GLIMPSES OF SUPREME COURT RULINGS

7.  New Okhla Industrial Development Authority
and Ors. vs. Commissioner of Income Tax-Appeals and Ors. (2018) 406 ITR 209
(SC)

Deduction
of tax at source – Rent – Amounts constituting annual lease rent payable to
GNOIDA, expressed in terms of percentage (e.g. 1%) of the total premium for the
duration of the lease, are rent, and therefore subject to TDS

The
Respondent Rajesh Projects (India), a private limited company engaged in the
business of real estate activities of constructing, selling residential units
etc., entered into a long-term lease for 90 years with the Greater Noida
Industrial Development Authority for Plot No. GH-07A for development and
marketing of Group Flats. As per terms of the lease deed, the company partially
paid the consideration amount for the acquisition of the plot to Greater Noida
at the time of execution of the lease deed and is also paying the balance lease
premium annually as per the terms and conditions of the lease deed.

Notice
u/s. 201/201(A) of the Income Tax Act, 1961 was issued by the Income Tax
department inquiring regarding non-deduction of tax at source under section
194-I of the Income Tax Act from the annual lease rent paid to Greater Noida.
The Respondent-company replied to the notices. The Respondents case was that it
did not deduct tax at source as it was advised by Greater Noida that it is a
Government authority, hence the tax deduction at source provisions are not
applicable. The Assessing Officer passed the order dated 31.03.2014 for the
Financial Year 2010-2011 and 2011-2012, whereby the Respondent was held as
“assessee-in-default” for non-deduction/non-deposit of TDS on account
of payment of lease rent and interest made to Greater Noida. Consequent demand
was raised against the Respondents.

Aggrieved by the order, the Respondent-company
filed an appeal before the Commissioner of Income Tax-Appeals. Respondents
prayed to stay the demand which was refused and recovery proceedings were
initiated. Aggrieved by assessment and recovery proceedings emanating
therefrom, the Respondent-company filed a Writ Petition praying for various
reliefs including the relief that Respondent-company be not treated as
“assessee-in-default” under the Income Tax Act for non-deduction/depositing
the tax at source in respect of payment of rent on lease land and in respect of
other charges paid to Greater Noida. Different other entities also filed the
writ petitions in the Delhi High Court praying for more or less the same
reliefs relating to lease rent payment and for payment of interest to Greater
Noida. All the writ petitions involving common questions of law and facts were
heard together and were allowed by the Delhi High Court.

Before the High Court, Greater Noida and the Noida authorities contended
that they are local authorities within the meaning of section 10(20) of the
Income Tax Act, 1961, hence their income is exempt from the Income Tax. It was
further contended that the interest received by them is exempt u/s. 194A(3)(iii)(f)
of the Income Tax Act and they were exempted from payment of any tax on the
interest.

The
revenue refuted the contention of Greater Noida and Noida contending that
w.e.f. 01.04.2003, the Greater Noida and Noida is not a local authority within
the meaning of section 10(20) and further they are also not entitled for the
benefit of notification issued u/s. 194A(3)(iii)(f). It was further contended
that with regard to payment of rent to the Noida and Greater Noida, the
Respondent-company was liable to deduct the tax on payment of interest, no
income-tax was deducted by the Respondent-company while paying rent to Noida
and Greater Noida, hence they are “assessee-in-default”.

The Delhi
Court held as follows:

(1)
Amounts paid as part of the lease premium in terms of the time-schedule(s) to
the Lease Deeds executed between the Petitioners and GNOIDA, or bi-annual or
annual payments for a limited/specific period towards acquisition of lease hold
rights are not subject to TDS, being capital payments;

(2)
Amounts constituting annual lease rent, expressed in terms of percentage (e.g.
1%) of the total premium for the duration of the lease, are rent, and therefore
subject to TDS. Since the Petitioners could not make the deductions due to the
insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to
comply with the provisions of law and make all payments, which would have been
otherwise part of the deductions, for the periods, in question, till end of the
date of this judgment. All payments to be made to it, henceforth, shall be
subject to TDS.

