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TMI Blog2011 (9) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of the income derived by it. 5. The assessee relied upon the order passed by the Income Tax Appellate Tribunal (ITAT), dated 24.3.1999 for the assessment year 1980-1981 where its status as local authority was admitted by the Assessing Officer. However, this fact has been found to be not correct by the Revenue. According to Revenue, the status has been taken as that of Company. It is stated the law is well settled that every assessment year is independent 6. The Assessing Officer while recording the finding with regard to assessment year in question, observed that the Assessee Corporation is an statutory body performing the public duty on behalf of the State Government and ordinarily possesses three wings namely, Jal Nigam, Nalkoop Wing and Construction & Design Wing. The activities of Jal Nigam Wing includes the supply of water and to provide sewerage facilities to public and maintenance thereof whereas the activities of Construction and Design Wing is to construct the Government buildings and the designing thereof. The Nalkoop Wing is to construct, maintenance of tubewell and water supply system. The Assessing Officer treated the assessee as Company and assessed the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Appellate Tribunal (in short the Tribunal) and granted exemption under Section 10 (20) of the Income Tax Act to the Assessee Corporation. 8. While assailing the impugned order passed by the Tribunal, Sri D.D. Chopra, learned counsel for the appellant has also relied upon the judgment of Hon'ble Supreme Court reported in CIT Vs. U.P. Forest Corporation, 230 ITR 945, and would submit that the Assessee Corporation is a statutory body and not an authority under Section 10 (20) of Incoem Tax Act. He invited attention to different paras of the judgment of the Forest Corporation (supra) to submit that at no stretch of imagination, the Assessee Corporation may be treated as authority under Section 10 (20) of the Income Tax Act and hence no exemption can be granted. 9. On the other hand, Sri Mudit Agarwal also relied upon the CIT Vs. U.P. Forest Corporation, 230 ITR 945 (supra), and invited attention to the provisions of the 1975 Act and submitted that the Jal Nigam is a local authority. He relied upon Section 3 of the 1975 Act which declares that the Nigam shall for all purposes be deemed to be a 'Local Authority'. The question involved is of public importance as to whether, Jal Nigam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nigam is the creation of statute by the State Legislature under the 1975 Act. Sub-section (3) of Section 3 of the 1975 declares that the Nigam shall for all purposes be deemed to be a local authority. Section 4 of 1975 Act provides that the Nigam shall consist of Chairman appointed by the State Government besides the members specified in sub-section (2). According to sub-section (2) of Section 4 of the 1975 Act, the Managing Director, Finance Director, Secretary to the State Government in the Finance Department, Ex Officio; Secretary to the State Government in -charge of the Water Supply Department, Ex Officio, Secretary to the State Government in the Planning Department, Ex Officio; Director of Local Bodies, U.P., Ex Officio Director of Medical and Health Services U.P. Ex Officio and elected heads of the local bodies in the State, to be nominated by the State Government, shall be the member of the Jal Nigam Board. It shall be appropriate to reproduce Section 3 and 4 of 1975 Act as under:- "3. Establishment of the Nigam- (1) The State Government shall by notification in the Gazette and with effect from a date to be specified therein, constitute a corporation by the name of the Utt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Nigam.-The functions of the Nigam shall be the following, namely:- 1. the preparation, execution, promotion and financing the schemes for the supply of water and for sewerage and sewage disposal; 2. to render all necessary services in regard to water supply and sewerage to the State Government and local bodies, on request to private institutions or individuals; 3. to prepare State plans for water supply, sewerage and drainage on the directions of the State Government; 4. to review and advise on the tariff, taxes and charges of water supply in the areas of Jal Sansthan and local bodies which have entered into an agreement with the Nigam under Section 46; 5. to assess the requirement for materials and arrange for their procurement and utilisation; 6. to establish State standards for water supply and sewerage services; 7. to perform all functions, not stated herein which were being performed by the Local Self-Government Engineering Department before the commencement of this Act; 8. to review annually the technical, financial, economic and other aspects of water supply and sewerage system of every Jal Sansthan or local bodies which have entered into an agreement with the Niga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the functions of Jal Nigam shall be preparation, execution, promotion and financing the schemes for the supply of water and for sewerage and sewage disposal and shall render all necessary services in regard to water supply and sewerage to the State Government and local bodies, on request to private institutions or individuals along with the maintenance of related infrastructure. The Jal Nigam shall lay down the schedule of fees for all services rendered by the Nigam to the State Government, local bodies, institutions or individuals and shall also approve tariffs for water supply and sewerage services applicable to respective local areas comprised within the jurisdiction of Jal Sansthan. 