THE INCOME TAX OFFICER, vs. URBAN IMPROVEMENT TRUST

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 10577 OF 2018 (arising out of SLP (C) No. 16836 of 2018) THE INCOME TAX OFFICER … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST …RESPONDENT(S) WITH CIVIL APPEAL NO. 10578 OF 2018 (arising out of SLP (C) No. 16837 of 2018) COMMISSIONER OF INCOME TAX (EXEMPTIONS) … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST KOTA …RESPONDENT(S) WITH CIVIL APPEAL NO. 10579 OF 2018 (arising out of SLP (C) No. 16838 of 2018) INCOME TAX OFFICER … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST KOTA … RESPONDENT(S) WITH CIVIL APPEAL NO. 10580 OF 2018 (arising out of SLP (C) No. 16839 of 2018) COMMISSIONER OF INCOME TAX … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST THROUGH DIRECTOR … RESPONDENT(S) Signature Not Verified Digitally signed by SUSHIL KUMAR RAKHEJA Date: 2018.10.13 13:25:02 IST Reason: 1 WITH CIVIL APPEAL NO. 10581 OF 2018 (arising out of SLP (C) No. 18076 of 2018) THE INCOME TAX OFFICER … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST, KOTA … RESPONDENT(S) WITH CIVIL APPEAL NO. 10584 OF 2018 (arising out of SLP (C) No. 23293 of 2018) INCOME TAX OFFICER … APPELLANT(S) VERSUS M/S URBAN IMPROVEMENT TRUST …RESPONDENT(S) WITH CIVIL APPEAL NO. 10582 OF 2018 (arising out of SLP (C) No. 18662 of 2018) THE INCOME TAX OFFICER KOTA … APPELLANT(S) VERSUS URBAN IMPROVEMENT TRUST … RESPONDENT(S) WITH CIVIL APPEAL NO. 10586 OF 2018 (arising out of S.L.P. (C) No. 28107 OF 2018) (Diary No. 24603 of 2018) THE INCOME TAX OFFICER … APPELLANT(S) VERSUS M/S URBAN IMPROVEMENT TRUST … RESPONDENT(S) WITH CIVIL APPEAL NO. 10585 OF 2018 (arising out of SLP (C) No. 23294 of 2018) THE INCOME TAX OFFICER KOTA … APPELLANT(S) VERSUS 2 URBAN IMPROVEMENT TRUST KOTA …RESPONDENT(S) WITH CIVIL APPEAL NO. 10583 OF 2018 (arising out of SLP (C) No. 22987 of 2018) COMMISSIONER OF INCOME TAX … APPELLANT(S) VERSUS M/S URBAN IMPROVEMENT TRUST … RESPONDENT(S) J U D G M E N T ASHOK BHUSHAN, J. Leave granted. 2. These appeals have been filed by the Revenue challenging the Division Bench judgments of Rajasthan High Court dated 25.07.2017 as well as subsequent judgment dated 23.10.2017 following earlier judgment. The High Court vide its above judgments has dismissed all the income tax appeals of the Revenue and allowed that of assesse – Urban Improvement Trust. The Division Bench accepted the claim of the assessee that it is local authority within the meaning of Clause (iii) of Explanation to Section 10(20) of the Income Tax Act, 1961 and hence it is entitled for exemption under Section 10(20) of the Act. The Revenue have been contending that Urban Improvement Trust, the assessee is not a local authority within the meaning of Explanation to Section 10(20), hence it is not entitled for 3 exemption. 3. For deciding this batch of appeals, it shall be sufficient to notice the facts of Civil Appeal arising out of S.L.P. (C) No. 18067 of 2018 – The Income Tax Officer Vs. M/s. Urban Improvement Trust, Kota. 4. Section 10(20) has been amended by Finance Act, 2002 w.e.f. 01.04.2003. A Notice under Section 142(1) of the Income Tax Act, 1961 (hereinafter referred to as “I.T. Act”) was issued dated 01.08.2005 requiring the assessee to file a return for the assessment year 2003- 2004. A reply was submitted on behalf of the assessee that Urban Improvement Trust – the assessee is a municipality within the meaning of Article 243P of the Constitution of India, hence it is 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 is exempted under Section 10(20). An appeal was filed by the assessee before the Commissioner (Appeals). Commissioner (Appeals) passed an order on 10.02.2010 holding that assessee is a local authority within the meaning of Section 10(20) of the I.T. Act. The Revenue filed an appeal before the Income Tax Appellate Tribunal 4 (hereinafter referred to as “ITAT”) challenging the appellate order. The ITAT accepted the Revenue’s claim that assessee is not covered within the definition of Clause (iii) of Explanation to Section 10(20). The Appellate Tribunal in Paragraph 2.6 allowed the appeal and restored back the matter to the Commissioner of Income Tax (Appeals). Para 2.6 of the Order of the ITAT is as follows:-

