JAGDISH SAHAI J. - At the instance of the City Board, Mussoorie (hereinafter referred to as the assessee), the following questions of law have been referred to us by the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal) for our opinion :
'1. Whether the licence to supply electrical energy to an extended area operated to extend the jurisdictional area of the assessee and as such the income rising from the supply of electrical energy to such extended areas was exempt under section 4(3)(iii) of the Indian Income-tax Act
2. Whether the City Board of Mussoorie was a local authority included in the category of person an envisaged in section 2(9) of the Indian Income-tax Act and whether the income accruing to the said City Board was liable to tax
3. Whether the administrator appointed by the U.P. Government under section 31(b) of the U.P. Municipalities Act after superseding the City Board, Mussoorie, was a local authority for the purpose of assessment under the Indian Income-tax Act, 1922
4. Whether the supply of electrical energy to the consumers in the extended area was business within the meaning of section 10 of the Indian Income-tax Act ?'
The assessee is a municipality functioning under the provisions of the U.P. Municipalities Act (hereinafter called the Municipalities Act). The following facts emanate from the statement of case submitted by the Tribunal. The assessee obtained a licence under section 4(1) of the Indian Electricity Act (hereinafter called the Electricity Act) to supply electrical energy within the municipal limits of Mussoorie. Under Notification No. 917-C/895-W dated October 13, 1919, the U.P. Government granted to the assessee a licence under section 4(3)(b) of the Electricity Act sanctioning the extension of supply of electrical energy to the following places :
1. Cantonment of Landour and adjacent lands.
2. Cantonment of Dehra Dun and adjacent lands.
3. Municipality of Dehra Dun and adjacent lands.
4. Notified area of Rajpur and adjacent lands.
Admittedly, the extended areas were outside the municipal of limits of Mussoorie. Ever since the notification mentioned above, the assessee has been regularly supplying electrical energy not only in the City of Mussoorie but also to the extended areas mentioned above. The City Board of Mussoorie was superseded under section 30 of the Municipalities Act and on April 17, 1943, an officer-in-charge and an administrator were appointed by the U.P. Government to carry on the affairs of the City Board. In the assessment years 1949-50, 1950-51 and 1951-52, the Income-tax Officer taxed the profits arising from the supply of electrical energy by the assessee to the extended area to income-tax (hereinafter referred to as the tax). The contention of the assessee was that the aforesaid income could not be taxed by virtue of the provisions of section 4(3)(iii) of the Indian Income-tax Act (hereinafter referred to as the Act) but the same was not accepted either by the Income-tax Officer or by the Appellate Assistant Commissioner or by the Tribunal.
We have heard Mr. S.N. Misra for the assessee and Mr. Gopal Behari for the income-tax department. We will first answer the second question. Section 2(9) of the Act reads as follows :
'2(9) Person includes a Hindu undivided family and a local authority.'
Local authority is therefore comprehended in the word 'person'. The Act does not define 'local authority' but section 3, clause (31), of the General clauses Act (Central) reads as follows :
'3.(31) Local authority shall mean a Municipal Committee, District Board, body of port commissioners or other authority legally entitled to, or entrusted by the Goverment with, the control or management of a Municipal or Local fund.'
Consequently, there cannot be any escape from the conclusion that by virtue of being a municipality the assessee is a local authority and, consequently, a person liable to pay tax. We, therefore, answer the second question in the affirmative and against the assessee.
We will now take up the third question. Admittedly, the City Board of Mussoorie was superseded and on 17th April, 1943, an office-in-charge and an administrator were appointed to carry on its affairs. It is contended by Mr. Misra that because of the appointment of an office-in-charge and an administrator and for the reason that the City Board of Mussoorie was superseded it ceased to be a local authority and cannot consequently be assessed to tax. We have no hesitation in saying that there is no substance whatsoever in this submission. The City Board of Mussoorie was a Municipality when the present Municipalities Act was passed. Section 2, clause (9), of the Municipalities Act reads as follows :
'2.(9) Municipality means any local areas which is a Municipality by reason of a notification issued under section 3 or subject to the provisions of the said section any local area which was a municipality at the time immediately preceding commencement of this Act.'
Consequently, the City Board is a municipality within the meaning of and for the purposes of the Municipalities Act. Under section 3 of the Municipalities Act the State Government can declare any local area to be a municipality. Section 6 of that Act provides that in every municipality there shall be a Municipal Board and such Board shall be a body corporate by the name of the Municipal Board of the place by reference to which the municipality is know having a perpetual succession and a common seal and subject to any restriction or qualification imposed by this or any other enactment vested with the capacity of suing or being sued in its corporate name, of acquiring, holding and transferring property movable or immoveable and of entering into contracts. The provisions of section 6 mentioned above clearly make a municipality a legal person and a corporation with perpetual succession. The mere fact that the administration of a municipality is taken over by the Government from the elected representatives of the people does not mean that it ceases to be a corporate body or becomes a department of the Government. There is nothing in section 31 of the Municipalities Act to suggest that on supersession a Municipal Board loses its identity as a municipality and becomes merged in the State Government as one of its departments. Section 31 of the Municipalities Act reads as follows :
'31. When a Board is superseded under section 31 the following consequences shall follow :
(a) all members of the Board including the President shall on a date to be specified under the order vacate their offices as such but without prejudice to their eligibility for re-election or re-nomination;
(b) such person or persons as the State Government may appoint in that behalf shall as long as supersession of the Board lasts exercise and perform, so far as may be, the powers and duties of the Board and shall be deemed to be the Board for all purposes; and
(c) a fresh Board shall be constituted with effect from the date of its expiry of the period of supersession as though the term under section 10A had expired.'
