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TMI Blog2014 (12) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under Article 289( 1) of the Constitution of India. 4. Without prejudice, it is contended that the activities of the appellant board constitute the functions incidental to the ordinary functions of the State and therefore, its income is immune from tax under Clause (3) to Article 289 of the Constitution of India. 5. The appellant contends that the functions performed by the appellant board fall under Article 48A of the Constitution of India which provides for protection and improvement of environment falling under the directive principles of State Policy in Part IV of the Constitution of India. The appellant therefore, contends that any income derived in the exercise of functions performed by the State or incidental to ordinary functions of the State is not liable to tax under Article 289(1) or under Article 289(3) of the Constitution of India. 6. It is contended that the appellant is an agent of the State performing the State functions falling under Article 48A of the Constitution. Hence, its income is immune from taxation. 7. It is contended that the decision of the Hon'ble Supreme Court in Adityapur Industrial Area Development Authority Vs. Union of India & Others r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d control of pollution) Act, 1974. Subsequently, after enactment of AIR (prevention and control of pollution) Act, 1981 by the Parliament, the name of the Board was changed to AP Pollution Control Board. Till AY 2002-03, assessee claimed exemption u/s 10(20) of the Act, as a local authority. However, after amendment to the definition of local authority u/s 10(20) with effect from 01/04/2003, by Finance Act, 2002, assessee became liable to pay income-tax. Since assessee failed to file any return of income, even after it became liable to pay tax, AO initiated action u/s 147 of the Act by issuing a notice u/s 148 on 31/10/08 calling upon assessee to submit return of income for AYs. 2004-05 to 2008-09. In response to the notice issued u/s 148, assessee filed its return of income for impugned AY on 04/12/2008 on the basis of unaudited accounts. Subsequently, assessee filed revised return along with statutory audit reports on 04/06/09. AO observed that revised return can only be filed when the omission was not within the knowledge of assessee. As assessee was well aware that the accounts were not audited by the respective due dates, the revised returns filed are not valid in law, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ps/Solid Waste Management - water cess funds 0 0 5. Ecocity TUDA 3,18,300 0.053 6. Common Effluent treatment plant 0 0 7. Real Time Qir Quality Monitoring Stations 0 0 8. Financial assistance workshop/roadshow 5,10,819 0.085 9. National air quality monitoring 31,463 0.005 10. Model facilities MSW - Suryapet Municipality 0 0 Grand Total 96,11,786 2,103 REVENUE EXPENDITURE Sl.No. Particulars Actual for 2004- 05 Percentage of available funds 1 Salary and allowances 3,60,75,365 6.00 2 t o 48 Other expenditure 5,41,59,535 9.00 Total 9,02,34,900 15.00 5. On analyzing the data as appearing in the tables, AO observed that the amount spent towards salaries is three times more than the amounts used for the schemes formulated by the board. It was also noted by AO that the total revenue expenditure is 15% of the available funds and the total amounts applied for various schemes is only 2%. According to the AO, establishment expenditure is approximately 8 times the amounts applied for various schemes. On examining the balance sheet as on 31/03/05, he noticed that the total FDs amounted to Rs. 42.4 crores. Thus, about 70.67% of the available funds was simpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt board does not have requisite approval u/s 10(23)(vi) for the year, iii) That it had huge surplus and the unspent funds were kept in FDs, showing that its income was not being utilized towards the avowed charitable objects, iv) That the board is not registered u/s 43(1) of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987." Ld. CIT(A) did not approve the view of AO that only because assessee has not spent substantial part of its income for the objects of prevention and control of pollution and has earned surplus in the respective AYs, the character of the assessee is non-charitable. He also observed that the expenditure incurred towards salaries of the staff cannot be considered to be towards purposes beyond the aims and objects of the board. Ld. CIT(A) observed that considering the nature of functions to be performed by board which is of regulatory, advisory and technical in nature, it has to be performed with the help of officers and staff having requisite technical and scientific qualification. Therefore, payment of salary cannot be a disqualifying factor as far as claim of exemption is concerned. Ld. CIT(A) also observed that the observations mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee were to be treated to be in the nature of trade or business as the parliament has not made any specific provision regarding taxation of income derived there from, the income earned by assessee will not be immune from taxation. Ld. CIT(A) opined that assessee being an independent legal personality distinct from the state and till such time the income earned by assessee goes to its own funds and not to the state coffers, the income earned by assessee will not be free from taxation under article 289 of the Constitution of India. Accordingly, he rejected assessee's claim of exemption under article 289. 