1998 (3) TMI 5 - SC - Income Tax

U. P. Forest Corporation the assessee herein was constituted by a notification issued under section 3 of the U. P. Forest Corporation Act 1974. This Corporation was established for better preservation supervision development of forest and better exploitation of forest produce within the State of Uttar Pradesh - High Court was not correct in coming to the conclusion that the respondent was a local authority and entitled to exemption under section 10(20)

Issues Involved:
1. Whether the respondent is a local authority and thus exempt from tax under section 10(20) of the Income-tax Act, 1961.
2. Whether the respondent's income is held for charitable purposes and thus exempt from tax under section 11(1) of the Income-tax Act, 1961.
3. Whether the High Court should have entertained the writ petitions under article 226 of the Constitution when an alternative remedy was available.

Detailed Analysis:

1. Local Authority Status and Tax Exemption under Section 10(20) of the Income-tax Act, 1961

The primary issue is whether the respondent, the U. P. Forest Corporation, qualifies as a local authority and is therefore exempt from tax under section 10(20) of the Income-tax Act, 1961. The respondent was constituted under the U. P. Forest Corporation Act, 1974, for the preservation, supervision, and development of forests and the exploitation of forest produce in Uttar Pradesh. The Assessing Officer rejected the respondent's claim of being a local authority and taxed it as an "artificial juridical person" for the assessment years 1977-78 and 1980-81, and as a "company" for the assessment year 1984-85.

The High Court had ruled in favor of the respondent, considering it a local authority based on section 3(3) of the U. P. Forest Corporation Act and section 3(31) of the General Clauses Act. However, the Supreme Court referred to the criteria laid down in the case of Union of India v. R. C. Jain, AIR 1981 SC 951, which stipulates that a local authority must have attributes similar to a municipal committee, district board, or body of port commissioners, including the power to raise funds through taxes, rates, charges, or fees.

The Supreme Court found that the respondent did not meet these criteria. Specifically, the members of the respondent-Corporation were not elected by the inhabitants of the area, it did not perform civic duties typically entrusted to municipal bodies, and it lacked the power to levy taxes or fees. Thus, the respondent could not be considered a local authority under section 3(31) of the General Clauses Act, and consequently, its income was not exempt under section 10(20) of the Income-tax Act.

2. Charitable Purposes and Tax Exemption under Section 11(1) of the Income-tax Act, 1961

The second issue concerns whether the respondent's income is held for charitable purposes and thus exempt under section 11(1) of the Income-tax Act. The High Court had also ruled in favor of the respondent on this ground. However, the Supreme Court noted that this contention was not raised before the income-tax authorities and that the respondent had not registered itself as a trust or institution under section 12A of the Act, which is a prerequisite for claiming exemption under section 11.

The Supreme Court opined that the High Court should not have examined this issue without it being raised before the income-tax authorities. The proper course would have been to remand the case to the Tribunal or the assessing authority for a decision. Therefore, the Supreme Court directed the assessing authority to investigate and examine whether the respondent's income is exempt under section 11(1)(a) of the Act within six months.

3. Jurisdiction of the High Court under Article 226

The third issue is whether the High Court should have entertained the writ petitions under article 226 of the Constitution when an alternative remedy was available. The Supreme Court observed that the High Court should not have entertained the writ petitions, emphasizing that petitioners should not bypass the procedure provided by the taxing statute. However, given the prolonged litigation, the Supreme Court decided not to dismiss the appeals on this ground at this late stage.

Conclusion

The Supreme Court allowed the appeals, setting aside the High Court's decision. It held that the respondent is not a local authority and thus not exempt from tax under section 10(20) of the Income-tax Act. The Court directed the assessing authority to consider the respondent's claim for exemption under section 11(1)(a) of the Act within six months. There was no order as to costs.

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