Case Law Details
Status of the Local Authority cannot be denied for the reason that members of the assessee-Mandi Parishad not elected
Local Authority Status cannot be denied for non election of members of assessee-Mandi Parishad
RELEVANT PARAGRAPH
15. We have heard both the parties at length and carefully gone through the materials available on record. In the instant case, the controversy to be resolved is whether assessee was a Local Authority for the year under consideration and as such was eligible for exemption of income u/s. 10(20) of the Act or not. Section 10 of the Act deals with the income which are not to be included in computing total income of previous year of any person and clause (20) of section 10 deals with the income of a local authority, It is not in dispute that assessee being a Mandi Parishad was established in accordance with the provisions contained in Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964. To decide the issue whether assessee was a local or not for the year under consideration, it is relevant to discuss the provisions of section 10(20) which read as under:-
“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included –
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(20) the income of a local authority which is chargeable under the head “Income from house property”, “Capital Gains” or “Income from other sources” or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [not being water or electricity] within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.
Explanation — For the purpose of this clause, the expression “local authority” means –
(i) Panchayat as referred to in clause (d) of article 243 of the Constitution ; or
(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or
(iii) Municipal Committee and District Board, legally-entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or
(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924).”
16. The aforesaid Explanation to section 10(20) of the Act provides definition to the expression Local Authority and it is an exhaustive definition. As per above definition of Local Authority inserted w.e.f. 1.4.2003, assessee does not fall in the above said exhaustive definition, as such is not entitled to exemption u/s. 10(20) of the Act w.e.f. 1.4.2003. Now we have to see whether the assessee is entitled to claim exemption u/s. 10(20) of the Act being a Local Authority before the amendment in the said section by-the finance Act, 2002 w.e.f. 1.4.2003. The term “Authority” in the context of clause (20) to section 10 of the Act is construed to mean an authority which must be legally entitled to or entrusted by the Government with control or management of local funds. It must be empowered to exercise quasi Governmental or Governmental powers to perform Governmental or quasi Governmental functions. It must also be empowered to issue direction which may be enforced with punishment. It must have a vested right to command and be obeyed, and must have power to make regulations, rules or bye laws having the force of law. The word “Authority” as part of the expression “Local Authority” has the effect of an enlarging the meaning of local authority as ordinarily understood indicating not merely Municipalities and Panchayats. The Constitution of India had understood the word “Authority” in the Constitution widely and Article 12 of the Constitution defining the state would include “such authorities within the territory of India or under the control of the Central Government” and since modern governments perform a large number of functions through autonomous bodies serving as instrumentalities of the state having considerable authority under the statutes, which creates them, the word “Authority” has been understood in a wide sense, so that the law applicable under the Constitution would apply for income tax puiposes as well. Therefore, the Marketing Boards being creation of the State is subject to the Constitutional limitation as the State itself. In the case of A jay Hasia vs. Khalid Mujib, AIR 1981 SC 487, the Hon’ble Supreme Court of India laid down the following tests for the inference whether a body is instrumentality of the Government and therefore an authority or not:-
“(1) If the entire share capital of the body is held by the Government, it goes a long way towards indicating that a body is an instrumentality of the Government.
(2) Where the financial assistance given by the government is so large as to meet almost entire expenditure of the body, it may indicate that the body is impregnated with governmental character.
(3) It is a relevant factor if the body enjoys monopoly status which is conferred or protected by the state.
(4) Existence of deep and pervasive state control may afford an indication that the body is a state instrumentality.
(5) If the functions performed by the body are of public importance and closely related to governmental functions, it is a relevant factory to treat the body as an instrumentality of the government.”
