's case for the assessment year under consideration and the then law will apply.
However, from the above, in spite of not being a "local authority", the two wings of the assessee corporation like other entities namely - Port Trust would gain exemption by having the amount applied for the purpose as a deduction, which is ordinarily available only for earning the income and not for application. Since the withdrawal as well as the subsequent amendments are effective from assessment year 2002-03, the controversy as regards any interpretation of the three sections namely Section 10(20), 10(20A) and 10(29) would persist. But then the fact that exemption of these have been withdrawn being not a "local authority", should probably strengthen the case for exemption wherever the more liberal application of the meaning of the word 'authority' is possible. Again restoration of the exemption by the new provision 36(1)(xii) may not apply for all the bodies which may qualify for treatment as authority since this provision may be construed as applicable only for those formed by special Acts like Port Trust Act; Warehousing Corporation Act; Jal Nigam and so on.
Whether the benefit of Section 36 (1)(xii) can be extended to the two wings of the assessee which are outside the ambit of "local authority", needs to be examined on merit. Neither the Tribunal nor the lower authorities have examined this aspect pertaining to two wings in question of the assessee. Hence, the order passed by the Tribunal is hereby set aside and restored the matter back to the Tribunal to examine the same in the light of the above discussion.
The answer to the substantial question is partly in favour of the assessee (about first wing namely Jal Nigam Wing) and against the revenue. Regarding the other two wings (Construction & Design Services; and Nalkoop) , the answer to the substantial question is left open.
The Appeal is disposed of accordingly.
Dated:22 September, 2011 VNP/-