7. As far as assessee's claim of exemption u/s 10(23C(vi) is concerned, ld. CIT(A) noted that the Chief Commissioner of Incometax vide order dated 10/12/2009 has rejected assessee's claim of approval u/s 10(23C)(vi). However, considering the fact that assessee has filed writ application challenging the order of CCIT, which is still pending in the jurisdictional High Court, he directed the AO to ascertain present status and decide the issue in accordance with the directions of Hon'ble High Court while deciding the writ application. Being aggrieved of the aforesaid order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e so derived is immune from union taxation under article 289( 1 ) of the Constitution of India. iv) At the same time it is open to the union to impose any tax in respect of any profit derived in any such trade or business, if the Parliament by law so provides. Even in the case of any such income derived from trade or business run by the state, if the Parliament by law declares that it is incidental to an ordinary function of the Government, it will not be liable for taxation. The effect of Article 289 of the Constitution of India can be summarized as under: a) all income of the state be it from a commercial or a noncommercial or a welfare activity of a State is exempt from union taxation; b) in respect of any income derived from trade or business carried on by the state, the Parliament may by law, impose any tax; c) If the Parliament declares that any trade or business carried on by the state to be incidental to the ordinary functions of the Government, then also tax cannot be imposed from such activity of trade; 8.5. It is submitted that the taxability of any income derived by the state depends upon the following factors: a) is it a pure state function; b) is it a commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate except the state no one can else carry on the activity. This is also not an activity mandated to be done only by the state under the Constitution of India or by statute. The Development Authority is not Cl regulatory body. The Development authority is merely acting as a complimentary body to the activity of promotion of industries which is also undertaken by private players. Therefore, the judgment of the Hon 'ble Supreme Court should be understood in the light of the nature of activity that is sought to be discharged by the Development authority constituted under the Bihar State Act which is a commercial activity, though by itself the authority may not be carrying on any trade. 8.9. Ld. AR submitted, it may be true that the Adityapur Industrial Area Development Authority in carrying out its functions may not be carrying on any trade or business. Yet the fact remains even a private entity can take up similar activity. This is not the case in the A.P.Pollution Control Board. 8.10. Referring to the decision of the Hon'ble Supreme Court in A.P. State Road Transport Corpn.Ltd. Vs. ITO (52 ITR 524). Here again carrying on transport business is not the prerogative of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state govt. or the fees received by it is the income of the state. He submitted that as the income derived by assessee goes to enhance its own funds and not to the state govt. the income generated will not be the income of the state govt. To substantiate such contention, ld. DR brought to our notice the provisions contained under Chapter VI of water (Prevention and control of pollution) Act, 1974. Thus, in sum and substance, ld. DR submitted that as assessee is a distinct legal entity separate from the state govt. and income of assessee also goes to its own kitty not to the state, it cannot be said that the income earned by assessee being the income of state govt. is exempt from taxation under article 289(1) of the Constitution of India. In support of such contention, ld. DR relied upon the following decisions: 1. AP State Road Transport Corporation Vs. CIT, 52 ITR 524 (SC) 2. Adityapur Industrial Development Authority, 283 ITR 97 3. AP Housing Board Vs. DCIT, ITA No. 717/H/12 and others, dt. 31/05/13 10. In rejoinder, ld. AR submitted that the principle decided by the ITAT, Hyderabad Bench in case of AP Housing Board (supra) will not apply to the facts of assessee's case beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, we need to observe that though the assessee board was created with effect from 24/01/1976 as Andhra Pradesh State Board for the Prevention and Control of Water Pollution and subsequently rechristened as Andhra Pradesh Pollution Control Board after enactment of the AIR (prevention and control of pollution) Act, 1981, but, the assessee board never claimed immunity from payment of income-tax under article 289 of the Constitution of India. Only after assessee lost the claim of exemption u/s 10(20) of the Act, by virtue of amendment to the definition of the expression local authority w.e.f. 01/04/2003 and it failed in its attempt, either in getting approval u/s 10(23C)(vi) or being registered u/s 12AA of the Act for the impugned AY, as a last resort it staked its claim of immunity from payment of income-tax under article 289 of the Constitution