14. The Jal Sansthan is also established under 1975 Act. According to sub-section (4) of Section 18 of the 1975 Act, the Jal Sansthan shall be a body corporate having perpetual succession and a common seal and shall sue and be sued by the name of ") short name of the area specified in the said notification) Jal Sansthan" and have the power to acquire, hold or dispose of property. Section 20 provides that Jal Sansthan is constituted to have jurisdiction over the local area of a Nagar Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sansthans specified in the notification under sub-section (1) into the area of one Jal Sansthan; or (d) declare that any part in the area of a Jal Sansthan specified in the notification under sub-section (1) shall cease to be such area. 20. Constitution of Jal Sansthan-(1) Jal Sansthan constituted to have jurisdiction over the local area of a Nagar Mahapalika shall consist of a Chairman who shall be the Nagar Pramukh of the Nagar Mahapalika (ex officio), and the following other members, namely - (a) a General Manager, to be appointed by the Nigam with the approval of the State Government who shall be a qualified engineer having administrative experience and experience of water supply and sewerage works; (b) a Joint Director of Medical and Health Services to be nominated by the Director of Medical and Health Services, Uttar Pradesh; (c) three Sabhasads of the Nagar Mahapalika nominated by the State Government; (d) two representatives of the Nigam; (e) the Director of Local Bodies, Uttar Pradesh; (f) the Mukhya Nagar Adhikari of the Nagar Mahapalika. (2) A Jal Sansthan constituted to have jurisdiction over the local area of a Municipal Board shall consist of a Chairman who s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercising, discharging or performing such powers, duties or functions the Jal Nigam shall be deemed to be the Jal Sansthan and the date of such notification shall be deemed to be the date of constitution of the Jal Sansthan]." 16. Thus, over all reading of statutory provisions contained in 1975 Act reveals that broadly, the functions of Jal Nigam shall be the preparation, execution, promotion of plans with regard to supply of water established and maintenance of sewerage system on a decided fee for the services rendered by it. Under the 1975 Act, the working area of Jal Nigam including Jal Sansthan is whole of the State of U.P. 17. It is obvious from the aforesaid provisions that the power of Jal Nigam is to lay down the schedule of fees for the services rendered by it to the Government, local bodies and the areas notified. The tariff of water supply and sewerage services is to be approved by the Board of Jal Nigam. Thus, at no stretch of imagination, the Jal Nigam may impose or tax under the tariff for the services rendered by it. 18. The question cropped up is, whether Jal Nigam is a local authority under Section 10 (20 of the Income Tax Act. Under Section 10 of the Income A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te ordinarily being instrumentalities of State fulfilling twin test as propounded by the Hon'ble Supreme Court in the case reported in AIR 1981 SC 487: Ajay Hasia etc. Vs. Khalid Mujib Sehravardi and others etc.; AIR 1979 SC 1628: R.D. Shetty Vs. The International Airport Authority of India; to be the authority being 'State' under Article 12 of the constitution. Even the companies which are not framed under any special statute, have been held to be an authority being fully managed, controlled and financed by the Government. The Explanation added in Section 10 (20) of the Income Tax Act, removes the ambiguity or confusion if any for all time to come. 23. It may be taken into account that the word, 'authority', or, 'local', used in Article 12 of the Constitution of India, refers to instrumentalities of the State as settled by Hon'ble Supreme Court by catena of judgments. It is not necessary that an authority being the instrumentalities of the State, be involved in charitable activities and may claim exemption under Section 10 (20) of Income Tax Act, 1961. For exemption under Section 10 (20), the instrumentalities of the State must fulfil the necessary conditions provided under chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.1993. Article 243P of the Constitution defines the Committee, District, Metropolitan are, Municipal area, Municipality, and Panchayat. Part IX of the Constitution was added by the Seventy-third Amendment Act, 1992 giving effect from 24.4.1993, and deals with creation, establishment and election of Panchayats to function within their specified territorial area. Accordingly, for the purpose of explanation given in Section 10 (20) of the Income Tax Act, the area or jurisdiction of local authority shall be the area for which the Panchayat, Municipality or Municipal Committee or District Board, has been constituted. 28. The Cantonment Board constituted under the Cantonments Act, 1924, also discharges its public functions within the specified area constituted under the Act. 29. The Parliament to its wisdom has used the word, 'local' as prefix to the word 'authority'. The word 'local' confines the jurisdiction or area of functions of the authority within specified limit under a statutory provision or Act possessing different features and functional activities provided under Part IX and IXA of the Constitution. 