TMI Blog1996 (5) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... common seal with the powers subject to the provisions of the Boards Act. The Board used to receive grants on various occasions from the consolidated fund of the State and in discharge of its duties, the same was required to be disbursed for the purpose such as roads, drainage, street lights, water supply, schemes for primary facilities, sanitation, play ground, public toilets/bathrooms, community hall, service vehicles, etc., to the local authorities, i.e., a municipality or municipal corporation under the provisions contained in the Gujarat Municipalities Act (hereinafter referred to as "the Municipalities Act" or "the Bombay Provincial Municipal Corporations Act, 1949") (hereinafter referred to as "the BPMC Act"). The Board had some surplus amount with it and the same was invested, as a result of which there was income arising out of such investment. The State Government decided that the interest amount which may be earned be retained by the Board as a part of the grant-in-aid given to it by the Government. This intimation was given, vide letter annexure "A", dated May 28, 1982, and was reiterated, vide letter dated April 15, 1996, at page 110 of the petition. In view of this am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment or improvement of cities, towns and villages or for both. It was contended by him that even reading the entire Boards Act, the functions of the Board are very limited and is that of disbursing the amount of grant and loans, assessment of income of local bodies and giving advice to the local bodies or to the Government regarding sound municipal finance, and, therefore, the Board cannot claim the benefit of exemption under section 10(20A) of the Income-tax Act. With regard to article 289(1) of the Constitution of India, Mr. Shelat contended that the Board is a financial corporation established by an Act and as this Board has an income, it is liable to be taxed. With regard to the concurrence given by the State Government, it is contended that the Finance Department has agreed that the interest amount may be retained as a grant-in-aid given to it by the Government, but looking to the letter as a whole, it is only a proposal and, therefore, it cannot be said that the proposal is accepted by the Board and, therefore, it is a grant. It was further submitted that the amount is required to be disbursed for the purposes laid down under the Act and if there is any amount with the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities Loans Act, 1951, and to any general or special order made by the State Government made in this behalf-- (i) to grant loans to the local authorities, out of the fund, (ii) to distribute on behalf of the State Government grant-in-aid of the revenues of the local authorities, out of the amounts provided to the Board by the Government for that purpose, for the performance by such authorities of their duties and functions under the Bombay Provincial Municipal Corporations Act, 1949, or, as the case may be, the Gujarat Municipalities Act, 1963 ; (b)(i) to assess income of a local authority received during any financial year, from each of the sources mentioned in section 82 of the Bombay Provincial Municipal Corporations Act, 1949, or, as the case may be, section 82 of the Gujarat Municipalities Act, 1963, and the expenditure incurred by a local authority in such financial year in carrying out the obligatory and discretionary duties or functions imposed on it under the provisions of the Bombay Provincial Municipal Corporations Act, 1949, or, as the case may be, of the Gujarat Municipalities Act, 1963, and, (ii) having regard to such assessment, to tender advice to the local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposited with the State Bank of India or any bank included in the Second Schedule to the Reserve Bank of India Act, 1934, or invested in such securities as may be approved by the State Government." It is the duty of the State Government to make available grants for the Board under section 18 of the Boards Act, which reads as under : " 18. The State Government may, after appropriation duly made in this behalf, from time to time make grants and subventions to the Board for the purposes of this Act, on such terms and conditions as the State Government may determine. " Section 20 of the Boards Act provides for power to borrow, which reads as under : "20. The Board may, from time to time, with the previous sanction of the State Government and subject to the provisions of this Act and to such conditions as the State Government may, by general or special order, impose, borrow any moneys required for the purposes of this Act by making arrangements with the banks or other bodies or institutions approved by the State Government for this purpose. " We have indicated earlier that accounts are required to be audited as provided under section 21 of the Boards Act, which reads as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elfth 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. 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 law." "243Y. (1) The Finance Commission constituted under article 243-I shall also review the financial position of the municipalities and make recommendations to the Governor as to-- (a) the principles which should govern-- (i) the distribution betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for this Board to recommend to the State Government the principles which govern the grants-in-aid to the local authorities. Looking to the duties and functions of the Board, it is very clear that the Board is assigned to assess the income of the local authority received during any financial year from each of the sources mentioned in section 82 of the Gujarat Municipalities Act, 1963. The Board has also to assess the expenditure incurred by the local authority in discharge of its obligatory as well as discretionary duties. It has also to advise the local authorities the ways and means to be adopted for increasing the income and the pattern to be followed for incurring expenditure. This Board has also to recommend for improvement of assessment and collection of taxes and fees levied by the local authority and effecting economy in the expenditure incurred by a local authority. Mr. Kaji submitted that looking to these functions which are to be discharged by the Board the only conclusion that can be drawn is that the Board is discharging the function on behalf of the State. Looking to the provisions contained in the Constitution of India and the BPMC Act and the Gujarat Municipalities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e money is received by the Board by way of grant-in-aid and is invested in securities which are approved by the Government, then it has acted as per the direction of the State Government. Even as per the letter annexed at annexure "A", it is very clear that the amount of interest which may be earned, is to be retained by the Board as a part of grant-in-aid given to it by the Government. Mr. Kaji further submitted that by letter dated April 15, 1996 (at page 110), the Government has reiterated that interest is an additional grant the same was clarified even earlier by letter dated May 20, 1989 (annexure "A"). In the letter dated April 15, 1996, it has been reiterated that the interest on the deposits made by the Board was from the beginning and is a grant-in-aid by the State to the Board, and not belonging to the Board, and is meant for disbursement to the municipalities for various schemes to be formulated