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CASE NO.: Appeal (civil)  6382 of 2003

PETITIONER: Adityapur Industrial Area Development Authority

RESPONDENT: Union of India & Ors.

DATE OF JUDGMENT: 03/05/2006

BENCH: B.P. SINGH & S. H. KAPADIA

JUDGMENT: J U D G M E N T  

B.P. SINGH, J.

       Adityapur Industrial Area Development Authority \026 the appellant  herein challenged, by a writ petition, the notice issued by the Deputy  Commissioner of Income Tax, TDS Circle, Jamshedpur dated February 14,  2003 to the Manager of the Central Bank of India, Jamshedpur bringing to  the notice of the Manager of the Bank that the Finance Act, 2002 had  brought about changes in the Income Tax Act and while Section 10(20A)  had been omitted, an Explanation was added to Section 10(20) of the Act.   The provisions of the Income Tax Act, 1961 as they stood after the  amendment obliged the Bank to deduct income tax at source from the  interest accrued on fixed deposit receipts of the appellant/Authority.  The  Manager of the Bank was required to comply with the provisions and deduct  tax at source and report compliance.  The High Court of Jharkhand at Ranchi  in the aforesaid writ petition pronounced its judgment on May 8, 2003  dismissing the writ petition holding that in view of the amended provisions  of the Income Tax Act, the notice was valid and legal.  The appellant/  Authority has impugned the judgment and order of the High Court in this  appeal by special leave.   

The appellant/Authority has been constituted under the Bihar  Industrial Areas Development Authority Act, 1974 to provide for planned  development of industrial area, for promotion of industries and matters  appurtenant thereto.  The appellant/Authority is a body corporate having  perpetual succession and a common seal with power to acquire, hold and  dispose of properties, both moveable and immovable, to contract, and by the  said name sue or be sued. The Authority consists of a Chairman, a Managing  Director and five other Directors appointed by the State Government.  The  Authority is responsible for the planned development of the industrial area  including preparation of the master plan of the area and promotion of  industries in the area and other amenities incidental thereto.  The Authority  has its own establishment for which it is authorized to frame regulations  with prior approval of the State Government.  The State Government is  authorized to entrust the Authority from time to time with any work  connected with planned development, or maintenance of the industrial area  and its amenities and matters connected thereto.  Section 7 of the Act obliges  the Authority to maintain its own fund to which shall be credited moneys  received by the Authority from the State Government by way of grants,  loans, advances or otherwise, all fees, rents, charges, levies and fines  received by the Authority under the Act, all moneys received by the  Authority from disposal of its moveable or immovable assets and all moneys  received by the Authority by way of loan from financial and other  institutions and debentures floated for the execution of a scheme or schemes  of the Authority duly approved by the State Government.  Unless the State

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Government otherwise, directs, all moneys received by the Authority shall  be credited to its funds which shall be kept with the State Bank of India and/  or one or more of the Nationalized Banks and drawn as and when required  by the Authority.

       Article 289 of the Constitution of India provides as follows:-

"289.  Exemption of property and income of a State from  Union taxation. \026 (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 of business which Parliament may by  law declare to be incidental to the ordinary functions of  Government."   

It is also necessary to notice the relevant provisions of the Income Tax  Act, 1961. Chapter III of the Income Tax Act relates to incomes which do  not form part of total income.  The relevant part of Section 10 as it stood  before its amendment by the Finance Act of 2002 read as follows:-

"10.  In computing the total income of a previous year of any  person, any income falling within any of the following clauses  shall not be included:-  

                 \005.                           \005.                           \005. (20)    the income of a local authority which is chargeable under  the head "Income from house property", "Capital gains"  or "Income from other sources" or from a trade or  business carried on by it which accrues or arises from the  supply of a commodity or service (not being water or  electricity) within its own jurisdictional area or from the  supply of water or electricity within or outside its own  jurisdictional area ;   

(20A)   any income of an authority constituted in India by or  under any law enacted either for the purpose of dealing  with and satisfying the need for housing accommodation  or for the purpose of planning, development or  improvement of cities, towns and villages, or for both."              

