THE INCOME TAX OFFICER versus URBAN IMPROVEMENT TRUST on 12 October 2018

THE INCOME TAX OFFICER

v.

URBAN IMPROVEMENT TRUST

(Civil Appeal No. 10577 of 2018)

OCTOBER 12, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Income Tax Act, 1961:

Section 10(2) Explanation clause (iii) (as amended by FianceAct, 2002) – Whether Urban Improvement Trust (assessee)constituted under Rajasthan Improvement Act is a local authoritywithin meaning of clause (iii) of Explanation to s. 10(2) – Plea ofassessee that it is a “Municipal Committee” under clause (iii) ofExplanation to s. 10 (2) – Held: Scheme of the Urban ImprovementAct, under which the assessee was constituted, does not permitacceptance of the plea that assessee is a “Municipal Committee”within meaning of clause (iii) of Explanation to s. 10(20) – RajasthanImprovement Act, 1959 – ss. 47, 48, 61 to 64 and 105.

Allowing the appeals, the Court

HELD: 1. A perusal of the Scheme of the Rajasthan UrbanImprovement Act, 1959 as well as the Rajasthan MunicipalitiesAct, 1959 indicate that Urban Improvement Trust undertakesdevelopment in the urban area included in municipality/municipalboard. Urban Improvement Trust is not constituted in place ofthe municipality/municipal board rather it undertakes the act ofimprovement in urban areas of a municipality/municipal boardunder the Rajasthan Urban Improvement Act, 1959. It may alsoperform certain limited powers of the municipal board as referredto in Sections 47 and 48 of Urban Improvement Act but on thestrength of such provision Urban Improvement Trust does notbecome a municipality or municipal board. [Para 27][861-A-B]

2. After the insertion of Part IXA in the Constitution by theConstitution (Seventy-fourth)Amendment Act, 1992 w.e.f.01.06.1993, Articles 243Q deals with constitution ofMunicipalities. Section 10(20) Explanation, Clause (ii) relates to

A

B

CD

E

F

G

H

AMunicipalities; the assessee has not based its claim on the basisof Clause (ii) of Explanation rather it has confined its claim toonly Clause (iii). Under Clause (iii) claim of the assessee is thatit is a “Municipal Committee”. [Paras 27 and 28][861-C-D]

3. The provisions of Sections 47 and 48 of RajasthanBImprovement Act, 1959 are to permit certain powers of themunicipal boards to be performed by the Trust which does nottransform the Trust into a Municipal Committee. Sections 61 to64 are the provisions empowering levy of betterment charges,which is again in reference to and in context of carrying outimprovement by the Improvement Trust in urban areas. TheCMunicipal Board, Kota performs its functions, in areas whereMunicipal Board still exists. There is no reason to accept thatUrban Improvement Trust is a Municipal Committee within themeaning of Section 10(20)Explanation Clause (iii). Section 105,which provides for ultimate dissolution of Trust and transfer of Dits assets and liabilities to the Municipal Board, does not in anymanner improve the case of the assessee. When the Trust isdissolved or at dissolution, properties and funds and dues vestedin or realisable by the Trust shall vest in and be realisable by theMunicipal Board, which is a provision for different purpose andobject. The above provision does not support the plea thatEImprovement Trust is a Municipal Committee as referred to inClause (iii) of Explanation to Section 10(20) of the I.T. Act. Thus,the scheme of the Rajasthan Urban Improvement Act, 1959 doesnot permit acceptance of the contention of the appellant assesseethat Urban Improvement Trust is a Municipal Committee withinFthe meaning of Section 10(20) Explanation (iii). [Paras 35, 36 and37][865-D-H; 866-A-B]

New Okhla Industrial Development Authority v. ChiefCommissioner of Income Tax & Ors. (2018) 8 SCALE365; Agricultural Produce Market Committee Narela,GDelhi v. Commissioner of Income Tax and Another(2008) 9 SCC 434 : [2008] 12 SCR 387 – relied on.Union of India v. R.C. Jain (1981) 2 SCC 308 – referredto.

H

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 10577of 2018.

From the Judgment and Order dated 23.10.2017 of the High Courtof Judicature for Rajasthan Bench at Jaipur in D.B. Income Tax AppealNo. 287 of 2016

With

Civil Appeal Nos. 10578, 10579, 10580, 10581, 10584, 10582,10586, 10585, 10583 of 2018.

Vikramjit Banerjee, ASG, K. Radhakrishnan, Sr. Adv., RupeshKumar, Arijit Prasad, Mrs. Anil Katiyar, Advs. for the Appellant.

Sanjay Jhanwar, Rajat Sharma, Tarun Gupta, Advs. for theRespondent.

The Judgment of the Court was delivered by ASHOK BHUSHAN, J. 1. Leave granted.