(3)
Amounts which are payable towards interest on the payment of lump sum lease
premium, in terms of the Lease which are covered by Section 194-A are covered
by the exemption u/s. 194A(3)(f) and therefore, not subjected to TDS.

(4) For
the reason mentioned in (3) above, any payment of interest accrued in favour of
GNOIDA by any Petitioner who is a bank-to the GNOIDA, towards fixed deposits,
are also exempt from TDS.

Aggrieved
by the aforesaid judgment of Delhi High Court, Greater Noida, Noida as well as
Revenue has filed appeals before the Supreme Court.

The
Supreme Court held that insofar as the appeals filed by Noida/Greater Noida
were concerned, the principal submission raised by the Appellant is applicability
of section 10(20) of the Income Tax Act. In New Okhla Industrial Development
Authority vs. Commissioner of Income Tax-Appeals and Ors., (406 ITR 178) it
had been held that Noida was not a “local authority” within the
meaning of section 10(20) of the Income Tax Act as amended by the Finance Act,
2002 w.e.f. 01.04.2003.

Insofar as
the question relating to exemption u/s. 194A(3) (iii)(f) by virtue of
notification dated 24.10.1970, i.e. the exemption of interest income of the
Noida, was concerned, in Commissioner of Income Tax (TDS) Kanpur and Anr.
vs. Canara Bank(406 ITR 161) it had been held that Noida was covered by the
notification dated 22.10.1970, and therefore the judgment of the Delhi High
Court holding that Noida/Greater Noida was entitled for the benefit of section
194A(3)(iii)(f) had to be approved. Coming to the direction of the High Court
regarding deduction of tax at source on the payment of lease rent as per
section 194-I of the Income Tax Act, 1961, the Supreme Court held that a
perusal of the Circular dated 30.01.1995 relied by Noida/Greater Noida indicate
that circular was issued on the strength of section 10(20A) and section 10(20)
as it existed at the relevant time. Section 10(20) has been amended by Finance
Act, 2002 by adding an explanation and further section 10(20A) has been omitted
w.e.f. 01.04.2003. The very basis of the circular has been knocked out by the
amendments made by Finance Act, 2002. Thus, the Circular could not be relied by
Noida/Greater Noida to contend that there was no requirement of deduction of
tax at source u/s. 194-I. Thus, deduction at source is on payment of rent u/s.
194-I, which was clearly the statutory liability of the Respondent-company. The
High Court has adjusted the equities by recording its conclusion and issuing a
direction.

In view of
what has been stated above, the Supreme Court did not find any error in the
judgment of the High Court dated 16.02.2017. In result, all the appeals were
dismissed.

8. Commissioner
of Income Tax (TDS), Kanpur and Ors. vs. Canara Bank (2018) 406 ITR 161 (SC)

Deduction
of tax at source – Payment of interests by the banks to the State Industrial
Development Authority does not require any deduction at source in terms of
section 194A(3)(iii)(f)

The New Okhla Industrial
Development Authority (NOIDA), hereinafter referred to as “Authority”
was constituted by Notification dated 17.04.1976 issued u/s. 3 of the Uttar
Pradesh Industrial Area Development Act, 1976 hereinafter referred to as
“1976 Act”. The Canara Bank, is the banker of the Authority. The Bank
made a payment of Rupees Twenty Crore Ten Lakh as interest to Authority in form
of FDs/Deposits for the financial year 2005-06. The Canara Bank, however, did
not deduct tax at source u/s. 194A of the Income Tax Act, 1961 hereinafter
referred to as “IT Act, 1961”.

Notices
were issued by the Commissioner of Income-tax (TDS) to Canara Bank asking for
information pertaining to interest paid to the Authority on its deposits.
Notices were also issued by the Commissioner of Income-tax (TDS) to the Bank
for showing cause for not deducting tax at source. A writ petition had been
filed by the NOIDA being Writ Petition No. 1338/2005 challenging the notices
issued to the Authority as well as its bankers. Assessment proceeding could not
proceed due to certain interim directions passed by the High Court in the above
writ petition. The writ petition was ultimately dismissed by the High Court on
28.02.2011 holding that the Authority was not a local authority within the
meaning of section 10(20) of IT Act, 1961 and its income was not exempt from
tax. The Assessing Officer thereafter proceeded to pass an order u/s.
201(1)/201(1A) read with section 194A of the IT Act, 1961 dated 28.02.2013.

