State tax exemption and income-tax relief denied where the entity remained a separate corporate body outside Article 289 and section 10(20).

Article 289(1) exempted only the property or income of a State, and a body corporate with separate legal personality, its own funds, assets and liabilities, and capacity to sue and be sued did not qualify while it continued to exist independently. Because the entity's funds and liabilities would vest in the State Government only on dissolution, its income remained its own and was not income of the State. The amendment to section 10 of the Income-tax Act also removed the broader exemption under section 10(20A) and confined section 10(20) to enumerated local authorities, a category that did not include the appellant. The income-tax notice was therefore upheld as valid.

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Issues: Whether the appellant was entitled to exemption from Union taxation under Article 289(1) of the Constitution of India and the pre-amended exemption provisions of the Income-tax Act, 1961.

Analysis: The exemption under Article 289(1) applies only where the property or income in question is the property or income of a State. The appellant was constituted as a body corporate with a distinct legal personality, its own funds, assets and liabilities, and the power to sue and be sued in its own name. The statutory scheme showed that its funds and liabilities would devolve on the State Government only upon dissolution, which meant that until then the income remained its own and did not become the income of the State. The amendment to section 10 of the Income-tax Act, 1961 had omitted section 10(20A) and restricted section 10(20) to the specifically enumerated local authorities, within which the appellant did not fall.

Conclusion: The appellant was not entitled to exemption under Article 289(1) or under section 10(20) of the Income-tax Act, 1961, and the income-tax notice was valid.

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