30. Article 243W contains power of authority and responsibility of municip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution defines Municipal area, Municipality, Panchayats, Metropolitan area as under, to quote:- "243P. Definitions.- In this Part, unless the context otherwise requires,- (a) "Committee" means a Committee constituted under article 243S; (b) "district" means a district in a State; (c) "Metropolitan area" means an area having a population of ten lakhs or more, comprised in one or more districts and consisting of two or more Municipalities or Panchayats or other contiguous areas, specified by the Governor by public notification to be a Metropolitan area for the purposes of this Part; (d) "Municipal area" means the territorial area of a Municipality as is notified by the Governor; (e) "Municipality" means an institution of self-government constituted under article 243Q; (f) "Panchayat" means a Panchayat constituted under article 243B; (g) "population" means the population as ascertained at the last preceding census of which the relevant figures have been published." 32. Article 243 Q of the Constitution of India, defines Nagar Panchayats, Municipal Corporation and Article 243 U, specifies duration of municipalities, to quote: "243Q. Constitution of Municipa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period for which the dissolved Municipality would have continued under clause (1) had it not been so dissolved.". 33. Article 243 N protects the law relating to Panchayats of the State as existing before the constitutional amendment. The nature and work of Panchayats all over the country as well as in the State of U.P. is of different nature than other local bodies. In the State of U.P., the Panchayats are governed by the U.P. Panchayat Raj Act, 1947 which was later on, amended by the State Legislature making it in conformity with the Part-IX of the Constitution of India. 34. U.P. Jal Nigam in any case, cannot be treated as a local body at par with Panchayat defined under the Panchayat Raj Act, 1947. Every Panchayat is an elected body with different nature of the statutory responsibilities. The tenure of the Panchayat is co-extensive with the statutory elected period unless dissolved earlier on the ground given in the statute by the Government. Moreover, once the Constitution protects the law relating to Panchayats, the period cannot be extended for U.P. Jal Nigam or alike bodies. 35. On the other hand, Jal Nigam as well as Jal Sansthan are body corporate having life co-exitens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Act was enacted later in point of time than the Land Acquisition Act; but this Act was a consolidating and amending Act and a definition given therein of the expression "local authority" is the same as that contained in the earlier Acts of 1868 and 1887. The definition given in S. 3 (31) will therefore, hold good for construing the expression "local authority" occurring in the Land Acquisition Act. We have already quoted the definition. 1. It will be clear from the definition that unless it is shown that the State Transport Corporation is an 'authority' and is legally entitled to or entrusted by the Government with control or management of a local fund it cannot be regarded as a local authority. No material has been placed before us from which it could be deduced that the funds of the Corporation can be regard as local funds. It was no doubt submitted by the learned Attorney General that the Corporation was furnished with funds by the Government for commencing for its business; but even if that were so, it is difficult to appreciate how that would make the funds of the Corporation local funds. 2. Learned Attorney General then relied upon the provisions of S. 29 of the Bombay S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oting economic interest of the people. The circumstance that the statutory body is required to carry on some activities of the nature of trade or commerce does not indicate that the Board must be excluded from the scope of the word "State". The Electricity Supply Act showed that the Board had power to give directions, the disobedience of which is punishable as a criminal offence. The power to issue directions and to enforce compliance is an important aspect." It may be noted that the word, "authority", given in Article 12 has got vital expression and other word, "authority" given in Section 10 (20) of Income Tax Act, speaks for local authority with different nature. 39. In AIR 1981 SC 951: Union of India and others. v. R.C. Jain and others, Hon'ble Supreme Court while considering the status of Delhi Development authority held that it shall be the "local authority". There lordship held that Delhi Development Authority is an independent entity and elected by inhabitants of the area, possesses autonomy to decide for itself the question of policy affecting the area administered by it. It has been entrusted by the statute that governmental functions and duties as are usually entrusted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Delhi. 