TaxTMI 
TaxTMI 
2014 (12) TMI 973
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....me of the State and is therefore not liable to tax under Article 289( 1) of the Constitution of India. 4. Without prejudice, it is contended that the activities of the appellant board constitute the functions incidental to the ordinary functions of the State and therefore, its income is immune from tax under Clause (3) to Article 289 of the Constitution of India. 5. The appellant contends that the functions performed by the appellant board fall under Article 48A of the Constitution of India which provides for protection and improvement of environment falling under the directive principles of State Policy in Part IV of the Constitution of India. The appellant therefore, contends that any income derived in the exercise of functions performed by the State or incidental to ordinary functions of the State is not liable to tax under Article 289(1) or under Article 289(3) of the Constitution of India. 6. It is contended that the appellant is an agent of the State performing the State functions falling under Article 48A of the Constitution. Hence, its income is immune from taxation. 7. It is contended that the decision of the Hon'ble Supreme Court in Adityapur Industrial Ar....
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.... exercise of power conferred by section 4(1) of water (prevention and control of pollution) Act, 1974. Subsequently, after enactment of AIR (prevention and control of pollution) Act, 1981 by the Parliament, the name of the Board was changed to AP Pollution Control Board. Till AY 2002-03, assessee claimed exemption u/s 10(20) of the Act, as a local authority. However, after amendment to the definition of local authority u/s 10(20) with effect from 01/04/2003, by Finance Act, 2002, assessee became liable to pay income-tax. Since assessee failed to file any return of income, even after it became liable to pay tax, AO initiated action u/s 147 of the Act by issuing a notice u/s 148 on 31/10/08 calling upon assessee to submit return of income for AYs. 2004-05 to 2008-09. In response to the notice issued u/s 148, assessee filed its return of income for impugned AY on 04/12/2008 on the basis of unaudited accounts. Subsequently, assessee filed revised return along with statutory audit reports on 04/06/09. AO observed that revised return can only be filed when the omission was not within the knowledge of assessee. As assessee was well aware that the accounts were not audited by the respectiv....
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....II (for incinerator) 0 0 3. Clean process technology schemes - water cess funds 17,51,938 0.29 4. Financial assistance to the municipalities for establishment of STPs/Solid Waste Management - water cess funds 0 0 5. Ecocity TUDA 3,18,300 0.053 6. Common Effluent treatment plant 0 0 7. Real Time Qir Quality Monitoring Stations 0 0 8. Financial assistance workshop/roadshow 5,10,819 0.085 9. National air quality monitoring 31,463 0.005 10. Model facilities MSW - Suryapet Municipality 0 0 Grand Total 96,11,786 2,103 REVENUE EXPENDITURE Sl.No. Particulars Actual for 2004- 05 Percentage of available funds 1 Salary and allowances 3,60,75,365 6.00 2 t o 48 Other expenditure 5,41,59,535 9.00 Total 9,02,34,900 15.00 5. On analyzing the data as appearing in the tables, AO observed that the amount spent towards salaries is three times more than the amounts used for the schemes formulated by the board. It was also noted by AO that the total revenue expenditure is 15% of the available funds and the total amounts applied for various schemes is only 2%. According to the AO, establishment expendi....
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....d materials on record, found that AO has basically assessed the income at the hands of assessee for the following reasons: "i) that the appellant board does not have registration under sec. 12A for the year, ii) That the appellant board does not have requisite approval u/s 10(23)(vi) for the year, iii) That it had huge surplus and the unspent funds were kept in FDs, showing that its income was not being utilized towards the avowed charitable objects, iv) That the board is not registered u/s 43(1) of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987." Ld. CIT(A) did not approve the view of AO that only because assessee has not spent substantial part of its income for the objects of prevention and control of pollution and has earned surplus in the respective AYs, the character of the assessee is non-charitable. He also observed that the expenditure incurred towards salaries of the staff cannot be considered to be towards purposes beyond the aims and objects of the board. Ld. CIT(A) observed that considering the nature of functions to be performed by board which is of regulatory, advisory and technical in nature, it has to be performed with the....
