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REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.792-793 OF 2014 NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY    ... APPELLANT

VERSUS CHIEF COMMISSIONER OF INCOME TAX & ORS.     ... RESPONDENTS

J U D G M E N T

ASHOK BHUSHAN, J.

The  appellant  by  these  appeals  has  challenged  the

Division  Bench  judgment  of  Allahabad  High  Court  dated

28.02.2011  dismissing  the  writ  petition  filled  by  the

appellant challenging the notices issued by the Income

Tax Authority under Section 142 of the Income Tax Act,

1961 as well as the judgment dated 04.11.2011 rejecting

the review application.  

2. The facts giving rise to these appeals are:

The  appellant-New  Okhla  Industrial  Development

Authority  (hereinafter  referred  to  as  the  “Authority”)

has  been  constituted  under  Section  3  of  the  U.P.

Industrial  Area  Development  Act,  1976  (hereinafter

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referred  to  as  the  ‘Act,  1976’)  by  notification  dated

17.04.1976.  The  Act,  1976  was  enacted  by  State

Legislature  to  provide  for  the  constitution  of  an

Authority  for  the  development  of  certain  areas  in  the

State into industrial and urban township and for matters

connected  therewith.  Under  the  Act,  1976  various

functions have been entrusted to the Authorities. Notices

under Section 142 of the Income Tax Act dated 28.07.1998

and  08.08.1998  were  issued  to  the  appellant.  The

appellant  challenging  the  said  notices  filed  writ

petition contending that appellant is a local authority,

hence,  is  exempted  from  payment  of  income  tax  under

Section  10(20)  and  Section  10(20A)  of  Income  Tax  Act,

1961  (hereinafter  referred  to  as  “I.T.Act,  1961).  The

writ petition was allowed by the Division Bench of the

Allahabad  High  Court  on  14.02.2000  holding  that  the

appellant is a local body. It was held that it is covered

by the exemption under Section 10(20A) of I.T.Act, 1961.

The Division Bench, however, did not go into the question

whether it is also exempt under Section 10(20).

3. By the Constitution (74th Amendment) Act, 1992, the

Parliament  had  inserted  Part  IXA  of  the  Constitution

providing  for  the  constitution  of  Municipalities.  A

notification dated 24.12.2001 was issued by the Governor

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in exercise of the power under the proviso to clause (1)

of  Article 243Q of the Constitution of India specifying

the appellant to be an “industrial township” with effect

from  the  date  of  the  notification  in  the  Official

Gazette.  A  notice  dated  29.08.2005  was  issued  by  the

Assistant Commissioner of Income Tax to the appellant for

furnishing  Income  Tax  Return  for  the  assessment  year

2003-2004  and  2004-2005.  Notice  mentioned  that  after

omission  of  Section  10(20A)  w.e.f.  01.04.2003  the

Authority has become taxable. Notice under Section 142(1)

was also enclosed for the above purpose.  

4. Notices were also issued to different Banks requiring

different  information.  The  appellant  vide  its  letter

dated  20.09.2005  replied  the  notice  dated  29.08.2005

stating  that  it  is  a  local  authority  and  exempt  from

Income Tax hence notice under Section 142 be withdrawn.

The  Income  Tax  authorities  also  issued  notice  to  the

different Banks to deduct TDS as required under Section

194A of the Income Tax Act and remit the same to the

Central Government Account.   

5. The  appellant  filed  a  writ  petition  praying  for

quashing the notice under Section 142 of the Income Tax

Act  dated  29.08.2005.  The  appellant  also  challenged

notice dated 31.08.2005 issued under Section 131 to the

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Bankers of the appellant. Notice dated 21.09.2005 under

Section  194A  was  also  sought  to  be  quashed.  The  writ

petition was contested by the Income Tax Department. The

High Court in the writ petition decided the only question

“whether  New  Okhla  Industrial  Development  Authority

(NOIDA) is a local authority after 01.04.2003 within the

meaning of Section 10(20) of the Income Tax Act, 1961”.

The  Division  Bench  of  the  High  Court  relying  on  two

judgments of this Court in  Agricultural Produce Market

Committee, Narela, Delhi vs. Commissioner of Income Tax

and another, (2008) 9 SCC 434 and Adityapur Industrial

Area Development Authority vs. Union of India and others,

(2006) 5 SCC 100, held that after 01.03.2003 the NOIDA is

not  a  local  authority  within  the  meaning  of  Section

10(20)  of  the  I.T.Act,  1961.  The  writ  petition  was

consequently  dismissed.  Although,  the  appellant  had

prayed  for  quashing  notices  issued  to  its  Bankers  and

notice  under  Section  194A  but  the  High  Court  did  not

advert to the said issue. We do not find any necessity to

advert  to  the  aforesaid  issues,  since,  different

concerned  Banks  have  already  filed  civil  appeals

challenging the judgment of the High Court rendered in

their writ petition which has been separately challenged

by a group of civil appeals being Civil Appeal arising

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out  of  SLP(C)  No.3168  of  2017-Commissioner  of  Income

Tax(TDS), Kanpur vs. Canara Bank where we have considered

and decided those issues by our judgment of this date.

After dismissal of the writ petition dated 28.02.2011 the

appellant  filed  a  review  application  which  too  was

dismissed on 04.11.2011. Aggrieved by those two judgments

Civil Appeal Nos.792-793 of 2014 have been filed by the

appellant.

6. We  have  heard  Shri  Balbir  Singh,  learned  senior

counsel  appearing  for  the  appellant  and  Shri  K

Radhakrishnan, learned senior counsel appearing for the

Revenue.  We  have  also  heard  various  learned  counsel

appearing for different Banks.

7. Learned counsel for appellant submits that both the

judgments of this Court relied on by the High Court for

dismissing  the  writ  petition  were  not  applicable  and

clearly distinguishable. He submits that judgment of this

Court  in  Agricultural  Produce  Market  Committee,

Narela(supra) was a case where this Court was concerned

with  status  of  Agricultural  Produce  Market  Committee

which  was  not  akin  to  the  appellant  in  view  of  the

statutory  provisions  contained  in  Act,  1976,  hence,

reliance on such case was misplaced.

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8. With regard to judgment of this Court in  Adityapur

Industrial  Area  Development  Authority(surpa),  it  is

submitted that this Court essentially has considered in

the above case regarding the exemption under Article 289

of the Constitution of India whereas appellant does not

rely on Article 289. He further submits that Governor of

U.P. has issued notification dated 24.12.2001 under the

proviso  to  Article  243Q(1)(a)  which  provision  was  not

considered in the above mentioned two cases, hence, the

present  case  is  clearly  distinguishable  from  the

aforesaid two judgments. It is submitted that Municipal

Services are being provided by the authority, hence, it

is a local authority entitled to the benefit of Section

10(20) of the I.T. Act, 1961. The constitutional scheme

envisages performance of municipal functions even by a

body which may not be elected and yet performs municipal

functions. Article 243Q envisaged such authority and also

having been recognised such an authority by issuing the

notification, it is a local authority and is entitled for

the  benefit  of  exemption.  There  does  not  exist  any

elected municipality for the industrial development area

and it is the appellant which is entrusted to discharge

municipal  functions  as  enumerated  in  the  12th Schedule

under Article 243P of the Constitution. The appellant was

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not only a creation of a statute but has been statutorily

charged  to  perform  functions,  including  municipal

functions.  The  appellant  is  a  local  body  having  local

fund and its accounts are audited by the Examiner of the

Local Fund accounts. The appellant also has authorisation

by  law  to  levy  tax  in  contradistinction  to  a  mere

development authority.  