Income Tax
Authority held that the Bank was an Assessee in default. The default was
computed and demand notice as per section 156 of the IT Act, 1961 was issued.
Penalty proceeding was also separately initiated. The Canara Bank aggrieved by
the order of the Assessing Officer dated 28.02.2013 filed an appeal before the
Commissioner of Income Tax (Appeals). Before the Commissioner, the bank relied
on Notification dated 22.10.1970 issued u/s. 194A(3) (iii)(f) of the IT Act,
1961. The Appellate Authority vide its judgment dated 02.12.2013 allowed the
appeal setting aside the order of the Assessing Officer. The Revenue aggrieved
by the judgment of the Appellate Authority filed an appeal before the Income
Tax Appellate Tribunal. The Tribunal also held that payment of interests by the
banks to the State Industrial Development Authority did not require any
deduction at source in terms of section 194A(3)(iii)(f).

The
Revenue aggrieved by the order of the Tribunal filed an appeal u/s. 260A of the
Act before the High Court. The Division Bench of the High Court vide its
judgment dated 04.04.2016 dismissed the appeal.

The
Supreme Court noted the provisions of section 194A of the IT Act, 1961and the
Notification dated 22.10.1970 issued u/s. 194A(3)(iii)(f).

According to the Supreme Court, to decide the controversy, it was
necessary to ascertain the concept of a Corporation. The Supreme Court observed
that a Corporation is an artificial being which is a legal person. It is a
body/corporate established by an Act of Parliament or a Royal Charter. It
possesses properties and rights which are conferred by the Charter constituting
it expressly or incidentally.

The
Supreme Court noted that before it, there was no issue that the Authority was
not a Corporation. It was also not contended that Authority was not a statutory
corporation. What was contended before it was that Authority having not been
established by a Central, State or Provincial Act was not covered by
Notification dated 22.10.1970 hence, not eligible for the benefit.

The
Supreme Court observed that the Appellant on the one hand submits that the
Authority has not been established by 1976 Act rather it has been established
under the 1976 Act, hence it was not covered by Notification dated 22.10.1970
whereas the Respondent submits that Authority has been established by the 1976
Act and hence, it fulfills the condition as enumerated under Notification dated
2.10.1970. Alternatively, it was submitted that words “by and under”
have been interchangeably used in the IT Act, 1961 and there was no difference,
even if, the Authority was established under the 1976 Act.

The
Supreme Court noted that section 194A(3)(iii) clauses (b), (c) and (d) refer to
expression “established”. In sub clause (b) expression used is
“established by or under a Central, State or Provincial Act”, in sub
clause (c) the expression used is “established under the Life Insurance
Corporation Act” and in sub clause (d) expression used is
“established under the Unit Trust of India Act”. The Supreme Court
held that the section thus uses both the expressions “by or under”.
According to the Supreme Court, the expression established by or under an Act
had come for consideration before it on several occasions. In Sukhdev Singh
vs. Bhagatram Sardar Singh Raghuvanshi (1975) 45 Com Cas 285 (SC), the
Court had occasion to consider the status of company incorporated under the
Companies Act. The Court held that Company incorporated is not a Company
created by the Companies Act. Again in S.S. Dhanoa vs. Muncipal Corporation,
Delhi (1981) 3 SCC 431 the Court had occasion to consider a Registered
Society which was a body/corporate. The question was as to whether the State
Body/corporate is a Corporation within the meaning of Clause Twelfth of section
21 of the Indian Penal Code (Indian Penal Code). The Court again held that
expression Corporation means a Corporation created by the legislature. Another
judgment which had occasion to consider the expression established by or under
the Act was a judgment in Dalco Engineering Private Limited vs. Satish
Prabhakar Padhye and Ors. (2010) 4 SCC 378. The Court had occasion to
examine the provision of section 2k, of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995,
specifically expression “establishment” means a Corporation
established by or under Central, Provincial or State Act. The Court held that
the phrase established by or under the Act is a standard term used in several
enactments to denote a statutory corporation established or brought into
existence by or under the statute. On Company it was held that the company is
not established under the Companies Act and an incorporated company does not
“owe” its existence to the Companies Act.

