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PETITIONER: THE COMMISSIONER OF INCOME TAX, LUCKNOW

       Vs.

RESPONDENT: U.P. FOREST CORPORATION

DATE OF JUDGMENT:       02/03/1998

BENCH: B.N. KIRPAL, A.P. MSIRA

ACT:

HEADNOTE:

JUDGMENT:                  THE 2ND DAY OF MARCH, 1998 Present:                Hon’ble Mr. Justice B.N. Kirpal                Hon’ble Mr. Justice A.P. Misra Ranbir Chandra,  N.K. Aggarwal, B. Krishna Prasad, Advs. for the appellant S.P. Gupta,  Sr.Adv., Sunil Gupta, H.K. Puri, Advs. with him for the Respondent                       J U D G M E N T      The following Judgment of the Court was delivered: KIRPAL. J.      The question  involved in  these appeals is whether the respondent is  a local  authority and, therefore, its income is exempt  from tax  under Section  10(20) of the Income Tax Act, 1961 (hereinafter referred to as ‘The Act’)      The U.P.  Forest Corporation,  the assessee herein, was constituted by  Notification issued  under Section  3 of the U.P. Forest  Corporation Act,  1974.  This  Corporation  was established   for    better    preservation,    supervision, development of  forest and  better  exploitation  of  forest produce within  the state of Uttar Pradesh. It took over the work which  was formerly  done by the forest contractors and its income  was from  the exploitation of forest produce and sales thereof.      These appeals  relate to  the assessment  year 1977-78, 1980-81  and   1984-85.  During  the  course  of  assessment proceedings, the  respondent had  claimed its  status to  be that of  ‘local authority’  and, therefore,  its income  was liable to  be exempted from levy of tax by virtue of Section 10(20) of  the Act. The assessing officer rejected the claim and, in  respect to the assessment year 1977-78 and 1980-81, it taxed  it in  the status  of  "artificial  jurisdictional person" and in respect to the year 1984-85, as a ‘company’.      The respondent  then filed  appeals in  respect to  the year 1977-78,  1980-81 and  the Commissioner  of Income  Tax (Appeal), following  in earlier  decision of  the  Allahabad High Court in Writ Petition No. 1568/1977 for the assessment year 1976-77, came to the conclusion that the respondent was a local  authority and  as such its income was exempted from tax. This order was challenged in appeal before the Tribunal

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which set  aside the order of the Commissioner of Income Tax (Appeals) on the ground that the respondent was not  a local authority in  view of the decision of this Court in the case of Union of India Vs. R.C. Jain. 1981 (2) SCR 854.      Instead of  following the  procedure prescribed  by the Act by  way of  a reference  under Section 256 of the Income Tax Act,  the respondent  chose to file three writ petitions in the  Allahabad High  Court challenging  the order  of the Tribunal in  respect to  the assessment  years  1977-78  and 1980-81 and  order of the Assessing Authority for assessment year 1984-85 which had been made by it. These writ petitions were entertained by the High Court which allowed the same by coming to  the conclusion  that the  respondent was  a local authority and,  therefore, its  income was  exempt from tax. Before  the  High  Court,  it  was  also  contended  by  the respondent  that   it  was  a  charitable  Institution  and, therefore, its income was in any case, entitled to exemption under Section  11(1) of  the Act. This contention also found favour with the High Court.      In  these   appeals,  by   special  leave,  apart  from contending that  the High  Court ought not to have exercised its jurisdiction  under Article  226 of the Constitution, as the respondent should have availed of the alternative remedy open to it under the Act, it has been submitted on behalf of the appellant  that the decision of the High Court on merits is clearly  contrary to  the law laid down by this Court and the  respondent   cannot  be   regarded  an  being  a  local authority. In  support of  this contention,  strong reliance was placed by the counsel for the appellant on the aforesaid decisions in R.C. Jain’s (supra) as well as the decisions in Valjibhai Muljibhai  Soneji &  Anr. Vs. The State of ‘Bombay (now Gujarat)  and others,  1964 (3) S.C.R. 686 and Calcutta State Transport  Corporation Vs. Commissioner of Income Tax, 219 L.T.R. 515.      On behalf  of the  respondent, Shri S.P. Gupta. learned counsel submitted  that the  respondent Corporation had been set up  to discharge  Governmental functions  and it  was  a local authority  within the  meaning of  that expression  in Section 3(31)  of the  General  Clauses  Act.  It  was  also submitted  that   the  Section   3(3)  of  the  U.P.  Forest Corporation Act  provides that the Corporation shall for all purposes be  a local authority and further more according to Section 17,  the fund  of the  Corporation is  regarded as a local fund.  It was  contended that the respondent satisfied the criterion  of local  authority as laid down by this Curt in R.C.  Jain’s case (supra) and, therefore, the decision of the High  Court  calls  no  interference.  On  the  question whether the  Corporation exists  and functions under a legal obligation for  charitable purposes  as defined  by  Section 2(15) of  the Act  and, therefore,  it’s income exempt under Section 11(1)(a)  of the  Act reliance  was  placed  on  the decision of this Court in Commissioner of Income Tax, Andhra Pradesh, Hyderabad  Vs. Andhra  Pradesh State Road Transport Corporation, Hyderabad, 1986(1) SCR 570.      We will  first consider  the question as to whether the respondent is entitled to exemption under Section 10(20) the Act. The said sub-clause reads as under:      "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