9. Learned counsel appearing for the Revenue refuting

the submissions of appellant contends that in view of the

Explanation added to Section 10(20) of the I.T.Act, 1961

by Finance Act, 2002, the appellant is no longer covered

by the definition of ‘local authority’. The definition of

‘local authority’ as contained in Explanation is not an

inclusive definition but being an exhaustive definition

unless the appellant is covered by any of the clauses

mentioned  in  the  Explanation  it  cannot  claim  an

exemption.  It  is  further  submitted  that  omission  of

Section 10(20A) by the same Finance Act clearly indicates

that  those  authorities  which  were  treated  as  local

authority prior to Finance Act is no longer entitled to

avail the benefit of exemption. It is evident from the

Constitution 74th Amendment Act, 1992 that the Parliament

has  introduced  certain  minimum  safeguards  so  that

municipalities could act as vibrant democratic units of

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self-government so as to not leave them to the vagaries

of laws being enacted by different State Legislatures.

The Parliament was focussed on making provisions of local

self-government alone and not on the aspect of municipal

services and Legislation on municipalities operates in a

different legislative field as compared to Legislation on

Industrial  Development  Authorities.  After  the

Constitution Amendment both U.P. Municipality Act, 1916

and  U.P.  Municipal  Corporation  Act,  1959  have  been

amended  in  the  light  of  constitutional  provisions  as

contained  in  Part  IXA  of  the  Constitution  whereas  no

amendments  have  been  made  in  Act,  1976  which  clearly

indicates  that  the  authority  was  never  treated  as

municipality within the meaning of Article 243Q. There

are large number of factors which must be possessed by

the municipality under the constitutional scheme which is

absent in the authority.

10. Hence,  Constitution  never  recognised  industrial

township as referred to in proviso to Article 243Q as

equivalent  to  municipality.  Further,  the  notification

under the proviso to Article 243Q dated 24.12.2001 itself

indicates that no municipality has been constituted in

the  area  in  which  appellant  operated.  The  Authority

clearly is not a local authority. The Finance Act, 2002

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brought substantial changes in the definition of local

authority by defining local authority exclusively and by

omitting Section 10(20A), the benefits earlier enjoyed by

various authorities which were treated local authorities

were taken away. The provisions of Section 10 sub-section

(20) are clear and taking plain and literal meaning of

the  provision,  the  appellant  is  not  entitled  for

exemption; the High court has rightly dismissed the writ

petition filed by the appellant.

11. Learned  counsel  appearing  for  the  Banks  have  also

adopted the submissions made by the learned counsel for

the  Revenue  in  support  of  their  contention  that  the

appellant  is  a  local  authority  within  the  meaning  of

Section 10 sub-section (20) of the I.T. Tax, 1961.

12. Learned counsel for both the parties have relied on

various judgments of this Court which shall be referred

to while considering the submissions made by the parties.

13. We  have  considered  the  submissions  made  by  the

learned counsel for the parties and perused the records.

14. The only issue which needs to be considered in these

appeals  is  as  to  whether  the  appellant  is  a  local

authority within the meaning of Section 10(20) as amended

by Finance Act, 2002 w.e.f. 01.04.2003. Before we proceed

further,  it  is  necessary  to  notice  the  provisions  of

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Section 10(20) which existed prior to its amendment by

Finance Act, 2002 and after amendment w.e.f. 01.04.2003:

Section  10(20)  prior  to amendment  by  the  Finance Act, 2002

Section  10(20)  after amendment  by  the  Finance Act, 2002

the  income  of  a  local authority  which  is chargeable  under  the  head “Income  from  house property”,  “Capital  gains” or  “Income  from  other sources” or from a trade or business  carried  on  by  it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the  supply  of  water  or electricity  within  or outside  its  own jurisdictional area;

the  income  of  a  local authority  which  is chargeable  under  the  head “Income  from  house property”,  “Capital  gains” or  “Income  from  other sources” or from a trade or business  carried  on  by  it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the  supply  of  water  or electricity  within  or outside  its  own jurisdictional area;

 Explanation.—For  the purposes of this clause, the expression “local authority” means—  (i)  Panchayat  as referred to in clause (d) of article  243  of  the Constitution87; or

(ii)  Municipality  as referred to in clause (e) of article  243P  of  the Constitution88; or  

(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

(iv)  Cantonment  Board  as

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defined  in  section  389  of the Cantonments Act, 1924 (2 of 1924);

“10(20A)  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;”

Section  10(20A):Omitted  by the Finance Act, 2002 w.e.f. 1.4.2002

15. The constitutional provisions contained in Part IXA

of the Constitution of India as inserted by Constitution

74th Amendment Act, 1992 also need to be noted. Article

243P  contains  the  definitions.  Article  243P(e)  defines

Municipality which is to the following effect:

“243P(e)”Municipality” means an institution of self-government  constituted  under  Article 243Q;”

16. Article  243Q  provides  for  the  Constitution  of

Municipalities which is to the following effect:

“243Q.  Constitution  of  Municipalities.- (1) There shall be constituted in every State,-

(a) a Nagar Panchayat (by whatever name called) for a transitional area, that is to say, an area  in  transition  from  a  rural  area  to  an urban area;

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“243ZF.  Continuance  of  existing  laws  and Municipalities.- Notwithstanding  anything  in this Part, any provision of any law relating to Municipalities in force in a State immediately before  the  commencement  of  the  Constitution (Seventy-fourth Amendment) Act, 1992, which is inconsistent with the provisions of this Part, shall continue to be in force until amended or repealed by a competent Legislature or other competent authority or until the expiration of one year from such commencement, whichever is earlier:

Provided  that  all  the  Municipalities existing immediately before such commencement shall  continue  till  the  expiration  of  their duration,  unless  sooner  dissolved  by  a resolution  passed  to  that  effect  by  the Legislative Assembly of that State or, in the case of a State having a Legislative Council, by  each  House  of  the  Legislature  of  that State.”

20. It is also relevant to notice certain provisions of

Act,  1976,  before  we  proceed  further  to  examine  the

issue. The authority has been constituted by notification

dated 17.04.1976 exercising power under Section 3 of Act,

1976.  Section  3  provides  for  Constitution  of  the

Authority which is to the following effect:

“3.(1)  The  State  Government  may,  by notification,  constitute  for  the  purposes  of this Act, An authority to be called (Name of the area) Industrial Development Authority, for any industrial development area.  (2) The Authority shall be a body corporate.