2. These appeals have been filed by the Revenue challenging theDivision Bench judgments of Rajasthan High Court dated 25.07.2017 aswell as subsequent judgment dated 23.10.2017 following earlier judgment.The High Court vide its above judgments has dismissed all the incometax appeals of the Revenue and allowed that of assesse – UrbanImprovement Trust. The Division Bench accepted the claim of theassessee that it is local authority within the meaning of Clause (iii) ofExplanation to Section 10(20) of the Income Tax Act, 1961 and hence itis entitled for exemption under Section 10(20) of the Act. The Revenuehave been contending that Urban Improvement Trust, the assessee isnot a local authority within the meaning of Explanation to Section 10(20),hence it is not entitled for exemption.

3. For deciding this batch of appeals, it shall be sufficient to noticethe facts of Civil Appeal arising out of S.L.P. (C) No. 18067 of 2018 –The Income Tax Officer Vs. M/s. Urban Improvement Trust, Kota.

A

B

C

D

E

F

G

H

A4. Section 10(20) has been amended by Finance Act, 2002 w.e.f.01.04.2003. A Notice under Section 142(1) of the Income Tax Act, 1961(hereinafter referred to as “I.T. Act”) was issued dated 01.08.2005requiring the assessee to file a return for the assessment year 2003-2004. A reply was submitted on behalf of the assessee that UrbanImprovement Trust – the assessee is a municipality within the meaningBof Article 243P of the Constitution of India, hence it is not required to filean income tax return. Assessing Officer passed an assessment orderdated 28.03.2006 rejecting the contention of the assessee that its incomeis exempted under Section 10(20). An appeal was filed by the assesseebefore the Commissioner (Appeals). Commissioner (Appeals) passedCan order on 10.02.2010 holding that assessee is a local authority withinthe meaning of Section 10(20) of the I.T. Act. The Revenue filed anappeal before the Income Tax Appellate Tribunal (hereinafter referredto as “ITAT”) challenging the appellate order. The ITAT accepted theRevenue’s claim that assessee is not covered within the definition ofClause (iii) of Explanation to Section 10(20). The Appellate Tribunal inDParagraph 2.6 allowed the appeal and restored back the matter to theCommissioner of Income Tax (Appeals). Para 2.6 of the Order of theITAT is as follows:- “2.6 Considering our decision in the case of Rajasthan HousingBoard, we feel that the Ld. CIT (A) was not justified in holdingEthat income of UTI is exempt u/s 10(20) of the Act. The Ld.CIT(A) has not decided other issues raised before him by theassessee because the Ld. CIT(A) was of the opinion that incomeof the assessee was exempt u/s 10(20) of the Act. Since we arevacating the order of the Ld. CIT(A) on the issue of liability ofFexemption u/s 10(20) of the Act, therefore, other issues are requiredto be considered afresh by the Ld. CIT (A). Accordingly, theappeals are restored back on the file of the Ld. CIT(A).”

5. Both the assessee and Revenue aggrieved by the order of ITAThad filed appeals before the High Court under Section 260A of the I.T.GAct. The High Court decided all the appeals vide its judgment dated25.07.2017. High Court held the assessee to be local authority within themeaning of Section 10(20) Explanation. After answering the above issuein favour of the assessee, the High court held that other issues havebecome academic. Consequently, the appeals filed by the Revenue weredismissed and that of the assessee were allowed.H

6. Another set of appeals have been filed by the Revenuequestioning the subsequent judgment of the High Court dated 23.10.2017deciding Income Tax Appeal No. 287 of 2016 and other appeals. Theabove appeals were filed by the assessee against the judgment of theITAT dated 08.06.2017 wherein ITAT had set aside the order of theAssessing Officer and had directed the Assessing Officer to providereasons for issuing Notice under Section 148 to the assessee in respectof assessment years 2005-2006 to 2009-2010. Assessee thereafter wasallowed to file objection before the Assessing Officer and AssessingOfficer was directed to pass a speaking order. Operative portion of thejudgment of ITAT contained in Para 7 is to the following effect:- “7. Since we have set aside the order passed in respect of theassessment year 2005-06 to 2009-10 as the Assessing Officerhas not provided the reasons u/s 148 of the Act, therefore, theappeals of the revenue arising out of the order passed by the LdCIT(A) in respect of the assessment year 2005-06 to 2009-10are also set aside with the direction to the Assessing Officer topass fresh order after providing the reasons to the assessee andafter deciding the objections if any in terms of the judgment in thecase of GKN DRIVESHAFTS (INDIA) LTD. VS. INCOME-TAX OFFICER AND OTHERS [2003] 259 ITR 19(SC). In lightof above, all the appeals of the assessee as well as revenue areset aside to the file of the Assessing officer for the statisticalpurposes.”

7. Aggrieved by the order of the ITAT, the appeals were filed bythe assessee. Assessee’s contention before the High Court was thatassessee being covered by definition of local authority within the meaningof Section 10(20) Explanation of I.T. Act, its income was exempt. TheDivision Bench of the High Court relied and quoted its earlier DivisionBench Judgment dated 25.07.2017 mentioned above and allowed theappeals filed by the assessees.

8. Revenue aggrieved by the aforesaid two judgments have comeup in these appeals. By both the judgments of the High Court, largenumber of income tax appeals were decided giving rise to different appealsunder consideration in this batch of appeals.