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    water or electricity within its own      jurisdictional  area  or  from  the      supply  of   water  or  electricity      within   or    outside   its    own      jurisdictional area".      The expression  ‘local authority’ is not defined in the Income Tax  Act Section  3(31) of  the General  Clauses Act, however, defines ‘local authority’ as under:      " ‘Local  authority’ shall  mean  a      municipal      committee   district      board, body  of port  Commissioners      or other authority legally entitled      to, or  entrusted by the Government      with, the  control or management of      a municipal or local fund."      This  expression  came  up  for  consideration  in  the aforesaid cases  of Valjibhai  Muljibhai  Soneji’s  (supra), R.C.   Jain’s   (supra)   and   Calcutta   State   Transport Corporation’s (supra).  In Valjibhai Muljibhai Soneji’s case (supra),  a   contention  had  been  urged  that  the  State Transport Authority was a local authority, in the context of proceedings arising  out of  challenge to  acquisition under the Land  Acquisition Act.  It had  been contended  that the State Transport  Corporation was not a local authority but a Company and  that the  provisions of  Part VII  of the  Land Acquisition  Act   not  having   been  complied   with,  the acquisition was  bad. Dealing  with this  contention, it was observed by this Court at page 696:      "The  definitions   given  in   the      General Clauses  Act, 1897,  govern      all Central  Acts  and  Regulations      made after  the commencement of the      Act".      While perusing  the expression  ‘local  authority’,  as defined under  Section 3(31)  of the General Clauses Act, it was observed  at page  697 that the funds of the Corporation could not  be regarded  as  local  fund.  Dealing  with  the contentiors that the Bombay State Transport Act, 1950 itself provided that  the Corporation  shall for  all  purposes  be deemed to  be local  authority, it  was  observed  that  "No doubt, that  is so. But the definition contained in this Act cannot override  the definition  contained  in  the  General Clauses Act  of 1897  which alone  must apply for construing the expression  occurring in  a Central  Act like  the  Land Acquisition Act  unless there  is something repugnant in the subject or context."      Applying the  above principle in the present case, even though Section  3(3) of  the  U.P.  Forest  Corporation  Act regards the Corporation as being the local authority but for the purposes  of the  Act, the  meaning of expression ‘local authority’ as contained in General Clauses Act, which is the Central Act,  has to be seen. Merely because the U.P. Forest Corporation Act regards the respondent as a local authority, would not, in law, make the respondent a local authority for the purposes  of Section  10(20) of  the  Act.  Whether  the respondent is  a local  authority or  not has to be examined without regard  to the  fact that  Section 3(3)  of the U.P. Forest Corporation  Act regards it as a local authority. The test for   determining whether a body is local authority had been laid down by this Court in R.C. Jain’s case (supra). In the context  of applicability  of the  Bonus Act,  1965, the question which arose there was whether the Delhi Development Authority was a local authority. In constructing the meaning of the  expression ‘local  authority’ as  defined in Section 3(3) of  the General  Clauses Act,  it was  observed by this