41. The question with regard to exemption under Section 10 (20) of the Income Tax Act, was considered by the Calcutta High Court and repelled the contention of the assessee and declined to grant exemption to treat the Calcutta Transport Corporation as "local authority" vide, Vol.108 (1977) Page 922: Calcutta State Transport Corporation. Vs. Commissioner of Income Tax Act West Bengal-IV. Feeling aggrieved with the judgment, the Calcutta State Transport Corporation preferred appeal. While upholding the judgment, relying upon the case of R.C. Jain (Supra), it has been held by Hon'ble Supreme Court that Calcutta Transport Corporation is not an authority within the meaning of Section 10 (20) of the Income Tax Act hence it shall not be entitled for exemption under the Income Tax Act. 42. In the case reported in Vol.230 (1998) page 945: Commissioner of Income Tax. Vs. U.P. Forest Corporation, Hon'ble Supreme Court was seized with the power under Section 10 (20) of the Income Tax Act. The Division Bench Judgment of Allahabad High Court had allowed the exemption holding the U.P. Forest Corporation as a "local authority". Hon'ble Supreme Court set aside the judgment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or institution has to get itself registered which seems to be not a case with regard to case of the U.P. Jal Nigam. 44. In the case reported in (2006) 5 SCC 100: Adityapur Industrial Area Development Authority. Vs. Union of India and others, Hon'ble Supreme Court held that Bihar Industrial Area Development Authority a statutory body though is a body corporate having legal personality different from the State and has its own income and generate its own fund which is not that of State though not carrying trade or business but shall not be an authority in view of the subsequent amendment done to Section 10 (20-A) and Section 10 (20) of Income Tax Act. Their lordships have considered the explanation added to amendment with effect from 1.4.2003 in para-5 of the judgment, which has been enforced from 1.4.2003 and held that since it does not include authority such as Adityapur Industrial Area Development Authority it shall not be entitled for exemption. The judgment of High Court was upheld by the Hon'ble Supreme Court, to reproduce relevant portion of para 7 and 13 as under:- "7. The High Court by its impugned judgment and order held that in view of the fact that Section 10 (20-A) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be entitled for exemption, to reproduced relevant para 35, 36, 37, 38, 39, 40 and 41 as under:- "35. One more aspect needs to be mentioned. In the case of R.C. Jain the test of "like nature" was adopted as the words "other authority" came after the words "Municipal Committee, District Board, Body of Port Commissioners". Therefore, the words "other authority" in Section 3(31) took colour from the earlier words, namely, "Municipal Committee, District Board or Body of Port commissioners". This is how the functional test is evolved in the case of R.C. Jain. However, as stated, earlier Parliament in its legislative wisdom has omitted the words "other authority" from the said Explanation to Section 10(20) of the 1961 Act. The said Explanation to Section 10(20) provides a definition to the word "local authority". It is an exhaustive definition. It is not an inclusive definition. The words "other authority" do not find place in the said Explanation. Even, according to the appellant(s), AMC(s) is neither a Municipal Committee nor a District Board nor a Municipal Committee nor a panchayat. Therefore, in our view functional test and the test of incorporation as laid down in the case of R.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43ZF which refers to the "Municipalities". This Article, inter alia, states that notwithstanding anything in Part IXA, any provision of any law relating to Municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of Part IXA, shall continue to be in force until amended or repealed by a competent Legislature. In our view, Article 243N and Article 243ZF indicates that there could be enactments which still retain the entities like Municipal Committees and District Boards and if they exist, Parliament intends to give exemption to their income under Section 10 (20) of the 1961 Act. v. Before concluding we quote hereinbelow an important principle of law enunciated by this Court in the case of R.C. Jain (supra) which reads as under: "...it is not a sound rule of interpretation to seek the meaning of words used in an Act, in the definition clause of other statutes." vi. Since we are of the view that AMC(s) is neither a Municipal Committee nor a District Board under the said Explanation to Section 10(20) of the 1961 Act, we refrain from going into the question : whether the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own fund and Section 27 provides that local bodies to assist the Corporation. For convenience, Section 17 and 27 of the Act are reproduced as under: "17. Fund of the Corporation-(1) The Corporation shall have its own fund which shall be a local fund and to which shall be credited all moneys received by or on behalf of the Corporation. i. The fund shall be applied towards meeting expenses incurred by the Corporation in the discharge of its functions under this Act and for no other purpose. ii. The money of the Fund shall be kept in the State Bank of India or in the Utrtar Pradesh Co-operative Bank or in any Scheduled Bank: Provided that nothing in this sub-section shall be deemed to preclude the Corporation from retaining such balances in cash as may be necessary for current payment or from investing any portion of the fund not required for immediate expenditure in any of the securities described in Section 20 of the India Trusts Act, 1882. 