(Emphasis supplied by us)
17. Since many authorities claimed to be Local Authority, therefore, it was considered by the C.B.D.T. to make radical amendment in clause (20) of section 1 0 of the Act by incorporating a definition of Local Authority by way of amendment by the finance Act, 2002 w.e.f. 1.4.2003. That amendment is not with retrospective effect rather is prospective being effective from assessment year 2003-04. However, the controversy as regards to the interpretation of section 10(20) of the Act would persist and to overcome that controversy we have to see various judgments of the Hon’ble Courts. It is an undisputed fact that before insertion of Explanation to section 10(20) of the Act, the word “focal Authority” has not been defined in the Income-tax Act. Although included in the definition of “person” in section 2(31)(vi) of the Income Tax Act, 1961, there is no definition of the expression “focal Authority” in the Income-tax Act. Hence, it is appropriate to refer to the definition of that expression in section 3(31) of the General Clauses Act. 1 897 which defines that an authority in order to be a Local Authority must be of like nature and character as Municipal Committee, District Boards or Body of Port Commissioners, it should possess many, if not all, of the characteristics of a Municipal Committee, etc and it should possess one essential feature namely that it is legally entitled to, or entrusted by the Government with control and management of a Municipal or Local Authority. Since the Legislature in its wisdom has excluded expression “other authority” found u/s. 3(31) of the General Clauses Act, 1897 from the Explanation to section 10(20) of the Act w.esf. 1.4.2003 i.e. assessment year 2003-04 but there appears to be no intention to make amendment effective as retrospective, so it cannot be held that before 1.4.2003 the authority other than authorities defined in Explanation to section 10(20) of the Act cannot claim the status of Local Authority.
18. As we have already mentioned that word “Local Authority” is not defined for the relevant assessment year under the Income-tax Act but it is defined u/s. 3(31) of the General Clauses Act. 1 897, and the major tests to determine whether a body is a Local Authority are as follows:-
“(i) The authority must have separate legal existence as a corporate body with autonomous status;
(ii) Prior to function in a defined area and ordinarily, wholly or partly; directly or indirectly be elected by the inhabitants of the area;
(iii) It has to perform governmental functions such as running a market, providing civic amenities, etc;
(iv) It should have power to raise funds for the furtherance of its activities and the fulfillment of its projects by levying taxes/fees in addition to money provided by Government. Control and management of the fund has to vest with the authority.”
19. Now it is to be seen whether assessee satisfies the above said tests. It is noticed that the assessee is established under the, Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964 and the clause 26A therein reads as under:-
“26-A. Establishment of the Board.- (1) The State Government shall, by notification in the Gazette and with effect from a date to be specified therein, constitute a Board by the name of the State Agricultural Produce Markets Board with its head office at Lucknow.
(2) The Board shall be a body corporate by the said name having perpetual succession and a common seal and may sue or be sued by the said name and acquire, hold and dispose of property and enter into contracts
(3) The Board shall for all purposes be deemed to be a local authority.”
22. From the conjoint reading of the aforesaid clauses of Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964, it would be clear that assessee fulfils all the requirements of the tests laid down u/s. 3(31) of the General Clauses Act, 1897 except that its office bearers are not elected but they are free to take their own policy decisions, so it can be said that the assessee Board performs Governmental functions such as to approve proposals of the new sites selected by the Committee for the development of markets, to make necessary arrangements for propaganda and publicity of matters related to regulate marketing of agricultural produce, to provide facilities for the training of officers and servants of Committees, superintendence and control over the working of the Market Committees and other affairs thereof i.e. construction of new market yards and development of existing markets and market areas, etc.
25. From the conjoint reading of the above discussed various clauses relating to the establishment, constitution of the assessee Board, its powers, raising of funds and their utilization, it would be clear that the assessee is a Corporate Body having separate autonomous status. Its operational areas are defined. It is free to take its own decisions for the purpose of establishment and to run a market, to provide civic amenities in the market, to provide facilities to the agriculturists, other producers and payers of the market fee in the market area, development of market yards, painths, repairs of link roads, market lanes, etc and having superintendence and control over the working of Market Committees. As such the assessee Board is fulfilling the various tests laid down in the above referred to cases of Ajay Hasia vs. Khalid Mujib (supra) and Union of India vs. R. C. Jain (supra) except that its officer bearers are not elected. However, the office bearers and the members are selected from the State Government, Specialized filed relating to the agriculture, Out of the producers, traders and commission agents, so it can be said that the members of the assessee Board are selected from the fields which are directly related to the agriculture sector. Therefore, only for this reason that the members of the assessee Board are not elected, the status of the “Local Authority” cannot be denied to the assessee when all other tests laid down by the Hon’ble Supreme Court of India in the above referred to cases have been fulfilled. Now we have to discuss the ratio of various cases laws related to the Market Committees.
