By TIOL News Service

ALLAHABAD, MAY 19, 2016: THE issue is - Whether interest credited/paid by a bank on the fixed deposit receipts purchased by the 'New Okhla Industrial Development Authority' (NOIDA), is exempted from deduction of tax at source u/s 194-A(1), being a Corporation established under Industrial Act. YES is the answer.

Facts of the case:

The assessee is a bank. During concerned year, the AO noticed that for the A.Ys 2006-07 and 2007-08, M/s. Canara Bank failed to deduct tax at source u/s 194-A(1) on the interest credited/paid on the fixed deposit receipts purchased by the New Okhla Industrial Development Authority (NOIDA). Accordingly, a notice was issued to the assessee bank. In response, the assessee contended that NOIDA was a Corporation established by a State Act and, therefore, exempted from deduction of TDS in view of the notification dated 22 Oct 1970 issued u/s 194-A(3)(iii)(f). The said contention was however rejected and the assessee was treated as in default and accordingly, an order u/s 201(1)/201(1-A) was passed. Further, a demand notice u/s 156 was issued and penalty proceedings u/s 271-C were directed to be initiated separately. On appeal, the CIT(A), after examination of the provisions of Uttar Pradesh Industrial Area Development Act, held that NOIDA was a corporation established by the said Act and, therefore, entitled to the benefit of the notification dated 22 Oct 1970. The appeal was, accordingly, allowed.

After hearing the parties, the High Court had held that,

++ the issue that arises for consideration is as to whether NOIDA is a corporation entitled for exemption from deduction of tax at source under the provisions of the notification dated 22 October 1970 issued u/s 194-A(3)(iii)(f) of the Act. This notification provides that the provisions of section 194-A(1) of the Act shall not apply to any corporation established by a Central, State or Provincial Act. According to the Revenue, NOIDA is not a corporation that has been established by Industrial Act and, therefore, would not be entitled for exemption while according to the Bank, it is a corporation established by the Industrial Act and, therefore, entitled for exemption. A perusal of section 194(1)(3)(iii) clearly indicates that the provisions of sub-section (1) of section 194-A of the Act shall not apply to such income credited or paid to banking company to which the Banking Regulation Act, 1949 applies, or any cooperative society engaged in the business of banking, financial corporation established by or under a Central or State Act, Life Insurance Corporation of India, Unit Trust of India or those notified u/s 194-A(1)(3)(iii)(f). The notification dated 22 October 1970 exempts any Corporation established by a Central, State or Provincial Act. The Bank asserts that NOIDA is a Corporation established by a State Act and is, therefore, exempted from deduction of income tax on the basis of the notification dated 22 October 1970 issued u/s 194-A(3)(iii)(f). The issue that arose before the Supreme Court in Dalco Engineering Pvt. Ltd. case, was whether a Company incorporated under the Companies Act other than a government Company, was an "establishment" as defined in section 2(k) of the Disabilities Act and as to whether the assessee was entitled to claim any relief with reference to section 47 of the Disabilities Act. It is in this context that the Supreme Court observed that the words "a corporation established by or under a Central, Provincial or State Act" is a standard term used in several enactments to denote a statutory corporation established or brought into existence by or under a statute. The Supreme Court observed that the term is always used to denote certain categories of authorities which are "State" as contrasted from non-statutory companies which do not fall under the ambit of "State";

++ with regard to the decision of the Supreme Court in Dalco Engineering Pvt. Ltd., which deals with the State Financial Corporation Act, 1951, assessee's counsel submitted that the Central Act in section 3 provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State under such name as may be specified in the notification, while in the case of NOIDA, the State Act itself provides for constitution of an Authority by issuance of a notification. What is important to notice is that in Dalco Engineering Pvt. Ltd. case, the Supreme Court while dealing with the State Financial Corporation, specifically observed that when the words "by or under an Act" are preceded by the words "established", it is clear that the reference is to a corporation that it is brought into existence by an Act or under an Act. It also needs to be noted is, as is also clear from the preamble to the Industrial Act, that the Act provides for the constitution of an Authority for the development of certain areas in the State. Thus, the Act itself constitutes the Authority. Section 3(1) of the Act provides that the name of the area shall be added before the Industrial Development Authority. In other words, whether it be NOIDA or any other Authority that is to be constituted u/s 3(1) of the Act, the name of the Authority has been indicated. So far as the NOIDA is concerned, the name of the Authority is the New Okhla Industrial Development Authority. Thus, except for naming a particular Industrial Area Development Authority, since more than one Authority could be constituted, the Authority has been constituted by the Act and merely because the area of the Authority has not been defined under the Act and has been left to the discretion of the State Government, cannot, in our opinion, make any difference for the purposes of determining whether it has been established by an Act. The Authority is a body corporate and consists of officers of the State Government. It can appropriately be gathered from the provisions of Industrial Act that NOIDA has been established by the Industrial Act and otherwise also even by necessary implications it is more than apparent that NOIDA has been established by the State Industrial Act. There is, therefore, no doubt that NOIDA owes its existence to a Statute which is the fountainhead of its powers. Even otherwise, the fine distinction sought to be made by the Revenue's counsel, losses significance when the provisions of section 194-A(3)(iii)(c) and (d) are examined;

++ it is seen that in case of S.S. Dhanoa, the Supreme Court pointed out that a Corporation established "by" or "under" an Act of Legislature can only mean a body corporate which owes its existence and not merely its corporate status to the Act and in this connection the Supreme Court referred to: a municipality; a zila parishad; or a gram panchayat which owe their existence and status to an Act of Legislature. NOIDA has been granted a status of a Municipality under Article 243-Q of the Constitution of India which deals with the constitution of a Municipality. The said Article provides that there shall be constituted in every State, - (a) a Nagar Panchayat for a transitional area, that is to say, an area in transition from a rural area to an urban area; (b) a Municipal Council for a smaller urban area; and (c) a Municipal Corporation for a larger urban area. The proviso to Article 243-Q, however, stipulates that a Municipality under this clause may not be constituted in such urban area or part thereof as the Governor may, having regard to the size of the area and the municipal services being provided or proposed to be provided by an industrial establishment in that area and such other factors as he may deem fit, specify to be an industrial township. The State Government has issued a notification in exercise of the powers conferred under the proviso to clause (1) of Article 243-Q of the Constitution, which provides that having regard to the size of NOIDA which has been declared to be an Industrial Development Area by a notification dated 17 April 1976 and the municipal services being provided by NOIDA, the Governor is pleased to specify that NOIDA would be an "Industrial Township" with effect from the date of publication of the notification. This clearly means that instead of Municipal Corporation providing services, NOIDA would provide the said services and if that be so, then as observed by the Supreme Court in S.S. Dhanoa, NOIDA will owe its existence to an Act of the State. We have, therefore, no manner of doubt from a reading of the provisions of the Industrial Area Development Act that the NOIDA has been constituted by the State Act and, therefore, entitled to exemption of payment of tax at source u/s 194-A(1).

(See 2016-TIOL-955-HC-ALL-IT)