by the Board for catering to the needs of the weaker sections as clarified earlier in annexure "A". Therefore, he submitted that the Board is acting on behalf of the State and any amount of interest received by the Board cannot be taxed because it is an income of the State Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by the Central Government or there is nothing to indicate that citizens can be admitted as shareholders. As pointed out earlier, there is no trading activity of the Board. There is no question of profit and loss that would be made as a result of this activity and as pointed out, it has no trading activity. There is no question of bringing out duality between the Board, on the one hand, and the State or the Central Government or the shareholder, on the other hand, because the property of the Board is owned by the State itself. In the instant case, there is no question of trade or business but the amount which was lying with the Board was invested for which interest is received, which the State Government is treating as a part of the grant-in-aid, and, therefore, the question of taxing that amount does not arise. In our view, the Board has received the interest, but as the same is treated as grant-in-aid by the State as per letter at annexure "A", the same cannot be taxed because the amount of interest is purported to be earned by the State and is grant-in-aid and not an income of the Board. Mr. Kaji, learned counsel further submitted that in the instant case, even under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if the Board is engaged directly or indirectly in the work of development or improvement, it can certainly be said that there is a business or trading, but we find that there is no such object. In the case of Gujarat Industrial Development Corporation v. CIT [1985] 151 ITR 255 (Guj), the following two questions were referred to the court for opinion of this court (page 257) : " 1. Whether the Tribunal was right in holding that the income of the assessee-Corporation was not exempt under article 289(1) of the Constitution of India ? 2. Whether the Tribunal was right in holding that the income of the assessee-Corporation was not exempt from payment of income-tax under the provisions of section 10(20A) of the Income-tax Act, 1961 ? " The Board is constituted under the Act and is playing an important role in implementing the schemes under the BPMC Act and the Gujarat Municipalities Act. The Constitution (article 243W) provides that the Legislature of a State may, by law, endow 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is necessary to make any grant to the Corporation and if so, the amount thereof. (2) The grant so determined shall be made to the Corporation every year but it may revise after a period of every five years having regard to the recommendations of the Gujarat Municipal Finance Board in respect of the revision of grants to Corporation." Section 144 of the Gujarat Municipalities Act, 1963, has also been amended on the same lines. Section 20A of the BPMC Act provides for financial assistance to the Corporation wherein we find mention of section 126A of the BPMC Act. Reading this, it is very clear that the State Government has to consider the recommendations of the Board and make grants to the Corporation and, therefore, it is amply clear that for improve ment of cities and towns, the Board is existing and in aid to the Government, it is discharging its functions. The object is required to be gathered from various provisions indicated therein and that requires a liberal interpretation. In view of the duties discharged by the Board, it is very clear that the Board is existing to assist the State Government for improve ment of cities and towns. From the object also, it is very clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hole reading of the Act that the whole Act is intended to establish a Corporation for the purpose of establishing industries in towns, villages and other places in the Gujarat State." If any corporation is permitted to carry on business in its own name, then the matter is altogether different. In the instant case, the Board is not permitted to do any business whatsoever. Its function is to aid the Government in disbursing the grants-in-aid to the local authorities with a view to improve cities and towns. In the Act, there is nothing to show that this Board is entitled to do anything independently which would suggest that the Board is engaged in a trade or business. It is an admitted position that the Board is established to distribute on behalf of the State Government the grants-in-aid to the local authorities, etc., as defined in section 14 of the Boards Act. For improvement of cities and towns one has to see the Twelfth Schedule to the Constitution and the Board has to disburse the amount of grant to the local authorities for such development or improvement. Thus, on the facts, it is clear that the Board is not established to carry on trade or business and it is not established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real income or its profit. It is, therefore, required to be excluded under section 28 of the Income-tax Act, 1961, for the purpose of calculation of income. . . . The court has, therefore, made a clear distinction between the nature of income and the nature of wealth for the purposes of the Wealth-tax Act. The title to the fund, therefore, is not conclusive in deciding whether the amount which is deposited in that fund constitutes a diversion of the amount deposited in that account at source or not. What is necessary is to see whether there is a diversion at source and whether the assessee has lost domain and control over the amount so diverted." This court has again considered the decision reported in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC) and reiterating the view, the court, in the case of Rajkot Dist. Gopalak Co-op. Milk Producers' Union Ltd. v. CIT [1993] 204 ITR 590 (Guj), held that payment to be made as a result of statutory or contractual obligation even though it may be related to the profits, may be in the nature of an obligation as a result of which profits to that extent are diverted by an overriding title. The headnote, on the said judgment, at page 591, rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case, even if interest is received, that itself is not a determining factor as it does not amount to receipt in law because the same is to be treated as grant-in-aid in view of the directive of the State Government at annexure "A". In view of the aforesaid decision, even if there is a receipt, in view of the principles of diversion, this will not amount to income of the Board and, therefore, the same is not taxable. Mr. Shelat, learned counsel for the Revenue, submitted that so far as the letter at annexure "A", is concerned, it is merely a proposal only, looking to the later part of the letter, which reads as under : "I shall be grateful, if you can formulate a concrete proposal in this regard on which Government's approval can be obtained at an early date." Really speaking, this letter is in three parts. The first part, which deals with the decision of the Finance Department, and it reads that : "This is regarding the interest that the Gujarat Municipal Finance Board has earned out of its deposits in the different banks. The Finance Department has agreed that the interest amount may be retained by the Board as a part of the grant-in-aid given to it by the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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