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Court at page 857-858 as follows:      "Let us, therefore, concentrate and      confine our  attention and  enquiry      to   the   definition   of   ‘local      authority’ in  Section 3(31) of the      General Clause  Act. A  proper  and      careful scrutiny of the language of      Section  3(31)   suggests  that  an      authority in  order  to  be  social      Authority, must  be of  like nature      and  character   as   a   Municipal      Committee, District  Board or  Body      of Port  Commissioners, possessing,      therefore, many, if not all, of the      distinctive     attributes      and      characteristics  of   a   Municipal      Committee, District  Board, or Body      of    Port    Commissioner,    but,      possessing one  essential  feature,      namely, that it is legally entitled      to or  entrusted by  the Government      with, the control and management of      a municipal  or  local  fund.  What      then are the distinctive attributes      and characteristics, all or many of      which   a    Municipal   Committee,      District  Board  or  Body  of  Port      Commissioners shares with any other      local    authority?    First    the      authorities  must   have   separate      legal   existence    as   Corporate      bodies.  They   must  not  be  mere      Governmental agencies  but must  be      legally independent entitles. 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      appreciate measure  of the 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  these      connected with  providing amenities      to the inhabitants of the locality,      like health and education services,      water and  sewerage,  town  planing      and  development,  roads,  markets,      transportation,   social    welfare      services etc.  etc. Broadly  we may      say that 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   funds   for   the   of   their

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    activities and  the fulfillment  of      their projects  by  levying  taxes,      rates, charges,  or fees.  This may      be in  addition to  moneys provided      by  Government   or   obtained   by      borrowing  or  otherwise.  What  is      essential  is   that   control   or      management of the fund must vest in      the authority. " (emphasis added)      This Court  then examined  the provisions  of the Delhi Development Act  and came  to the  conclusion that  the said Authority  had  the  above  mentioned  attributes  of  local authority as  defined by Section 3(31) of the General Clause Act.      The decision  in R.C.  Jain’s  Case  (supra)  was  then followed in  Calcutta  State  Transport  Corporation’s  case (supra) where the assesses had contended that it was a local authority.  While   holding  that   the  definition  of  the Corporation was  not similar  to the definition of the Delhi Development Act, it was observed as follows:      We  do  not  think  that  the  said      decision is  of  any  help  to  the      assesses herein.  The assesses is a      road     transport      corporation      constituted    to    render    road      transport services  in  the  State.      Sections  18   &  19  of  the  Road      Transport  Corporations  Act  which      set out the general duty and powers      of   the    Corporation   establish      clearly  that  the  Corporation  is      meant  mainly   and  only  for  the      purpose of  providing an efficient,      adequate, economical  and  properly      coordinated    system    of    road      transport services  in the State or      part of  it, as the case may be. It      has   no    element   of    popular      representation in its constitution.      Its powers  and functions  bear  no      relation   to    the   powers   and      functions of a municipal committee,      district  board  or  body  of  port      commissioners. It  is more  in  the      nature of  a trading  organisation.      Merely because it has a fund or for      that matter  merely because  it  is      constituted  to  provide  a  public      service and  to employ  persons  in      that connection,  it cannot be said      that its  functions are  similar to      those of municipal council district      board    or     body    of     port      commissioners.    The     assessee-      Corporation  stands  no  comparison      with    the    Delhi    Development      Authority which  has,  inter  alia,      power to  prepare a Master Plan for      Delhi    specifying    the    zones      (zonalisation), specifying  the use      to which  each zone  can be put to,      power  to   order   demolition   of      buildings,  where  development  has      been  commenced   or  completed  in      contravention of  the  Master  Plan