By the Finance Act, 2002 with effect from April 1, 2003 an  Explanation was added to Section 10(20) and Section 10(20A) was omitted.   The Explanation added to Section 10(20) is as follows :-

"Explanation. \026 For the purposes of this clause, the expression  "local authority" means \026

(i)     Panchayat as referred to in clause (d) of article 243 of the  Constitution ; or

(ii)    Municipality as referred to in clause (e) of article 243P of  the Constitution; or

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(iii)   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

(iv)    Cantonment Board as defined in section 3 of the  Cantonments Act, 1924 (2 of 1924). "  

       It would thus be seen that the income of a local authority chargeable  under the head "Income from house property", "Capital gains" or "Income  from other sources" or from a trade or business carried on by it was earlier  excluded in computing the total income of the Authority of a previous year.   However, in view of the amendment, with effect from April 1, 2003, the  Explanation "local authority" was defined to include only the authorities  enumerated in the Explanation, which does not include an authority such as  the appellant.  At the same time Section 10 (20A) which related to income of  an authority constituted in India by or under any law enacted for the purpose  of dealing with and satisfying the need for housing accommodation or for  the purpose of planning, development or improvement of cities, towns and  villages, which before the amendment was not included in computing the  total income, was omitted.  Consequently, the benefit conferred by (20A) on  such an authority was taken away.

       The High Court by its impugned judgment and order held that in view  of the fact that Section 10(20A) was omitted and an Explanation was added  to Section 10(20) enumerating the "local authorities" contemplated by  Section 10(20), the appellant/Authority could not claim any benefit under  those provisions after April 1, 2003.  It further held that the exemption under  Article 289(1) was also not available to the appellant/Authority as it was a  distinct legal entity, and its income could not be said to be the income of the  State so as to be exempt from Union taxation.  The said decision of the High  Court is impugned in this appeal.

Shri K.K. Venugoal, learned Senior Advocate appearing on behalf of  the appellant submitted that having regard to Section 3(3) of the General  Clauses Act and the provisions of Section 7 of the Bihar Industrial Areas  Development Authority Act, 1974, it must be held that the appellant is a  local Authority.  According to him the appellant/Authority must be held to  be a local Authority within the meaning of Section 10(20) of the Income Tax  Act.  He further submitted that Article 289 (1) exempted from Union  taxation, the properties and income of a State.  Referring to Clause (2) of  Article 289, he submitted that it contemplates a trade or business being  carried on by or on behalf of the Government of a State.  That brings in the  concept of agency under the Contract Act.  Therefore, by necessary  implication, an agency of the State, not carrying on trade or business, is not  covered by Clause (2) of Article 289 and, therefore, the exemption must  extend to such an agency of the State Government.  He also relied on some  decisions of this Court.  He also submitted that the amendment referred to  above in Section 10 of the Income Tax Act is not made by reference to  Article 289 of the Constitution of India and that was perhaps not present to  the mind of the Legislature.  He commended a public policy approach in  such matters.   

Mr. T.S. Doabia, learned senior counsel appearing on behalf of the  Union of India, repelled the submissions urged on behalf of the appellants by  contending that unless the income generated by an agency or instrumentality  of the State went to the coffers of the State directly and remained the income  of the State, the agency, whether Corporation, Company or an Authority,  could not claim the exemption from Union taxation under Article 289 (1).   The true test to be applied in the context of Article 289 (1) of the  Constitution was whether the income accruing is the income of the State.   What is exempted under Article 289 (1) from Union taxation is the income  of the State and not the income of any authority under the State.  In the facts  of this case he submitted that the appellant/ Authority being a distinct legal