9. We have heard Mr. Vikramjit Banerjee, learned AdditionalSolicitor General of India, Shri K. Radhakrishnan, learned senior counsel AB

C

DE

F

G

H

Afor the appellants. Shri Sanjay Jhanwar and other learned counsel havebeen heard for the respondent.

10. Learned counsel for the appellant in support of the appealcontends that the Division Bench of the High Court committed error incoming to the conclusion that Urban Improvement Trust - the assesseeBis a local authority within the meaning of Explanation to Section 10(20)of the I.T. Act. It is submitted that Urban Improvement Trust mighthave been earlier getting benefit of wide definition of local authorityprior to amendment by Finance Act, 2002 but after amendments in Section10(20) by Finance Act, 2002, Urban Improvement Trust is no longerincluded in the definition of local authority. Learned counsel for theCappellant further submits that assessee, i.e. Urban Improvement Trust isnot covered by any of clauses, i.e. clauses (i) to (iv) of Explanation toSection 10(20) of the I.T. Act. Learned counsel for the appellant furtherrelies on recent judgment of this Court in New Okhla IndustrialDevelopment Authority Vs. Chief Commissioner of Income TaxD& Ors. (2018) 8 SCALE 365, by which judgment, this Court hadoccasion to interpret Section 10(20) Explanation and the constitutionalprovisions of Articles 243P and 243Q of the Constitution.

11. Learned counsel for the assessee refuting the submission ofappellant contends that Urban Improvement Trust is fully covered byEthe definition of local authority as contained in Explanation to Section10(20) as amended by Finance Act, 2002. It is submitted that the UrbanImprovement Trust is constituted under the Rajasthan UrbanImprovement Act, 1959 and the assessee is performing various municipalfunctions, hence it is also entitled for the benefit, which is extended tothe municipalities. Learned counsel for the respondent submits that theFassessee, i.e. Urban Improvement Trust is covered within the definitionof local authority as given in sub-clause(iii) of Explanation, i.e. “MunicipalCommittee”. It is submitted that assessee performs the municipalfunctions, collects charges, has control over the municipal funds andafter dissolution of the trust, the entire fund is reverted back to theGMunicipal Board, which provision clearly indicate that it is a MunicipalCommittee and covered by definition of local authority under Section10(20). Learned counsel submits that the judgment of this Court in NewOkhla Industrial Development Authority Vs. Chief Commissionerof Income Tax & Ors.(supra) is distinguishable since in the saidjudgment, this Court had occasion to consider the provisions of UttarH

Pradesh Industrial Area Development Act, 1976, which was entirelydifferent legislation from one, which is under consideration in the presentcase, i.e. The Rajasthan Urban Improvement Act, 1959.

12. We have considered the submissions of the learned counselfor the parties and have perused the records.

13. The only issue, which has been raised by the learned counselfor the parties in this batch of appeals is as to “whether the UrbanImprovement Trust constituted under the Rajasthan Urban ImprovementAct, 1959 is a local authority within the meaning of Explanation to Section10(20) of the I.T. Act, 1961”?

14. By Finance Act, 2002, Section 10(20) of the I.T. Act wasamended by inserting an Explanation w.e.f. 01.04.2003. Section 10(20)as amended by Finance Act, 2002 is as follows:-

“10(20) the income of a local authority which is chargeable underthe head “Income from house property”, “Capital gains” or“Income from other sources” or from a trade or business carriedon by it which accrues or arises from the supply of a commodityor service (not being water or electricity) within its ownjurisdictional area or from the supply of water or electricity withinor outside its own jurisdictional area.

Explanation.—For the purposes of this clause, the expression“local authority” means—

(i) Panchayat as referred to in clause (d) of article 243 of theConstitution; or

(ii) Municipality as referred to in clause (e) of article 243P of theConstitution; or

(iii) Municipal Committee and District Board, legally entitled to,or entrusted by the Government with, the control or managementof a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the CantonmentsAct, 1924 (2 of 1924);”

15. By Finance Act, 2002, provisions of Section 10(20A) wasalso deleted. Section 10(20A) as it existed prior to Finance Act, 2002was as follows:- A

B

C

D

E

F

G

H

A

“10(20A) any income of an authority constituted in India by orunder any law enacted either for the purpose of dealing with andsatisfying the need for housing accommodation or for the purposeof planning, development or improvement of cities, towns andvillages or for both;”

B16. At this juncture, it is relevant to notice the Explanatory Noteson Finance Act, 2002. Explanatory Notes was on both the sections –Section 10(20) as well as Section 10(20A). Paragraphs 12.2 to 12.4 and13.1 to 13.4 of the Explanatory Notes, which are relevant for the presentpurpose are as follows:- C“12.2 Through Finance Act, 2002, this exemption has beenrestricted to the Panchayats and Municipalities as referred to inArticles 243(d) and 243(p)(e) of the Constitution of Indiarespectively. Municipal Committees and District Boards, legallyentitled to or entrusted by the Government with the control ormanagement of a Municipal or a local fund and Cantonment BoardsDas defined under section 3 of the Cantonments Act, 1924.