(3)  The  Authority  shall  consist  of  the following:–

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(a)  The  Secretary  to  the  Government,  Uttar Pradesh,  Member  Industries  Department  or  his Nominee not below Chairman the rank of Joint Secretary-ex-official.          Member Chairman

(b)  The  Secretary  to  the  Government,  Uttar Pradesh, Member Public works Department or his nominee not below the rank of Joint Secretary ex-official.                             Member

(c)  The  Secretary  to  the  Government,  Uttar Pradesh,  Local  Member  Self-Government  or  his nominee  not  below  the  rank  of  joint Secretary-ex official.  

Member

(d)  The  Secretary  to  the  Government,  Uttar Pradesh,  Finance  Member  Department  or  his nominee  not  below  the  rank  of  Joint Secretary-ex official.  

(e)  The  Managing  Director,  U.P.  State Industrial  Development  Member  Corporation-ex official.  

(f) Five members to be nominated by the State Government Member by notification. Member

(g) Chief Executive Officer.   Member Secretary

(4) The headquarters of the Authority shall be at such place as may be notified by the State Government.  

(5)  The  procedure  for  the  conduct  of  the meetings for the Authority shall be such as may be prescribed.  

(6)  No  act  or  proceedings  of  the  Authority shall be invalid by reason of the existence of any vacancy in or defect in the constitution of the Authority.”

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21. Section 6 provides for the function of the Authority

which is to the following effect:

“6.(1) The object of the Authority shall be to  secure  the  planned  development  of  the industrial development area.  

(2) Without prejudice to the generality of the objects of the Authority, the Authority shall perform the following functions :–  

(b) to prepare a plan for the development of the industrial development area;  

(c)  to  demarcate  and  develop  sites  for industrial, commercial and residential purpose according to the plan;  

(d) to provide infrastructure for industrial, commercial and residential purposes;  

(e) to provide amenities;  

(f) to allocate and transfer either by way of sale or lease or otherwise plots of land for industrial, commercial or residential purposes;

(g) to regulate the erection of buildings and setting up of industries: and  

(h)  to  lay  down  the  purpose  for  which  a particular site or plot of land shall be used, namely  for  industrial  or  commercial  or residential  purpose  or  any  other  specified purpose in such area.”

22. Section  7  deals  with  power  of  the  Authority  in

respect of transfer of land. Section 8 deals with power

to issue directions in respect of creation of building.

Section  9  deals  with  ban  on  erection  of  building  in

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contravention of regulations. Section 10 deals with power

to  require  proper  maintenance  of  site  or  building.

Section  11  empowers  the  Authority  to  levy  of  tax.  By

Section 12 certain provisions of U.P. Urban Planning and

Development Act, 1973 has been made applicable.

Chapter VII deals Finance, Accounts and Audit.  

23. We may also notice the notification dated 24.12.2001

issued by the Governor in exercise of the powers under

the  proviso  to  Clause  (1)  of  Article  243Q.  The

notification is as follows:

“NOTIFICATION No.6709/77-4-2001-56 Bha/99

In exercise of the powers under the proviso to  Clause  (1)  of  Article  243Q  of  the Constitution  of  India,  the  Governor,  having regard to the size of the New Okhla Industrial Development Area, which has been declared as an industrial  development  area  by  Government Notification  No.4157-HI/XVIII-11,  dated  April 17,  1976  and  the  municipal  services  being provided  by  the  New  Okhla  Industrial Development Authority in that area, is pleased to  specify  the  said  New  Okhla  Industrial Development Area to be an “industrial township” with effect from the date of publication of this notification in the official gazette.

By order,

Sd/- (Anoop Mishra)

Secretary.”

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24. The submissions made by the parties can be dealt with

in the following two heads:

A. The status of the Authority by virtue of notification dated 24.12.2001 issued under Clause (1) of Article 243Q.

B. Whether the appellant is a local authority “within the meaning of Section 10 sub-section (20) as explained in Explanation added by Finance Act, 2002.

(A) Part IXA of the Constitution: 25. The  Statement  of  Objects  and  Reasons  of  the

Constitution  74th Amendment  Act,  1992,  briefly  outlined

the object and purpose for which Constitution Amendment

was brought in. It is useful to refer to the Statement of

Objects and Reasons of the Constitution Amendment which

is to the following effect:

“STATEMENT OF OBJECTS AND REASONS

In many States local bodies have become weak and  ineffective  on  account  of  a  variety  of reasons, including the failure to hold regular elections,  prolonged  supersessions  and inadequate devolution of powers and functions. As a result, Urban Local Bodies are not able to perform effectively as vibrant democratic units of self-government.  

2. Having regard to these inadequacies, it is considered necessary that provisions relating to Urban Local Bodies are incorporated in the Constitution particularly for-  

(i)  putting  on  a  firmer  footing  the relationship between the State Government and the Urban Local Bodies with respect to-

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(a) the functions and taxation powers; and  

(b) arrangements for revenue sharing;  

(ii) Ensuring regular conduct of elections;  

(iii) ensuring timely elections in the case of supersession; and  

(iv) providing adequate representation for the weaker  sections  like  Scheduled  Castes, Scheduled Tribes and women.”

26. The  Kishansing  Tomar  Municipal  Corporation  Of  The

City Of Ahmedabad Ad Others, 2006 (8) SCC 352, noticing

the object and purpose of Constitution 74th Amendment Act,

1992 stated as following:

“12. It  may  be  noted  that  Part  IX-A  was inserted in the Constitution by virtue of the Constitution  (Seventy-fourth)  Amendment  Act, 1992.  The  object  of  introducing  these provisions was that in many States the local bodies were not working properly and the timely elections were not being held and the nominated bodies  were  continuing  for  long  periods. Elections  had  been  irregular  and  many  times unnecessarily  delayed  or  postponed  and  the elected bodies had been superseded or suspended without adequate justification at the whims and fancies of the State authorities. These views were expressed by the then Minister of State for  Urban  Development  while  introducing  the Constitution Amendment Bill before Parliament and thus the new provisions were added in the Constitution  with  a  view  to  restore  the rightful  place  in  political  governance  for local bodies. It was considered necessary to provide a constitutional status to such bodies and  to  ensure  regular  and  fair  conduct  of elections.  In  the  Statement  of  Objects  and Reasons  in  the  Constitution  Amendment  Bill relating to urban local bodies, it was stated:”

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27. The constitutional provisions as contained in Part

IXA delineate that the Constitution itself provided for

constitution  of  Municipalities,  duration  of

Municipalities,  powers  of  Authorities  and

responsibilities  of  the  Municipalities.  The

Municipalities are created as vibrant democratic units of

self-government.   The  duration  of  Municipality  was

provided  for  five  years  contemplating  regular  election

for  electing  representatives  to  represent  the

Municipality. The special features of the Municipality as

was  contemplated  by  the  constitutional  provisions

contained in Part IXA cannot be said to be present in

Authority as delineated by statutory scheme of Act, 1976.