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entity, earning income and managing its own funds, cannot claim that its  income is the income of the State.  In particular, he laid emphasis on Section  17 of the Bihar Industrial Area Development Authority Act, 1974 which  reads as follows:-

"When the State Government is satisfied that the purpose for  which the Authority was established under this Act has been  substantially achieved so as to render the continuance of the  Authority unnecessary, the Government may by notification in  the official Gazette, declare that the Authority shall be  dissolved with effect from such date as may be specified in the  notification and the authority shall be deemed to be dissolved  accordingly from the said date and all the properties, funds and  dues realizable by the authority alongwith its liabilities shall  devolve upon the State Government."   

He submitted that the Government has powers to dissolve the appellant/  Authority with effect from such date as it may specify in the Notification.   With effect from that date the properties, funds and dues realizable by the  Authority along with its liabilities devolve upon the State Government. It,  therefore follows as a necessary corollary that till such time as the Authority  is not dissolved, its properties, funds and dues are those of the Authority  itself and not of the State.  If it were otherwise there was no need for Section  17 to prescribe that as from the date of dissolution of the Authority,  properties, funds and dues realizable by the Authority along with its  liabilities shall devolve upon the State Government.

A mere perusal of Article 289(1) discloses that a claim of exemption  under it must proceed on the foundation that the exemption is claimed in  respect of property and income of a State.  Once it is held that the property  and income is that of the State, a question may well arise whether it is still  taxable in view of the provision of Clause (2) of Article 289 which  dominantly is in the nature of a proviso. Clause (2) empowers the Union to  impose any tax to such extent 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 operation connected therewith.  Thus, even  the income of the State within the meaning of Clause (1) of Article 289 may  be taxed by law made by the Parliament, if such income is derived from a  trade or business of any kind carried on by or on behalf of the Government  of a State or any operations connected therewith.  Clause (1) of Article 289,  therefore empowers Parliament to frame law imposing a tax on income of a  State which is earned by means of trade or business of any kind carried by or  on behalf of the State Government.

It is true, as submitted by Sri Venugopal, that Clause (2) of Article  289 empowers the Parliament to make a law imposing a tax on income  earned only from trade or business of any kind carried by or on behalf of the  State.  It does not authorize the Parliament to impose a tax on the income of  a State if such income is not earned in the manner contemplated by Clause  (2) of Article 289.  This, to our mind, does not answer the question which  arises for our consideration in this appeal.  Clause (2) of Article 289 pre- supposes that the income sought to be taxed by the Union is the income of  the State, but the question to be answered at the threshold is whether in  terms of Clause (1) of Article 289, the income of the appellant/ Authority is  the income of the State.  Having regard to the provisions of the Bihar  Industrial Areas 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 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 Clause (2) of  Article 289, it still is an Authority constituted under an Act of the  Legislature of the State having a distinct legal personality, being a body  corporate, as distinct from the State.  Section 17 of the Act further clarifies  that only upon its dissolution its assets, funds and liabilities devolve upon

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the State Government.  Necessarily therefore, before its dissolution, its  assets, funds and liabilities are its own.  It is, therefore, futile to contend that  the income of the appellant/ Authority is the income of State Government,  even though the Authority is constituted under an Act enacted by the State  Legislature by issuance of a Notification by the Government thereunder.   

According to Basu’s Commentary on the Constitution of India (Sixth  Edition, page 50, volume ’L’) Articles 285 and 289 are analogous to each  other inasmuch as while Article 285 exempts Union property from State  taxation, Article 289 exempts the State property from taxation.  While clause  (1) of Article 289 exempts from Union taxation any income of a State,  derived from governmental or non-governmental activities, clause (2)  provides an exception, namely, that income derived by a State from trade or  business will be taxable, provided a law is made by Parliament in that  behalf.  Clause (3) of Article 289 is an exception of the exception prescribed  by clause (2) of Article 289 and it provides that income derived from  particular trade or business may be made immune from Union taxation if  Parliament declares such trade or business as incidental to the ordinary  functions of Government (emphases supplied).  The reason is obvious.   Under the constitution, the State has no power to tax any income other than  agricultural income.  Under the Constitution, power to tax "income" is  vested only in the Union.  Therefore, while any property of the Union is  immune from State taxation under Article 285(1), income derived by the  State from business, as distinguished from governmental purposes, shall not  have exemption from Union taxation unless the Parliament declares such  trade or business as incidental to the ordinary functions of Government of  the State [See Article 289(3)]  (emphasis supplied).