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....tution of India. Ld. CIT(A) was of the view that the activities carried on by assessee cannot even be said to be as business or trade or any operation of that nature on behalf of the state govt. Even otherwise also, if the operations of the assessee were to be treated to be in the nature of trade or business as the parliament has not made any specific provision regarding taxation of income derived there from, the income earned by assessee will not be immune from taxation. Ld. CIT(A) opined that assessee being an independent legal personality distinct from the state and till such time the income earned by assessee goes to its own funds and not to the state coffers, the income earned by assessee will not be free from taxation under article 289 of the Constitution of India. Accordingly, he rejected assessee's claim of exemption under article 289. 7. As far as assessee's claim of exemption u/s 10(23C(vi) is concerned, ld. CIT(A) noted that the Chief Commissioner of Incometax vide order dated 10/12/2009 has rejected assessee's claim of approval u/s 10(23C)(vi). However, considering the fact that assessee has filed writ application challenging the order of CCIT, which is still pending....
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.... On several occasions, a state takes up a commercial activity just as any private entity can also take up. There is no bar under the Statute from State taking up any commercial activity. If a State takes up a commercial activity and derives any income, the income so derived is immune from union taxation under article 289( 1 ) of the Constitution of India. iv) At the same time it is open to the union to impose any tax in respect of any profit derived in any such trade or business, if the Parliament by law so provides. Even in the case of any such income derived from trade or business run by the state, if the Parliament by law declares that it is incidental to an ordinary function of the Government, it will not be liable for taxation. The effect of Article 289 of the Constitution of India can be summarized as under: a) all income of the state be it from a commercial or a noncommercial or a welfare activity of a State is exempt from union taxation; b) in respect of any income derived from trade or business carried on by the state, the Parliament may by law, impose any tax; c) If the Parliament declares that any trade or business carried on by the state to be incidental to ....
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....vity can also be undertaken by any non-state or private organization, providing planned development of industrial area and to promote industries. This is a subject which is not exclusively a state function. It is one thing to state, that a state can carry on the activity, but altogether different to state except the state no one can else carry on the activity. This is also not an activity mandated to be done only by the state under the Constitution of India or by statute. The Development Authority is not Cl regulatory body. The Development authority is merely acting as a complimentary body to the activity of promotion of industries which is also undertaken by private players. Therefore, the judgment of the Hon 'ble Supreme Court should be understood in the light of the nature of activity that is sought to be discharged by the Development authority constituted under the Bihar State Act which is a commercial activity, though by itself the authority may not be carrying on any trade. 8.9. Ld. AR submitted, it may be true that the Adityapur Industrial Area Development Authority in carrying out its functions may not be carrying on any trade or business. Yet the fact remains even a....
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....sessee being a distinct legal entity separate from the state govt., the income derived by assessee cannot be considered to be the income of state govt. thereby making it immune from taxation under article 289(1) of the Constitution of India. Ld. DR submitted that neither the funds of assessee are the funds of the state govt. or the fees received by it is the income of the state. He submitted that as the income derived by assessee goes to enhance its own funds and not to the state govt. the income generated will not be the income of the state govt. To substantiate such contention, ld. DR brought to our notice the provisions contained under Chapter VI of water (Prevention and control of pollution) Act, 1974. Thus, in sum and substance, ld. DR submitted that as assessee is a distinct legal entity separate from the state govt. and income of assessee also goes to its own kitty not to the state, it cannot be said that the income earned by assessee being the income of state govt. is exempt from taxation under article 289(1) of the Constitution of India. In support of such contention, ld. DR relied upon the following decisions: 1. AP State Road Transport Corporation Vs. CIT, 52 ITR 524 ....
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....vity has to be treated as income of the state govt. 11. We have considered the elaborate submissions made from both sides and perused the orders of the departmental authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by the parties before us. At the outset, we need to observe that though the assessee board was created with effect from 24/01/1976 as Andhra Pradesh State Board for the Prevention and Control of Water Pollution and subsequently rechristened as Andhra Pradesh Pollution Control Board after enactment of the AIR (prevention and control of pollution) Act, 1981, but, the assessee board never claimed immunity from payment of income-tax under article 289 of the Constitution of India. Only after assessee lost the claim of exemption u/s 10(20) of the Act, by virtue of amendment to the definition of the expression local authority w.e.f. 01/04/2003 and it failed in its attempt, either in getting approval u/s 10(23C)(vi) or being registered u/s 12AA of the Act for the impugned AY, as a last resort it staked its claim of immunity from payment of income-tax under article 289 of the Constitution of India, that too a....