12.3 The exemption under clause (20) of section 10 would,therefore, not be available to Agricultural Marketing Societies andAgricultural Marketing Boards, etc., despite the fact that theymay be deemed to be treated as local authorities under any otherECentral or State Legislation. Exemption under this clause wouldnot be available to port trusts also.

12.4 This amendment will take effect from 1st April, 2003 andwill, accordingly, apply in relation to the assessment year 20032004 and subsequent assessment years.

F

13.1 Under the existing provisions contained in clause (20A) ofsection 10, income of the Housing Boards or other statutoryauthorities set up for the purpose of dealing with or satisfying theneed for housing accommodations or for the purpose of planning,development or improvement of cities, towns and villages is exemptGfrom payment of income tax.

13.2 Through Finance Act, 2002 clause (20A) of section 10 hasbeen deleted so as to withdraw exemption available to theabovementioned bodies. The income of Housing Boards of theStates and of Development Authorities would, therefore, alsobecome taxable.

H

13.3 Under section 80G, donation made to housing authorities,etc. referred to in clause (20A) of section 10 is eligible for 50%deduction from total income in the hands of the donors. Sinceclause (20A) of section 10 has been deleted, donation to the housingauthorities etc. would not be eligible for deduction in the hands ofthe donors and this may result in drying up of donations. To continuethe incentive to donation made to housing authorities etc., section80G has been amended so as to provide that 50% of the sum paidby an assessee to an authority constituted in India by or under anylaw enacted either for the purpose of dealing with and satisfyingthe need for housing accommodation or for the purpose of planning,development or improvement of cities, towns and villages, or forboth, shall be deducted from the total income of such assessee.

13.4 These amendments will take effect from lst April, 2003 andwill, accordingly, apply in relation to the assessment year 20032004 and subsequent assessment years.”

17. Section 10(20A), which existed prior to amendments made byFinance Act, 2002 exempted any income of an authority constituted inIndia by or under any law enacted either for the purpose of dealing withand satisfying the need for housing accommodation or for the purposeof planning, development or improvement of cities, towns and villages orfor both. The Rajasthan Urban Improvement Act, 1959 was enacted forthe improvement of Urban Areas in Rajasthan. The Act contains followingpreamble:- “An act for the improvement of Urban Areas in Rajasthan.

WHEREAS it is expedient to make provision for the improvementand expansion of urban areas in the State of Rajasthan.”

18. Section 10(20A) specifically granted exemption to income ofan authority constituted in India by or under any law and the RajasthanUrban Improvement Act, 1959 was, thus, clearly covered by Section10(20A) as was availing exemption under Section 10(20A) prior toFinance Act, 2002. What is the consequence of deletion of Section10(20A) and further insertion of Explanation under Section 10(20)providing for an exhaustive definition of the word “local authority”, whichwas not defined under the I.T. Act prior to Finance Act, 2002? Fordefinition of local authority, the provisions of General Clauses Act, 1897- Section 3(31) were looked into and applied. The definition of local A

B

C

D

E

F

G

H

Aauthority given under Section 3(31) of the General Clauses Act was asfollows:- “”local authority” shall mean a municipal committee, district board,body or port Commissioners or other authority legally entitled to,or entrusted by the Government with, the control or managementBof a municipal or local fund;”

19. The Explanation added to Section 10(20) now defines thedefinition of local authority in four clauses. Clause (i) relates to Panchayatas referred to in clause (d) of article 243 of the Constitution. Clause (ii)relates to Municipality as referred to in clause (e) of article 243P of theCConstitution. Clause(iv) relates to Cantonment Board as defined in section3 of the Cantonments Act, 1924 (2 of 1924). Learned counsel for theassessee claim that the assessee is covered under Clause (iii) ofExplanation to Section 10(20), which is to the following effect:- “(iii) Municipal Committee and District Board,legally entitled to,Dor entrusted by the Government with, the control or managementof a Municipal or local fund; or”

20. We, thus, have to confine our discussions to above Clause (iii)under which the assessee- Urban Improvement Trust claims to becovered. Before we advert to above Clause (iii), it is relevant to noticeEcertain provisions of the Rajasthan Urban Improvement Act, 1959 tofind out the nature of the Urban Improvement Trust constituted underthe said Act. The Rajasthan Urban Improvement Act, 1959 defines“improvement” in Section 2(vi) in following manner:- “2(vi) “improvement” with its grammatical variations means thecarrying out of building, engineering, mining or other operationsFin, on, over or under land or the making of any material change inany building or land [or making provision for any amenity in, on,over or under any building or land] and includes re-improvement;”

21. Section 2(x) defines “urban area” as follows:-G“2(x) “urban area” means the urban area notified under Section3 or, as the case may be, under Section 8;”

22. Section 2(2) of the Rajasthan Urban Improvement Act, 1959provides as follows:-

“2(2) All words and expressions not defined in this Act have,wherever used therein, the same meanings as are assigned tothem by the Municipal law for the time being in force:”

23. Section 9 provides for “Constitution of Trust”, which is as follows:- “Section 9. Constitution of Trusts.—(1) The Trust shall consistof—

(a) Chairman,

(b) two members of the Municipal Board, if any, having authorityin the urban area, [XXX].