5. Both the assessee and Revenue aggrieved by the order of ITAT had filed appeals before the High Court under Section 260A of the I.T. Act. The High Court decided all the appeals vide its judgment dated 25.07.2017. High Court held the assessee to be local authority within the meaning of Section 10(20) Explanation. After answering the above issue in favour of the assessee, the High court held that other issues 5 have become academic. Consequently, the appeals filed by the Revenue were dismissed and that of the assessee were allowed. 6. Another set of appeals have been filed by the Revenue questioning the subsequent judgment of the High Court dated 23.10.2017 deciding Income Tax Appeal No. 287 of 2016 and other appeals. The above appeals were filed by the assessee against the judgment of the ITAT dated 08.06.2017 wherein ITAT had set aside the order of the Assessing Officer and had directed the Assessing Officer to provide reasons for issuing Notice under Section 148 to the assessee in respect of assessment years 2005-2006 to 2009-2010. Assessee thereafter was allowed to file objection before the Assessing Officer and Assessing Officer was directed to pass a speaking order. Operative portion of the judgment of ITAT contained in Para 7 is to the following effect:- “7. Since we have set aside the order passed in respect of the assessment year 2005-06 to 2009-10 as the Assessing Officer has not provided the reasons u/s 148 of the Act, therefore, the appeals of the revenue arising out of the order passed by the Ld CIT(A) in respect of the assessment year 2005-06 to 2009-10 are also set aside with the direction to the Assessing Officer to pass fresh order after providing the reasons to the assessee and after deciding the objections if any in terms of the judgment in the case of GKN DRIVESHAFTS (INDIA) LTD. VS. INCOME-TAX 6 OFFICER AND OTHERS [2003] 259 ITR 19(SC). In light of above, all the appeals of the assessee as well as revenue are set aside to the file of the Assessing officer for the statistical purposes.” 7. Aggrieved by the order of the ITAT, the appeals were filed by the assessee. Assessee’s contention before the High Court was that assessee being covered by definition of local authority within the meaning of Section 10(20) Explanation of I.T. Act, its income was exempt. The Division Bench of the High Court relied and quoted its earlier Division Bench Judgment dated 25.07.2017 mentioned above and allowed the appeals filed by the assessees. 8. Revenue aggrieved by the aforesaid two judgments have come up in these appeals. By both the judgments of the High Court, large number of income tax appeals were decided giving rise to different appeals under consideration in this batch of appeals. 9. We have heard Mr. Vikramjit Banerjee, learned Additional Solicitor General of India, Shri K. Radhakrishnan, learned senior counsel for the appellants. Shri Sanjay Jhanwar and other learned counsel have been heard for the respondent. 7 10. Learned counsel for the appellant in support of the appeal contends that the Division Bench of the High Court committed error in coming to the conclusion that Urban Improvement Trust - the assessee is a local authority within the meaning of Explanation to Section 10(20) of the I.T. Act. It is submitted that Urban Improvement Trust might have been earlier getting benefit of wide definition of local authority prior to amendment by Finance Act, 2002 but after amendments in Section 10(20) by Finance Act, 2002, Urban Improvement Trust is no longer included in the definition of local authority. Learned counsel for the appellant further submits that assessee, i.e. Urban Improvement Trust is not covered by any of clauses, i.e. clauses (i) to (iv) of Explanation to Section 10(20) of the I.T. Act. Learned counsel for the appellant further relies on

