2022 (5) TMI 1389 - HC - Income Tax

Exemption of property and income of a State from Union taxation - Mussoorie Dehradun Development Authority - scope of separate entity / legal identity - collection of levies in the nature of fees, charges, tax etc. imposed by the State through an enactment, namely U.P. Urban Planning and Development Act, 1973 - HELD THAT - As apparent from the record that Mussoorie Dehradun Development Authority, constituted under the U.P. Urban, Planning Development Act, 1973, is a separate entity and distinct from the State, having its own legal identity. It is a corporate body. It can sue or be sued in its own name. It has its own assets, liabilities. But only when the State Government decides that the purpose of the Development Authority has been achieved, and there is no need for continuance of such Authority, then it may pass the order of dissolution of the same. In that event, the income, assets, liabilities of the Authority will vest with the State Government, and not otherwise. Thus, it is apparent from the record that the Hon ble Supreme Court has already dealt with this matter, and we, are in deference to the observations made by the Hon ble Supreme Court in the case of Adityapur Industrial Area Development Authority 2006 (5) TMI 61 - SUPREME COURT come to the conclusion that substantial Question Nos. a and b are already covered, and there is no need to further agitate with the issue. Amount that has been collected for infrastructure development is being spent on infrastructure development, and it should also be excluded from the income o the basis of doctrine of diversion of income by overriding title - We make it clear that the earlier observations regarding substantial Question Nos. a and b also cover this issue. Any fees collected for infrastructure development by the Development Authority will be treated as income and the expenses incurred by the Authority for the purposes of infrastructure development would be deducted from the income, and the rest is taxable, and that has been done, and in fact, this issue was not at all raised before the first and second appellate authorities. We find it appropriate to mention herein that before the ITAT, the only ground that has been taken by the assessee is as under - That on the facts and in the circumstances of the case and in law, the authorities below erred in holding that the claim of the appellant that there was diversion by overriding title in respect of infrastructure contribution is untenable. However, by filing these appeals before this Court, the assessee has developed its case, and included the substantial Question No. C , and that is also a good ground to dismiss the appeals. Thus, in the conspectus of the facts of the case, and the law applicable to this case, along with the ratio decided by the Hon ble Supreme Court in the case of Adityapur Industrial Area Development Authority (supra), we are of the opinion that there is no merit in these appeals, and the same are, hereby, dismissed.

Summary

Issues Involved:

1. Interpretation of Article 289 of the Constitution of India regarding whether 'State' includes statutory authorities.
2. Taxability of levies collected by statutory authorities under the Income Tax Act, 1961.
3. Applicability of the doctrine of diversion of income by overriding title to the receipts of the development authority.

Issue-wise Detailed Analysis:

1. Interpretation of Article 289 of the Constitution of India:

The primary issue is whether the term 'State' under Article 289 includes statutory authorities constituted for discharging State obligations. Article 289 provides for the exemption of property and income of a State from Union taxation. The court referred to the Supreme Court's interpretation in the case of Adityapur Industrial Area Development Authority vs. Union of India, which clarified that the exemption under Article 289(1) applies only to the State's property and income. The court emphasized that even if a statutory authority is created by the State, it does not automatically become part of the State for tax exemption purposes. The statutory authority, in this case, Mussoorie Dehradun Development Authority, is a separate legal entity with its own assets and liabilities, distinct from the State.

2. Taxability of Levies Collected by Statutory Authorities:

The second issue concerns whether the levies collected by the statutory authority under the U.P. Urban Planning and Development Act, 1973, constitute taxable income under the Income Tax Act, 1961. The court noted that the statutory authority, despite being created by the State, does not enjoy the same tax exemption as the State. The income generated from these levies is considered the authority's own income and is subject to taxation. The court reiterated that the statutory authority's income does not qualify as the State's income under Article 289(1), and therefore, it is taxable under the Income Tax Act.

3. Doctrine of Diversion of Income by Overriding Title:

The third issue is whether the receipts collected under specified heads of levies and maintained in a separate account, as per government orders, are governed by the doctrine of diversion of income by overriding title. The court addressed the appellant's argument that these funds should be excluded from taxable income because they are spent on infrastructure development as directed by the State Government. The court clarified that the doctrine of diversion of income by overriding title does not apply in this case. The funds collected for infrastructure development are treated as the authority's income, and only the expenses incurred for infrastructure development are deductible. The remaining amount is taxable. This issue was not raised before the first and second appellate authorities, and the court found no merit in the appellant's argument.

Conclusion:

The court concluded that the Mussoorie Dehradun Development Authority, being a separate legal entity distinct from the State, is subject to taxation on its income. The levies collected by the authority are considered its own income and are taxable under the Income Tax Act, 1961. The doctrine of diversion of income by overriding title does not exclude these receipts from taxable income. The appeals were dismissed, affirming the decisions of the lower authorities and the Income Tax Appellate Tribunal.