The Supreme Court reverting back to the provisions of 1976, Act observed
that the very preamble of that Act reads “an Act to provide for the
Constitution of an Authority for the development of certain areas in the State
into industrial and urban township and for masses connected through with”.

According
to the Supreme Court, the Act itself provides for constitution of an authority.
Section 2(b) of the 1976 Act defines Authority as authority constituted u/s. 3
of the Act. The Supreme Court observed that when one compares the provisions of
section 3 of 1976 Act with those of The State Financial Corporations Act, 1951,
it becomes clear that the establishment of Corporation in both the enactments
is by a notification by State Government. In the present case, notification has
been issued in exercise of power of section 3, the Authority has been
constituted.

According to the Supreme Court it having already laid down in Dalco
Engineering (supra) that establishment of various financial corporations
under State Financial Corporation Act, 1951 is establishment of a Corporation
by an Act or under an Act, the above ratio fully covers the present case and
therefore there was no doubt that the Authority have been established by the
1976 Act and it was clearly covered by the Notification dated 22.10.1970.
Further, the composition of the Authority was statutorily provided by section 3
of 1976 Act itself, hence, there was no denying that Authority had been
constituted by Act itself.

The
Supreme Court dismissed the appeal, holding that the High Court did not commit
any error in dismissing the appeal filed by the Revenue.

9. Deputy
Commissioner of Income Tax, Chennai vs. T. Jayachandran (2018) 406 ITR 1 (SC) 

Income
–The Respondent had acted only as a broker and could not claim any ownership on
the sum of Rs. 14,73,91,000/- and that the receipt of money was only for the
purpose of taking demand drafts for the payment of the differential interest
payable by Indian Bank and that the assessee had actually handed over the said
money to the Bank itself, the said sum of Rs. 14,73,91,000/- could not be
termed as the income of the Respondent

The Respondent-an individual and the proprietor of  Chandrakala and Company, was a stock broker
registered with the Madras Stock Exchange. He was stated to be an approved
broker of the Indian Bank. During the assessment years 1991-92, 1992-93 and
1993-94 the Respondent acted as a broker to the Indian Bank in purchase of the
securities from different financial institutions. It was
the case of the Revenue that the Indian Bank, in order to save itself from
being charged unusually high rate of interest on borrowing money from the
market, lured Public Sector Undertaking (PSUs) to make fixed term deposit with
it on higher rate of interest. The rate of interest offered to the PSUs for
making huge term deposits was to the extent of 12.75% of interest on fixed
deposits against the approved 8% rate of interest in accordance with the RBI
directions.

In order
to pay higher interest to the PSUs who made a fixed term deposit with the
Indian Bank, the bank requested the Respondent to purchase securities on its
behalf at a prescribed price which was unusually high but adequate to cover the
market price of the securities, brokerage/incidental charges to be levied by
the Respondent on these transactions, apart from covering the extra interest
payable to the PSUs. The Respondent, on the instructions of Indian Bank,
purchased securities at a particular rate quoted by the Bank and sold them to
Indian Railways Finance Corporation.

Bank of
Madura was the routing bank through which the securities were purchased and
sold to Indian Bank for which Bank of Madura charged service charges. The
Respondent was paid commission in respect of transactions done on behalf of
Indian Bank. Under instructions from Indian Bank, a portion of the amount
realised from the security transactions carried on behalf of Indian Bank was
paid by way of additional interest to certain Public Sector Undertakings (PSU)
on the deposits made with the Indian Bank and out of eight PSUs three had
confirmed the receipt of such additional interest through demand drafts.