Development Authority Vs. Chief Commissioner of Income

Court had occasion to interpret Section 10(20) Explanation and the constitutional provisions of Articles 243P and 243Q of the Constitution. 11. Learned counsel for the assessee refuting the 8 submission of appellant contends that Urban Improvement Trust is fully covered by the definition of local authority as contained in Explanation to Section 10(20) as amended by Finance Act, 2002. It is submitted that the Urban Improvement Trust is constituted under the Rajasthan Urban Improvement Act, 1959 and the assessee is performing various municipal functions, hence it is also entitled for the benefit, which is extended to the municipalities. Learned counsel for the respondent submits that the assessee, i.e. Urban Improvement Trust is covered within the definition of local authority as given in sub-clause(iii) of Explanation, i.e. “Municipal Committee”. It is submitted that assessee performs the municipal functions, collects charges, has control over the municipal funds and after dissolution of the trust, the entire fund is reverted back to the Municipal Board, which provision clearly indicate that it is a Municipal Committee and covered by definition of local authority under Section 10(20). Learned counsel submits that the

Development Authority Vs. Chief Commissioner of Income

judgment, this Court had occasion to consider the provisions of Uttar Pradesh Industrial Area Development 9 Act, 1976, which was entirely different legislation from one, which is under consideration in the present case, i.e. The Rajasthan Urban Improvement Act, 1959. 12. We have considered the submissions of the learned counsel for the parties and have perused the records. 13. The only issue, which has been raised by the learned counsel for the parties in this batch of appeals is as to “whether the Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, 1959 is a local authority within the meaning of Explanation to Section 10(20) of the I.T. Act, 1961”? 14. By Finance Act, 2002, Section 10(20) of the I.T. Act was amended by inserting an Explanation w.e.f. 01.04.2003. Section 10(20) as amended by Finance Act, 2002 is as follows:-

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15. By Finance Act, 2002, provisions of Section 10(20A) was also deleted. Section 10(20A) as it existed prior to Finance Act, 2002 was as follows:-

16. At this juncture, it is relevant to notice the Explanatory Notes on Finance Act, 2002. Explanatory Notes was on both the sections – Section 10(20) as well as Section 10(20A). Paragraphs 12.2 to 12.4 and 13.1 to 13.4 of the Explanatory Notes, which are relevant for the present purpose are as follows:-

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17. 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. The Act contains following preamble:-

18. 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 13 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 definition of local authority given under Section 3(31) of the General Clauses Act was as follows:-

19. 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). Learned counsel for 14 the assessee claim that the assessee is covered under Clause (iii) of Explanation to Section 10(20), which is to the following effect:-

20. We, thus, have to confine our discussions to above Clause (iii) under which the assessee- Urban Improvement Trust claims to be covered. Before we advert to above Clause (iii), it is relevant to notice certain provisions of the Rajasthan Urban Improvement Act, 1959 to find out the nature of the Urban Improvement Trust constituted under the said Act. The Rajasthan Urban Improvement Act, 1959 defines “improvement” in Section 2(vi) in following manner:-

21. Section 2(x) defines “urban area” as follows:-

15 22. Section 2(2) of the Rajasthan Urban Improvement Act, 1959 provides as follows:-

23. Section 9 provides for “Constitution of Trust”, which is as follows:-

(a) Chairman,

[(bb) X X X]

[x X x]

(4) If the said Board does not, by such date as may be fixed by the State Government, elect two of its members to be Trustees, the State Government shall appoint two members of the said Board to be Trustees and every person so appointed shall be deemed to be a Trustee as if he had been duly elected by the Municipal 16 Board.

24. Under Section 47, certain powers under the Municipal laws may be vested in the Trust. Section 48 provides for Transfer of duties etc. of Municipal Board to Trust. Sections 47 and 48 are as follows:-

Provided that the Trust may delegate to 17

25. Section 61 provides for the Improvement Fund. Section 62 empowers the Trust to levy betterment charges. Section 63 provides for assessment of betterment charge and Section 64 provides for settlement of betterment charge by arbitrators. One more section on which reliance has been placed by the learned counsel for the appellant is Section 105, which is to the following effect:-

(2) From the said date— (a) all properties, funds and dues which are 18

26. It is relevant to notice that in the same year in which the Rajasthan Urban Improvement Act, 1959 was passed, another enactment namely, the Rajasthan Municipalities Act, 1959 was enacted. Learned counsel for the respondent has referred to notification dated 09.07.1970 by which the State Government has established Urban Improvement Trust, Kota. Notification dated 09.07.1970 is as follows;- “TOWN PLANNING DEPARTMENT NOTIFICATION Jaipur, July 9, 1970

19 the State Government here by orders :

