2006 (5) TMI 61 - SC - Income Tax

Provisions of the Income-tax Act, 1961 as they stood after the amendment (section 10(20A) had been omitted, an Explanation was added to section 10(20)) obliged the bank to deduct income-tax at source from the interest accrued on fixed deposit receipts of the appellant/authority - held that HC is right in concluding that the appellant/authority could not claim exemption from Union taxation under article 289(1) of the Constitution of India - impugned notice was valid

Summary

Issues Involved:
1. Validity of the notice issued by the Deputy Commissioner of Income-tax.
2. Applicability of the amended provisions of the Income-tax Act, 1961.
3. Whether the appellant is a "local authority" under Section 10(20) of the Income-tax Act.
4. Applicability of Article 289(1) of the Constitution of India for exemption from Union taxation.

Issue-wise Detailed Analysis:

1. Validity of the notice issued by the Deputy Commissioner of Income-tax:
The appellant challenged the notice issued by the Deputy Commissioner of Income-tax, TDS Circle, Jamshedpur, which required the Central Bank of India to deduct income-tax at source from the interest accrued on fixed deposit receipts of the appellant/authority. The High Court of Jharkhand dismissed the writ petition, holding that the notice was valid and legal in view of the amended provisions of the Income-tax Act.

2. Applicability of the amended provisions of the Income-tax Act, 1961:
The Finance Act, 2002, brought significant changes to the Income-tax Act, 1961. Section 10(20A) was omitted, and an Explanation was added to Section 10(20). The amended provisions defined "local authority" to include only specific entities, excluding the appellant. Consequently, the appellant could no longer claim exemption under Section 10(20) or the omitted Section 10(20A).

3. Whether the appellant is a "local authority" under Section 10(20) of the Income-tax Act:
The appellant argued that it should be considered a "local authority" under Section 10(20) of the Income-tax Act, relying on Section 3(3) of the General Clauses Act and Section 7 of the Bihar Industrial Area Development Authority Act, 1974. However, the court held that the appellant did not qualify as a "local authority" as defined in the Explanation to Section 10(20) after the amendment.

4. Applicability of Article 289(1) of the Constitution of India for exemption from Union taxation:
The appellant claimed exemption from Union taxation under Article 289(1) of the Constitution, arguing that its income should be considered the income of the State. The court analyzed Article 289, which exempts the property and income of a State from Union taxation unless it involves trade or business carried on by or on behalf of the State. The court concluded that the appellant, being a distinct legal entity with its own assets, funds, and liabilities, could not claim that its income was the income of the State. The court referred to Section 17 of the Bihar Industrial Area Development Authority Act, which states that upon dissolution, the authority's properties, funds, and liabilities devolve upon the State Government, emphasizing that until dissolution, the income remains that of the authority.

Conclusion:
The Supreme Court upheld the High Court's judgment, concluding that the appellant/authority could not claim exemption from Union taxation under Article 289(1) of the Constitution. The notice issued by the income-tax authorities was deemed valid and legal. The appeal was dismissed without any order as to costs.