Applying the above test to the facts of the present case it is clear that  the benefit, conferred by Section 10(20A) of the Income Tax Act, 1961 on  the assessee herein, has been expressly taken away.  Moreover, the  explanation added to Section 10(20) enumerates the "local authorities"  which do not cover the assessee herein.  Therefore, we do not find any merit  in the submission advanced on behalf of the assessee.    

In 1964 7 SCR 17 : Andhra Pradesh State Road Transport  Corporation Vs. Income Tax Officer and Anr., the question arose as to  whether the income derived from trading activity by the Andhra Pradesh  Road Transport Corporation established under the Road Transport  Corporation Act, 1950 was not the income of the State of Andhra Pradesh  within the meaning of Article 289 (1) of the Constitution and hence  exempted from Union taxation.  This Court considered the scheme of Article  289 and observed as follows :-  

"The scheme of Art. 289 appears to be that ordinarily the  income derived by a State both from governmental and non- governmental or commercial activities shall be immune from  income-tax levied by the Union, provided, of course, the  income in question can be said to be the income of the State.   This general proposition flows from cl. (1).

       Clause (2) then provides an exception and authorities the  Union to impose a tax in respect of the income derived by the  Government of a State from trade or business carried on by it,  or on its behalf; that is to say, the income from trade or business  carried on by the Government of a State or on its behalf which  would not have been taxable under cl. (1), can be taxed,  provided a law is made by Parliament in that behalf.  If clause  (1) had stood by itself, it may not have been easy to include  within its purview income derived by a State from commercial  activities, but since cl. (2), in terms, empowers the Parliament  to make a law levying a tax on commercial activities carried on  by or on behalf of a State, the conclusion in inescapable that  these activities were deemed to have been included in cl. (1)  and that alone can be the justification for the words in which cl.

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(2) has been adopted by the Constitution.  It is plain that cl. (2)  proceeds on the basis that but for its provision, the trading  activity which is covered by it would have claimed exemption  from Union taxation under cl. (1).  That is the result of reading  cls. (1) and (2) together.  

       Clause (3) then empowers the Parliament to declare by  law that any trade or business would be taken out of the  purview of cl. (2) and restored to the area covered by cl. (1) by  declaring that the said trade or business is incidental to the  ordinary functions of government.  In other words, cl. (3) is an  exception to the exception prescribed by cl. (2).  Whatever trade  or business is declared to be incidental to the ordinary functions  of government, would cease to be governed by cl. (2) and  would then be exempt from Union taxation.  That, broadly  stated, appears to be the result of the scheme adopted by the  three clauses of Art. 289".

Reading these three Clauses together this Court held that the property  as well as the income in respect of which exemption is claimed under Clause  (1) must be the property and income of the State, and thus the crucial  question to be answered is: "Is the income derived by the State from its  transport activities the income of the State"?  It was observed that if a trade  or business is carried on by a State departmentally or through its agents  appointed exclusively for that purpose, there would be no difficulty in  holding that the income made from such trade or business is the income of  the State.  Difficulties arise when one is dealing with trade or business  carried on by a Corporation established by a State by issuing a Notification  under the relevant provisions of the Act.  In this context, the Court observed:

"\005\005\005\005.The corporation, though statutory, has a  personality of its own and this personality is distinct from that  of the State or other shareholders.  It cannot be said that a  shareholder owns the property of the corporation or carries on  the business with which the corporation is concerned.  The  doctrine that a corporation has a separate legal entity of its own  is so firmly rooted in our notions derived from common law  that it is hardly necessary to deal with it elaborately; and so,  prima facie, the income derived by the appellant from its  trading activity cannot be claimed by the State which is one of  the shareholders of the corporation".

