Local authority exemption under income tax law does not extend to an urban improvement trust performing limited municipal functions.

The Supreme Court held that the Explanation inserted in section 10(20) of the Income-tax Act creates an exhaustive definition of "local authority" limited to panchayats, municipalities, municipal committees or district boards, and cantonment boards. A trust constituted under the Rajasthan Urban Improvement Act, 1959, which performs urban development and improvement functions with limited municipal powers, does not become a municipality or municipal committee merely because some municipal functions are entrusted to it. The Court further noted that the withdrawal of the specific exemption for planning, development or improvement authorities under section 10(20A) could not be bypassed by expanding section 10(20), and that the General Clauses Act definition could not override the specific statutory definition. The trust was therefore held not entitled to exemption.

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Issues: Whether the Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959 is a local authority within the meaning of clause (iii) of the Explanation to section 10(20) of the Income-tax Act, 1961, and whether it remained entitled to exemption after deletion of section 10(20A).

Analysis: The Explanation inserted in section 10(20) by the Finance Act, 2002 creates an exhaustive definition of "local authority" limited to panchayat, municipality, municipal committee or district board, and cantonment board. The expression "Municipal Committee" in clause (iii) was intended to cover bodies actually functioning as municipal committees or district boards, not development trusts constituted under a separate urban improvement law. The scheme of the Rajasthan Urban Improvement Act, 1959 showed that the Trust undertook development and improvement functions in urban areas, could exercise only limited municipal powers for that purpose, and did not become a municipality or municipal committee merely because some municipal functions were entrusted to it. The earlier exemption under section 10(20A), which specifically covered authorities constituted for planning, development or improvement of cities and towns, had been withdrawn by deletion of that provision, and that legislative change could not be neutralised by expanding clause (iii) of the Explanation. The Court also held that the broader functional approach and the definition in section 3(31) of the General Clauses Act, 1897 could not override the exhaustive statutory definition in section 10(20).

Conclusion: The Urban Improvement Trust is not a local authority under clause (iii) of the Explanation to section 10(20) and is not entitled to exemption; the Revenue's appeals succeed.

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