It  is  true  that  various  municipal  functions  are  also

being performed by the Authority as per Act, 1976 but the

mere  facts  that  certain  municipal  functions  were  also

performed  by  the  authority  it  cannot  acquire  the

essential  features  of  the  Municipality  which  are

contemplated by Part IXA of the Constitution. The main

thrust of the argument of the learned counsel for the

appellant that the High Court having not adverted to the

notification  dated  24.12.2001  issued  under  proviso  to

Article 243Q(1) the judgments relied on by the High Court

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for dismissing the writ petition is not sustainable. We

thus have to focus on proviso to Article 243Q(1). For the

purpose and object of the industrial township referred to

therein whether industrial township mentioned therein can

be  equated  with  Municipality  as  defined  under  Article

243P(e). Article 243P(e) provides that the “Municipality

means an institution of self-government constituted under

Article 243Q. Whether the appellant is a institution of

self-government  constituted  under  Article  243Q  is  the

main question to be answered? Sub-clause (1) of Article

243Q provides that there shall be constituted in every

State-  a  Nagar  Panchayat,  a  Municipal  Council  and  a

Municipal Corporation, in accordance with the provisions

of this Part.  The proviso to sub-clause (1) provides

that: “Provided that a municipality under this clause may

not be constituted in such urban area or part thereof as

the Governor may, having regard to the size of the area

and the municipal services being provided or proposed to

be provided for an industrial establishment in that area

and such other factors as may he may deem fit, by public

notification, specify to be an industrial township.”.

28. Thus, proviso does not contemplate constitution of an

industrial  establishment  as  a  Municipality  rather

clarifies  an  exception  where  Municipality  under  clause

22

(1) of Article 243Q may not be constituted in an urban

area. The proviso is an exception to the constitution of

Municipality as contemplated by sub-clause (1) of Article

243Q. No other interpretation of the proviso conforms to

the constitution scheme.  

29. A Constitution Bench of this Court had noticed the

principles of statutory interpretation of a proviso in S.

Sundaram  Pillai  and  others  vs.  V.R.  Pattabiraman  and

others, 1985(1) SCC 591. The following has been laid down

by this Court in paragraphs 37 to 43:

“37. In  short,  generally  speaking,  a proviso  is  intended  to  limit  the  enacted provision so as to except something which would have  otherwise  been  within  it  or  in  some measure  to  modify  the  enacting  clause. Sometimes a proviso may be embedded in the main provision and becomes an integral part of it so as to amount to a substantive provision itself.

38. Apart  from  the  authorities  referred  to above,  this  Court  has  in  a  long  course  of decisions explained and adumbrated the various shades, aspects and elements of a proviso. In State of Rajasthan v.  Leela Jain,AIR 1965 SC 1296, the following observations were made:

“So  far  as  a  general  principle  of construction of a proviso is concerned, it has been broadly stated that the function of a proviso is to limit the main part of the section and carve out something which but for the proviso would have been within the operative part.”

23

39. In the case of STO, Circle-I, Jabalpur v. Hanuman Prasad, AIR 1967 SC 565, Bhargava, J. observed thus:

“It is well-recognised that a proviso is added to a principal clause primarily with the object of taking out of the scope of that principal clause what is included in it and what the legislature desires should be excluded.”

40. In Commissioner of Commercial Taxes v. R.S. Jhaver, AIR 1968 SC 59, this Court made the following observations:

“Generally speaking, it is true that the proviso is an exception to the main part of the section; but it is recognised that in exceptional  cases  a  proviso  may  be  a substantive provision itself.”

41. In Dwarka Prasad v. Dwarka Das Saraf, AIR 1975 SC 1758 Krishna Iyer, J. speaking for the Court observed thus: (SCC pp. 136-37, paras 16, 18)

“There is some validity in this submission but  if,  on  a  fair  construction,  the principal  provision  is  clean  a  proviso cannot  expand  or  limit  it.  Sometimes  a proviso  is  engrafted  by  an  apprehensive draftsman  to  remove  possible  doubts,  to make matters plain, to light up ambiguous edges. Here, such is the case.

* * *

If  the  rule  of  construction  is  that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause, the stand we have taken is sound.  To  expand  the  enacting  clause, inflated by the proviso, sins against the fundamental  rule  of  construction  that  a proviso must be considered in relation to

24

the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso,  although  the  golden  rule  is  to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.”

42. In Hiralal Rattanlal v. State of U.P., 1973 (1)SCC  216,  this  Court  made  the  following observations: [SCC para 22, p. 224: SCC (Tax) p. 315]

“Ordinarily  a  proviso  to  a  section  is intended to take out a part of the main section for special treatment. It is not expected to enlarge the scope of the main section.  But  cases  have  arisen  in  which this Court has held that despite the fact that a provision is called proviso, it is really  a  separate  provision  and  the so-called proviso has substantially altered the main section.”

43. We  need  not  multiply  authorities  after authorities  on  this  point  because  the  legal position  seems  to  be  clearly  and  manifestly well  established.  To  sum  up,  a  proviso  may serve four different purposes:

(1) qualifying  or  excepting  certain provisions from the main enactment:

(2) it  may  entirely  change  the  very concept  of  the  intendment  of  the enactment  by  insisting  on  certain mandatory conditions to be fulfilled in  order  to  make  the  enactment workable:

(3) it  may  be  so  embedded  in  the  Act itself as to become an integral part of the enactment and thus acquire the

25

tenor and colour of the substantive enactment itself; and

(4) it may be used merely to act as an optional  addenda  to  the  enactment with  the  sole  object  of  explaining the real intendment of the statutory provision.”

30. Applying rules of interpretation as laid down by this

Court, it is clear that proviso is an exception to the

constitutional provisions which provide that there shall

be  constituted  in  every  State  a  Nagar  Panchayat,  a

Municipal Council and a Municipal Corporation. Exception

is covered by proviso that where an industrial township

is  providing  municipal  services  the  Governor  having

regard to the size of the area and the municipal services

either being provided or proposed to be provided by an

industrial establishment specify it to be an industrial

township. The words ‘industrial township’ have been used

in  contradiction  of  a  Nagar  Panchayat,  a  Municipal

Council  and  a  Municipal  Corporation.   The  object  of

issuance  of  notification  is  to  relieve  the  mandatory

requirement of constitution of a Municipality in a State

in  the  circumstances  as  mentioned  in  proviso  but

exemption from constituting Municipality does not lead to

mean that the industrial establishment which is providing

municipal services to an industrial township is same as

26

Municipality  as  defined  in  Article  243P(e).  We  have

already noticed that Article 243P(e) defines Municipality

as  an  institution  of  self-government  constituted  under

Article  243Q,  the  word  constituted  used  under  Article

243P(e)  read  with  Article  243Q  clearly  refers  to  the

constitution  in  every  State  a  Nagar  Panchayat,  a

Municipal  Council  or  a  Municipal  Corporation.  Further,

the words in proviso “a Municipality under this clause

may not be constituted” clearly means that the words “may

not  be  constituted”  used  in  proviso  are  clearly  in

contradistinction with the word constituted as used in

Article  243P(e)  and  Article  243Q.  Thus,  notification

under  proviso  to  Article  243Q(1)  is  not  akin  to

constitution of Municipality. We, thus, are clear in our

mind  that  industrial  township  as  specified  under

notification dated 24.12.2001 is not akin to Municipality

as contemplated under Article 243Q.

