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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 ..... he assessment proceeding also for the AY, assessee never claimed that its income is exempt from taxation by virtue of article 289(1) of the Constitution of India - the income generated by the board which goes to constitute its own fund does not go to the consolidated fund of the state and is distinct and separate from the fund of the state govt. Section 62 of The Water (prevention and control of pollution) Act, 1974 empowers the state govt. to supersede the state pollution control board, if it is of the opinion that the state board has persistently made defaults in the performance of the functions imposed on it by or under the Act or circumstances exist which render it necessary in the public interest to do so - only upon supersession of the state board the state govt. takes over all the powers and functions and duties performed by the state board and also property owned or controlled by the board shall vest in the state govt. - therefore, it becomes clear that until supersession of the state board, not only it retains its distinct and independent identity but also the funds and property of the board also remains in its possession. The income/receipts of the board remain as its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant 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 reported in 283 ITR P.97 is inapplicable. The learned Commissioner of Income tax(Appeals) erred in mechanically in applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, AO ignored both the original as well as revised returns of income. In course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. Training programme 1,98,54 0 0.033 18. Exhibition expenses 58,444 0.009 19. Environmental zoning GIS 10,00,000 0.167 Grand Total 1,22,17,514 2.036 PAYMENTS CENTRAL SCHEMES Sl. No. Particulars Actual for 2004-05 Percentage of available funds 1 Geo-reference of industries under world bank IPP 69,99,266 1.67 2. Hyderabad waste management project TSDF II (for incinerator) 0 0 3. Clean process technology schemes water cess funds 17,51,938 0.29 4. Financial assistance to the municipalities for establishment of STPs/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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pointed out. Though, assessee claimed that the provisions of AP Charitable and Hindu Religious Endowments Act, 1987 is not applicable, as the Board cannot be termed as a public charitable institution or endowment, but, AO rejected such submissions of assessee. Finally, AO having noticed the fact that the assessee is neither registered u/s 12AA of the Act, nor approved u/s 10(23C)(iv), held that it is not eligible for availing exemption either u/s 11 or u/s 10(23C(iv). Accordingly, AO treated the surplus of ₹ 33,77,52,980 as income of assessee for the impugned AY. Being aggrieved of the assessment order so passed, assessee preferred appeal before ld. CIT(A). 6. Before the first appellate authority, assessee apart from challenging the disallowance of exemption claimed u/s 10(23C) also raised additional ground claiming immunity from taxation under article 289 of the Constitution of India. As far as the issue raised in additional ground is concerned, ld. CIT(A) called for a report from AO on the issue. Ld. CIT(A) after considering the submissions of assessee in the context of the facts and materials on record, found that AO has basically assessed the income at the hands of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been spent as per the directions of the state govt. but the same remain as the fund of assessee board and not of the state govt. Ld. CIT(A) analyzing the provisions of article 289(1) of the Constitution of India observed that what is exempt from union taxation is the income of the state and not the income of any authority under the state. Ld. CIT(A) observed, if the government exercises its power to dissolve the board, then the properties, funds, debts, etc. of the board devolve thereafter upon the state govt. Till the time of such dissolution all of those belong to assessee itself and not to the state. Ld. CIT(A) referring to the decision of Hon ble Supreme Court in case of Adityapur Industrial Area Development Authority Vs. Union of India and others, 283 ITR 97, held that even if assessee board has been constituted by the state govt. with a view to fulfill the state obligation under article 48A of the Constitution of India, that fact alone is not sufficient to conclude that income of assessee is the income of state itself, so as to exempt it from union taxation as per article 289 of the Constitution of India. Ld. CIT(A) was of the view that the activities carried on by assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate bodies can take up. The State cannot allow the above functions to be discharged by any private entity. These functions can only be discharged by the State or any one appointed by it on its behalf to discharge the above state functions. 8.3 It was submitted that the above state functions should be distinguished from any commercial activity which a state can take up on its own or even a private body can also take up. Therefore whether the function discharged is a pure state function or not, or is a commercial activity, depends upon the function that is sought to be discharged. 8.4 Referring to the effect of Article 289 of the Constitution of India, ld. AR submitted as under: i) Levy of tax on the state income is governed by Article 289 of the Constitution of India. An analysis of the above article reveals the following position. ii) All income derived by the state is exempt. The income could be from an activity which is totally non-commercial purely to be discharged by the state or a commercial activity which a state can carry on just as any private entity can discharge;. iii) On several occasions, a state takes up a commercial activity just as any private entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Government. e) The appellant board is vested with powers which only a state can discharge and not any private entity or a private organization. f) The functions to be discharged by the Board are set out in the Water (Prevention and Control of Pollution) Act, 1974 and The Air (Prevention and Control of Pollution) Act, 1981. g) It is not as if anyone can discharge these functions. The state is not acting as a complimentary body to any non-state or private entity or organization discharging similar functions. 8.7. Ld. AR objecting to reliance placed by CIT(A) on the decision of Adityapur Industrial Area Development Authority (supra), submitted that there is a distinction between the appellant body and the case relied on by the Commissioner of Income tax(Appeals). 