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)

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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  

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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

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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

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(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:-

“2.6  Considering our decision in the case of Rajasthan Housing Board, we feel that the Ld. CIT  (A)  was  not  justified  in  holding  that income of UTI is exempt u/s 10(20) of the Act. The Ld. CIT(A) has not decided other issues raised before him by the assessee because the Ld. CIT(A) was of the opinion that income of the assessee was exempt u/s 10(20) of the Act. Since we are vacating the order of the Ld. CIT(A) on the issue of liability of exemption u/s 10(20) of the Act, therefore, other issues are required to be considered afresh by the Ld. CIT (A).  Accordingly, the appeals are restored back on the file of the Ld. CIT(A).”

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

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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

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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.

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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

recent judgment of this Court in  New Okhla Industrial

Development Authority Vs. Chief Commissioner of Income

Tax & Ors. (2018) 8 SCALE 365, by which judgment, this

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

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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

judgment  of  this  Court  in  New  Okhla  Industrial

Development Authority Vs. Chief Commissioner of Income

Tax & Ors.(supra) is distinguishable since in the said

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:-

“10(20) 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 busi- ness carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own ju- risdictional area or from the supply of water or electricity within or outside its own ju- risdictional  area.

Explanation.—For the purposes of this clause, the expression "local authority" means—

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(i)  Panchayat as referred to in clause (d) of article 243 of the Constitution; or

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

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Gov- ernment with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924);”

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:-

“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;”

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:-

“12.2 Through  Finance  Act,  2002,  this exemption  has  been  restricted  to  the Panchayats and Municipalities as referred to

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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.

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.

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.

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

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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.”

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:-

“An act for the improvement of Urban Areas in Rajasthan.

WHEREAS it is expedient to make provision for the improvement and expansion of urban areas in the State of Rajasthan.”  

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

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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:-  

“”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;”  

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

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the assessee claim 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”

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:-

“2(vi)  "improvement"  with  its  grammatical variations means the carrying out of building, engineering,  mining  or  other  operations  in, on, over or under land or the making of any material change in any building or land [or making provision for any amenity in, on, over or under any building or land] and includes re-improvement;”  

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

“2(x)  "urban  area"  means  the  urban  area notified under Section 3 or, as the case may be, under Section 8;”

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22. Section  2(2)  of  the  Rajasthan  Urban  Improvement

Act, 1959 provides as follows:-

“2(2) All words and expressions not defined in this Act have, wherever used therein, the same meanings  as  are  assigned  to  them  by  the Municipal law for the time being in force:”  

23. Section  9  provides  for  “Constitution  of  Trust”,

which is as follows:-

“Section  9.  Constitution  of  Trusts.—(1)  The Trust shall consist of—  

(a) Chairman,  

(b) two members of the Municipal Board, if any,  having  authority  in  the  urban  area, [XXX].

[(bb) X X X]  

[(c) such number of other persons, as may be determined by the State Government for each Trust, of whom one shall be a person belonging to Scheduled Tribe or Scheduled Caste, if no person of such caste or tribe is represented in the Trust by virtue of Clause (a) or Clause (b)]  

[x X x]  

(2) The Chairman and the persons referred to in Clause (c) of Sub-section (1) [x x x] shall be  appointed  by  the  State  Government  by notification.  

(3)  The  members  of  the  Municipal  Board referred  in  Clause  (b)  of  Sub-section  (1) shall be elected by the said Board.  

(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

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Board.  

(5)  If  the  said  Board  shall  have  been superseded or dissolved in accordance with the provision of the Municipal law for the time being in force, it shall be represented on the Trust by persons appointed or elected, as the case  may  be,  by  the  officer  or  authority appointed under the said law to discharge the functions and exercise the powers of the Board during  the  period  of  its  supersession  or dissolution.  

(6) Of the person referred to in Clause (c) of Sub-section (1) at least one shall be a person in the service of the State Government.  

(7)  The  names  of  all  persons  appointed  or elected to the Trust shall be notified by the State Government in the Official Gazette.”

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:-

“Section 47. Powers under the Municipal laws vested in the Trust.—(1) Such provisions of the Municipal law for the time being in force in any part of the State as may be prescribed in the case of each Trust, shall so far as may be  consistent  with  the  tenor  of  this  Act, apply to [the urban area for which the Trust is  established  under  this  Act  and]  all references  in  the  said  provisions  to  the Municipal Board, Council or Corporation shall be construed as references to the Trust which, in respect of any [such urban area] may alone exercise and perform all or any of the powers and  functions  which  under  any  of  the  said provisions  might  have  been  exercised  and performed by the Municipal Board, Council or Corporation or by the Chairman or President or by any officer thereof:  

Provided that the Trust may delegate to

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the Chairman or to any officer of the Trust all or any of the powers conferred under this section.  