27. Local bodies to assist the Corporation-(1) Every local body shall render such assistance and furnish such information to the Corporation and make available for its inspection and examination such records, maps, plans and other documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for construction of these words in the later statute: "D' Emden v. Pedder, CLR at p. 100 per Griffiths, CJ.: 'When a particular form of legislative enactment which has received authoritative interpretation, whether by judicial decision or by a long course of practice, is adopted in the framing of a later statute, it is a sound rule of construction to hold that the words so adopted were intended by the legislature to bear the meaning which had been so put upon them.' " "According to Lord Macmillian, 'if an Act of Parliament referring to the same subject, and passed with the same purpose, and for the same object, the safe and well-known rule of construction is to assume that the legislature when using well-known words upon which there have been well-known decisions uses those words in the sense which the decisions have attached to them'." 53. The aforesaid proposition has again been reiterated in the case reported in (2009) 12 SCC 419: CCE. Vs. Shree Baidyanath Ayurved Bhavan Ltd., and (2010) 5 SCC 349: Union of India. Vs. Alok Kumar. In the case of Alok Kumar, Hon'ble Supreme court held that court should examine every word of a statute in its context while keeping in mind prea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sus. 59. In the case reported in 2006 (2) SCC 670, Vemareddy Kumaraswamy Reddy and another VS. State of A.P, Hon'ble Supreme Court held that by the language, a statute is clear and unambiguous, the court cannot make any addition or substitution of words unless otherwise, the provisions appears meaningless or are of doubtful meaning. 60. In the case reported in (2004) 6 SCC 672: Maulvavi Hussain Haji Abraham Umar Ji. Vs. State of Gujrat and another, Hon'ble Supreme Court held that a casus omisus ought not to be created by interpretation, save in some case of strong necessity. 61. In the case reported in (2006) 2 SCC 670: Vemareddy Kumarswamy Reddy and another. Vs. State of A.P., Hon'ble Supreme Court held that where the language of the statute is clear and unambiguous, court cannot make any addition or substitution of words, unless otherwise the provision appears meaningless or of doubtful meaning. 62. The relevant portion from to Maxwell on the Interpretation of Statutes (12th edition page 36) is reproduced as under:- "A construction which would leave without effect any part of the language of a statute will normally be rejected. Thus, where an Act plainly gave an appeal from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed. There is no room for any intendment. There is no equity about the tax. There is no presumption as to tax. Nothing is to be read and nothing is to be implied. 66. In a case reported in 2009 (27) LCD 161, Lipton India Ltd. Gaziabad Vs. State of U.P. and others, a Division Bench of this Court while pronouncing the judgment by one of use (Hon'ble Mr. Justice Devi Prasad Singh), held that while interpreting taxing provisions, a provision should not be read in isolation but it should be read in reference to context. In the present case, provisions contained under Section 10 (20) of the Income Tax Act, 1961, should not be read in isolation but it must be read keeping in view the provisions contained in Chapter-III of the Income Tax Act, 1961. An over all scheme provided therein with regard to tax exemption or the income, do not conform part of total income. 67. Subject to aforesaid broader principle with regard to principle of reading down or supply of causus omisus, Section 10 (20) of the Income Tax Act is construed independently or under the explanation confining the exemption only to the specified local authority or local bodies, the language being clear and unambiguous, liter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid principle, the State Government cannot exercise power to an 'item' meant for the Central Government. The local authority should be defined keeping in view the provisions contained in Part IX and IXA of the Constitution and Section 10 (20) of the Income Tax Act read with Chapter-III of the Income Tax Act, 1961. Merely because the State legislature has used the word, 'local authority' in sub-section (3) of Section 3 of the 1975 Act, it shall not entitled the U.P. Jal Nigam to claim exemption unless Income Tax Act itself provide. REPUGNANCY 73. In view of the Article 254 of the Constitution to the extent of repugnancy, the Central Act shall prevail and the provision contained in Section 10 (20) of the Income Tax Act 1961, shall prevail over and above the U.P. Water Supply and Sewerage Act, 1975. The provisions of the 1975 Act may not be construed in the manner which may make the provisions contained in the Income Tax Act, redundant or expanded. Even by applying the principle of pith and substance the provisions contained in 1975 Act shall not make the U.P. Jal Nigam a "local authority" under Section 10 (20) of the Income Tax Act 1961. 74. In the event of conflict b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2002. The word, "local authority" has been defined in the Section 3 (31) of the General Clauses Act, 1897, an old Central Act, which has been interpreted by the Hon'ble Supreme court by catena of judgments (supra). 