By TIOL News Service

NEW DELHI, OCT 15, 2018: THE ISSUE IS - Whether merely because the Urban Improvement Trust is assigned certain powers under the municipal Act, it can claim to be put on equal footing with a municipal committee for the purpose of income tax exemption. NO IS THE VERDICT.

Facts of the case

The assessee, Urban Improvement Trust, had claimed exemption as a local authority as per Sec 10(20). Since the relevant Section was amended vide Finance Act, 2002 the Revenue issued a notice u/s 142(1). In reply the assessee had claimed that it was a municipality within the meaning of Article 243P of the Constitution of India, hence it was not required to file an income tax return. Assessing Officer passed an assessment order dated 28.03.2006 rejecting the contention of the assessee that its income was exempted under Section 10(20). Its stand was upheld by the CIT(A). On appeal, the ITAT reversed the CIT(A) order but the same was again reversed by the High Court.

On appeal, the Apex Court held that,

++ section 10(20A), which existed prior to amendments made by Finance Act, 2002 exempted any income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both. The Rajasthan Urban Improvement Act, 1959 was enacted for the improvement of Urban Areas in Rajasthan. Section 10(20A) specifically granted exemption to income of an authority constituted in India by or under any law and the Rajasthan Urban Improvement Act, 1959 was, thus, clearly covered by Section 10(20A) as was availing exemption under Section 10(20A) prior to Finance Act, 2002;

++ what is the consequence of deletion of Section 10(20A) and further insertion of Explanation under Section 10(20) providing for an exhaustive definition of the word “local authority”, which was not defined under the I.T. Act prior to Finance Act, 2002? For definition of local authority, the provisions of General Clauses Act, 1897 - Section 3(31) were looked into and applied;

++ the Explanation added to Section 10(20) now defines the definition of local authority in four clauses. Clause (i) relates to Panchayat as referred to in clause (d) of article 243 of the Constitution. Clause (ii) relates to Municipality as referred to in clause (e) of article 243P of the Constitution. Clause (iv) relates to Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924). The counsel for the assessee claims that the assessee is covered under Clause (iii) of Explanation to Section 10(20), which is to the following effect:- “(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or”

++ a perusal of the Scheme of the Rajasthan Urban Improvement Act, 1959 as well as the Rajasthan Municipalities Act, 1959 indicate that Urban Improvement Trust undertakes development in the urban area included in municipality/municipal board. Urban Improvement Trust is not constituted in place of the municipality/municipal board rather it undertakes the act of improvement in urban areas of a municipality/municipal board under the Rajasthan Urban Improvement Act, 1959. It may also perform certain limited power of the municipal board as referred to in Sections 47 and 48 but on the strength of such provision Urban Improvement Trust does not become a municipality or municipal board. After the insertion of Part IXA in the Constitution by the Constitution (Seventy-fourth) Amendment Act, 1992 w.e.f. 01.06.1993, Articles 243Q deals with constitution of Municipalities. Section 10(20) Explanation, Clause (ii) relates to Municipalities;

++ the counsel for the assessee has not based its claim on the basis of Clause (ii) of Explanation rather it has confined its claim to only Clause (iii). Under Clause (iii) claim of the assessee is that it is a “Municipal Committee”. We, thus, have to answer as to whether it is a Municipal Committee within the meaning of Explanation to Section 10(20) or not?;

++ the word “Municipal Committee” as occurring in Section 10(20) Explanation came for consideration before this Court in Agricultural Produce Market Committee Narela, Delhi Vs. Commissioner of Income Tax and Another. In this case, this Court had examined the Explanation to Section 10(20) as amended by Finance Act, 2002 and the definition of local authority contained therein;

++ this Court has held that the words “Municipal Committee and District Board” in Explanation were used out of abundant caution. In 1897, when the General Clauses Act was enacted there existed in India Municipal Committees and District Boards, which were discharging the municipal functions in different parts of the country. The expression “Municipal Committee and District Board” were included by amendments incorporated by Finance Act, 2002 to take into its fold those Municipal Committees and District Board which are still discharging municipal functions where no other municipalities or boards to discharge municipal functions have been constituted;

++ this Court further noticed the constitutional provision of Part IX-A and noticed that any law relating to municipalities in force in a State immediately before the commencement of the Constitution (Seventy-fourth Amendment) Act, 1992, even if inconsistent with the provisions of Part IX-A, shall continue to be in force until amended or repealed by a competent legislature;

++ the word “Municipal Committee” occurring in Clause (iii) Explanation, thus, has a definite purpose and object. Purpose and object was to cover those bodies, which are discharging municipal functions but are not covered by the definition of municipalities as was required to be constituted by Article 243Q of the Constitution of India. Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959, thus, cannot be held to be covered by the definition of Municipal Committee as contained in Clause (iii) of Explanation to Section 10(20) of the I.T. Act;

++ further, prior to deletion of Section 10(20A), Section 10(20A) was a provision which exempted the income of authority constituted in India by or under any law enacted for the purpose of planning, development or improvement of cities, towns and villages or for both. There cannot be any dispute that Urban Improvement Trust, i.e. the assessee was fully covered by the definition of authorities as contained in Section 10(20A) prior to its deletion. When there is a specific deletion of Section 10(20A), the said deletion was for an object and purpose. The Explanatory Notes in Paragraph Nos. 13.1 to 13.4 clearly mentioned that “income of certain Housing Boards etc. to become taxable”. The deletion of authorities, which were enumerated in Section 10(20A) was a clear indicator that such authorities, which were enjoying exemption under Section 10(20A) shall no longer be entitled to enjoy the exemption henceforth. The deletion of Section 10(20A) thus has to be given a purpose and meaning;

++ the provisions of Sections 47 and 48 are to permit certain powers of the municipal boards to be performed by the Trust which does not transform the Trust into a Municipal Committee. The power entrusted under Sections 47 and 48 are for limited purpose, for purposes of carrying out the improvement by the Improvement Trusts.

(See 2018-TIOL-384-SC-IT)