8.8. It was submitted, in Adityapur Industrial Area Dev. Authority, a body corporate was constituted under the Bihar Industrial Area Dev. Authority Act, 1974 to provide for planned development of industrial area for promotion of industries and connected matters. This is essentially a commercial activity. This activity can also be undertaken by any non-state or private organization, providing planned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard. It is state which performs the obligation through an agent appointed exclusively for the purpose. To substantiate the aforesaid contention, ld. AR referred to various provisions of the Water (prevention and control of pollution) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, 8.13. Ld. AR submitted, the fact that assessee board shall have its own funds, does not make any difference if it is acting as an exclusive agent of the state for performing a state function or a state obligation which falls wholly in the realm of state domain. This distinction may be relevant in all cases where the functions performed by the state can also be performed by a non state agent as the functions do not fall exclusively within the state domain. This distinction is vital and makes all the difference in determining whether the income derived by the appellant board can be said to be a state income falling within the provisions of Article 289( 1) of the Constitution of India. 9. The ld. DR on the other hand strongly supporting the finding of the ld. CIT(A) on the issue submitted that assessee being a distinct legal entity separate from the state govt., the income derived b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how that the functions performed by the board are only state functions and no private player is entitled to charge such fee from industries. The board does not render any services to the persons paying such fee. Therefore, the character and nature of receipts of the board indicate that it is working only as an agent or an extended arm of the state and not like any corporation established for carrying out the activities which even a non-state actor or any private institution can carryout. It was submitted that the board does not owe any obligation to any person or institution or industry for receiving any money. The beneficiaries of the activities of the board are public at large or the citizens of the state. It was submitted that the activity undertaken by the board is a welfare activity which a welfare state undertakes in discharge of its duties towards its objects. The board does not carry out any business or commercial activity. Thus, it was submitted that as the activity carried on by the board is of such a nature which the state alone can carry on the income generated/derived from such activity has to be treated as income of the state govt. 11. We have considered the elabor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... look into the provision contained under article 289(1) of the Constitution of India, which is extracted hereunder for the sake of convenience: Exemption of property and income of a State from Union taxation (1) The property and income of a State shall be exempt from Union taxation (2) Nothing in clause ( 1 ) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith (3) Nothing in clause ( 2 ) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of government. 12. On careful analysis of Article 289, extracted above, it is to be observed, the said article is divided into three parts. Clause (1) of Article 289 says that the property and income of State shall be exempt from union taxation. Article 289(2) however prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctions under the Act, but, of course with the consent of the or the authority given by the Central or State govt. Section 38 provides that the board for each financial year shall prepare its own budget showing estimated receipt and expenditure for the next FY and copy of the said budget shall be forwarded to the Central/State Govt. From the aforesaid provisions, it becomes abundantly clear that the income generated by the board which goes to constitute its own fund does not go to the consolidated fund of the state and is distinct and separate from the fund of the state govt. Section 62 of The Water (prevention and control of pollution) Act, 1974 empowers the state govt. to supersede the state pollution control board, if it is of the opinion that the state board has persistently made defaults in the performance of the functions imposed on it by or under the Act or circumstances exist which render it necessary in the public interest to do so. Only upon supersession of the state board the state govt. takes over all the powers and functions and duties performed by the state board and also property owned or controlled by the board shall vest in the state govt. Therefore, from the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under article 289(1) of the Constitution of India. 15. The Hon ble Supreme Court in case of Adityapur Industrial (supra) while examining provisions under Bihar Industrial Area Development Authority, 1974 which are akin to section 37 and 62 of The Water (prevention and control of pollution) Act, 1974 observed as under: Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly s. 17 thereof, we have no manner of doubt that the income of the appellant/Authority constituted under the said Act is its own income and that the appellant/Authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of cl. (2) of Art. 289, it still is an Authority constituted under an Act of the legislature of the State having a distinct legal personal ity, being a body corporate, as distinct from the State. Sec. 17 of the Act further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessari ly therefore, before its dissolution, its assets, funds and l iabilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of India only if the income can be said to be the income of the state govt. 17. Considered in the light of the ratio laid down by the Hon ble Supreme Court as aforesaid and facts involved in the present appeal, under no circumstances it can be held that the income/receipts of the assessee is that of the state govt.. This is because, not only assessee is a distinct and separate legal/juristic entity but funds of the assessee also belong to assessee. Though, the learned AR has tried to impress upon us that the principles laid down in case of Adityapur Industria. (supra) will not be applicable to assessee, but, we are unable to agree with the same. In our view, the principles laid down by the Hon ble Supreme Court squarely applies to the facts of the case of assessee. While dealing with identical issue in case of AP Housing Board (supra), a coordinate bench of this Tribunal has held that Housing Board being a separate juristic entity, income derived by it cannot be considered to be the income of the state under article 289 of the Constitution of India. 18. The entire issue can also be looked into from another angle. As can be seen till AY 2002-03, assessee had been claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X
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