31. At  this  juncture,  we  may  also  notice  the  two

judgments as relied on by the High Court and three more

judgments where Article 243Q came for consideration. The

first judgment which needs to be noticed is  Adityapur

Industrial  Area  Development  Authority  (supra). The

Adityapur  Industrial  Development  Authority  was

constituted under the Bihar Industrial Area Development

27

Authority Act, 1974.  In paragraph 2 of the judgment the

constitution of the authority was noticed which is to the

following effect:

“2. The  appellant  Authority  has  been constituted  under  the  Bihar  Industrial  Area Development Authority Act, 1974 to provide for planned  development  of  industrial  area,  for promotion of industries and matters appurtenant thereto.  The  appellant  Authority  is  a  body corporate  having  perpetual  succession  and  a common seal with power to acquire, hold and dispose  of  properties,  both  movable  and immovable, to contract, and by the said name sue or be sued. The Authority consists of a Chairman, a Managing Director and five other Directors  appointed  by  the  State  Government. The Authority is responsible for the planned development  of  the  industrial  area  including preparation of the master plan of the area and promotion of industries in the area and other amenities incidental thereto. The Authority has its  own  establishment  for  which  it  is authorised  to  frame  regulations  with  prior approval  of  the  State  Government.  The  State Government  is  authorised  to  entrust  the Authority  from  time  to  time  with  any  work connected  with  planned  development,  or maintenance  of  the  industrial  area  and  its amenities  and  matters  connected  thereto. Section 7 of the Act obliges the Authority to maintain  its  own  fund  to  which  shall  be credited moneys received by the Authority from the State Government by way of grants, loans, advances  or  otherwise,  all  fees,  rents, charges,  levies  and  fines  received  by  the Authority under the Act, all moneys received by the Authority from disposal of its movable or immovable assets and all moneys received by the Authority by way of loan from financial and other institutions and debentures floated for the execution of a scheme or schemes of the Authority  duly  approved  by  the  State Government. Unless the State Government directs

28

otherwise, all moneys received by the Authority shall be credited to its funds which shall be kept with State Bank of India and/or one or more of the nationalised banks and drawn as and when required by the Authority.”

32. On  the  question  as  to  whether  the  Adityapur

Industrial Area Development Authority was covered within

the meaning of local authority as per Section 10(20) as

amended by the Finance Act, 2002, the High Court held

that  the  appellant  authority  could  not  have  claimed

benefit  under  the  provisions  after  01.04.2003.  In

paragraphs 6 and 7 following was held:

“6. It would thus be seen that the income of a  local  authority  chargeable  under  the  head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or  business  carried  on  by  it  was  earlier excluded in computing the total income of the Authority of a previous year. However, in view of the amendment, with effect from 1-4-2003 the Explanation  “local  authority”  was  defined  to include only the authorities enumerated in the Explanation,  which  does  not  include  an authority such as the appellant. At the same time Section 10(20-A) which related to income of  an  authority  constituted  in  India  by  or under  any  law  enacted  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, which before the amendment was  not  included  in  computing  the  total income, was omitted. Consequently, the benefit conferred  by  sub-section  (20-A)  on  such  an authority was taken away.

29

7. The High Court by its impugned judgment and order held that in view of the fact that Section 10(20-A) was omitted and an Explanation was  added  to  Section  10(20)  enumerating  the “local  authorities”  contemplated  by  Section 10(20), the appellant Authority could not claim any  benefit  under  those  provisions  after 1-4-2003. It further held that the exemption under Article 289(1) was also not available to the appellant Authority as it was a distinct legal entity, and its income could not be said to be  the income  of the  State so  as to  be exempt from Union taxation. The said decision of the High Court is impugned in this appeal.”

33. One of the submissions which was raised before this

Court was that exemption under Article 289(1), was also

available to the appellant-Authority. The said submission

was considered and negativated. Apart from rejecting the

claim under Article 289(1), this court noticing Section

10(20) has held in paragraph 13:

“13. Applying the above test to the facts of the present case it is clear that the benefit, conferred by Section 10(20-A) of the Income Tax Act,  1961  on  the  assessee  herein,  has  been expressly taken away. Moreover, the Explanation added to Section 10(20) enumerates the “local authorities” which do not cover the assessee herein. Therefore, we do not find any merit in the  submission  advanced  on  behalf  of  the assessee.”

34. In the present case although exemption under Article

289 was not claimed or contended but the above judgment

30

cannot be said to be not relevant to the present case

since, the Court has also dwelled upon Section 10(20) as

amended w.e.f. 01.04.2003. We, thus, do not accept the

submission of the appellant that the above case was not

relevant for the present case and was wrongly relied on

by the High Court.

35. The second judgment which is relied on by the High

court  is  Agricultural  Produce  Market  Committee,  Narela

(supra).  The  Agricultural  Produce  Market  Committee  was

constituted  under  the  Delhi  Agricultural  Produce

Marketing (Regulation) Act, 1998. The question arose as

to  whether  Agricultural  Market  Committee  is  a  “local

authority” under the Explanation to Section 10(20) of the

Income Tax Act, 1961. In the above context it was noticed

that  all  Agricultural  Market  Committees  at  different

places  were  enjoying  exemption  from  income  tax  under

Section 10(20) prior to its amendment by the Finance Act,

2002  w.e.f.  01.04.2003.  The  definition  of  ‘local

authority’ under Section 3(31) of General Clauses Act,

1897 is as follows:

“”local  authority”  shall  mean  a  municipal committee,  district  board,  body  or  port Commissioners  or  other  authority  legally entitled  to,  or  entrusted  by  the  Government with, the control or management of a municipal or local fund;”

31

36.  In the above case this Court noticed in extenso the

provisions  of  Delhi  Agricultural  Produce  Marketing

(Regulation) Act, 1998 and provisions of Section 10(20)

of  the  Income  Tax  Act,  1961.  Definition  of  local

authority as contained in Explanation to Section 10(20)

and Section 3(31) of the General Clauses Act was also

noticed  and  discussed.  This  Court  held  that  the

definition  of  local  authority in  General  Clauses  Act

under  Section  3(31)  is  no  longer  applicable  after  the

amendment  of  Section  10(20)  by  Finance  Act,  2002.

Following was laid down by this Court in paragraphs 31

and 32:

31. Certain  glaring  features  can  be deciphered  from  the  above  comparative  chart. Under Section 3(31) of the General Clauses Act, 1897, “local authority” was defined to mean “a Municipal  Committee,  District  Board,  Body  of Port Commissioners  or other authority legally entitled to … the control or management of a municipal  or  local  fund”.  The  words  “other authority” in Section 3(31) of the 1897 Act have  been  omitted  by  Parliament  in  the Explanation/definition  clause  inserted  in Section 10(20) of the 1961 Act vide the Finance Act, 2002. Therefore, in our view, it would not be correct to say that the entire definition of the  word  “local  authority”  is  bodily  lifted from  Section  3(31)  of  the  1897  Act  and incorporated,  by  Parliament,  in  the  said Explanation to Section 10(20) of the 1961 Act. This deliberate omission is important.