In exercise of the powers conferred by sub- section(2) of Section 9 of the said Act, the State Government further appoints the following persons as the Chairman and other Member of the said Trust for a period of three years with effect from 10.7.1970 or earlier till he is required to hold the office under Section 11 and 12 of the said Act:

The Municipal Council, Kota is called upon to appoint the two persons to be trustees of the said Trust in pursuance of sub-section(5) of Section 9 of the said Act within the period of one month from the date of issue of this Notification. By Order of the Governor, R.K. Saxena, Secretary to the Government” 27. A perusal of the Scheme of the Rajasthan Urban Improvement Act, 1959 as well as the Rajasthan Municipalities Act, 1959 indicate that Urban Improvement 20 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. 28. Learned 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? 21 29. The word “Municipal Committee” as occurring in Section 10(20) Explanation came for consideration before

Narela, Delhi Vs. Commissioner of Income Tax and

Court had examined the Explanation to Section 10(20) as amended by Finance Act, 2002 and the definition of local authority contained therein. After noticing the definition of local authority as contained in Section 10(20) Explanation w.e.f. 01.04.2003 as well as Section 3(31) of the General Clauses Act, 1897. Following was stated in Para 30 and 31:-

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30. In the above case, earlier judgment of this Court

considered where this Court had laid down and applied the functional test as to whether a body is local authority or not? This Court laid down that functional

applicable after amendment of Section 10(20) of I.T. Act by Finance Act, 2002. Following was laid down in paragraph 35:-

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31. This Court further noticed the expression “Municipal Committee” in Clause (iii) of Section 10(20). This Court held that the words “Municipal Committee and District Board” in Explanation were used out of abundant

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. In paragraph Nos. 36 and 37 following has been laid down:-

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32. 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. In Para 39, following has been laid down:-

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33. In above case, this Court, thus, has held that the expression “Municipal Committee and District Board” occurring in Clause (iii) of Explanation referred to those bodies, which are discharging municipal functions and power in any part of country and so far has not been substituted by any other Body by any Act of 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, as noticed 26 above, 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 as noticed above 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.

Authority Vs. Chief Commissioner of Income Tax & Ors.

Bench had considered in detail the object and purpose of Section 10(20A), the object and purpose of Finance Act, 27 2002 amendment adding the Explanation to Section 10(20) and deletion of Section 10(20A). 35. 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. 36. Sections 61 to 64 as noticed above are the provisions empowering levy of betterment charges, which is again in reference to and in context of carrying out improvement by the Improvement Trust in urban areas. The Municipal Board, Kota performs its functions, in areas where Municipal Board still exists. There is no reason to accept that Urban Improvement Trust is a Municipal Committee within the meaning of Section 10(20) Explanation Clause (iii). Coming back to Section 105, which provides for ultimate dissolution of Trust and transfer of its assets and liabilities to the Municipal Board, this provision does not in any manner improve the case of the assessee. When the Trust is dissolved or at dissolution, properties and funds and dues vested in or realisable by the Trust shall vest in and be realisable by the Municipal Board, which is a provision for 28 different purpose and object. The above provision does not support the contention that Improvement Trust is a Municipal Committee as referred to in Clause (iii) of Explanation to Section 10(20) of the I.T. Act. 37. We, thus, are of the view that Scheme of the Rajasthan Urban Improvement Act, 1959 does not permit acceptance of the contention of the appellant assessee that Urban Improvement Trust is a Municipal Committee within the meaning of Section 10(20) Explanation (iii). The purpose and object for expression “Municipal Committee” used in Section 10(20) Explanation (iii) has been explained, as already noticed above, by this

38. The entire consideration of the High Court in the impugned judgment is contained in paragraph 15 to 18 which are to the following effect:-

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39. The High Court based its decision on the fact that functions carried out by the assessee are statutory 30 functions and it is carrying on the functions for the benefit of the State Government for urban development. The said reasoning cannot lead to the conclusion that it is a Municipal Committee within the meaning of Section 10(20) Explanation Clause (iii). The High Court has not adverted to the relevant facts and circumstances and without considering the relevant aspects has arrived at erroneous conclusions. Judgments of the High Court are unsustainable. 40. In view of foregoing discussions, we are of the view that judgments of the High Court deserves to be set aside. All the appeals are allowed. In view of setting aside the judgments of the High Court dated 25.07.2017 and 23.10.2017, the order passed by ITAT revives. Parties shall bear their own costs.

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