The
Respondent filed his return of income for the Assessment Year 1991-92 declaring
his income at Rs. 4,82,83,620/-. The Assessing Officer passed assessment order
u/s. 143(3) and raised a demand for a sum of Rs. 14,73,91,000/- with regard to
the sum payable to the PSUs while holding that the Respondent has not acted as
a broker in the transactions carried out for the Indian Bank rather as an
independent dealer and that there was no overriding title in favour of the
PSU’s with regard to the additional amount earned out of the securities
transactions and it is a case of application of income after accrual and,
hence, the said amount is liable to be assessed as the income of the
Respondent.

The
Respondent, being dissatisfied with the order, preferred an Appeal before the
Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax
(Appeals), set aside the demand for additional tax while deciding the issue in
favour of the Respondent and held that the alleged additional interest payable
to the PSUs could not be considered as the income of the Respondent.

Being
aggrieved, the Revenue filed an appeal before the Income Tax Appellate Tribunal
(hereinafter referred to as ‘the Tribunal’). The Tribunal, allowed the appeal
filed by the Revenue and held that the amount received at the hands of the
Respondent which was alleged to be payable to the PSUs was the income of the
Respondent and there was no overriding title existing in favour of the PSUs so
as to cause diversion of income.

In the
meanwhile criminal proceedings were initiated with respect to the present
transactions in question against the Respondent along with others which was
decided by the CBI court.

The court,
while acquitting the Respondent had observed that the relationship between the
Indian Bank and the Respondent was that of principal-agent and with regard to
the transactions in question the Respondent acted in the capacity of a broker
and not as an individual dealer.

However, the Tribunal refused to rely on the evidence produced in the
trial court on the ground that the assessment proceedings were different from
the criminal proceedings and the evidence adduced in the trial court couldn’t
be relied to absolve the Respondent from the tax liability.

Being
aggrieved by the order of the ITAT, the Assessee filed Tax Case Appeal before
the High Court. The High Court, set aside the order of the Tribunal while
relying on the evidence given in the criminal case in this regard.

Being
aggrieved, the Revenue filed an appeal before the Supreme Court.

According
to the Supreme Court, the only point for consideration before it was whether on
the facts and circumstances of the present case the High Court was right in
holding that the alleged additional interest payable to PSUs could not be
assessed as income of the Respondent?

The
Supreme Court was of the view that the answer to the short question whether the
alleged interest payable to the PSUs could be assessed as an income of the
Respondent depended on the determination of true nature of relationship between
the Indian Bank and the Respondent with regard to the transactions in question
and the capacity in which he held the amount of Rs. 14,73,91,000/-.

 As to the question of
relationship between the Indian Bank and the Respondent, the Supreme Court
observed that the normal settlement process in Government securities is that
during transaction banks make payments and deliver the securities directly to
each other. The broker’s only function is to bring the buyer and seller
together and help them to negotiate the terms for which he earns a commission
from both the parties. He does not handle either cash or securities. In this
respect, the broker functions like the broker in the interbank foreign exchange
market. The conduct of the Respondent in the transaction in question could not
be termed to be strictly within the normal course of business and the
irregularities could be noticed from the manner in which the whole transactions
were conducted. However, the same could not be basis for holding the Respondent
liable for tax with regard to the sum in question and what was required to be
seen was whether there accrued any real income to the Respondent or not.

According to the Supreme Court, it was required to be seen in what
capacity the Respondent held the said amount-independently or on behalf of the
Indian Bank. The Assessing Officer, while passing assessment order, had held
that there existed no agreement between the Respondent and the Indian Bank
about the payment of additional interest to the PSUs and there was no
overriding title in respect of the additional interest for the PSUs. However,
in the opinion of the Supreme Court, the position in this regard was very much
settled that an agreement need not be in writing but could be oral also and the
same could be inferred from the conduct of the parties.