77. Right from the Assessing Authority to the Tribunal, all the three forums have failed to discharge their statutory obligation. None of them have considered various pronouncements of Hon'ble Supreme Court (supra) read with Section 3 (31) of General Clauses Act, 1897 and the constitutional provisions contained in Part-IX and IXA of the Constitution, read with explanation added to in Section 10 (20) of the Income Tax Act, 1961 and have proceeded mechanically to decide the issue and even, the case of U.P. Forest Corporation (supra) has not been considered in its real perspective. 78. In view of the above, the appeal deserves to be allowed. The impugned order passed by the Tribunal is set aside. The question is answered in favour of the Revenue and against the assessee. However, the affect of the judgment shall be prospective. [Justice Devi Prasad Singh] (Delivered by Hon'ble Dr. Satish Chandra, J) I have carefully gone through the judgment prepar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the engineering works of Local Self Government were entrusted. In the year 1975, U.P. Jal Nigam was constituted vide Notification dated 18.6.1975 issued by the State Government under Section 3 of the Uttar Pradesh Water Supply and Sewerage Act, 1975 [hereinafter referred to as the 'Act' for the sake of brevity] and the status of the Nigam is a "local authority" under sub-Section (3) of Section 3 of the Act. For the assessment year under consideration, the A.O. has mentioned in his order that the assessee is consisting of three wings namely; (i) Jal Nigam Wing; (ii) Nalkoop Wing; and (iii) Construction & Design Wing. The A.O. in his order dated 21.03.2005 has observed that at the most activities of Jal Nigam Wing are that of a local authority whereas the activities of the remaining two wings are not at all of a 'local authority'. Finally, he observed that as the activities of Jal Nigam Wing appears to be that of a local authority, its income has been treated as exempt under section 10 (20) of the Income Tax Act, 1961. In First appeal, the CIT (A) has partly upheld the order by observing that all the three wings are covered by Section 10 (20) of the Income Tax Act and accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to avoid arbitrary application of power against individuals by centers of power. The emerging principle appears to be that a public corporation being a creation of the State is a subject matter to the Constitutional limitation as the State itself. Further, the governing power wherever located must be subject to the fundamental constitutional limitations. It is in such a view, it was found that statutory bodies like Life Insurance Corporation of India; and Oil and Natural Gas Commission were the "authorities" since these corporations do have independent personality in the eye of law and they serve as instrumentalities of the Government, though they may be subject to control of the Government. In Ramana D. Shetty v. International Airport Authority; AIR 1979 SC 1628, a statutory body was held to be 'an authority' wherein the concept of instrumentality or agency was regarded as the touchstones for the inference. A society registered under the Societies Registration Act with substantial Government control and funding as in the case of Indian Council of Scientific Research was found to be an authority as held in the case of Sabhaji Tevary v. Union of India; AIR 1975 SC 1329. Even a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution; or viii. Municipality as referred to in clause (e) of article 243P of the Constitution; or ix. Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or x. Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);] From the above, it is clear that the income of the "local authority" arising from its supply of a commodity or service, such as, supply of electricity or water, for domestic or industrial purposes, within its own jurisdictional area, is exempt. The reason for exempting income of a "local authority" arising from its activities within its jurisdictional area is that the money collected in the name of water, sewerage tax or fee from the inhabitants of local area is utilized on behalf of the inhabitants. The habitants consider themselves for a public purpose for their comfort or well being and in doing so, they cannot be said to have in view the making of any profit. The income derived by "local authority" from its activities outside its area was chargeable to income tax by amendment Finance (No.2) Act, 1997 w.e.f. 01.04.1997. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services etc. It has been entrusted for the purpose of civic duties and functions and also power to raise funds for the furtherance of its activities and the fulfilment of their project by levying taxes, reduce charges or fees which is in addition to moneys provided by the Government or obtained by borrowing or otherwise. The relevant portion of para 2 of the aforesaid judgment is reproduced as under: "... First, the authorities must have separate legal existence as Corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next, they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of the dependence may vary considerably but, an appreciable measure of autonomy there must be. Next, they must be entrusted by Statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transportation, and social welfare services etc. Broadly they may be entrusted with the performance of civic duties and functions, which