of India, that too at the stage of proceeding before the first appellate authority. It is a fact on record that during the assessment proceeding also for the impugned AY, assessee never claimed that its income is exempt from taxation by virtue of article 289(1) of the Constitution of India. Be that as it may, the issue before us is whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he government or State, or any operation connected therewith, or any property used or occupied for the purpose of such trade or business, or any income accruing or arising in connection therewith. Article 289(3) provides that nothing in clause(2) shall apply to any trade or business or to any class of trade or business, which parliament may by law to be incidental to the ordinary functions of government. Thus, a plain reading of the aforesaid clauses of Article 289 makes it clear that they are independent of each other and speaks of three different situations. 13. On a perusal of The Water (prevention and control of Pollution) Act, 1974, it is to be noticed that section 4 of the said Act empowers the state govt. to constitute a state pollution control board through a notification published in the official gazette for exercising such powers and functions as may be assigned to the board under the Act. Similarly, section 4 of The AIR (prevention and control of pollution) Act, 1981, provides that state pollution control boards constituted under section 4 of the water (prevention and control of pollution) Act, 1974 shall be deemed to be the state board for the prevention and control of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid facts vis-à-vis the provisions contained under Article 289 of the Constitution of India, it is evident that the powers/functions exercised by the board cannot be considered to be in the nature of trade or business. Therefore, clause (2) and (3) of Article 289 may not be applicable to the facts of assessee's case. The only provision under which assessee can possibly claim immunity from taxation is clause (1) of Article 289. On a plain reading of the said clause, it is clear that only property or income of state is exempt from union taxation. The expression 'income of a state' as incorporated under Article 289(1) has to be interpreted to mean, the income of the state govt. itself and not the income of some authority other than the state, such as statutory authority or board which is a independent/separate juristic entity, even though it may be owned or controlled by the state govt. As we have stated earlier, provisions of both the water (prevention and control of pollution) Act, 1974 and Air (prevention and control of pollution) Act, 1981, make it clear that the funds of the board are its own funds and does not belong to the state govt. Only in case of supersession of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Government thereunder." 16. The Hon'ble Supreme Court after analyzing the provisions contained under article 289 as a whole and taking note of the principles laid down by the Hon'ble Supreme Court in case of AP State Road Transport Corpn. Vs. ITO (52 ITR 524) observed as under: "Considerable reliance was placed on the principles laid down in the aforesaid decision by learned counsel appearing for the Union of India. He submitted that having regard to the provisions of the Act under which the appellant/Authority is established, the same conclusion may be reached. In particular, emphasizing the fact that as in Andhra Pradesh State Road Transport Corporation case (supra), so in the instant case as well, s. 17 of the Act provides that upon dissolution of the appellant/Authority, the properties, funds and dues realizable by the Authority along with its liabil ities shall devolve upon the State Government. Impliedly, therefore, such properties, funds and dues vest in the Authority till its dissolution, and only thereafter it vests in the State Government. He also referred to various other provisions of the Act and submitted that there was nothing in the Act which attempted to lif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thermore, it is a fact on record that assessee has also applied for approval u/s 10(23C)(iv) of the IT Act, and approval has also been granted to assessee from AY 2009-10 onwards. From the aforesaid facts, it becomes clear that assessee by its own actions considers itself to be a separate legal entity distinct from the state govt. That being the case, the income/receipts of the board has to be treated as its own income and not of the state govt. In the aforesaid facts and circumstances, we agree with the ld. CIT(A) that assessee cannot get immunity from taxation under article 289 of the Constitution of India. 19. As far as the next issue relating to claim of exemption u/s 10(23C)(iv) of the Act is concerned, considering the fact that assessee's writ application is pending before the Hon'ble Jurisdictional High Court, we uphold the directions of the ld. CIT(A). 20. Now coming to the issue raised in ground No. 9 read with additional grounds, ld. AR has submitted before us that the actual receipts as per the revised return is Rs. 19,46,56,470 as against Rs. 32,77,52,980 considered by AO. After considering the submissions of assessee vis-à-vis the facts and materials on record ..... X X X X Extracts X X X X X X X X Extracts X X X X
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