IMPORTANT POINT
Where an Authority constituted under the State Act had its own income and managed its funds and had a distinct legal personality being a body corporate as distinct from State, income of Authority could not be said to be income of State exempt from Union taxation.

Headnote:Constitution of India — Article 289 — Income Tax Act, 1961 — Section 10 (As amended by Amendment Act 2002) Exemption of property and income of State from Union Taxation — Explanation “local authority” defined u/s 10(20) of Income Tax Act did not include an authority such as appellant — Notice issued by Deputy Commissioner of Income Tax TDS circle, to Bank to deduct income tax at source from interest accrued on fixed deposits of appellant Authority — Writ petition challenging the notice was dismissed by High Court holding that exemption u/s 289(1) of Constitution was not available to appellant as it was a distinct legal entity and its income could not be said to be income of State so as to exempt from Union Taxation — Appeal — Question whether income of appellant/Authority was the income of the State — In terms of Section 17 of Bihar Industrial Area Development Authority Act, 1974 under which appellant Authority was constituted, income of Authority was its own income and Appellant managed its own funds — Appellant was a distinct legal personality as distinct from State — Income of appellant/Authority could not be said to be income of State Govt. — High Court was right in its conclusion that appellant Authority could not claim exemption from Union taxation.
       Held : A mere perusal of Article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of Clause (2) of Article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of Clause (1) of Article 289 may be taxed by law made by the Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith. Clause (1) of Article 289, therefore empowers Parliament to frame law imposing a tax on income of a State which is earned by means of trade or business of any kind carried by or on behalf of the State Government.(Para 10)
       It is true, as submitted by Sri Venugopal, that Clause (2) of Article 289 empowers the Parliament to make a law imposing a tax on income earned only from trade or business of any kind carried by or on behalf of the State. It does not authorize the Parliament to impose a tax on the income of a State if such income is not earned in the manner contemplated by Clause (2) of Article 289. This, to our mind, does not answer the question which arises for our consideration in this appeal. Clause (2) of Article 289 pre-supposes that the income sought to be taxed by the Union is the income of the State, but the question to be answered at the threshold is whether in terms of Clause (1) of Article 289, the income of the appellant/ Authority is the income of the State. Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly Section 17 thereof, we have no manner of doubt that the income of the appellant/Authority constituted under the said Act is its own income and that the appellant/ Authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of Clause (2) of Article 289, it still is an Authority constituted under an Act of the Legislature of the State having a distinct legal personality, being a body corporate, as distinct from the State. Section 17 of the Act further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessarily therefore, before its dissolution, its assets, funds and liabilities are its own. It is, therefore, futile to contend that the income of the appellant/ Authority is the income of State Government, even though the Authority is constituted under an Act enacted by the State Legislature by issuance of a Notification by the Government thereunder. (Para 11)
       Having considered all aspects of the matter we hold that the High Court is right in concluding that the appellant/ Authority could not claim exemption from Union taxation under Article 289 (1) of the Constitution of India. The impugned notice issued by the Income Tax Authorities was, therefore, valid and legal and could not be successfully challenged in the writ petition.(Para 22)

JUDGMENT

B.P. Singh, J. — Adityapur Industrial Area Development Authority the appellant herein challenged, by a writ petition, the notice issued by the Deputy Commissioner of Income Tax, TDS Circle, Jamshedpur dated February 14, 2003 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 and while Section 10(20A) had been omitted, an Explanation was added to Section 10(20) of the Act. The provisions of the Income Tax Act, 1961 as they stood after the amendment obliged the Bank to deduct income tax at source from the interest accrued on fixed deposit receipts of the appellant/Authority. The Manager of the Bank was required to comply with the provisions and deduct tax at source and report compliance. The High Court of Jharkhand at Ranchi in the aforesaid writ petition pronounced its judgment on May 8, 2003 dismissing the writ petition holding that in view of the amended provisions of the Income Tax Act, the notice was valid and legal. The appellant/ Authority has impugned the judgment and order of the High Court in this appeal by special leave.

2. The appellant/Authority has been constituted under the Bihar Industrial Areas Development Authority Act, 1974 to provide for planned development of industrial area, for promotion of industries and matters appurtenant thereto. The appellant/Authority is a body corporate having perpetual succession and a common seal with power to acquire, hold and dispose of properties, both moveable and immovable, to contract, and by the said name sue or be sued. The Authority consists of a Chairman, a Managing Director and five other Directors appointed by the State Government. The Authority is responsible for the planned development of the industrial area including preparation of the master plan of the area and promotion of industries in the area and other amenities incidental thereto. The Authority has its own establishment for which it is authorized to frame regulations with prior approval of the State Government. The State Government is authorized to entrust the Authority from time to time with any work connected with planned development, or maintenance of the industrial area and its amenities and matters connected thereto. Section 7 of the Act obliges the Authority to maintain its own fund to which shall be credited moneys received by the Authority from the State Government by way of grants, loans, advances or otherwise, all fees, rents, charges, levies and fines received by the Authority under the Act, all moneys received by the Authority from disposal of its moveable or immovable assets and all moneys received by the Authority by way of loan from financial and other institutions and debentures floated for the execution of a scheme or schemes of the Authority duly approved by the State Government. Unless the State Government otherwise, directs, all moneys received by the Authority shall be credited to its funds which shall be kept with the State Bank of India and/ or one or more of the Nationalized Banks and drawn as and when required by the Authority.

3. Article 289 of the Constitution of India provides as follows:-

"289. Exemption of property and income of a State from Union taxation. — (1) The property and income of a State shall be exempt from Union taxation.

(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a 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 accruing or arising in connection therewith.

(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade of business which Parliament may by law declare to be incidental to the ordin

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2006 Supreme(SC) 444

IMPORTANT POINTWhere an Authority constituted under the State Act had its own income and managed its funds and had a distinct legal personality being a body corporate as distinct from State, income of Authority could not be said to be income of State exempt from Union taxation.

Cases Referred (8)

IMPORTANT POINT
Where an Authority constituted under the State Act had its own income and managed its funds and had a distinct legal personality being a body corporate as distinct from State, income of Authority could not be said to be income of State exempt from Union taxation.