[(bb) X X X]

[(c) such number of other persons, as may be determined by theState Government for each Trust, of whom one shall be a personbelonging to Scheduled Tribe or Scheduled Caste, if no person ofsuch caste or tribe is represented in the Trust by virtue of Clause(a) or Clause (b)]

[x X x]

(2) The Chairman and the persons referred to in Clause (c) ofSub-section (1) [x x x] shall be appointed by the State Governmentby notification.

(3) The members of the Municipal Board referred in Clause (b)of Sub-section (1) shall be elected by the said Board.

(4) If the said Board does not, by such date as may be fixed bythe State Government, elect two of its members to be Trustees,the State Government shall appoint two members of the said Boardto be Trustees and every person so appointed shall be deemed tobe a Trustee as if he had been duly elected by the MunicipalBoard.

(5) If the said Board shall have been superseded or dissolved inaccordance with the provision of the Municipal law for the timebeing in force, it shall be represented on the Trust by personsappointed or elected, as the case may be, by the officer or authorityappointed under the said law to discharge the functions and exercisethe powers of the Board during the period of its supersession ordissolution.

A

B

C

D

E

F

G

H

A(6) Of the person referred to in Clause (c) of Sub-section (1) atleast one shall be a person in the service of the State Government.

(7) The names of all persons appointed or elected to the Trustshall be notified by the State Government in the Official Gazette.”

24. Under Section 47, certain powers under the Municipal lawsBmay be vested in the Trust. Section 48 provides for Transfer of dutiesetc. of Municipal Board to Trust. Sections 47 and 48 are as follows:-

“Section 47. Powers under the Municipal laws vested inthe Trust.—(1) Such provisions of the Municipal law for thetime being in force in any part of the State as may be prescribedCin the case of each Trust, shall so far as may be consistent withthe tenor of this Act, apply to [the urban area for which the Trustis established under this Act and] all references in the saidprovisions to the Municipal Board, Council or Corporation shallbe construed as references to the Trust which, in respect of anyD[such urban area] may alone exercise and perform all or any ofthe powers and functions which under any of the said provisionsmight have been exercised and performed by the Municipal Board,Council or Corporation or by the Chairman or President or by anyofficer thereof:

EProvided that the Trust may delegate to the Chairman or to anyofficer of the Trust all or any of the powers conferred under thissection.

[(2) to (5) Omitted by Rajasthan Act No. 26 of 1976.]

Section 48, Transfer of duties etc. of Municipal Board toFTrust.—The State Government may by notification in the OfficialGazette transfer to the Trust any of the duties, powers, functionsand responsibilities of the Municipal Board and thereupon the Trustshall carry out, exercise, perform and discharge such duties, powers,functions and responsibilities.”

G25. Section 61 provides for the Improvement Fund. Section 62empowers the Trust to levy betterment charges. Section 63 provides forassessment of betterment charge and Section 64 provides for settlementof betterment charge by arbitrators. One more section on which reliancehas been placed by the learned counsel for the appellant is Section 105,which is to the following effect:-H

“Section 105. Ultimate dissolution of Trust and Transfer ofits assets and liabilities to the Municipal Board.—(1) Whenall schemes sanctioned under this Act have been executed orhave been so far executed as to render the continued existenceof the Trust, in the opinion of the State Government, unnecessary,the State Government may by notification declare that the Trustshall be dissolved from such date as may be specified in this behalfin such notification and the Trust shall be deemed to be dissolvedaccordingly.

(2) From the said date—

(a) all properties, funds and dues which are vested in or realisableby the Trust shall vest in and be realisable by the Municipal Board; (b) all liabilities which are enforceable against the Trust shall beenforceable against the Municipal Board;

(c) for the purpose of completing the execution of any schemesanctioned under this Act, Which has not been fully executed bythe Trust, and, of realising properties, funds and dues referred toin Clause (a) the functions of the Trust under this Act shall bedischarged by the Municipal Board as if it were the Trust underthis Act, and (d) the Municipal Board shall keep separate accounts of all moneysrespectively received and expended by it under this Act, until allloans raised hereunder have, been repaid and until all other liabilitiesreferred to in clause (b) have been duly met.”

26. It is relevant to notice that in the same year in which theRajasthan Urban Improvement Act, 1959 was passed, another enactmentnamely, the Rajasthan Municipalities Act, 1959 was enacted. Learnedcounsel for the respondent has referred to notification dated 09.07.1970by which the State Government has established Urban ImprovementTrust, Kota. Notification dated 09.07.1970 is as follows;- “TOWN PLANNING DEPARTMENT

NOTIFICATION

Jaipur, July 9, 1970

No. 5 (3) TP/70- In exercise of the powers conferred bySection 8 read with Section 9 and 13 of the Rajasthan Urban A

B

C

D

E

F

G

H

AImprovement Act, I959 (Act No. 35 of 1959) of the StateGovernment here by orders :

1. that for the purpose of carrying out improvement of theUrban Area included in the Municipal limits of Kota Town,a board of trustee called the improvement Trust, Kota shallBbe established.