This Court considered the scheme of the Act under which the State  Corporation was constituted and held :- "\005\005\005\005.The main point which we are examining at  this stage is: is the income derived by the appellant from its  trading activity, income of the Stage under Art. 289 (1)?  In our  opinion, the answer to this question must be in the negative.   Far from making any provision which would make the income  of the Corporation the income of the State, all the relevant  provisions emphatically bring out the separate personality of  the Corporation and proceed on the basis that the trading  activity is run by the Corporation and the profit and loss of the  Corporation.  There is no provision in the Act which has  attempted to lift the veil from the face of the Corporation and  thereby enable the shareholders to claim that despite the form  which the organization has taken, it is the shareholders who run  the trade and who can claim the income coming from it as their  own.  Section 28 which provides for the payment of interest  clearly brings out the duality between the Corporation on the  one hand and the State and Central Governments on the other.   Take for instance the case of supersession of the Corporation  authorized by S. 38.  Section 38 (2) ( c) emphatically brings out  the fact that the property really vests in the corporation, because  it provides that during the period of supersession, it shall vest in

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the State Government \005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005.. \005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005 \005\005 \005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005Therefore, we are  satisfied that the income derived by the appellant from its  trading activity cannot be said to be the income of the State  under Art. 289 (1), and if that is so, the facts that the trading  activity carried on by the appellant may be covered by Art. 289  (2), does not really assist the appellant’s case.  Even if a trading  activity falls under cl. (2) of Art. 289, it can sustain a claim for  exemption from Union taxation only if it is shown that the  income derived from the said trading activity is the income of  the State.  That is how ultimately, the crux of the problem is to  determine whether the income in question is the income of the  State and on this vital test, the appellant fails".        

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 Road Transport  Corporation case, so in the instant case as well, Section 17 of the Act  provides that upon dissolution of the appellant/Authority, the properties,  funds and dues realizable by the Authority along with its liabilities 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 lift the veil from the face of the Corporation.  Even though the Authority  was created under an Act of the Legislature, it was still an Authority which  had a distinct personality of its own, having perpetual succession and a  common seal, with powers to acquire, hold and dispose of property, and to  contract, and could sue and be sued in its own name.  Shri Venugopal, on the  other hand, tried to distinguish the judgment on the ground that the Andhra  Pradesh Road Transport Corporation is being run on business lines, and a  Corporation that runs on business lines is distinguishable and different from  a Corporation which is not run on those lines.  Even if such a distinction is  drawn, that will not have the effect of making the income of the Corporation  the income of the State Government having regard to the other features  noticed above.   

Shri Venugopal then relied upon two decisions of this Court reported  in 1970 (3) SCC 323 Shri Ramtanu Co-operative Housing Society Ltd. and  Anr. Vs. State of Maharashtra and Ors. and (1997) 7 SCC 339 New Delhi  Municipal Council Vs. State of Punjab and Ors..  In Shri Ramtanu Co- operative Housing Society; the question which arises for consideration in the  instant appeal did not arise at all.  The question was whether the State of  Maharashtra was competent to enact the Maharashtra Industrial  Development Act, 1961 and whether the impugned Legislation fell within  Entry 43 List I of the Seventh Schedule of the Constitution, so that only the  Parliament was empowered to enact such Legislation and not the State of  Maharashtra.  In that context, this Court considered the true character scope  and intent of the Act by reference to the purposes and the provisions of the  Act.  Having considered the various provisions of the Act including those  relating to the functions and powers of the Corporation, this Court concluded  that in pith and substance the Act was meant for the establishment, growth  and organization of industries, acquisition of land in that behalf and carrying  out the purposes of the Act by setting up the Corporation as one of the limbs  or agencies of the Government.  It held that even though the Corporation  received moneys from disposal of lands, buildings and other properties and  also received rents and profits, such receipts arose not out of any business or  trade but out of sole purpose of establishment, growth and development of  industries.  The Corporation was not a trading Corporation, as it was not  involved in buying or selling activity.  The true character of the Corporation  was to act as an architectural agent of the development and growth of