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....rty and income of State shall be exempt from union taxation. Article 289(2) however provides that nothing in clause(1) shall prevent the union from imposing and authorizing the imposition of any tax to such extent, if any, as parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of the government or State, or any operation connected therewith, or any property used or occupied for the purpose of such trade or business, or any income accruing or arising in connection therewith. Article 289(3) provides that nothing in clause(2) shall apply to any trade or business or to any class of trade or business, which parliament may by law to be incidental to the ordinary functions of government. Thus, a plain reading of the aforesaid clauses of Article 289 makes it clear that they are independent of each other and speaks of three different situations. 13. On a perusal of The Water (prevention and control of Pollution) Act, 1974, it is to be noticed that section 4 of the said Act empowers the state govt. to constitute a state pollution control board through a notification published in the official gazette for exercising such powers and functio....
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....owned or controlled by the board shall vest in the state govt. Therefore, from the aforesaid provision, it becomes clear that until supersession of the state board, not only it retains its distinct and independent identity but also the funds and property of the board also remains in its possession. 14. Therefore, examining the aforesaid facts vis-à-vis the provisions contained under Article 289 of the Constitution of India, it is evident that the powers/functions exercised by the board cannot be considered to be in the nature of trade or business. Therefore, clause (2) and (3) of Article 289 may not be applicable to the facts of assessee's case. The only provision under which assessee can possibly claim immunity from taxation is clause (1) of Article 289. On a plain reading of the said clause, it is clear that only property or income of state is exempt from union taxation. The expression 'income of a state' as incorporated under Article 289(1) has to be interpreted to mean, the income of the state govt. itself and not the income of some authority other than the state, such as statutory authority or board which is a independent/separate juristic entity, even though it may ....
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....e Government. Necessari ly therefore, before its dissolution, its assets, funds and l iabilities are its own. It is, therefore, futile to contend that the income of the appellant/Authority is the income of State Government, even though the Authority is constituted under an Act enacted by the State legislature by issuance of a notification by the Government thereunder." 16. The Hon'ble Supreme Court after analyzing the provisions contained under article 289 as a whole and taking note of the principles laid down by the Hon'ble Supreme Court in case of AP State Road Transport Corpn. Vs. ITO (52 ITR 524) observed as under: "Considerable reliance was placed on the principles laid down in the aforesaid decision by learned counsel appearing for the Union of India. He submitted that having regard to the provisions of the Act under which the appellant/Authority is established, the same conclusion may be reached. In particular, emphasizing the fact that as in Andhra Pradesh State Road Transport Corporation case (supra), so in the instant case as well, s. 17 of the Act provides that upon dissolution of the appellant/Authority, the properties, funds and dues realizable by the Authority a....
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.... be looked into from another angle. As can be seen till AY 2002-03, assessee had been claiming exemption u/s 10(20) by treating itself to be a local authority. Moreover, assessee has also applied for registration u/s 12AA of the Act as a charitable institution and has also been granted such registration in pursuance to the directions of the ITAT. Furthermore, it is a fact on record that assessee has also applied for approval u/s 10(23C)(iv) of the IT Act, and approval has also been granted to assessee from AY 2009-10 onwards. From the aforesaid facts, it becomes clear that assessee by its own actions considers itself to be a separate legal entity distinct from the state govt. That being the case, the income/receipts of the board has to be treated as its own income and not of the state govt. In the aforesaid facts and circumstances, we agree with the ld. CIT(A) that assessee cannot get immunity from taxation under article 289 of the Constitution of India. 19. As far as the next issue relating to claim of exemption u/s 10(23C)(iv) of the Act is concerned, considering the fact that assessee's writ application is pending before the Hon'ble Jurisdictional High Court, we uphold the di....