2. That the said trust shall consist of:-

a. A Chairman.

b. Two members/Nominees of the Municipal Council,Kota.

C

c. Chief Town Planner or his nominee.

d. 4 other persons.

In exercise of the powers conferred by sub-section(2) ofSection 9 of the said Act, the State Government further appointsthe following persons as the Chairman and other Member of thesaid Trust for a period of three years with effect from 10.7.1970or earlier till he is required to hold the office under Section 11 and12 of the said Act:

D

1. Shri Nathu Lal Jain, Advocate Chairman E

2. Chief Town Planner or his Nominee Member

3. Sushri Nagendra Bala, Ex. M.L.A. Member

4. Collector, Kota Member

3. The term of the office of the said Trustees shall commencewith effect from 10.7.70.

F

The Municipal Council, Kota is called upon to appoint thetwo persons to be trustees of the said Trust in pursuance of sub-section(5) of Section 9 of the said Act within the period of onemonth from the date of issue of this Notification.

G

By Order of the Governor,

R.K. Saxena,

Secretary to the Government”

H

27. A perusal of the Scheme of the Rajasthan Urban ImprovementAct, 1959 as well as the Rajasthan Municipalities Act, 1959 indicate thatUrban Improvement Trust undertakes development in the urban areaincluded in municipality/municipal board. Urban Improvement Trust isnot constituted in place of the municipality/municipal board rather itundertakes the act of improvement in urban areas of a municipality/municipal board under the Rajasthan Urban Improvement Act, 1959. Itmay also perform certain limited power of the municipal board as referredto in Sections 47 and 48 but on the strength of such provision UrbanImprovement Trust does not become a municipality or municipal board.After the insertion of Part IXA in the Constitution by the Constitution(Seventy-fourth) Amendment Act, 1992 w.e.f. 01.06.1993, Articles 243Qdeals with constitution of Municipalities. Section 10(20) Explanation,Clause (ii) relates to Municipalities.

28. Learned counsel for the assessee has not based its claim onthe basis of Clause (ii) of Explanation rather it has confined its claim toonly Clause (iii). Under Clause (iii) claim of the assessee is that it is a“Municipal Committee”. We, thus, have to answer as to whether it is aMunicipal Committee within the meaning of Explanation to Section 10(20)or not?

29. The word “Municipal Committee” as occurring in Section10(20) Explanation came for consideration before this Court inAgricultural Produce Market Committee Narela, Delhi Vs.Commissioner of Income Tax and Another, (2008) 9 SCC 434. Inthe above case, this Court had examined the Explanation to Section10(20) as amended by Finance Act, 2002 and the definition of localauthority contained therein. After noticing the definition of local authorityas contained in Section 10(20) Explanation w.e.f. 01.04.2003 as well asSection 3(31) of the General Clauses Act, 1897. Following was stated inPara 30 and 31:-

“30. At the outset, it may be noted that prior to the Finance Act,2002, the said 1961 Act did not contain the definition of the word“local authority”. That word came to be defined for the first timeby the Finance Act, 2002 vide the said Explanation/definition clause.

31. Certain glaring features can be deciphered from the abovecomparative chart. Under Section 3(31) of the General ClausesAct, 1897, “local authority” was defined to mean “a Municipal AB

C

D

E

F

G

H

SUPREME COURT REPORTS

A

ACommittee, District Board, Body of Port Commissioners or otherauthority legally entitled to … the control or management of amunicipal or local fund”. The words “other authority” in Section3(31) of the 1897 Act have been omitted by Parliament in theExplanation/definition clause inserted in Section 10(20) of the 1961Act vide the Finance Act, 2002. Therefore, in our view, it wouldBnot be correct to say that the entire definition of the word “localauthority” is bodily lifted from Section 3(31) of the 1897 Act andincorporated, by Parliament, in the said Explanation to Section10(20) of the 1961 Act. This deliberate omission is important.”

30. In the above case, earlier judgment of this Court in Union ofCIndia Vs. R.C. Jain, (1981) 2 SCC 308 was considered where thisCourt had laid down and applied the functional test as to whether a bodyis local authority or not? This Court laid down that functional test asevolved in R.C. Jain’s case (supra) is no more applicable afteramendment of Section 10(20) of I.T. Act by Finance Act, 2002. FollowingDwas laid down in paragraph 35:- “35. One more aspect needs to be mentioned. In R.C. Jain, (1981)2 SCC 308 the test of “like nature” was adopted as the words“other authority” came after the words “Municipal Committee,District Board, Body of Port Commissioners”. Therefore, the wordsE“other authority” in Section 3(31) took colour from the earlierwords, namely, “Municipal Committee, District Board or Body ofPort Commissioners”. This is how the functional test is evolved inR.C. Jain. However, as stated earlier, Parliament in its legislativewisdom has omitted the words “other authority” from the saidExplanation to Section 10(20) of the 1961 Act. The saidFExplanation to Section 10(20) provides a definition to the word“local authority”. It is an exhaustive definition. It is not an inclusivedefinition. The words “other authority” do not find place in thesaid Explanation. Even, according to the appellant(s), AMC(s) isneither a Municipal Committee nor a District Board nor a MunicipalGCommittee nor a panchayat. Therefore, in our view functionaltest and the test of incorporation as laid down in R.C. Jain is nomore applicable to the Explanation to Section 10(20) of the 1961Act. Therefore, in our view the judgment of this Court in R.C.Jain followed by judgments of various High Courts on the statusand character of AMC(s) is no more applicable to the provisions E