29. In view of the aforesaid discussions, it can be concluded that assessee was established under Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964. The provisions of the said Act enable the assessee to provide facilities for superintendence and control over the working of Market Committee, giving directions to the Committees in general or any Committee in particular, to approve the proposal of the new sites selected by the Committees for the development of markets, to make necessary arrangements for propaganda and publicity of matters related to regulate marketing of agricultural produce, to do other things as may be general interest of Market Committees, to use funds for providing facilities to the agriculturists, other producers, for construction, maintenance and repairs of link roads, for development of principle market yards, for providing aid to financially weak and under developed Committees, etc. Therefore, we are of the view that the assessee was entitled to exemption u/s. 10(20) of the Act prior to assessment year 2003-04 because Explanation has been inserted in section 10(20) of the Act w.e.f. 1.4.2003, when the assessee does not fall in the various categories defined therein. However, prior to that date i.e. 1.4.2003, no such instruction is issue by the C.B.D.T. to the Tax Authorities that the assessee cannot claim the status of Local Authority. For that proposition, it is relevant to discuss the Board Circular No 8 of 200*2 dated 27.8.2002 which read as under:-
“FINANCE ACT, 2002 – EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES.
Circular No.8 of 2002, dated August 27, 2002.
“1. INTRODUCTION
1.1 The Finance Act, 2002 as passed by the Parliament, received the assent of the President on 11th t-lay, 2002 and has been enacted as Act No. 20 of 2002. This circular explains the substance of the provisions of the Act relating to direct taxes.
12. Income of certain Local Authorities to become taxable
12.1 Under the existing provisions contained in clause (20) of section 10, the income of a local authority chargeable under the head Income from house property, ‘Capital gains’ or Income from other sources or from a trade or business carried on by it which accrues or arise!; from the supply of a commodity or service within its jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area is exempt from payment of income-tax.
12.2 Through Finance Act, 2002, this exemption has been restricted to the Panchayats and Municipalities as referred to in Articles 243(d) and 243(p)(e) of the Constitution of India respectively, Municipal Committees and District Boards, legally entitled to or entrusted by the Government with the control or management of a Municipal or a local fund and Cantonment Boards as 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 and Agricultural Marketing Boards etc. despite the fact that they may be deemed to be treated as local authorities under any other Central or State legislation. Exemption under this clause would not be available to Port Trusts also.
12.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and Subsequent assessment years.”
30. From instruction 12.3 in the above Circular, it is crystal clear that exemption under clause (20) of section 10 would not be available to the assessee w.e.f. 1.4.2003. However, nothing is stated for the period preceding 1.4.2003 which clearly shows that there was no intention of the C.B.D.T. to make circular effective retrospectively rather it is prospective, therefore, assessee was entitled to the status of “Local Authority” before amendment which is effective from 1.4.2003. Further more the Hon’ble Supreme Court of India in the case of Agricultural Produce Market Committee, Narela vs. C.l.T. and Another (supra) has considered its earlier judgment in thecase of Union of India vs. R. C. Jain, 1981 2 SCC 308 (supra). The said judgment has not been overruled. Therefore functional tests as laid down in the aforesaid case i.e. Union of India vs. R. C. Jain (supra) are applicable for the years which falls prior to the amendment made by the Finance Act, 2002 in section 10(20) of the Act. The Hon’ble Supreme Court of India vide para 9 page 4 of the above said judgment of Agricultural Produce Market Committee, Narela, observed as under:-
“At the outset, it may be stated that all AMCs at different places were enjoying exemption from Income-tax u/s. 10(20) of the 1961 Act prior to its amendment by the Finance Act, 2002 with effect from April 1,2003.”
35. In the instant case also, keeping in view the ratio laid down in above referred to case of Hon’ble Delhi High Court, it can be held that assessee was entitled to exemption u/s. 10(20) of the Act for the assessment year under consideration because the year falls prior to assessment year 2003-04 i.e. assessment year from which the status of “Local Authority” is not available to the assessee. We, therefore, in view of the aforesaid discussions, set aside the orders of the authorities below on the issue relating to the status of “Local Authority” to the assessee and direct the Assessing Officer to consider assessee as “Local Authority” for the purposes of section 10(20) of the Act.