32

32. It may be noted that various High Courts had taken the view prior to the Finance Act, 2002 that AMC(s) is a “local authority”. That was because there was no definition of the word “local  authority”  in  the  1961  Act.  Those judgments proceeded primarily on the functional tests  as  laid  down  in  the  judgment  of  this Court  vide  para  2  in  R.C.  Jain.  We  quote hereinbelow para 2 which reads as under: (SCC pp. 311-12)

“2.  Let  us,  therefore,  concentrate  and confine  our  attention  and  enquiry  to  the definition  of  ‘local  authority’  in  Section 3(31) of the General Clauses Act. A proper and  careful  scrutiny  of  the  language  of Section 3(31) suggests that an authority, in order to be a local authority, must be of like  nature  and  character  as  a  Municipal Committee,  District  Board  or  Body  of  Port Commissioners,  possessing,  therefore,  many, if not all, of the distinctive attributes and characteristics  of  a  Municipal  Committee, District  Board,  or  Body  of  Port Commissioners, but, possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with, the control  and  management  of  a  municipal  or local  fund.  What  then  are  the  distinctive attributes and characteristics, all or many of  which  a  Municipal  Committee,  District Board or Body of Port Commissioners shares with any other local authority? First, the authorities  must  have  separate  legal existence as corporate bodies. They must not be  mere  governmental  agencies  but  must  be legally independent entities. Next, they must function  in  a  defined  area  and  must ordinarily,  wholly  or  partly,  directly  or indirectly, be elected by the inhabitants of the  area. Next,  they must  enjoy a  certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be complete and the degree of the dependence  may  vary  considerably  but,  an appreciable  measure  of  autonomy  there  must

33

be. Next, they must be entrusted by statute with such governmental functions and duties as are usually entrusted to municipal bodies, such  as  those  connected  with  providing amenities to the inhabitants of the locality, like health and education services, water and sewerage,  town  planning  and  development, roads,  markets,  transportation,  social welfare services, etc. etc. Broadly we may say  that  they  may  be  entrusted  with  the performance  of  civic  duties  and  functions which would otherwise be governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges, or fees.  This  may  be  in  addition  to  moneys provided  by  Government  or  obtained  by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority.”

37. The Court further held that Explanation under Section

10(20) provides an exhaustive definition and the tests

laid down by this Court in an earlier case i.e. Union of

India and others vs. R.C. Jain and others, 1981 (2) SCC

308, are no longer applicable. In paragraph 35 following

was stated:

“35. One more aspect needs to be mentioned. In  R.C.  Jain the  test  of  “like  nature”  was adopted  as  the  words  “other  authority”  came after the words “Municipal Committee, District Board, Body of Port Commissioners”. Therefore, the words “other authority” in Section 3(31) took  colour  from  the  earlier  words,  namely, “Municipal Committee, District Board or Body of Port Commissioners”. This is how the functional test  is  evolved  in  R.C.  Jain2.  However,  as

34

stated earlier, Parliament in its legislative wisdom has omitted the words “other authority” from the said Explanation to Section 10(20) of the 1961 Act. The said Explanation to Section 10(20) provides a definition to the word “local authority”. It is an exhaustive definition. It is  not  an  inclusive  definition.  The  words “other authority” do not find place in the said Explanation.  Even,  according  to  the appellant(s),  AMC(s)  is  neither  a  Municipal Committee nor a District Board nor a Municipal Committee nor a panchayat. Therefore, in our view  functional  test  and  the  test  of incorporation as laid down in R.C. Jain2 is no more applicable to the Explanation to Section 10(20) of the 1961 Act. Therefore, in our view the  judgment  of  this  Court  in  R.C.  Jain2 followed by judgments of various High Courts on the status and character of AMC(s) is no more applicable to the provisions of Section 10(20) after  the  insertion  of  the Explanation/definition  clause  to  that sub-section vide the Finance Act, 2002.”

38. This Court held that Agricultural Marketing Committee

is also not covered by the words “Municipal Committee,

District Board, Body of Port Commissioners” as used in

Explanation of Section 10(20).  

39. In this context, we also refer to the judgment of

this Court in Saij Gram Panchayat vs. State of Gujarat an

others,  1999  (2)  SCC  366.  This  Court  had  occasion  to

consider in the above case Gujarat Industrial Development

Act,  1962,  the provisions of Article 243Q and Gujarat

Municipalities Act, 1963.

35

40. This Court held that Gujarat Industrial Development

Act operates in a totally different sphere from Parts IX

and IXA of the Constitution and the Gujarat Panchayats

Act, 1961. In paragraph 16 of the judgment following was

held:

“The  Gujarat  Industrial  Development  Act operates  in  a  totally  different  sphere  from Parts IX and IX-A of the Constitution as well as the Gujarat Panchayats Act, 1961 and the Gujarat Municipalities Act, 1962 — the latter being  provisions  dealing  with  local self-government, while the former being an Act for  industrial  development  and  orderly establishment and organisation of industries in a State.”  

41. It is, however, true that in the above case this

Court was not concerned with the issue which has arisen

in the present case and the Court was concerned with a

different controversy.  

42. We, thus, conclude that authority constituted under

Act, 1976 with regard to which notification under proviso

to Article 243Q(1) dated 24.12.2001 has also been issued

is not akin to the Municipality constituted under Article

243Q(1).

B. Section 10(20) as amended by the Finance Act, 2002 43. We have already noticed that by the Finance Act, 2002

an Explanation has been added to Section 10(20) of the

36

I.T.  Act,  1961  and  Section  10(20A)  has  been  omitted.

Prior to Finance Act, 2002 there being no definition of

‘local authority’ under the I.T. Act, the provisions of

Section  3(31)  of  the  General  Clauses  Act,  1897  were

pressed into service while interpreting the extent and

meaning of local authority. The Explanation having now

contained the exhaustive definition of local authority,

the definition of local authority as contained in Section

3(31) of General Clauses Act, 1892 is no more applicable.

Section  3  of  the  General  Clauses  Act  begins  with  the

words  “In  this  Act,  and  in  all  Central  Acts  and

Regulations  made  after  the  commencement  of  this  Act,

unless  there  is  anything  repugnant  in  the  subject  or

context,-.... The definition given of the local authority

under Section 3(31) does not now govern the field in view

of  the  express  omission  of  the  expression  “all  other

authority”.   This  Court  has  already  in  Agricultural

Produce  Market  Committee,  Narela  (supra),  held  that

definition under Section 3(31) of the General Clauses Act

is now no more applicable to interpret local authority

under Section 10(20) of the I.T. Act. Before we proceed

further it shall be useful to notice certain well settled

principles  of  statutory  interpretation  of  fiscal

37

statutes. This Court in A.V. Fernandez vs. The State of

Kerala, AIR 1957 SC 657 laid following:

“(29)  It  is  no  doubt  true  that  in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and n ot merely  to  the  spirit  of  the  statute  or  the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If on the other hand, the case is not covered  within  the  four  corners  of  the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion that the appellant was liable to assessment as contended by the Sales Tax Authorities.”