G

H

of Section 10(20) after the insertion of the Explanation/definitionclause to that sub-section vide the Finance Act, 2002.”

31. This Court further noticed the expression “MunicipalCommittee” in Clause (iii) of Section 10(20). This Court held that thewords “Municipal Committee and District Board” in Explanation wereused out of abundant caution. In 1897, when the General Clauses Actwas enacted there existed in India Municipal Committees and DistrictBoards, which were discharging the municipal functions in different partsof the country. The expression “Municipal Committee and District Board”were included by amendments incorporated by Finance Act, 2002 totake into its fold those Municipal Committees and District Board whichare still discharging municipal functions where no other municipalities orboards to discharge municipal functions have been constituted. Inparagraph Nos. 36 and 37 following has been laid down:-

“36[**]. The question still remains as to why Parliament has usedthe words “Municipal Committee” and “District Board” in Item(iii) of the said Explanation. In our view, Parliament has defined“local authority” to mean—a panchayat as referred to in clause(d) of Article 243 of the Constitution of India and municipality asreferred to in clause (e) of Article 243-P of the Constitution ofIndia. However, there is no reference to Article 243 after thewords “Municipal Committee” and “District Board”. In our view,the Municipal Committee and District Board in the said Explanationare used out of abundant caution.

37. In 1897, when the General Clauses Act was enacted thereexisted in India Municipal Committees and District Boards. Theycontinued even thereafter. In some remote place it is possible thatthere exists a Municipal Committee or a District Board. Therefore,in our view, apart from a panchayat and municipality, Parliamentin its wisdom decided to give exemption to Municipal Committeeand District Board. Earlier there were District Board Acts invarious States. Most of the States had repealed those Acts.However, it is quite possible that in some remote place DistrictBoard may still exist. Therefore, Parliament decided to giveexemption to such Municipal Committees and District Boards.Therefore, in our view, advisedly Parliament has retained exemptionfor Municipal Committee and District Board apart from panchayatand municipality.”

A

B

C

DE

F

G

H

A32. This Court further noticed the constitutional provision of PartIX-A and noticed that any law relating to municipalities in force in aState immediately before the commencement of the Constitution(Seventy-fourth Amendment) Act, 1992, even if inconsistent with theprovisions of Part IX-A, shall continue to be in force until amended orrepealed by a competent legislature. In Para 39, following has been laidBdown:- “39. Similarly, under Part IX-A there is Article 243-ZF whichrefers to the “Municipalities”. This article, inter alia, states thatnotwithstanding anything in Part IX-A, any provision of any lawrelating to municipalities in force in a State immediately beforeCthe commencement of the Constitution (Seventy-fourthAmendment) Act, 1992, which is inconsistent with the provisionsof Part IX-A, shall continue to be in force until amended or repealedby a competent legislature. In our view, Article 243-N and Article243-ZF indicate that there could be enactments which still retainDthe entities like Municipal Committees and District Boards and ifthey exist, Parliament intends to give exemption to their incomeunder Section 10(20) of the 1961 Act.”

33. In above case, this Court, thus, has held that the expression“Municipal Committee and District Board” occurring in Clause (iii) ofEExplanation referred to those bodies, which are discharging municipalfunctions and power in any part of country and so far has not beensubstituted by any other Body by any Act of Legislature. The word“Municipal Committee” occurring in Clause (iii) Explanation, thus, has adefinite purpose and object. Purpose and object was to cover those bodies,which are discharging municipal functions but are not covered by theFdefinition of municipalities as was required to be constituted by Article243Q of the Constitution of India. Urban Improvement Trust constitutedunder the Rajasthan Urban Improvement Act, 1959, thus, cannot beheld to be covered by the definition of Municipal Committee as containedin Clause (iii) of Explanation to Section 10(20) of the I.T. Act. Further,Gas noticed above, prior to deletion of Section 10(20A), Section 10(20A)was a provision which exempted the income of authority constituted inIndia by or under any law enacted for the purpose of planning,development or improvement of cities, towns and villages or for both.There cannot be any dispute that Urban Improvement Trust, i.e. the H

H

assessee was fully covered by the definition of authorities as containedin Section 10(20A) prior to its deletion. When there is a specific deletionof Section 10(20A), the said deletion was for an object and purpose.The Explanatory Notes in Paragraph Nos. 13.1 to 13.4 as noticed aboveclearly mentioned that “income of certain Housing Boards etc. to becometaxable”. The deletion of authorities, which were enumerated in Section10(20A) was a clear indicator that such authorities, which were enjoyingexemption under Section 10(20A) shall no longer be entitled to enjoy theexemption henceforth. The deletion of Section 10(20A) thus has to begiven a purpose and meaning.

