2011 (9) TMI 174 - HC - Income Tax

Exemption under Section 10 (20) of Income Tax Act - U.P. Jal Nigam - Local Authority - 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)? - Held that - 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.

Summary

Issues Involved:
1. Whether the U.P. Jal Nigam is a "Local Authority" under Section 10(20) of the Income Tax Act, 1961.
2. Whether the U.P. Jal Nigam is entitled to exemption under Section 10(20) of the Income Tax Act, 1961.
3. Interpretation of statutory provisions and the applicability of the General Clauses Act, 1897.
4. The impact of the Finance Act, 2002 on the definition of "Local Authority."
5. The applicability of Article 289 of the Constitution of India regarding exemption from Union taxation.

Detailed Analysis:

1. Whether the U.P. Jal Nigam is a "Local Authority" under Section 10(20) of the Income Tax Act, 1961:
The court examined the definition of "local authority" under Section 3(31) of the General Clauses Act, 1897, which includes a municipal committee, district board, or body of port commissioners, or other authority legally entitled to control or manage a municipal or local fund. The court also considered the attributes of a local authority as laid down in the R.C. Jain case, which include separate legal existence, functioning in a defined area, autonomy, and the power to raise funds through taxes, rates, charges, or fees.

2. Whether the U.P. Jal Nigam is entitled to exemption under Section 10(20) of the Income Tax Act, 1961:
The court analyzed whether U.P. Jal Nigam meets the criteria of a "local authority" as defined in the Income Tax Act post the Finance Act, 2002 amendment. The amendment restricts the definition to Panchayats, Municipalities, Municipal Committees, District Boards, and Cantonment Boards. The court found that U.P. Jal Nigam does not fit into any of these categories, as it lacks the necessary attributes such as elected members and the power to levy taxes.

3. Interpretation of statutory provisions and the applicability of the General Clauses Act, 1897:
The court emphasized that the definition of "local authority" in the General Clauses Act should be applied to the Income Tax Act. It highlighted that U.P. Jal Nigam's characterization as a local authority under state legislation does not automatically qualify it for exemption under the Income Tax Act. The court also referenced the U.P. Forest Corporation case, where similar statutory provisions were deemed insufficient to qualify as a local authority for tax exemption purposes.

4. The impact of the Finance Act, 2002 on the definition of "Local Authority":
The Finance Act, 2002, introduced an explanation to Section 10(20) of the Income Tax Act, explicitly defining "local authority" and excluding entities like U.P. Jal Nigam. The court noted that this legislative change aimed to remove ambiguities and restrict exemptions to specific entities, thus excluding U.P. Jal Nigam from the purview of Section 10(20).

5. The applicability of Article 289 of the Constitution of India regarding exemption from Union taxation:
The court examined whether U.P. Jal Nigam could claim exemption under Article 289, which exempts the property and income of a State from Union taxation. The court concluded that U.P. Jal Nigam, being a statutory corporation with a distinct legal personality, does not qualify for this exemption. The court referenced several Supreme Court judgments, including the Andhra Pradesh State Road Transport Corporation case, which clarified that the income of a statutory corporation is not the income of the State.

Conclusion:
The court concluded that U.P. Jal Nigam does not qualify as a "local authority" under Section 10(20) of the Income Tax Act, 1961, and is not entitled to exemption under the said section. The court also held that U.P. Jal Nigam cannot claim exemption under Article 289 of the Constitution. The matter was remanded to the Tribunal to examine the applicability of Section 36(1)(xii) of the Income Tax Act regarding the two non-exempt wings of U.P. Jal Nigam. The substantial question of law was answered partly in favor of the Revenue and partly in favor of the Assessee.