Development authority receipts taxable in its own hands; Article 289 exemption and overriding-title diversion claim both failed.

A statutory development authority is treated as a separate legal and taxable entity, so its receipts do not become the income of the State merely because it is created under a State enactment; exemption under Article 289 was therefore unavailable. Receipts earmarked for infrastructure development also were not diverted at source by overriding title, because earmarking did not transfer ownership of the income and only actual expenditure for that purpose could be deducted. The authority's income was held taxable in its own hands, and the appeals failed.

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Issues: (i) Whether the income and receipts of a development authority constituted under the U.P. Urban, Planning & Development Act, 1973 could be treated as the income of the State so as to claim exemption under Article 289 of the Constitution of India. (ii) Whether the receipts earmarked for infrastructure development were excluded from taxable income on the ground of diversion of income by overriding title.

Issue (i): Whether the income and receipts of a development authority constituted under the U.P. Urban, Planning & Development Act, 1973 could be treated as the income of the State so as to claim exemption under Article 289 of the Constitution of India.

Analysis: The applicable legal position was treated as settled by the earlier Supreme Court ruling construing Article 289 in the context of an analogous development authority statute. The authority was held to be a separate legal entity with its own assets, liabilities and funds, capable of suing and being sued in its own name. The dissolution provision in the State enactment showed that its assets and funds would vest in the State only upon dissolution, and not before. On that basis, the authority's income could not be equated with the income of the State merely because it was created under a State statute.

Conclusion: The claim for exemption under Article 289 failed and was against the assessee.

Issue (ii): Whether the receipts earmarked for infrastructure development were excluded from taxable income on the ground of diversion of income by overriding title.

Analysis: The Court treated this contention as covered by the same reasoning. Amounts collected by the development authority for infrastructure purposes remained its income, and only the expenditure actually incurred for such purposes could be deducted. The claimed earmarking did not establish a diversion of income at source by an overriding title. The Court also noted that the point had not been pressed before the lower appellate authorities in the same form.

Conclusion: The plea of diversion of income by overriding title was rejected and was against the assessee.

Final Conclusion: The development authority's receipts were held to be taxable in its hands, and the appeals failed in full.

Ratio Decidendi: A statutory development authority is a distinct taxable entity, and its receipts are not the income of the State unless the statute or factual setting shows a true vesting in the State; mere earmarking of receipts for a public purpose does not by itself create diversion of income by overriding title.

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