2011 (1) TMI 1038 - HC - Income Tax

U. P. Jal Nigam, Lucknow - whether a local authority or company ? - Held that - the powers and functions of U. P. Jal Nigam are akin to the various powers and functions amongst others of the municipalities or district boards. It has already been demonstrated that the Jal Nigam was established to improve the water supply and sewerage services in the State, which was being performed earlier by the municipal bodies. Due to rapid growth in the population and vast expansion of urbanization and fast development of science, it appears that the State Government though it fit to entrust the work of water supply and sewerage services to a specialized body (the U. P. Jal Nigam), instead of leaving it in the hands of unspecialized persons, discharging the municipal functions. It has not been found as a fact even by the Income-tax Appellate Tribunal that the U. P. Jal Nigam has been formed to trade in water supply or it is a trading organization. The constitution of the Jal Nigam shows that it has popular representatives as its five members are amongst the elected representatives. It has got power of superintendence over the Jal Sansthans and the Jal Sansthans have been held to be local authority - thus decided U. P. Jal Nigam, Lucknow, is a local authority .

Summary

Issues Involved:
1. Whether the assessee-corporation is a "local authority" for purposes of the Income-tax Act, 1961.
2. Whether the assessee-corporation is a company within the meaning of section 2(26) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the assessee-corporation is a "local authority" for purposes of the Income-tax Act, 1961:

The principal question for determination is whether the U.P. Jal Nigam, Lucknow, qualifies as a "local authority" under section 10(20) of the Income-tax Act, 1961. The relevant assessment year is 1980-81. The term "local authority" was not defined in the Income-tax Act at that time but was defined under section 3(31) of the General Clauses Act, 1897. The Income-tax Appellate Tribunal (ITAT) had previously held that the assessee-corporation did not qualify as a "local authority."

The court examined various provisions of the U.P. Water Supply and Sewerage Act, 1975, and the definition of "local authority" under the General Clauses Act. The ITAT had concluded that the U.P. Jal Nigam did not possess the necessary attributes of a local authority, such as autonomy, elected representatives, and the power to levy taxes.

The court referred to the Supreme Court's decision in Union of India v. R.C. Jain, AIR 1981 SC 951, which laid down five criteria for an entity to be considered a "local authority":
1. Separate legal existence as a corporate body.
2. Functioning in a defined area with elected representatives.
3. A certain degree of autonomy.
4. Entrusted with governmental functions usually performed by municipal bodies.
5. Power to raise funds through taxes, rates, charges, or fees.

Analyzing the U.P. Jal Nigam under these criteria, the court found:
- The Nigam is a body corporate with perpetual succession and a common seal, capable of suing and being sued.
- It functions in a defined area, and its members include elected heads of local bodies.
- It enjoys autonomy in its operations, despite the State Government's supervisory role.
- It performs governmental functions related to water supply and sewerage, which were previously managed by municipal bodies.
- It has the power to raise funds through fees for services rendered, and its fund is deemed to be a "local fund."

The court concluded that the U.P. Jal Nigam meets all five criteria and is thus a "local authority" under section 10(20) of the Income-tax Act for the relevant assessment year. The ITAT's decision was overturned, and the question was answered in favor of the assessee.

2. Whether the assessee-corporation is a company within the meaning of section 2(26) of the Income-tax Act, 1961:

The court noted that this question did not arise from the ITAT's order, as there was no controversy before the Tribunal regarding the assessee's status as a company. The assessee was assessed as a company by the Department, and the dispute was solely about the exemption under section 10(20) of the Act. Therefore, this question was not addressed in detail and was decided accordingly.

Conclusion:

The court held that the U.P. Jal Nigam is a "local authority" for the purposes of section 10(20) of the Income-tax Act, 1961, for the relevant assessment year 1980-81. The second question regarding the status of the assessee as a company did not arise from the Tribunal's order and was not a matter of controversy. The judgment was thus in favor of the assessee on the primary issue.