NOIDA not a local authority u/s 10(20) and hence not exempt from Income Tax-Supreme Court

NOIDA not a local authority u/s 10(20) and hence not exempt from Income Tax-Supreme Court. By performing certain municipal functions it cannot acquire the essential features of the Municipality contemplated by the Constitution.

ABCAUS Case Law Citation:
ABCAUS 2393 (2018) 07 SC

Important Case Laws Cited/relied upon by the parties:
Sundaram Pillai and others vs. V.R. Pattabiraman and others, 1985(1) SCC 591.

Saij Gram Panchayat vs. State of Gujarat an others, 1999 (2) SCC 366.
State of Gujarat and others vs. ESSAR Oil Limited and another, 2012 (3) SCC 522
Agricultural Produce Market Committee vs. Commissioner of Income-tax, (2006)156 ITR 286

The instant appeal had been filed challenging the Division Bench judgment of Allahabad High Court dismissing the writ petition filled by the appellant challenging the notices issued by the Income Tax Authority under Section 142 of the Income Tax Act, 1961 (the Act) and the judgment rejecting the review application.

The appellant-New Okhla Industrial Development Authority (Noida) had been constituted under Section 3 of the U.P. Industrial Area Development Act, 1976 (the 1976 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 matters connected therewith.

Income Tax Department issued notices under Section 142 of the Income Tax Act, 1961 (the Act) to the appellant requiring it to file return of income. The appellant filed writ petition contending that it was a local authority, hence, exempted from payment of income tax under Section 10(20) and Section 10(20A) of the Act. The writ petition was allowed by the Division Bench of the Allahabad High Court holding that the appellant was a local body and covered by the exemption under Section 10(20A) of the Act.

Later, By the Constitution (74th Amendment) Act, 1992, the Parliament had inserted Part IXA of the Constitution providing for the constitution of Municipalities and “industrial township” status of the appellant was withdrawn.

Again, a notice was issued by the Assistant Commissioner of Income Tax to the appellant for furnishing Income Tax Return . The Income Tax authorities also issued notice to the different Banks to deduct TDS as required under Section 194A of the Income Tax Act and remit the same to the Central Government Account.

The appellant filed a writ petition praying for quashing the notice u/s 142 of the Income Tax Act. The appellant also challenged notices issued under Section 131 to the Bankers of the appellant. However the High Court held that after 01.03.2003 the NOIDA was no longer a local authority within the meaning of Section 10(20) of the Act and the writ petition was consequently dismissed. The appellant filed a review application which too was dismissed by the Hon’ble High Court.

Aggrieved by those two judgments the instant civil appeal had been filed by the appellant.

The Hon’ble Supreme Court observed that the only question to be considered was as to whether the appellant is a local authority within the meaning of Section 10(20) as amended by Finance Act, 2002.

The Hon’ble Supreme Court observed that the constitutional provisions as contained in Part IXA delineate that the Constitution itself provided for constitution of Municipalities, duration of Municipalities, powers of Authorities and responsibilities of the Municipalities. The Municipalities are created as vibrant democratic units of self-government. The duration of Municipality was provided for five years contemplating regular election for electing representatives to represent the Municipality. The special features of the Municipality as was contemplated by the constitutional provisions contained in Part IXA cannot be said to be present in Authority as delineated by statutory scheme of 1976 Act. It is true that various municipal functions are also being performed by the Authority as per 1976 Act but the mere facts that certain municipal functions were also performed by the authority it cannot acquire the essential features of the Municipality which are contemplated by Part IXA of the Constitution.

The Hon’ble Supreme Court opined that proviso to Article 243Q(1) does not contemplate constitution of an industrial establishment as a Municipality rather clarifies an exception where Municipality under clause (1) of Article 243Q may not be constituted in an urban area. The proviso is an exception to the constitution of Municipality as contemplated by sub-clause (1) of Article 243Q. No other interpretation of the proviso conforms to the constitution scheme.

The Hon’ble Supreme Court clarified that the proviso is an exception to the constitutional provisions which provide that there shall be constituted in every State a Nagar Panchayat, a Municipal Council and a Municipal Corporation. Exception is covered by proviso that where an industrial township is providing municipal services the Governor having regard to the size of the area and the municipal services either being provided or proposed to be provided by an industrial establishment specify it to be an industrial township. 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 was 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).

The Hon’ble Supreme Court opined that, notification under proviso to Article 243Q(1) is not akin to constitution of Municipality. Accordingly, an industrial township as specified under notification dated 24.12.2001 is not akin to Municipality as contemplated under Article 243Q.

It was clarified that prior to Finance Act, 2002 there was no definition of ‘local authority’ under the Income Tax Act, and 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. Now the Explanation having an exhaustive definition of local authority, Section 3(31) of General Clauses Act, 1892 is no more applicable.

The Hon’ble Supreme Court referring to the Explanatory Notes on Finance Act, 2002 on Section 10(20) and Section 10(20A) pointed out that notes 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.

The Hon’ble Supreme Court clarified that 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 under Section 10(20) to claim exemption.

It was held that NOIDA is not a local authority as contained in Explanation to Section 10(20).

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