1948 (3) TMI 36 - HC - Income Tax

Summary

Issues:
- Taxability of income derived by the Municipal Corporation of the City of Bombay from supplying water outside the city limits.
- Interpretation of Section 4(3)(iii) of the Income-tax Act regarding the exemption of income of local authorities.
- Determination of whether the activities of the Municipality constitute a trade or business.
- Analysis of whether the supply of water falls within the jurisdictional area of the Municipality.

Analysis:

The judgment by the High Court of Bombay dealt with the taxability of income derived by the Municipal Corporation of the City of Bombay from supplying water outside the city limits. The main issue revolved around the interpretation of Section 4(3)(iii) of the Income-tax Act, which provides an exemption for the income of local authorities. The exemption, however, does not apply if the income is derived from a trade or business, arises from the supply of commodities or services, and if the supply is outside the jurisdictional area of the local authority.

The court analyzed the Municipal Act to determine the duties and powers of the Municipal Authorities. It was noted that supplying water was an obligatory duty of the Municipal Corporation under Section 61(b) of the Act. The court also highlighted that the Corporation had the power to acquire and hold property within or outside the city limits, with all property held by the Corporation vested in it in trust for the purposes of the Municipal Act.

Regarding the question of whether the activities of the Municipality constituted a trade or business, the court emphasized that a trade or business involves deriving income or profits with method and continuity. As the Municipality was deriving income from supplying water, the court concluded that this operation must be characterized as the carrying on of a trade or business.

The court further examined whether the supply of water fell within the jurisdictional area of the Municipality. Despite owning property outside the city limits, the court held that the jurisdiction of the Municipality was confined to the City of Bombay. The mere ownership of property outside the area did not extend the jurisdiction of the Municipality. The court rejected the argument that supplying water constituted a municipal function under Section 63(k) for the promotion of public health and convenience, as such duties were to be discharged within the city limits.

In conclusion, the court held that the income derived by the Municipality from supplying water outside the city limits was not exempt under Section 4(3)(iii) of the Income-tax Act. The activities of the Municipality were deemed to fall outside the exemption, making the income liable to tax. The judgment was delivered with the assessee directed to pay the costs, with Justice Tendolkar concurring.