TMI Blog2006 (5) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... manager of the bank that the Finance Act, 2002 had brought about changes in the Income-tax Act and while section 10(20A) had been omitted, an Explanation was added to section 10(20) of the Act. The provisions of the Income-tax Act, 1961 as they stood after the amendment obliged the bank to deduct income-tax at source from the interest accrued on fixed deposit receipts of the appellant/authority. The manager of the bank was required to comply with the provisions and deduct tax at source and report compliance. The High Court of Jharkhand at Ranchi in the aforesaid writ petition pronounced its judgment on May 8, 2003 dismissing the writ petition holding that in view of the amended provisions of the Income-tax Act, the notice was valid and legal. The appellant/authority has impugned the judgment and order of the High Court in this appeal by special leave. The appellant/authority has been constituted under the Bihar Industrial Area Development Authority Act, 1974 to provide for planned development of industrial area, for promotion of industries and matters appurtenant thereto. The appellant/authority is a body corporate having perpetual succession and a common seal with power to acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which Parliament may by law declare to be incidental to the ordinary functions of Government." It is also necessary to notice the relevant provisions of the Income-tax Act, 1961. Chapter III of the Income-tax Act relates to incomes which do not form part of total income. The relevant part of section 10 as it stood before its amendment by the Finance Act of 2002 read as follows: "10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included:- (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; (20A) any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , learned senior advocate appearing on behalf of the appellant, submitted that having regard to section 3(3) of the General Clauses Act and the provisions of section 7 of the Bihar Industrial Area Development Authority Act, 1974, it must be held that the appellant is a local authority. According to him the appellant/authority must be held to be a local authority within the meaning of section 10(20) of the Income-tax Act. He further submitted that article 289(1) exempted from Union taxation, the properties and income of a State. Referring to clause (2) of article 289, he submitted that it contemplates a trade or business being carried on by or on behalf of the Government of a State. That brings in the concept of agency under the Contract Act. Therefore, by necessary implication, an agency of the State, not carrying on trade or business, is not covered by clause (2) of article 289 and, therefore, the exemption must extend to such an agency of the State Government. He also relied on some decisions of this court. He also submitted that the amendment referred to above in section 10 of the Income-tax Act is not made by reference to article 289 of the Constitution of India and that was pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by the authority along with its liabilities shall devolve upon the State Government. A mere perusal of article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of clause (2) of article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent 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 operation connected therewith. Thus, even the income of the State within the meaning of clause (1) of article 289 may be taxed by law made by Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of article 289, therefore empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried on by or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a State from trade or business will be taxable, provided a law is made by Parliament in that behalf. Clause (3) of article 289 is an exception to the exception prescribed by clause (2) of article 289 and it provides that income derived from particular trade or business may be made immune from Union taxation if Parliament declares such trade or business as incidental to the ordinary functions of Government. The reason is obvious. Under the Constitution, the State has no power to tax any income other than agricultural income. Under the Constitution, power to tax "income" is vested only in the Union. Therefore, while any property of the Union is immune from State taxation under article 285(1), income derived by the State from business, as distinguished from governmental purposes, shall not have exemption from Union taxation unless Parliament declares such trade or business as incidental to the ordinary functions of Government of the State (see article 289(3)). Applying the above test to the facts of the present case it is clear that the benefit conferred by section 10(20A) of the Income-tax Act, 1961 on the assessee herein, has been expressly taken away. Moreover, the Explanation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring that the said trade or business is incidental to the ordinary functions of Government. In other words, clause (3) is an exception to the exception prescribed by clause (2). Whatever trade or business is declared to be incidental to the ordinary functions of Government, would cease to be governed by clause (2) and would then be exempt from Union taxation. That, broadly stated, appears to be the result of the scheme adopted by the three clauses of article 289." Reading these three clauses together this court held that the property as well as the income in respect of which exemption is claimed under clause (1) must be the property and income of the State, and thus the crucial question to be answered is: "Is the income derived by the State from its transport activities the income of the State?" It was observed that if a trade or business is carried on by a State departmentally or through its agents appointed exclusively for that purpose, there would be no difficulty in holding that the income made from such trade or business is the income of the State. Difficulties arise when one is dealing with trade or business carried on by a corporation established by a State by issuing a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 289(1), and if that is so, the facts that the trading activity carried on by the appellant may be covered by article 289(2), does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State. That is how ultimately, the crux of the problem is to determine whether the income in question is the income of the State, and on this vital test, the appellant fails." Considerable reliance was placed on the principles laid down in the aforesaid decision by learned counsel appearing for the Union of India. He submitted that having regard to the provisions of the Act under which the appellant/authority is established, the same conclusion may be reached. In particular, emphasizing the fact that as in Andhra Pradesh State Road Transport Corporation's case [1964] 52 ITR 524 (SC), so in the instant case as well, section 17 of the Act provides that upon dissolution of the appellant/authority, the properties, funds and dues realizable by the authority along with its liabilities shall devolve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government. It held that even though the corporation received moneys from disposal of lands, buildings and other properties and also received rents and profits, such receipts arose not out of any business or trade but out of sole purpose of establishment, growth and development of industries. The corporation was not a trading corporation, as it was not involved in buying or selling activity. The true character of the corporation was to act as an architectural agent of the development and growth of industrial towns by establishing and developing industrial estates and industrial areas. It, therefore, negatived the argument that the corporation being a trading one, the impugned legislation fell within entry 43 of List I of the Seventh Schedule. This decision does not help the appellant because even if it is held that the appellant/authority is not a trading authority, yet that does not answer the question whether the income of the authority is the income of the State so as to attract clause (1) of article 289. Similarly, the decision in New Delhi Municipal Council v. State of Punjab [1997] 7 SCC 339 does not advance the case of the appellant. It was held that the property/munici ..... X X X X Extracts X X X X X X X X Extracts X X X X
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