1. Statutory corporation established under Road Transport Corporations Act — Income tax assessment — Claim for exemption from Union taxation under Article 289(1) of the Constitution. (Para 1 , 2 )
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1964 Supreme(SC) 64
SUPREME COURT OF INDIA
5th March, 1964.
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, J.C. SHAH, N. RAJAGOPALA AYYANGAR AND S.M. SIKRI, JJ.
The A.P. State Road Transport Corporation by its Chief Executive Officer, Hyderabad (In all the Appeals), Appellant
Versus
The Income-tax Officer, B 1 B-Ward, Hyderabad and another (In all the Appeals), Respondents.
Civil Appeals Nos. 475 to 478 of 1963.
Advocates Appeared
Mr. D. Narasaraju, Advocate General for State of Andhra Pradesh (Messrs P. R. Ramchandra Rao and T. V. R. Tatachari, Advocates, with him), for Appellant (In all the Appeals); Mr. K. N. Rajagopal Sastri, Senior Advocate, (Messrs Gopal Singh and R. N.Sachthey, Advocates, with him), for Respondents (In all the Appeals); M/s. Rajeshwari Parshad and S. P. Varma, Advocates, for Intervener No. 1. (In all the Appeals); Mr. B. Sen, Senior Advocate, (Messrs. S. C. Bose and P. K. Bose, Advocates, with him), for Intervener No. 2 (In all the Appeals), Mr. M. C. Setalvad, Senior Advocates (Messrs. S. C. Bose and P. K. Bose, Advocates with him), for Intervener No. 3 (In all the Appeals).
A statutory corporation is a separate legal entity from the State. Consequently, its income is not "income of the State" under Article 289(1) of the Constitution and is not exempt from Union taxation unless specifically provided by statute.
Headnote:(A) Constitution of India - Article 289(1), (2) and (3) - Road Transport Corporations Act, 1950 - Income-tax Act - Exemption from Union taxation - Property and income of a State - Separate legal entity of a statutory corporation - Whether income derived by a statutory corporation established by a State government constitutes "income of the State" - A statutory corporation, though created by a statute and controlled by the State, possesses a separate legal personality distinct from the State - Income derived by such a corporation from trading activities is its own and not the income of the State unless the statute expressly provides otherwise (Paras 17, 21).
(B) Constitution of India - Article 289 - Interpretation - Clause (1) provides general exemption for State income; Clause (2) is an exception allowing Union tax on trade or business carried on by or on behalf of a State; Clause (3) is an exception to the exception for activities incidental to ordinary government functions (Paras 14, 15, 16).
(C) Doctrine of Immunity of Instrumentalities - American doctrine regarding immunity of State agencies from Federal taxation is inapplicable to the Indian Constitution and has been rejected (Paras 11, 12).
(D) Repugnancy - Absence of a specific provision in a statutory corporation's governing Act regarding the liability to pay income tax does not create repugnancy with the charging section of the Income-tax Act, nor does it imply an exemption from tax (Para 22).
Facts of the case:
A statutory corporation established under a central act for road transport was served a notice of assessment for income tax. The corporation challenged the assessment, claiming it was not an assessee under the tax law, that its income was immune from Union taxation as it ultimately benefited the State, and that it was a local authority.
Findings of Court:
The corporation is a separate legal entity with its own personality. The provisions of the governing Act emphasize this duality. The transfer of surplus funds to the State for road development does not transform the corporation's income into the State's income.
Issues: Whether the income of a State-controlled statutory corporation is the "income of the State" exempt from Union taxation under Article 289(1) of the Constitution.
Ratio Decidendi: The court held that a statutory corporation is a separate legal entity. For income to be exempt under Article 289(1), it must be the income of the State. Since the corporation's income is its own, it does not satisfy the requirement of being "income of the State," regardless of State control or the eventual use of profits.
Result: Appeals dismissed.