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industrial towns by establishing and developing industrial estates and  industrial areas.  It, therefore, negative the argument that the Corporation  being a trading one, the impugned Legislation fell within Entry 43 of List I  of the Seventh Schedule.

This decision does not help the appellant because even if it is held that  the appellant/ Authority is not a trading Authority, yet that does not answer  the question whether the income of the Authority is the income of the State  so as to attract Clause (1) of Article 289.

Similarly, the decision in New Delhi Municipal Council Vs. State of  Punjab and Ors. (supra) does not advance the case of the appellant.  It was  held that the property/ municipal taxes levied by the New Delhi Municipal  Council under the relevant Act constituted Union taxation within the  meaning of Clause (1) of Article 289 of the Constitution of India.  The levy  of property taxes under the aforesaid enactments on lands or buildings  belonging to the State Government was invalid and incompetent by virtue of  the mandate contained in Clause (1) of Article 289.  However, if any land or  building is used or occupied for the purpose of any trade or business,  meaning thereby a trade or business carried on with profit motive, by or on  behalf of the State Government, such land or building shall be subject to the  levy of the property taxes levied by the said enactments.  In other words,  State property exempted under Clause (1) means such property as is used for  the purpose of the Government and not for the purpose of trade or business.   That was a case where the question arose in relation to the levy of property  tax on lands and buildings owned by the State Governments which was  "property of the State Government".  In the instant case, we are concerned  with the income of the appellant/ Authority and the same principles apply.   The exemption can be claimed only if the income can be said to be the  income of the State Government.  In the facts of this case, it is not possible  to hold that the income of the appellant/ Authority is the income of the State  Government.   

Learned counsel for the Union of India also relied upon two decisions  reported in (1999) 6 SCC 74 Food Corporation of India Vs. Municipal  Committee, Jalalabad and Anr. and (1999) 6 SCC 78 Board of Trustees for  the Visakhapatnam Port Trust Vs. State of A.P. and Ors. and submitted that  this Court has consistently taken the view that a Corporation having the  attributes of a Company must be held to be distinct from the Central  Government, and not eligible for exemption from taxation under Article 285.   The High Court also in its impugned judgment and order has referred to  several decisions of this Court wherein this Court dealing with cases arising  under Article 285 of the Constitution of India, which exempts properties of  the Union from State taxation, took a similar view.  We may usefully refer to  the cases reported in: AIR 1999 SC 2573 Food Corporation of India Vs.  Municipal Committee, Jalalabad & Anr., (1995) 5 SCC 251 Municipal  Commissioner of Dum Dum Municipality and Ors. Vs.  Indian Tourism  Development Corporation and Ors., 1994 Supp (3) SCC 316 Central  Warehousing Corporation Vs. Municipal Corporation and AIR 1982 SC  697 Western Coalfields Ltd. Vs. Special Area Development Authority, Korba  and Anr. and Bharat Aluminium Company Ltd. Vs. Special Area  Development Authority, Korba and Ors.  

Having considered all aspects of the matter we hold that the High  Court is right in concluding that the appellant/ Authority could not claim  exemption from Union taxation under Article 289 (1) of the Constitution of  India.  The impugned notice issued by the Income Tax Authorities was,  therefore, valid and legal and could not be successfully challenged in the  writ petition.  Accordingly, this appeal is dismissed but without any order as  to costs.