[(2) to (5) Omitted by Rajasthan Act No. 26 of 1976.]

Section  48,  Transfer  of  duties  etc.  of Municipal Board to Trust.—The State Government may by notification in the Official Gazette transfer  to  the  Trust  any  of  the  duties, powers, functions and responsibilities of the Municipal Board and thereupon the Trust shall carry  out,  exercise,  perform  and  discharge such  duties,  powers,  functions  and responsibilities.”  

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:-

“Section  105.  Ultimate  dissolution  of  Trust and Transfer of its assets and liabilities to the  Municipal  Board.—(1)  When  all  schemes sanctioned under this Act have been executed or have been so far executed as to render the continued  existence  of  the  Trust,  in  the opinion of the State Government, unnecessary, the  State  Government  may  by  notification declare that the Trust shall be dissolved from such date as may be specified in this behalf in such notification and the Trust shall be deemed to be dissolved accordingly.  

(2) From the said date—  

(a) all properties, funds and dues which are

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vested in or realisable by the Trust shall vest in and be realisable by the Municipal Board;  

(b)  all  liabilities  which  are  enforceable against the Trust shall be enforceable against the Municipal Board;  

(c)  for  the  purpose  of  completing  the execution of any scheme sanctioned under this Act, Which has not been fully executed by the Trust, and, of realising properties, funds and dues referred to in Clause (a) the functions of  the  Trust  under  this  Act  shall  be discharged by the Municipal Board as if it were the Trust under this Act, and  

(d) the Municipal Board shall keep separate accounts of all moneys respectively received and expended by it under this Act, until all loans raised hereunder have, been repaid and until  all  other  liabilities  referred  to  in clause (b) have been duly met.”

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

No.  5  (3)  TP/70-  In  exercise  of  the powers  conferred  by  Section  8  read  with Section  9  and  13  of  the  Rajasthan  Urban Improvement Act, I959 (Act No. 35 of 1959) of

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the State Government here by orders :

(1) that  for  the  purpose  of  carrying  out improvement of the Urban Area included in the  Municipal  limits  of  Kota  Town,  a board of trustee called the improvement Trust, Kota shall be established.  

(2) That the said trust shall consist of:- (a) A Chairman. (b) Two members/Nominees of the Municipal  

Council, Kota. (c) Chief Town Planner or his nominee. (d) 4 other persons.  

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:

1. Shri Nathu Lal Jain, Advocate Chairman 2. Chief Town Planner or his Nominee Member 3. Sushri Nagendra Bala, Ex. M.L.A. Member 4. Collector, Kota Member

(3) The  term  of  the  office  of  the  said Trustees shall commence with effect from 10.7.70.

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

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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?

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29. 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, (2008) 9 SCC 434.  In the above 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.   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:-

“30. At the outset, it may be noted that prior to the Finance Act, 2002, the said 1961 Act did not contain the definition of the word “local authority”. That word came to be de- fined for the first time by the Finance Act, 2002  vide  the  said  Explanation/definition clause.

31. Certain glaring features can be deciphered from the above comparative chart. Under Sec- tion 3(31) of the General Clauses Act, 1897, “local authority” was defined to  mean “a Mu- nicipal  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 au- thority” in Section 3(31) of the 1897 Act have been  omitted  by  Parliament  in  the Explanation/definition clause inserted in Sec- tion 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 defini- tion of the word “local authority” is bodily lifted from Section 3(31) of the 1897 Act and

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incorporated, by Parliament, in the said Ex- planation to Section 10(20) of the 1961 Act. This deliberate omission is important.”

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

in  Union of India Vs. R.C. Jain, (1981) 2 SCC 308  was

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

test as evolved in R.C. Jain’s case (supra)  is no more

applicable after amendment of Section 10(20) of I.T. Act

by  Finance  Act,  2002.   Following  was  laid  down  in

paragraph 35:-

“35. One more aspect needs to be mentioned. In R.C. Jain, (1981) 2 SCC 308 the test of “like nature” was adopted as the words “other au- thority” came after the words “Municipal Com- mittee, District Board, Body of Port Commis- sioners”. Therefore, the words “other author- ity” 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. Jain. However, as stated earlier, Parlia- ment in its legislative wisdom has omitted the words “other authority” from the said Explana- tion 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 in- clusive definition. The words “other author- ity” do not find place in the said Explana- tion.  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. Jain is no more applicable to the

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Explanation to Section 10(20) of the 1961 Act. Therefore, in our view the judgment of this Court in  R.C. Jain followed by judgments of various High Courts on the status and charac- ter of AMC(s) is no more applicable to the provisions of Section 10(20) after the inser- tion of the Explanation/definition clause to that sub-section vide the Finance Act, 2002.”