Legal Category Hierarchy
Table of Contents
2. Exemption under Article 289(1) — Status as local authority — Non-inclusion in assessee categories under Income-tax Act — Repugnancy between statutory Act and Income-tax Act. (Para 2 , 3 , 4 , 7 , 8 , 22 )
3. Statutory corporation possesses separate legal personality — Income of corporation distinct from State income — Rejection of immunity of instrumentalities doctrine — No repugnancy between statutes. (Para 5 , 6 , 9 , 10 , 11 , 12 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 )
4. Income of a statutory corporation with separate legal entity is not income of the State under Article 289(1) unless specifically provided by statute. (Para 17 , 18 , 21 )
5. Appeals dismissed with costs. (Para 23 )
6. Does the income of a statutory corporation constitute the income of a State for exemption under Article 289(1)?
No. A statutory corporation is a separate legal entity distinct from the State. Its income is its own, not the State's, unless a specific statutory provision explicitly makes the corporation's income the income of the State. (Para 17 , 18 , 21 )
7. Is the American doctrine of immunity of State instrumentalities from Federal taxation applicable in India?
No. The Supreme Court has categorically rejected the doctrine of immunity of instrumentalities, holding it inapplicable to the interpretation of powers between the State and the Centre. (Para 12 )
8. Does the absence of a specific provision requiring a corporation to pay income tax in its governing Act create repugnancy with the Income-tax Act?
No. The absence of a specific provision for paying tax does not exempt a corporation from the Income-tax Act. Provisions regarding fund administration do not imply an exemption from general tax liability. (Para 22 )
9. How do clauses (2) and (3) of Article 289 interact with the general exemption in clause (1)?
Clause (1) provides general exemption. Clause (2) is an exception allowing Union tax on State trade or business. Clause (3) is an exception to the exception, restoring exemption if Parliament declares the business incidental to ordinary government functions. (Para 14 , 15 , 16 )
Judgment
GAJENDRAGADKAR, C.J.I. : These four appeals arise from four writ petitions filed by the appellant, the Andhra Pradesh State Road Transport Corporation, in the High Court of Andhra Pradesh against the Income-tax Officer, and the Appellate Assistant Commissioner of Income-tax, Hyderabad, respondents 1 and 2 respectively, in which it claimed a writ of prohibition restraining them from collecting any tax, or taking any proceedings under the Indian Income Tax Act against them. In its writ petitions, the appellant further claimed an order, writ, or other appropriate direction quashing the assessment orders passed by respondent No. 1 on the 29th February, 1960, for the years 1958-59 and 1959-60. For the first year, a tax of Rs. 13,60,963/86nP has been imposed for the period 11-1-1958 to 31-3-1958, and for the latter year, a tax of Rs. 34,44,430-48nP has been levied for the period 1-4-1958 to 31-3-1959. After hearing the parties, the High Court has dismissed the appellant s writ petitions with costs. The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that these four appeals have been brought to this Court.
2. It appears that the appellant was established under the Road Transport Corporations Act, 1950 (No. 64 of 1950) (hereinafter called the Act) by a notification issued by the Andhra Pradesh Government and it has been functioning with effect from the 11th January, 1958. Before the formation, of the appellant Corporation, the road transport was a department of the Government of Hyderabad and after integration of Hyderabad with the Andhra Pradesh, it was run by the Government of Andhra Pradesh. During the whole of this period, the road transport was treated as exempt from income-tax. After the appellant Corporation was, however, formed the Income-tax department took the view that the income made by the appellant was liable to tax, and so, a notice under S. 22 of the Income-tax Act was served on the appellant on the 29th January, 1959. In pursuance of the proceedings which were taken after service of the notice, the impugned orders of assessment were passed. Before the Income-tax Officer, it was urged by the appellant that since the appellant was an independent body carrying on the business of road transport, it did not fall under any of the five categories of assessees under S. 3 of the Income-tax Act, it was neither an individual, nor a Hindu undivided family, nor a firm, nor a company, nor an association of persons, and as it was outside the said five categories of assessees, no tax could be levied against it. It was further argued that the net income of the appellant ultimately goes to the State of Andhra Pradesh under S. 30 of the Act, and as such it was immune from Union taxation under Art. 289 of the Constitution. Yet, another contention was raised in support of the plea that the notice issued by respondent No. 1 was invalid, and that was that the appellant was a local authority exempt from income-tax. All these contentions were rejected by respondent No. 1 with the result that the impugned orders of assessment came to be passed. It is the validity of these orders that the appellant challenged before the Andhra Pradesh High Court.
3. The High Court has held that the appellant is not a State-owned Corporation and that it is not carrying on business on behalf of the Government. It has also observed that the trade or business which the appellant was carrying on was not incidental to the ordinary functions of government, and since no declaration had been made to that effect under Art. 289(3), the appellant could not rely on Art.289 (1). The contention that the appellant was a local Authority which was urged before the High Court was rejected and the argument that the charging section of the Income-tax Act was repugnant with the material provisions of the Act, such as Sections 28, 29 and 30, was also held to be without any substance by the High Court. Thus, since non