Further, while considering the claim of the Respondent and the view of
the Assessing Officer, how the bank itself had treated the Respondent, was a
matter of relevance. The relationship between the Indian Bank and the
Respondent was very much clear by the evidence led during the criminal
proceedings. The Executive Director of the Bank had specifically spoken about
the role of the Respondent as a broker specifically engaged by the Bank for the
purchase of securities and that the Bank had included the interest money too in
the consideration paid, for the purpose of taking demand drafts in favour of
PSUs. Further, the evidence led by other bank officials pointed out that the
price of securities itself were fixed by the bank authorities and as per their
directions the Respondent had purchased the securities at the market price and
the differential amount was directed to be used for taking demand drafts from
the bank itself for paying additional interest to the PSUs. Further, the letter
dated 25.03.1994 by the Bank wherein the Bank had acknowledged the receipt of
Demand Drafts taken by the Respondent gave an unblurred picture about the
capacity of the Respondent in holding the amount in question. Consequently, the
conduct of the parties, as recorded in the criminal proceedings showing the
receipt of amount by the broker, the purpose of receipt and the demand drafts
taken by the broker at the instance of the bank were sufficient to prove the
fact that the Respondent acted as a broker to the Bank and, hence, the additional
interest payable to the PSUs could not be held to be his property or income.

According
to the Supreme Court, the income that had actually accrued to the Respondent
was taxable. What income has really occurred to be decided, not by reference to
physical receipt of income, but by the receipt of income in reality. Given the
fact that the Respondent had acted only as a broker and could not claim any
ownership on the sum of Rs. 14,73,91,000/- and that the receipt of money was
only for the purpose of taking demand drafts for the payment of the
differential interest payable by Indian Bank and that the Respondent had
actually handed over the said money to the Bank itself, the Supreme Court held
that  the Respondent held the said amount
in trust to be paid to the public sector units on behalf of the Indian Bank
based on prior understanding reached with the bank at the time of sale of
securities and, hence, the said sum of Rs. 14,73,91,000/- could not be termed
as the income of the Respondent. According to the Supreme Court, the decision
rendered by the High Court therefore required no interference.

The Supreme Court dismissed
the appeal.

10.  New Okhla Industrial Development Authority
vs. Chief Commissioner of Income Tax and Ors.

(2018)
406 ITR 178 (SC)

Exemption
– Local Authority – After omission of section 10(20A), only provision under
which a Body or Authority can claim exemption is section 10(20) –  Local authority having been exhaustively
defined in the Explanation to section 10(20), an entity has to fall u/s. 10(20)
to claim exemption.

The
Appellant-New Okhla Industrial Development Authority (hereinafter referred to
as the “Authority”) has been constituted u/s. 3 of the U.P.
Industrial Area Development Act, 1976 (hereinafter referred to as the ‘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 and for
matters connected therewith. Under the Act, 1976 various functions have been
entrusted to the Authorities. Notices u/s. 142 of the Income Tax Act dated
28.07.1998 and 08.08.1998 were issued to the Appellant. The Appellant
challenging the said notices filed writ petition contending that Appellant was
a local authority, hence, was exempted from payment of income tax u/s.10(20)
and section 10(20A) of Income Tax Act, 1961 (hereinafter referred to as
“I.T. Act, 1961).

The writ
petition was allowed by the Division Bench of the Allahabad High Court on
14.02.2000 holding that the Appellant was a local body. It was held that it is
covered by the exemption u/s. 10(20A) of I.T. Act, 1961. The Division Bench,
however, did not go into the question whether it was also exempt u/s. 10(20).

By the Constitution (74^th Amendment) Act, 1992, the
Parliament had inserted Part IXA of the Constitution providing for the
constitution of Municipalities. A notification dated 24.12.2001 was issued by
the Governor in exercise of the power under the proviso to Clause (1) of
Article 243Q of the Constitution of India specifying the Appellant to be an
“industrial township” with effect from the date of the notification
in the Official Gazette. A notice dated 29.08.2005 was issued by the Assistant
Commissioner of Income Tax to the Appellant for furnishing Income Tax Return
for the assessment year 2003-2004 and 2004-2005. Notice mentioned that after
omission of section 10(20A) w.e.f. 01.04.2003 the Authority had become taxable.
Notice u/s. 142(1) was also enclosed for the above purpose.

