Trading income of a statutory local authority is not State income under Article 289, but may qualify for section 10(20) exemption.

A statutory corporation treated as a local authority was held not to have its trading income exempt as the income of a State under Article 289, because governmental control alone does not make its income the income of the State and the corporation was a trading undertaking with separate accounts and autonomous activity. The same income was, however, held to fall within the statutory exemption for a local authority under section 10(20), since its trade in forest produce operated within its own jurisdictional area and the provision did not require proof of no profit motive or a statutory duty to supply. The article therefore distinguishes constitutional immunity from the narrower statutory exemption.

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Issues: (i) Whether the corporation's income was exempt from Union taxation as the income of a State under Article 289 of the Constitution of India; (ii) Whether the corporation was entitled to exemption under section 10(20) of the Income-tax Act, 1961 as a local authority carrying on trade or business within its own jurisdictional area.

Issue (i): Whether the corporation's income was exempt from Union taxation as the income of a State under Article 289 of the Constitution of India.

Analysis: The corporation was constituted as a local authority with a separate fund, separate budget, autonomous working, and its own trading activity and profit and loss account. The relevant constitutional protection under Article 289 does not treat every body controlled by the Government as the income of the State. The exemption applies to property and income of a State, and the Union may tax trade or business carried on by or on behalf of a State unless Parliament declares it incidental to ordinary governmental functions. On the facts, the corporation was a trading undertaking, not a mere governmental department, and its income was not shown to be the income of the State.

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

Issue (ii): Whether the corporation was entitled to exemption under section 10(20) of the Income-tax Act, 1961 as a local authority carrying on trade or business within its own jurisdictional area.

Analysis: Section 10(20) exempts specified incomes of a local authority, including income from a trade or business carried on by it which accrues or arises from the supply of a commodity or service within its own jurisdictional area. The corporation was treated as a local authority by statutory declaration and the surrounding record. Its jurisdictional area extended to the territorial limits of Uttar Pradesh, and the sale or supply of forest produce was carried on within that area through auctions and related dealings. The provision did not require absence of profit motive or a statutory duty to supply, and the record did not establish that the relevant income arose from supplies outside the jurisdictional area.

Conclusion: The corporation was entitled to exemption under section 10(20), and this issue was decided in favour of the assessee.

Final Conclusion: The corporation's claim under Article 289 was rejected, but its income for the assessment year in question was held to fall within the statutory exemption available to a local authority under section 10(20).

Ratio Decidendi: A statutory corporation treated as a local authority is not, merely by reason of governmental control or public purpose, entitled to treat its trading income as the income of a State under Article 289; but if it carries on trade or business supplying a commodity within its own jurisdictional area, the resulting income is exempt under section 10(20) of the Income-tax Act, 1961.

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