TMI Blog2011 (9) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... oration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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 Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otification 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anchayat 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 Municipaliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnmental 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 enf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 aggri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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 Leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutes 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. Justic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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. Non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 headed Health Engineering by offices an of Department the rank (PHED) of and was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 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 consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority, 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 Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ? 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 development, roads, markets, transportation, and 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 activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage 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 Corporation as a local authority . But the U.P. Forest 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esign 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied 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 " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ZF 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 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 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 conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 assessee-Gujrat as to whether Industrial the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 questio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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