34. This Court in New Okhla Industrial DevelopmentAuthority Vs. Chief Commissioner of Income Tax & Ors. (supra),which was a judgment delivered by this very Bench had considered indetail the object and purpose of Section 10(20A), the object and purposeof Finance Act, 2002 amendment adding the Explanation to Section 10(20)and deletion of Section 10(20A).

35. The provisions of Sections 47 and 48 are to permit certainpowers of the municipal boards to be performed by the Trust whichdoes not transform the Trust into a Municipal Committee. The powerentrusted under Sections 47 and 48 are for limited purpose, for purposesof carrying out the improvement by the Improvement Trusts.

36. Sections 61 to 64 as noticed above are the provisionsempowering levy of betterment charges, which is again in reference toand in context of carrying out improvement by the Improvement Trust inurban areas. The Municipal Board, Kota performs its functions, in areaswhere Municipal Board still exists. There is no reason to accept thatUrban Improvement Trust is a Municipal Committee within the meaningof Section 10(20) Explanation Clause (iii). Coming back to Section 105,which provides for ultimate dissolution of Trust and transfer of its assetsand liabilities to the Municipal Board, this provision does not in any mannerimprove the case of the assessee. When the Trust is dissolved or atdissolution, properties and funds and dues vested in or realisable by theTrust shall vest in and be realisable by the Municipal Board, which is aprovision for different purpose and object. The above provision does notsupport the contention that Improvement Trust is a Municipal Committeeas referred to in Clause (iii) of Explanation to Section 10(20) of the I.T.Act.

A

B

C

D

E

F

G

H

A

A37. We, thus, are of the view that Scheme of the Rajasthan UrbanImprovement Act, 1959 does not permit acceptance of the contention ofthe appellant assessee that Urban Improvement Trust is a MunicipalCommittee within the meaning of Section 10(20) Explanation (iii). Thepurpose and object for expression “Municipal Committee” used in Section10(20) Explanation (iii) has been explained, as already noticed above, byBthis Court’s judgment in Agricultural Produce Market CommitteeNarela, Delhi (supra).

38. The entire consideration of the High Court in the impugnedjudgment is contained in paragraph 15 to 18 which are to the followingeffect:- C

“15. It is true that the functions which are carried out by theassessee are statutory functions and carry on for the benefit ofthe State Government for urban development therefore, in ourconsidered opinion, the functions carried out by the authority is asupreme function and fall within the activity of the StateDGovernment.

16. In that view of the matter, the judgments which are stronglyrelied upon by counsel for the department are of no help in thefacts of the case as the case relied upon by the department wasin respect of industrial corporation which was under the statutefor the purpose of making profit. The fees and other chargeswhich are covered are statutorily for the development of the urbanarea. In that view of the matter, the judgment which sought to berelied upon by the counsel for the respondents, in our consideredopinion, would be of importance and the functions which are carriedout by the assessee is statutory function. In our considered opinion,under clause-10(20) & Sub-clause (3) Municipal Committee andDistrict Board are legal entity entrusted by the function of theGovernment within the control or management of the municipalor local authority and will try to help the assessee.

E

F

17. In that view of the matter, the reliance placed by counsel forthe department regarding 10(20) and explanation A will not makeany difference. Taking into consideration income of authority isunder constitution of India vide order enacted either for the purposeof dealing with or setting up the housing scheme for the purposeof planning and development of the improvement of the cities, G

H

town and villages or both for which the authority are created tocarry out the function of State which are sovereign whereas theurban development and calculation of development charges willfall under the development charges.

18. In that view of the matter, deletion of 20A will not makedifference in case of assessee. In our considered opinion, Clause-3 will come in the help of the assessee. In that view of the matter,we are considered opinion, that the authority assessee is a localauthority for the purpose of carrying out of the improvement anddevelopment function of the State.”

39. The High Court based its decision on the fact that functionscarried out by the assessee are statutory functions and it is carrying onthe functions for the benefit of the State Government for urbandevelopment. The said reasoning cannot lead to the conclusion that it isa Municipal Committee within the meaning of Section 10(20) ExplanationClause (iii). The High Court has not adverted to the relevant facts andcircumstances and without considering the relevant aspects has arrivedat erroneous conclusions. Judgments of the High Court are unsustainable.

40. In view of foregoing discussions, we are of the view thatjudgments of the High Court deserves to be set aside. All the appealsare allowed. In view of setting aside the judgments of the High Courtdated 25.07.2017 and 23.10.2017, the order passed by ITAT revives.Parties shall bear their own costs.

Kalpana K. Tripathy

Appeals allowed.

A

B

C

D

E

F

G

H