By TIOL News Service

NEW DELHI, JULY 02, 2018: THE ISSUE is - Whether an authority formed by the State Legislature for development of certain areas is entitiled to seek benefit u/s 10(20) of the I-T Act merely by urguing its status as 'local authority'. And the verdict is NO.

Facts of the case:

The assessee authority, constituted u/s 3 of the U.P. Industrial Area Development Act, 1976 by notification dated 17.04.1976. The Act, 1976 was enacted by State Legislature to provide for the constitution of an Authority for the development of certain areas in the State into industrial and urban township. Under the Act, 1976 various functions were entrusted to the Authorities. Notices u/s 142 of the I-T Act were issued to the assessee. The assessee filed writ petition by challenging the said notices and contended that it was a local authority, hence, was exempted from payment of income tax under Ss 10(20) and 10(20A) of I-T Act. The said petition was allowed by the High Court by holding that the assessee was a local body. It was also held that the assessee was covered by the exemption u/s 10(20A) of I-T Act. However, the Court overlooked the eligibility to claim exemption u/s 10(20).

Apex Court held that,

++ the Statement of Objects and Reasons of the Constitution 74th Amendment Act, 1992, briefly outlined the object and purpose for which Constitution Amendment was brought in. The constitutional provisions as contained in Part IXA delineate that the Constitution itself provided for constitution of Municipalities, duration of Municipalities, powers of Authorities and responsibilities of the Municipalities. The Municipalities are created as vibrant democratic units of self-government. The duration of Municipality was provided for five years contemplating regular election for electing representatives to represent the Municipality. The special features of the Municipality as was contemplated by the constitutional provisions contained in Part IXA cannot be said to be present in the assessee as delineated by statutory scheme of Act, 1976. It is true that various municipal functions are also being performed by the Authority as per Act, 1976 but the mere facts that certain municipal functions were also performed by the authority it cannot acquire the essential features of the Municipality which are contemplated by Part IXA of the Constitution;

++ sub-clause (1) of Article 243Q provides that there shall be constituted in every State- a Nagar Panchayat, a Municipal Council and a Municipal Corporation, in accordance with the provisions of this Part. Proviso does not contemplate constitution of an industrial establishment as a Municipality rather clarifies an exception where Municipality under clause (1) of Article 243Q may not be constituted in an urban area. The proviso is an exception to the constitution of Municipality as contemplated by sub-clause (1) of Article 243Q. No other interpretation of the proviso conforms to the constitution scheme;

++ proviso is an exception to the constitutional provisions which provide that there shall be constituted in every State a Nagar Panchayat, a Municipal Council and a Municipal Corporation. Exception is covered by proviso that where an industrial township is providing municipal services the Governor having regard to the size of the area and the municipal services either being provided or proposed to be provided by an industrial establishment specify it to be an industrial township. The words 'industrial township' have been used in contradiction of a Nagar Panchayat, a Municipal
Council and a Municipal Corporation. The object of issuance of notification is to relieve the mandatory requirement of constitution of a Municipality in a State in the circumstances as mentioned in proviso but exemption from constituting Municipality does not lead to mean that the industrial establishment which is providing municipal services to an industrial township is same as Municipality as defined in Article 243P(e). Notification under proviso to Article 243Q(1) is not akin to constitution of Municipality. We, thus, are clear in our mind that industrial township as specified under notification dated 24.12.2001 is not akin to Municipality as contemplated under Article 243Q;

++ the authority constituted under Act, 1976 with regard to which notification under proviso to Article 243Q(1) dated 24.12.2001 has also been issued is not akin to the Municipality constituted under Article 243Q(1). Prior to Finance Act, 2002, there being no definition of 'local authority' under the Act, the provisions of Sec. 3(31) of the General Clauses Act, 1897 were pressed into service while interpreting the extent and meaning of local authority. The Explanation having now contained the exhaustive definition of local authority, the definition of local authority as contained in Sec. 3(31) of General Clauses Act, 1892 is no more applicable. Sec. 3 of the General Clauses Act begins with the words "In this Act, and in all Central Acts and Regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context". The definition given of the local authority u/s 3(31) does not now govern the field in view of the express omission of the expression 'all other authority';

++ the explanatory note clearly indicates that by Finance Act, 2002 the exemption u/s 10(20) has been restricted to the Panchayats and Municipalities as referred to in Articles 243P(d) and 243P(e). Further by deletion of Clause (20A), the income of the Housing Boards of the States and of Development Authorities became taxable. After omission of Sec. 10(20A) only provision under which a Body or Authority can claim exemption is Sec. 10(20). Local authority having been exhaustively defined in the Explanation to Sec. 10(20), an entity has to fall u/s 10(20) to claim exemption. It is also useful to notice that this Court laid down in the case of State of Gujarat and others vs. ESSAR Oil Limited and another that a person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision;

++ for interpreting an explanation this Court in the case of S. Sundaram Pillai has stated that "... The proper function of an Explanation is to make plain or elucidate what is enacted in the substantive provision and not to add or subtract from it. Thus, an Explanation does not either restrict or extend the enacting part; it does not enlarge or narrow down the scope of the original section that it is supposed to explain.... The Explanation must be interpreted according to its own tenor; that it is meant to explain and not vice versa ..." ;

++ a Division Bench of the Allahabad High Court in Krishi Utpadan Mandi Samiti's case has held that "... It is also not possible to refer to the definitions in other Acts, as the I-T Act now specifically defines 'local authority'. It is well settled that in tax matters the literal rule of interpretation applies and it is not open to the Court to extend the language of a provision in the Act by relying on equity, inference. It is the first principle of interpretation that a statute should be read in its ordinary, natural and grammatical sense ..." A Division Bench of the Delhi High Court also in the case of Agricultural Produce Market Committee vs. CIT had an occasion to consider Sec. 10(20) as amended w.e.f. 01.04.2003 wherein, it was held that "... even if an entity constitutes a 'local authority' for purposes of the General Clauses Act, 1897 or for purposes of any other enactment for that matter, it would not be so construed for purposes of Sec. 10(20) unless it answers the description of one of those entities enumerated in the Explanation ..." ;

++ the assessee is not covered by the word/expression of 'Municipality' in clause (e) of Article 243P. Thus, the assessee is not clearly included in sub-clause (ii) of Explanation. It is not even the case of the assessee that the assessee is covered by Sec. 10(20) except clause (ii). Thus, we believe that the assessee is not covered by the definition of local authority as contained in Explanation to Sec. 10(20).

(See 2018-TIOL-232-SC-IT)