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    zonal  Plan   or  the   permission,      declaration  of  development  areas      and regulation  of  development  in      those   areas    and    power    to      gant/refuse     permission      for      development of  land. Contravention      of    the     Delhi     Development      Authority’s   orders      is   also      punishable  with  imprisonment  and      fine on  conviction as  a  criminal      Court. These  are  the  indicia  of      governmental  power-the   power  to      affect  persons  and  their  rights      even where  they do  not choose  to      deal  with   it,   the   power   of      compulsion.   A    road   transport      organisation  like   the   assessee      herein has  no such  power.  Unless      one chooses  to  deal  with  it  or      avail of  its services-  it  cannot      affect him  or his  rights; in  its      sense, it  is like  any other  non-      statutory   corporation.   In   its      context, it  is relevant  to notice      that thought Section 45 of the Road      Transport Corporation  Act  confers      the power  to make regulations upon      the  corporation,   that  power  is      confined to  "the administration of      the affairs  of  the  corporation".      Sub-section  (2)   of  Section  45,      which  elucidates  the  said  power      also shows  that the  said power is      confined to  internal management of      the  corporation  and  the  service      conditions of  its employees only".      (emphasis added)      Applying the  ratio of  the aforesaid  decisions to the facts of  the present  case, we find that it is not possible to hold that the Corporation is a local authority within the meaning of that expression contained in Section 3(31) of the General Clauses  Act, 1857.  In R.C. Jain’s case (supra), it has been  held that  the ‘local  authority’  must  have  the nature and  character of  a  Municipal  Committee,  District Board, Body  of Port  Commissioners. We are unable to accept the contention  of Shri Gupta that in interpreting the scope and extent  of  the  expression  ‘other  authority’  in  the definition of  ‘local authority’  in Section  3(31)  of  the General Clauses  Act the principle of ejusdem generis is not applicable because  there is  no distinct  genus or category running  through   the  bodies   uamed  earlier.  The  local authorities which  are  specifically  mentioned  in  Section 3(31) of  the General  Clause Act clearly can be regarded as local bodies which are interred to carry on self-government. It is  for this reason that this definition states that such a authority  must have  control or management of a Municipal or local  fund. Municipal Committee, District Board. Body of Port Commissioner  are entities  which carry  on  government affairs in  local areas  and they  would give  color to  the words ‘other authorities’ occurring in Section 3(31). To put it differently.  ‘other authority’  referred to  in  Section 3(31) must  be  similar  or  akin  to  municipal  committee, district board  or body a Port Commissioners. In R.C. Jain’s case (supra), at least five attributes of characteristics of an authority  falling under  Section 3(31)  of  the  General

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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  respondent   Corporation  are  not  wholly  or  partly, directly or  indirectly, elected  by the  inhabitants of the area. According  to Section 4 of the U.P. Forest Corporation Act, the  Corporation is  consisted of  a Chairman and eight members. The  chairman as  well as the members are nominated by the State Government. Five members, so appointed, must be officers serving  under the  State Government and three non- officials members  appointed by the State Government must be belonging to  the category, who in the Government’s opinion, possess experience  in matter  relating to  preservation and development of  forests. It is too tenuous to contend as was sought to  be done  by Shri  Gupta, that  because the  State Government is  a  democratically  elected  body,  therefore, persons nominated  by the  Government to  be members  of the Corporation must  be regarded as being indirectly elected by the inhabitants.  This contention  is clearly  unacceptable. The second  essential attribute,  which is  lacking  in  the present case,  is  that  the  respondent  do  not  have  the functions and  duties which  are usually  entrusted  to  the Municipal bodies  such as  providing civil  amenities to the inhabitants of  the locality  like health,  education,  town planning, markets,  transportation etc. Finally and which is most important,  the respondent  does not  have the power to raise funds  by levying  taxes, rates,  charge cor fees. The expression ‘local  fund’ occurring  in Section  3(31) of the General Clauses  Act would  mean the  fund of  a local self- government. In  deciding whether Delhi Development Authority was a  local authority,  the Court  had  to  examine  as  to whether it’s  said consisted  of any  funds flowed  directly from any  taxing power  vested in the D.D.A. It was observed in R.C. Jain’s case (supra) at page 863 as follows:      "In the first place when it is said      that one  of the  attributes  of  a      local authority  is  the  power  to      raise  funds   by  the   method  of      taxation,   taxation   is   to   be      understood  not  in  any  fine  and      narrow sense  as  to  include  only      those  compulsory   exaction’s   of      money imposed  for  public  purpose      and requiring  no consideration  to      sustain it,  but in a broad generic      sense  as   to  also  include  fees      levied  essentially   for  services      rendered. It is now well recognised      that there is no generic difference      between a  tax and  a fee; both are      compulsory  exaction  of  money  by      public authority.  In deciding  the      question whether  an authority is a      local  authority,  our  concern  is      only to find out whether the public      authority is  authorised by statute      to make  a compulsory  exaction  of      money  and  not  with  the  further      question  whether   the  money   so      exacted  is   to  be  utilised  for      specific or  general  purposes.  In      the   second    place   the   Delhi      Development      Authority       is      constituted for the sole purpose of      the planned  development  of  Delhi