would otherwise be Governmental duties, and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates charges, or fees. This may be in addition to money provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the "local authority". In the context of applicability of the Bonus Act, 1965, the question that arose whether the Delhi Development Authority was a "local authority" or not, in construing the meaning of the expression "local authority" as defined in Section 3 (31) of the General Clauses Act. The Hon'ble Supreme Court then examined the provisions of the Delhi Development Act and came to the conclusion that the said authority had above mentioned attributes of a "local authority" as defined by section 3 (31) of the General Clauses Act. The decision in R. C. Jain's case, AIR 1981 SC 951 was then followed in Calcutta State Transport Corporation's case, [1996]219 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, district board or body of port commissioners. In R.C. Jain's case, AIR 1981 SC 951, at least five attributes or characteristics of an authority falling under Section 3(31) of the General Clauses Act have been mentioned. At least three of the five attributes mentioned in the passage quoted above from R.C. Jain's case (supra), are absent here. Firstly, the members of the assessee are not wholly or partly, directly or indirectly, elected by the inhabitants of the area. According to Section 4 of the U.P. Jal Nigam, the Nigam consisted of a chairman and seven members. The Chairman is nominated by the State Government. The General Manager appointed by the Nigam with the approval of State Government must be belonging to the category, who in the Government's opinion, possess administrative experience in matters relating to water supply and sewerage works. The expression "local fund" occurring in Section 3(31) of the General Clauses Act would mean the fund of a local self- government. In R.C. Jain's case (supra) for deciding whether the Delhi Development Authority was a local authority, as already mentioned, the Court had examined as to whether its fund consisted of any funds flowed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity" though under Section 3 (3) of the U.P. Forest Corporation Act, 1974, it is provided that for all purposes it shall be the local authority. Their lordship has relied upon the ratio of R.C. Jain's case (supra) while reversing the judgment of Allahabad High Court, to quote relevant portion is as under:- "..In the case of the respondent-corporation, the Act does not enable it to levy any tax, cess or fee. It is the income from the sale of the forest produce which goes to augment its funds. It has no power under the Act of compulsory exaction such as taxes, fees, rates or charges. Like any commercial organization it makes profit from sale of forest produce and it has been given the power to raise loans. Whereas municipal or local funds are required to be spent for providing civic amenities, there is no such obligation on the respondent to do so. Merely because section 17 of the U.P. Forest Corporation Act states that the fund of the corporation "shall be a local fund" that would not make it a local fund as contemplated by section 3 (31) of the General Clauses Act. In our opinion, therefore, the High Court was not correct in coming to the conclusion that the respondent was a "lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason is that Article 254 of the Constitution provides the inconsistency between the laws made by the Parliament and laws made by the legislatures of State. Article 254 is reproduced as under: Article 254: (1) if any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void. (2) Where a law made by the Legislature of a State with respect to one of the matters enumerated in the Concurrent List contains any provision repugnant to the provisions of an earlier law made by Parliament or an existing law with respect to that matter, then, the law so made by the Legislature of such State shall, if it has been reserved for the consideration of the President and has received his ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Income Tax. Thus, the provision made in Section 3 (3) of the Act is of no use to the assessee. The question still remains as to why Parliament has used the words "Municipal Committee" and "District Board" in Item (iii) of the said Explanation to Section 10(20) of the Income Tax Act. It appears that Parliament has defined "local authority" to mean - a Panchayat as referred to in clause (d) of Article 243 of the Constitution of India, Municipality as referred to in clause (e) of Article 243P of the Constitution of India. However, there is no reference regarding "local authority" in the Article 243 after the words "Municipal Committee" and "District Board". It appears that the Municipal Committee and District Board in the said Explanation are used out of abundant caution. In 1897, when General Clauses Act was enacted, Municipal Committees and District Boards were already existed in India. They continued even thereafter. In some remote place, it is possible that there exists a Municipal Committee or a District Board. Therefore, apart from a Panchayat and Municipality, Parliament in its wisdom decided to give exemption to Municipal Committee and District Board. Earlier, there were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, by law, endow- (a) the Municipalities with such powers and authority as may be necessary to enable them to function