44. This Court in Rajasthan Rajya Sahakari Spinning and

Ginning Mills Federation Limited vs. Deputy Commissioner

of Income Tax, Jaipur, 2014(11) SCC 672 again reiterated

that  there  has  to  be  strict  interpretation  of  taxing

statutes and further the fact that one class of legal

entities  are  given  some  benefit  which  is  specifically

stated in the Act does not mean that the legal entities

not  referred  to  in  the  Act  would  also  get  the  same

benefit. Following was laid down in paragraph 23:

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“23. We are also of the view that in all the tax matters one has to interpret the taxation statute strictly. Simply because one class of legal entities are given some benefit which is specifically stated in the Act does not mean that the legal entities not referred to in the Act would also get the same benefit. As stated by this Court on several occasions, there is no equity in matters of taxation. One cannot read into a section which has not been specifically provided for and therefore, we do not agree with  the  submissions  of  the  learned  counsel appearing  for  the  appellant  and  we  are  not prepared to read something in the section which has  not  been  provided  for.  The  judgments referred to hereinabove support the view which we have expressed here.”

45. It shall be useful to refer to Explanatory Notes on

Finance  Act,  2002.  Explanatory  Notes  both  on  Section

10(20) and Section 10(20A) are relevant and contained in

paragraph 12.2 to 12.4 and 13.1 to 13.4. Paragraphs 12.2.

to  12.4  under  the  heading:  Income  of  certain  Local Authorities  to  become  taxable  are  to  the  following effect:

“12.2 Through  Finance  Act,  2002,  this exemption  has  been  restricted  to  the Panchayats  and  Municipalities  as  referred to in Articles 243(d) and 243(p)(e) of the Constitution  of  India  respectively. Municipal  Committees  and  District  Boards, legally  entitled  to  or  entrusted  by  the Government with the control or management of  a  Municipal  or  a  local  fund  and Cantonment Boards as defined under section 3 of the Cantonments Act, 1924.

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12.3 The  exemption  under  clause  (20)  of section  10  would,  therefore,  not  be available  to  Agricultural  Marketing Societies  and  Agricultural  Marketing Boards,  etc.,  despite  the  fact  that  they may  be  deemed  to  be  treated  as  local authorities  under  any  other  Central  or State  Legislation.  Exemption  under  this clause  would  not  be  available  to  port trusts also.

12.4 This amendment will take effect from 1st  April,  2003  and  will,  accordingly, apply  in  relation  to  the  assessment  year 2003 2004 and subsequent assessment years.”

46. Further paragraphs 13.1 to 13.4 of the Explanatory

Notes  contained  heading:  “Income  of  certain  Housing Boards  etc.  to  become  taxable”  on  deletion  of  Clause (20A), are as stated below:

“13.1 Under  the  existing  provisions contained  in  clause  (20A)  of  section  10, income  of  the  Housing  Boards  or  other statutory  authorities  set up  for  the purpose of dealing with or satisfying the need for housing accommodations or for the purpose  of  planning,  development  or improvement of cities, towns and villages is exempt from payment of income tax.

13.2 Through Finance Act, 2002 clause (20A) of section 10 has been deleted so as to withdraw  exemption  available  to  the abovementioned  bodies.  The  income  of Housing  Boards  of  the  States  and  of Development  Authorities  would,  therefore, also become taxable.

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13.3 Under  section  80G,  donation  made  to housing  authorities,  etc.  referred  to  in clause (20A) of section 10 is eligible for 50%  deduction  from  total  income  in  the hands of the donors. Since clause (20A) of section  10  has  been  deleted,  donation  to the housing authorities etc. would not be eligible for deduction in the hands of the donors and this may result in drying up of donations.  To  continue  the  incentive  to donation made to housing authorities etc., section  80G  has  been  amended  so  as  to provide  that  50%  of  the  sum  paid  by  an assessee  to  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, shall be deducted from the total income of such assessee.

13.4 These amendments will take effect from lst  April,  2003  and  will,  accordingly, apply  in  relation  to  the  assessment  year 2003 2004 and subsequent assessment years.”

47. The  explanatory  note  clearly  indicates  that  by Finance Act, 2002 the exemption under Section 10(20) has

been restricted to the Panchayats and Municipalities as

referred to in Articles 243P(d) and 243P(e). Further by

deletion  of  Clause  (20A),  the  income  of  the  Housing

Boards  of  the  States  and  of  Development  Authorities

became taxable.

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48. On a writ petition filed by the appellant before the

Allahabad High Court where the notices issued in the year

1998  under  Section  142  of  the  Income  Tax  Act  was

challenged vide its judgment dated 14.02.2000 the High

Court  held  that  appellant’s  case  comes  squarely  under

Section  10(20A)  of  the  Income  Tax  Act,  hence,  the

appellant was liable to be exempted under the said Act,

although, the High Court did not express any opinion on

the question whether appellant was exempted under Section

10(20) in that judgment.  

49. After  omission  of  Section  10(20A)  only  provision

under which a Body or Authority can claim exemption is

Section 10(20). Local authority having been exhaustively

defined in the Explanation to Section 10(20) an entity

has to fall under Section 10(20) to claim exemption. It

is also useful to notice that this Court laid down in

State of Gujarat and others vs. ESSAR Oil Limited and

another,  2012  (3)  SCC  522, that  a  person  invoking  an

exception or an exemption provision to relieve him of the

tax liability must establish clearly that he is covered

by the said provision. It is useful to extract paragraph

88 which is to the following effect:

“88. This Court in Novopan case, 1994 Supp (3) SCC 606, held that the principle that in case

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of  ambiguity,  a  taxing  statute  should  be construed in favour of the assessee, does not apply to the construction of an exception or an exempting provision, as the same have to be construed  strictly.  Further  this  Court  also held that a person invoking an exception or an exemption provision to relieve him of the tax liability  must  establish  clearly  that  he  is covered by the said provision and in case of doubt or ambiguity, benefit of it must go to the State.”

50. For  interpreting  an  explanation  this  Court  in  s.

Sundaram  Pillai  and  others  vs.  V.r.  Pattabiraman  and

others, 1985 (1) SCC 591, laid down in paragraphs 47 and

53 as follows:

“47. Swarup  in  Legislation  and Interpretation very aptly sums up the scope and effect of an Explanation thus:

“Sometimes an Explanation is appended to stress  upon  a  particular  thing  which ordinarily would not appear clearly from the provisions  of  the  section.  The  proper function of an Explanation is to make plain or  elucidate  what  is  enacted  in  the substantive  provision  and  not  to  add  or subtract from it. Thus an Explanation does not either restrict or extend the enacting part; it does not enlarge or narrow down the scope  of  the  original  section  that  it  is supposed to explain.... The Explanation must be interpreted according to its own tenor; that  it  is  meant  to  explain  and  not  vice versa.” (pp. 297-98)

53. Thus,  from  a  conspectus  of  the authorities referred to above, it is manifest

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that  the  object  of  an  Explanation  to  a statutory provision is—

“(a) to explain the meaning and intendment of the Act itself,

(b)  where  there  is  any  obscurity  or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve,

(c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful,

(d)  an  Explanation  cannot  in  any  way interfere with or change the enactment or any part thereof but where some gap is left which is  relevant  for  the  purpose  of  the Explanation,  in  order  to  suppress  the mischief and advance the object of the Act it can help or assist the Court in interpreting the  true  purport  and  intendment  of  the enactment, and

(e)  it  cannot,  however,  take  away  a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same.”

