Income of the State Government authorities incorporated under an Act is liable to Union taxation

Adityapur Industrial Area Development Authority vs. Union of India & Others [283 ITR 97 (SC)]

Article 289(1) of the Constitution of India provides that the property and income of a State shall be exempt from Union taxation. Article 289(2) provides that in respect of 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 accrues or arising in connection therewith will be liable to taxation by the Union.

Section 10(20) of the Income-tax Act, 1961 reads as under :

“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 :—

“(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”

The appellant has been constituted under the Bihar Industrial Area Development Authority Act, 1974 to provide for planned development of industrial area, for promotion of industries and matters appurtenant thereto. The Authority has its own establishment for which it is authorized to frame regulations with prior approval of the State Government. Section 7 of the Act obliges the authority to maintain its own fund.

A notice dated 14th February, 2003 was issued by Dy. CIT, TDS Circle, Jamshedpur 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 by omitting section 10(20A) and the Explanation was added to section 10(20) of the Act. The provisions of Income-tax Act, 1961 as they stood after the amendment obliged the bank to deduct income-tax at sources from the interest accrued on fixed deposit receipt of the appellant. The Manager of the Bank was required to comply with the provisions and deduct tax at sources and report compliance.

The appellant challenged the aforesaid notice by a writ petition filed before the Jharkhand High Court. Dismissing the said writ petition, the High Court held that in view of the fact that section 10(20A) was omitted and the Explanation was added to section 10(20) enumerating the “local authority” contemplated by section 10(20), the appellant could not claim any benefit under those provisions after 1st April, 2003. It was further held that exemption under Article 289(1) was also not available to the appellant 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 and therefore, the aforesaid notice was valid and legal.

Aggrieved from the aforesaid decision of High Court the appellant filed a special leave petition on the following grounds :

1. the appellant must be held to be a local authority within the meaning of section 10(20) of the Act,
    

2. Article 289(1) of the Constitution exempted from Union taxation, the property and the income of a State,
    

3. clause (2) of Article 289 contemplates a trade or business being carried on by or on behalf of the State Government. 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,
    

4. the amendment in section 10 of the Income-tax Act was not made by reference to Article 289 of the Constitution of India.

On behalf of the UOI it was contented that unless the income generated by an agency or instrumentality of the State went to the coffers of the State directly and remained in 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).

Affirming the decision of the Jharkhand High Court, the Supreme Court held that as the benefit of exemption conferred by section 10(20A) of the Income-tax Act, 1961, had been expressly taken away by the omission of section 10(20A) by the Finance Act, 2002, and the amendment of section 10(20) enumerating the local authorities, which did not cover the authority constituted under the Bihar Industrial Area Development Authority Act, 1974, the notices issued by the Income-tax Department to the Authority’s bank that the bank was liable to deduct tax at source on interest accrued on fixed deposits of the Authority were valid.