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

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.  In

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

“36**. The question still remains as to why Parliament has used the words “Municipal Com- mittee” and “District Board” in Item (iii) of the said Explanation. In our view, Parliament has defined “local authority” to mean—a pan- chayat as referred to in clause (d) of Article 243 of the Constitution of India and munici- pality as referred to in clause (e) of Article

24

243-P of the Constitution of India. However, there is no reference to Article 243 after the words  “Municipal  Committee”  and  “District Board”. In our view, the Municipal Committee and District Board in the said Explanation are used out of abundant caution.

37. In 1897, when the General Clauses Act was enacted there existed in India Municipal Com- mittees  and  District  Boards.  They  continued even thereafter. In some remote place it is possible that there exists a Municipal Commit- tee or a District Board. Therefore, in our view, apart from a panchayat and municipality, Parliament in its wisdom decided to give ex- emption  to  Municipal  Committee  and  District Board. Earlier there were District Board Acts in various States. Most of the States had re- pealed those Acts. However, it is quite possi- ble that in some remote place District Board may still exist. Therefore, Parliament decided to give exemption to such Municipal Committees and District Boards. Therefore, in our view, advisedly  Parliament  has  retained  exemption for  Municipal  Committee  and  District  Board apart from panchayat and municipality.”

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:-

“39. Similarly, under Part IX-A there is Arti- cle 243-ZF which refers to the “Municipali- ties”. This article, inter alia, states that

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notwithstanding  anything  in  Part  IX-A,  any provision of any law relating to municipali- ties in force in a State immediately before the commencement of the Constitution (Seventy- fourth Amendment) Act, 1992, which is incon- sistent  with  the  provisions  of  Part  IX-A, shall continue to be in force until amended or repealed by a competent legislature. In our view, Article 243-N and Article 243-ZF indi- cate  that  there  could  be  enactments  which still retain the entities like Municipal Com- mittees and District Boards and if they exist, Parliament intends to give exemption to their income under Section 10(20) of the 1961 Act.”

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.

 34. This  Court  in  New  Okhla  Industrial  Development

Authority Vs. Chief Commissioner of Income Tax & Ors.

(supra),  which  was  a  judgment  delivered  by  this  very

Bench had considered in detail the object and purpose of

Section 10(20A), the object and purpose of Finance Act,

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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

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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

Court’s  judgment  in  Agricultural  Produce  Market

Committee Narela, Delhi (supra).   

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:-

“15. It is true that the functions which are carried  out  by  the  assessee  are  statutory functions and carry on for the benefit of the State  Government  for  urban  development therefore,  in  our  considered  opinion,  the functions carried out by the authority is a supreme function and fall within the activity of the State Government.

16. In that view of the matter, the judgments which are strongly relied upon by counsel for the department are of no help in the facts of the  case  as  the  case  relied  upon  by  the

29

department  was  in  respect  of  industrial corporation which was under the statute for the purpose of making profit. The fees and other  charges  which  are  covered  are statutorily for the development of the urban area.   In  that  view  of  the  matter,  the judgment which sought to be relied upon by the counsel for the respondents, in our considered opinion,  would  be  of  importance  and  the functions  which  are  carried  out  by  the assessee  is  statutory  function.  In  our considered opinion, under clause-10(20) & Sub- clause  (3)  Municipal  Committee  and  District Board  are  legal  entity  entrusted  by  the function of the Government within the control or  management  of  the  municipal  or  local authority and will try to help the assessee.

17. In that view of the matter, the reliance placed by counsel for the department regarding 10(20) and explanation A will not make any difference. Taking into consideration income of authority is under constitution of India vide order enacted either for the purpose of dealing with or setting up the housing scheme for the purpose of planning and development of the  improvement  of  the  cities,  town  and villages or both for which the authority are created to carry out the function of State which  are  sovereign  whereas  the  urban development  and  calculation  of  development charges  will  fall  under  the  development charges.

18. In that view of the matter, deletion of 20A  will  not  make  difference  in  case  of assessee. In our considered opinion, Clause-3 will come in the help of the assessee. In that view of the matter, we are considered opinion, that  the  authority  assessee  is  a  local authority for the purpose of carrying out of the  improvement  and  development  function  of the State.”

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.     

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

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

NEW DELHI,  OCTOBER 12, 2018.

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