The
Appellant vide its letter dated 20.09.2005 replied the notice dated 29.08.2005
stating that it was a local authority and exempt from Income Tax hence notice
u/s. 142 be withdrawn. The Appellant filed a writ petition praying for quashing
the notice u/s. 142 of the Income Tax Act dated 29.08.2005. The High Court in
the writ petition decided the question “whether New Okhla Industrial
Development Authority (NOIDA) is a local authority after 01.04.2003 within the
meaning of section 10(20) of the Income Tax Act, 1961”. The Division Bench
of the High Court relying on two judgments of the Supreme Court in Agricultural
Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and Anr.
(2008) 9 SCC 434 and Adityapur Industrial Area Development Authority vs.
Union of India and Ors. (2006) 5 SCC 100, held that after 01.03.2003 the
NOIDA is not a local authority within the meaning of section 10(20) of the I.T.
Act, 1961. The writ petition was consequently dismissed.

According
to the Supreme Court, the only issue that arose for consideration in these
appeals was as to whether the Appellant was a local authority within the
meaning of section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003.
According to the Supreme Court, the submissions made by the parties could be
dealt with in the following two heads:

A. The
status of the Authority by virtue of notification dated 24.12.2001 issued under
Clause (1) of Article 243Q issued by the Governor specifying New Okhla
Industrial Area to be an “industrial township”.

B. Whether
the Appellant is a local authority “within the meaning of section 10
sub-section (20) as explained in Explanation added by Finance Act, 2002.

The
Supreme Court held as under:

(A) Part
IXA of the Constitution:

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).

Article 243P(e)
defines Municipality as an institution of self-government constituted under
Article 243Q. The word constituted used under Article 243P(e) read with Article
243Q clearly refers to the constitution in every State a Nagar Panchayat, a
Municipal Council or a Municipal Corporation. Further, the words in proviso
“a Municipality under this Clause may not be constituted” clearly
means that the words “may not be constituted” used in proviso are
clearly in contradistinction with the word constituted as used in Article
243P(e) and Article 243Q. Thus, notification under proviso to Article 243Q(1)
is not akin to constitution of Municipality. According to the Supreme Court,
industrial township as specified under notification dated 24.12.2001 is not
akin to Municipality as contemplated under Article 243Q.

B. Section
10(20) as amended by the Finance Act, 2002:

By the Finance Act, 2002 an Explanation has been added to section 10(20)
of the I.T. Act, 1961 and section 10(20A) has been omitted. Prior to Finance
Act, 2002 there being no definition of ‘local authority’ under the I.T. Act,
the provisions of section 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 section 3(31) of General Clauses
Act, 1892 is no more applicable.

The
Explanatory Notes on Finance Act, 2002 clearly indicates that by Finance Act,
2002 the exemption under section 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 section 10(20A) only provision under which a Body or Authority can
claim exemption is section 10(20). Local authority having been exhaustively
defined in the Explanation to section 10(20) an entity has to fall u/s. 10(20)
to claim exemption.

In Adityapur Industrial Area Development Authority (supra) after
considering section 10(20) as amended by the Finance Act, 2002 and consequences
of deletion of section 10(20A) it had been held that the benefit, conferred by
section 10(20-A) of the Income Tax Act, 1961 on the Assessee therein, had been
expressly taken away. Moreover, the Explanation added to section 10(20)
enumerates the “local authorities” which did not cover the Assessee
therein.

In Gujarat
Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC
17, after considering the provisions of section 10(20A) of I.T. Act it was
held that Gujarat Industrial Development Corporation was entitled for exemption
u/s. 10(20A).

The Gujarat Industrial Development Corporation was held to be entitled
for exemption u/s. 10(20A) at the time when the provision was in existence in
the statute book and after its deletion from the statute book the exemption was
no more available.

Further,
Explanation to section 10(20) uses the word ‘means’ and not the word
‘includes’. Hence, it was not possible to extend the definition of ‘local
authority’ as contained in the Explanation to section 10(20). It was also not
possible to refer to the definitions in other Acts, as the IT Act now
specifically defines ‘local authority’.

The
Supreme Court thus concluded that the Appellant was not covered by the definition
of local authority as contained in Explanation to section 10(20).