51. This Court in  Adityapur Industrial Area Development

Authority  (supra)  after  considering  Section  10(20)  as

amended  by  the  Finance  Act,  2002  and  consequences  of

deletion of Section 10(20A) has laid down following in

paragraph 13:

“13. Applying the above test to the facts of  the  present  case  it  is  clear  that  the benefit, conferred by Section 10(20-A) of the Income Tax Act, 1961 on the assessee herein, has been expressly taken away. Moreover, the Explanation  added  to  Section  10(20)

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enumerates the “local authorities” which do not cover the assessee herein. Therefore, we do  not  find  any  merit  in  the  submission advanced on behalf of the assessee.”

52. It is also relevant to notice that this Court in

Gujarat  Industrial  Development  Corporation  vs.

Commissioner  of  Income  Tax,  1997  (7)  SCC  17, after

considering the provisions of Section 10(20A) of I.T. Act

held that Gujarat Industrial Development Corporation is

entitled for exemption under Section 10(20A). The Gujarat

Industrial  Development  Corporation  was  held  to  be

entitled for exemption under Section 10(20A) at the time

when the provision was in existence in the statute book

and  after  its  deletion  from  the  statute  book  the

exemption is no more available. Now, reverting back to

Section 10(20) as amended by Finance Act, 2002, the same

has  also  come  for  consideration  before  different  High

Courts. A Division Bench of the Allahabad High court in

Krishi  Utpadan  Mandi  Samiti  vs.  Union  of  India  and

another, (2004) 267 ITR 460 stated following:

“A  bare  perusal  of  the  Explanation  of Section  10(20)  shows  that  now  only  four entities are local authorities for the purpose of Section 10(20), namely, (i) Panchayat, (ii) Municipality;  (iii)  Municipal  Committee  and District  Board;  (iv)  Cantonment  Board  Krishi Utpadan Mandi Samiti is not one of the entities mentioned in the Explanation to Section 10(20).

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It  may  be  noted  that  the  Explanation  to Section 10(20) uses the word 'means' and not the word 'includes'. Hence, it is not possible for  this  Court  to  extend  the  definition  of 'local  authority'  as  contained  in  the Explanation  to  Section  10(20),  vide  P. Kasilingam v. P.S.G. College of Technology, AIR 1995 SC 1395 (para 19). It is also not possible to refer to the definitions in other Acts, as the  IT  Act  now  specifically  defines  'local authority'.

It is well settled that in tax matters the literal rule of interpretation applies and it is not open to the Court to extend the language of a provision in the Act by relying on equity, inference, etc.

It is the first principle of interpretation that a statute should be read in its ordinary, natural and grammatical sense as observed by the Supreme Court of India:

"In  construing  a  statutory  provision the first and foremost rule of construction is the literary construction. All that the Court has to see at the very outset is what does the provision say. If the provision is unambiguous and if from the provision the legislative intent is clear, the Court need not  call  into  aid  the  other  rules  of construction of statutes. The other rules of construction are called into aid only when the legislative intent is not clear" vide Hiralal Ratanlal v. STO, AIR 1973 SC 1034;”

53. A Division Bench of the Delhi High Court also in

Agricultural Produce Market Committee vs. Commissioner of

Income-tax, (2006)156 ITR 286 had occasion to consider

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Section  10(20)  as  amended  w.e.f.  01.04.2003  where  the

High court in paragraph 8 has stated the following:

“8.  The  most  striking  feature  of  the Explanation  is  that  the  same  provides  an exhaustive  meaning  to  the  expression  "local authority".  The  word  "means"  used  in  the Explanation leaves no scope for addition of any other entity as a 'local authority' to those enlisted in the Explanation. In other words, even  if  an  entity  constitutes  a  'local authority' for purposes of the General Clauses Act,  1897  or  for  purposes  of  any  other enactment for that matter, it would not be so construed for purposes of section 10(20) of the Act unless it answers the description of one of those entities enumerated in the Explanation. Mrs. Ahlawat did not make any attempt to bring her case under clauses (i), (ii) and (iv) of the Explanation and in our opinion rightly so because the appellant committee cannot by any process  of  reasoning  be  construed  as  a Panchayat as referred to in clause (d) of Art. 243  of  the  Constitution  of  India,  a municipality in terms of clause (e) of Art. 243P  of  the  Constitution  of  India  or  a Cantonment Board as defined under section 3 of the Cantonments Act, 1924. What she argued was that looking to the nature of the functions enjoined upon the appellant committee, it must be deemed to be a municipal committee within the meaning of that expression in clause (iii) of the Explanation. We regret our inability to accept  that  submission.  We  say  so  for  two distinct  reasons.  Firstly  because  the expression "municipal committee" appears in a taxing  statute  and  must,  Therefore,  be construed strictly. It is fairly well-settled by a long line of decisions rendered by the Supreme Court that while interpreting a taxing statute,  one  has  simply  to  look  to  what  is clearly  stated  therein.  There  is,  in  fiscal statutes, no room for any intendment nor is there  any  equity  about  the  levy  sanctioned under the same. The following passage from Cape Brandy Syndicate v. IRC 1921 (1) KB 64 has been

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approved by the Apex Court in the decisions rendered by their Lordships.

"in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, One can only look fairly at the language used."

54. We fully endorse the views taken by the High Court in

the above two judgments.

55. Now, reverting back to Explanation to Section 10(20),

these are entities which mean the local authority. The

submission  of  the  appellant  is  that  the  appellant  is

covered  by  Clause  (ii)  of  the  Explanation  i.e.

“Municipality  as  referred  to  in  clause  (e)  of  Article

243P  of  the  Constitution”.  We,  while  discussing  above

provisions, have already held that the appellant is not

covered  by  the  word/expression  of  “Municipality”  in

clause (e) of Article 243P. Thus,  the  appellant  is  not

clearly included in sub-clause (ii) of Explanation. It is

not even the case of the appellant that the appellant is

covered by Section 10(20) except clause (ii).

56. Thus,  we  are  of  the  considered  opinion  that  the

appellant  is  not  covered  by  the  definition  of  local

authority as contained in Explanation to Section 10(20).

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57. In view of what has been stated above, we dismiss

these appeals.

.....................J.    ( A.K. SIKRI )

.....................J.   ( ASHOK BHUSHAN )

NEW DELHI, JULY 02, 2018.