as institutions of self- government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein,with respect to- (a) the preparation of plans for economic development and social justice; (b) the performance of functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule; (b) the Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule. 243X. Power to impose taxes by, and Funds of the Municipalities-The Legislature of a State may, by law- (a) authorise a Municipality to levy, collect and appropriate such taxes, duties, tolls and fees of are in accordance with such procedure and subject to such limits; (b) assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade or business, which Parliament by law declares to be incidental to the ordinary functions of Government. As per Section 3(58) of General Clauses Act, 1897, definition of the "State" has been defined. On a combined reading, it appears that Articles 285 and 289 provide for the immunity of the property of the Union and the State from mutual taxation, according to the federal principle. Article 289(1) provides exemption from Union taxation any income of a State, whether it is derived from governmental or non- governmental activities. But no exemption can be claimed under this clause, if the income in question is of some authority other than State e.g. a statutory corporation, which is a separate juristic entity, even though its shares are owned by the State itself, or the authority/corporation is State controlled as per the ratio laid down in A.P.S.R.T.C. vs. ITO; AIR 1964 SC 1486. Further, a business carried on by a State is not exempted from Union Taxation unless parliament has declared such business to be incidental to the functions of government under Article 289(3) of the Constitution, as was held in the case of New Delhi Municipal Council v. State of Punjab; AIR 1997 SC 284 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Article 289(1) of the Constitution of India. The State is entirely different from the Corporations which are created by laws which are enacted either by Parliament or by State Legislatures for different and distinct purposes. They are separate entities in law. They sue and are sued in their own capacities and for any contractual liability of the corporation; no person can sue the State because every corporation in itself is not the State but a separate legal entity. Under these circumstances, our opinion on the first question would be in the affirmative, and we hold that the decision of the Tribunal is right. Therefore, this point is decided in favour of the Revenue and against the assessee." In the judgment on this subject, dated 03.05.2006, in civil Appeal (Civil) 6382 of 2003 (Adityapur Industrial Area Development Authority vs. Union of India & Ors.) Hon'ble Apex Court reiterated the same principle by observing that : "Having regard to the provisions of the Bihar Industrial Area Development Authority Act, 1974, particularly Section 17 thereof, we have no manner of doubt that the income of the appellant/authority constituted under the said Act is its own income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the income-tax authorities. But it has academic value. Though U.P. Jal Nigam has never moved any application for the purpose of getting registration u/s 12AA of the Income Tax Act, 1961 or has never claimed its income to be exempt u/s 11 of the Income Tax Act, 1961, even after the amendment of the section 10(20) of the Income Tax Act, 1961 w.e.f. 01.04.2003. In the backdrops of the facts, let us also examine that if U.P. Jal Nigam would have applied for the registration u/s 12AA of the Income Tax Act, 1961 and had they have obtained requisite registration as aforesaid, whether such registration would entitle U.P. Jal Nigam to claim exemption u/s 11 of the said Act. It may be mentioned that granting registration u/s 12AA of the Act does not give blanket exemption to the assessee u/s 11 of the Act. The Institution-assessee may be registered u/s 12AA still they may not be eligible for exemption u/s 11 of the Act. Further, after examining the provisions, it is evident that the benefit cannot be extended to the assessee as it is not a trust/institution having charitable nature . So, its income cannot be exempted under section 11. After discussing the legal matrix pertaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porate was constituted or established. The deduction was authorized from the date on which the exemption was withdraw retrospectively by the Finance Act, 2003 w.e.f. 01.04.2002. Needless to mention that in the instant case, the annual accounts of the Nigam were kept in three parts- Jal Nigam; Construction & Design Services; and Nalkoop Wing. Consolidation of Financial Statements of all the three wings have been done from the financial year 2002-03 and henceforth have been maintained on the same pattern. For the assessment year under consideration (2002-03), the indirect benefit was provided by the then Section 36 (1)(xii) of the Income Tax Act, which reads as under: (xii)"any expenditure(not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorised by the Act under which such corporation or body corporate was constituted or established." The same is applicable in the assessee's case for the assessment year 2002-03. It may be mentioned that the above provision was substituted by the Finance Act, 2007 w.e.f. 01.04.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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