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    and no other purpose and there is a      merger, as it were, of specific and      general  purposes.   The  statutory      situation   is    such   that   the      distinction between tax and fee has      withered away.  In the  third place      we see  no reason  to hold that the      charge contemplated  by See 37 is a      fee  and   not  a  tax".  (emphasis      added)      In the case of 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 organisation  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"  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 ‘local  authority’ and entitled to exemption under Section 10(20) of the Act.      Coming to  the  question  whether  the  income  of  the respondent is  held for  charitable purposes and, therefore, exempt from  tax by  virtue of  Section 11(1) of the Act, we find no  such contention was raised by the respondent before the Income-tax  Authorities. In  order to  take advantage of the provisions  of Section  11 of  the Act,  a trust  or the institution has to get itself registered. Whether the income of the  Institution  can  be  regarded  as  being  held  for charitable purposes  and whether the institution is entitled to registration  under Section  12(A) of  the Income Tax Act requires investigation  of facts.  In the  absence  of  this contention  having   been  raised   before  the  Income  Tax Authorities, the  High Court,  in our  opinion, ought not to have itself embarked upon examining this issue for the first time and  then coming  to  a  conclusion  favorable  to  the respondent. We  do realise that the respondent did not raise this contention before the Income Tax Authorities because it had contended  that is was liable to exemption being a local authority. Perhaps  a contention in the alternative ought to have been  raised, but  this was not done. If the High Court had wanted  this issue  to be  decided, proper  course would have been  to have  reminded the  case to the Tribunal or to the Assessing Authority for a decision. This was perhaps not done  because  the  High  Court  had  already  come  to  the conclusion, in  our opinion wrongly, that the respondent was a local authority. Inasmuch as the respondent cannot, in our opinion, be regarded as being a local authority, interest of justice would  demand that  the question  as to  whether its income is  table to be exempied from tax under Section 11(1) of the  Act should  be investigated and examined by a proper forum under the Act.      These proceedings arise out of the writ petitions which have been  filed challenging the correctness of the decision of the  Tribunal in  respect of the assessment year 1977-78, 1980-81  and   that  of  the  Assessing  Authority  for  the assessment year  1984-85. In  our opinion, the proper course to adopt,  while allowing these appeals, would be to require

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the assessing  authority  to  examine  the  question  as  to whether the  respondent is  entitled to  the  benefit  under Section 11(1)  of the  Act. Before concluding, we would like to observe that the High Court ought not to have entertained the writ  petitions when  adequate  alternative  remedy  was available  to  the  respondent.  Under  peculiar  facts  and circumstances of  the  present  case  and  inasmuch  as  the litigation between  the parties  has been  going  on  for  a number of  years, we  do not think it will be appropriate to dismiss there  appeals on  this ground  all this late stage. We, however,  emphasis that  petitioners should not normally short circuit  the procedure  provided by the taxing statute and seek the redress by filling a petition under Article 226 of the Constitution of India.      For the  aforesaid reasons,  these appeals  are allowed and the  decision of  the High  Court is  set  aside.  While holding that  the respondent  is not a local authority whose income is exempted from tax under Section 10(20) of the Act, we, however,  direct the assessing authority to consider the claim of  the respondent that its income is not liable to be taxed in  view of  the provisions of Section 11(1)(A) of the Act. This  question  should  be  decided  by  the  assessing authority within  six months from today and the liability of the respondent to pay tax would be subject to the outcome of that decision. There shall be no order as to costs.