Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(ITAT) 27738

INCOME TAX APPELLATE TRIBUNAL (JAIPUR BENCH)
S. Seethalakshmi, Judicial Member, Gagan Goyal, Accountant Member
Urban Improvement Trust – Appellant
Versus
DCIT, Exemption, Jaipur – Respondent
ITA Nos. 949 & 950/JPR/2025

Advocates:
For the Appellants/Petitioners: Tarun Agarwal
For the Respondents: Rajesh Ojha

A statutory body functioning as an instrumentality of the state, characterized by deep and pervasive government control and the performance of governmental functions rather than commercial trade, qualifies as 'State' under Article 12 and its income is immune from Union taxation under Article 289(1) of the Constitution.

Headnote:(A) Income Tax Act, 1961 - Section 4, Section 10(20), Section 11(2), Section 12A, Section 10(46), Section 10(46A), Section 40A(3) - Constitution of India - Article 12, Article 289(1), Article 289(2) - Exemption of income of a statutory body from Union taxation - Whether a statutory body under government control constitutes a 'State' for tax immunity - The court held that if a body is found to be an instrumentality of the government with deep and pervasive state control, it is an 'authority' included in the term 'State' under Article 12, and its income is exempt under Article 289(1) unless it carries on a trade or business. (Paras 6, 15, 16, 18, 23)

(B) Appellate Jurisdiction - Power to remand - Tribunal as final fact-finding authority may set aside findings for de novo consideration when lower authorities fail to apply principles of natural justice and Constitutional safeguards regarding status of an assessee. (Paras 14, 25)

Facts of the case:
The assessee, a statutory body established by state legislation to carry out improvement of urban areas, claimed exemption of its income from taxation. The income tax authorities denied the exemption and made additions for non-compliance with procedural requirements for filing forms, treating the assessee as a taxable entity. The assessee contended it was an arm of the government and not taxable under the Constitution.

Findings of Court:
The court found that the assessee acts as an instrumentality of the government, is under deep and pervasive state control, and performs public functions that are not in the nature of trade or business. Consequently, it falls within the definition of 'State' under Article 12 and the income is exempt from Union taxation under Article 289(1).

Issues: Whether the assessee qualifies as a 'State' under Article 12 of the Constitution, thereby enjoying immunity from income tax under Article 289(1), and whether the taxing authorities erred in the addition of income for procedural lapses without considering the Constitutional status.

Ratio Decidendi: The status of a statutory body as an instrumentality of the state depends on tests such as state-held capital, deep and pervasive control, public function importance, and whether the body performs governmental functions. Because the assessee performs public administrative duties without profit motive, it is shielded from Union taxation as an agent of the state.

Result: Appeals allowed.

Table of Content
1. nature of assessee and exclusion from definition of local authority. (Para 6)
2. determining 'state' status under article 12 for instrumentalities. (Para 10 , 11 , 12 , 13 , 14 , 15 , 16)
3. distinction between commercial/trading activities and public service functions. (Para 17 , 18 , 19 , 20 , 21 , 22)
4. assessee income exempt from union taxation under constitutional immunity. (Para 23 , 24 , 25 , 26)

O R D E R

PER GAGAN GOYAL, A.M:

These two appeals by assessee is directed against the order of NFAC, Delhi dated 17.09.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’).

In ITA No. 949/JPR/2025, the assessee has raised the following grounds of appeal:-

1. The learned CIT (A) as well as Ld DCIT (Exemption) has erred in law as well as in fact in making addition of Rs.7,15,36,230/- merely on the ground that Form 10 could not be e-filed by the assessee while the requirement to e-file the same was introduced from the A.Y. 2016-17.

2. The Ld. CIT(A) failed to consider that the Appellant duly submitted Form-10 subsequently, and the same was available on record before the completion of assessment, thereby complying with the requirement of Section 11(2) of the Act.

3. The Ld. CIT (A) as well as Ld DCIT (Exemption) omitted to take into account the Circular no. 7/2018 dated 20.12.2018 issued by CBDT, directing the Commissioners of Income-tax to condone the delay in filing Form No.10.

4. The Ld CIT(A) as well as Ld DCIT(Exemption) erred in considering that, when Rs. 7,15,36,230/- has been actually set apart under section 11(2) and reported in form 10B, delay in uploading Form 10 cannot lead to disallowances.

5. The Ld. DCIT has erred in law as well as in facts in not providing proper opportunity of being heard to the appellant before passing the order.

6. That the appellant craves to add, alter OR amend all OR any of the grounds of appeal on OR before the hearing.

In ITA No. 950/JPR/2025, the assessee has raised the following grounds of appeal:-

1. The learned CIT (A) as well as Ld DCIT(Exemption) has erred in law as well as in fact in making addition of Rs. 15,09,81,770/- merely on the ground that Form 10 could not be e-filed by the assessee before the due date, which was merely a procedural omission.

3. The Ld. CIT (A) as well as Ld DCIT(Exemption) omitted to take into account the Circular no. 7/2018 dated 20.12.2018 issued by CBDT, directing the Commissioners of Income-tax to condone the delay in filing Form No.10.

4. The Ld CIT(A) as well as Ld DCIT(Exemption) erred in considering that, when Rs. 15,09,81,770/- has been actually set apart under section 11(2) and reported in form 10B, delay in uploading Form 10 cannot lead to disallowances.

5. The learned AO has erred in law as well as in facts in not providing proper opportunity of being heard to the appellant before passing the order.

6. That the appellant craves to add, alter OR amend all OR any of the grounds of appeal on OR before the hearing.

2. There are two appeals by the assessee for the A.Y.s mentioned (supra). The grounds raised by the assessee are purely legal in nature, to be decided by this bench. We are taking ITA No. 949/JPR/2025 as lead case, since issues involved in both the years are identical. The brief facts of the case are that the appellant is a statutory body created and established under the Rajasthan Urban Improvement Act, 1959 vide notification no. 5(3)/TP/70 dated 09/07/1970 in the Official Gazette with the object to carry out improvement of urban areas in the city of Bharatpur, Rajasthan. In view of the statutory status and the object of the trust, the appellant claimed to be a local authority within the meaning of section 10(20) of the Income Tax Act, 1961 and claimed exemption of its income.

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2025 Supreme(Online)(ITAT) 27738

INCOME TAX APPELLATE TRIBUNAL (JAIPUR BENCH)S. Seethalakshmi, Judicial Member, Gagan Goyal, Accountant MemberUrban Improvement Trust – AppellantVersusDCIT, Exemption, Jaipur – RespondentITA Nos. 949 & 950/JPR/2025

Cases Referred (1)

INCOME TAX APPELLATE TRIBUNAL (JAIPUR BENCH)
S. Seethalakshmi, Judicial Member, Gagan Goyal, Accountant Member
Urban Improvement Trust – Appellant
Versus
DCIT, Exemption, Jaipur – Respondent
ITA Nos. 949 & 950/JPR/2025