It would appear that the result of supersession would be, firstly, that the administration of the Municipal Boards affairs passes from the hands of its elected representatives, the members and the President, to that of the nominees of the Government and, secondly, that after the period of supersession is over a fresh election is to be held as if the term of the Board had expired under section 10A of the Municipalities Act. None of these two consequences affect the existence of the municipality as an incorporated association or a corporate body or a legal person. That being so, we have no hesitation in rejecting the submission of the learned counsel for the assessee and answer the third question in the affirmative and against the assessee.
We not come to question No. 1. Section 4(3)(iii) of the Act reads as follows :
'4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them.........
(iii) The income of local authorities except income from a trade or a business carried on by the authority so far as that income is not income arising from the supply of a commodity or service within its own jurisdictional area'.
Mr. Misras contention is that even though the extended areas are not within the territorial limits of the City Board of Mussoorie they form part of its jurisdictional area. Mr. Misra has sought to draw a distinction between the territorial limits of a municipality and 'its own jurisdictional area'. The submission is that whereas the expression 'territorial limits' connotes the idea of the physical area or the geographical boundaries, the words 'jurisdictional area' mean the operational sphere within which a municipality can carry on its optional functions. Support for the submission is sought from the provisions of section 8 of the Municipalities Act, which runs as follows :
'8. (1) A Board may make provision, within the limits of the municipality and with the sanction of the prescribed authority outside such limits for.......
(k) constructing, subsidizing or guaranteeing tramways, railroads, or other means of locomotion and electric or gas lighting or electric or gas power works;......
(n) the doing of anything whereon expenditure is declared by the State Government or by the Board with the sanction in the case of cities of the State Government and in the case of other municipalities of the prescribed authority to be an appropriate charge on the municipal fund :
Provided that the State Government may in respect of any municipality or all municipalities by notification in the official Gazette declare any of the functions mentioned in this section to be the duty of the Board or Boards concerned and thereupon the provisions of this Act shall apply thereto as if it has been the duty imposed by section 7.
(2) A Board may make provision for the extension beyond the limits of the municipality of the benefits of any municipal undertaking :
Provided that no provision shall be made for the extension of the benefits of a municipal undertaking for the supply of water to any local area which comprises or contains the whole or a portion of a cantonment without the previous sanction of the Central Government.'
It is submitted that section 8(1) of the Municipalities Act permits a municipality with the sanction of the prescribed authority to function outside its limits for certain purposes, which purposes include electric lighting or electric or gas power works. Section 7 of the Municipalities Act deals with the duties of a Board while section 8 deals with the discretionary functions of a municipal board. Mr. Misra contends that inasmuch as the assessee is discharging one of its discretionary functions in the extended areas, those areas must be deemed to be its jurisdictional area. In our judgment the submission is not sound. In the first place the expression is not 'within its jurisdictional area' but 'within its own jurisdictional area'. Some meanings have got to be given to the word 'own'. The legislature does not use words in vain and it is the duty of a court to give full meaning to every word occurring in a provision (see In the matter of Lachhman Prosad Babu Ram of Cawnpore). In our judgment the use of the words 'its own' is highly suggestive of the jurisdictional area being the same as the territorial limits. Area means a bounded space. In the Oxford New English Dictionary the following meaning has been given to the word 'area' :
'The amount of surface contained within given limits.'
Therefore, when section 4(3)(iii) speaks of it sown jurisdictional area it talks of that particular land or territory over which the municipality has got jurisdiction in its own right. Admittedly, the assessee has no such right in the extended areas. There is distinction between rendering service and having jurisdiction. The assessee in supplying electrical energy to the extended area renders service therein like any other commercial undertaking. It does not function there as a municipality but as any other licensee holding a licence under the Electricity Act. The functions of the assessee there are commercial and not a municipal. The cantonment of Landour as also the cantonment of Dehra Dun have got their own cantonment boards, which are bodies analogous to a municipality, while the City of Debra Dun has its own municipality. It cannot therefore be said that for the cantonment of Landour and Dehra Dun and for the City of Dehra Dun there are two local authorities one the Cantonment Board and the Municipality of Dehra Dun and the other the City Board of Mussoorie. The idea of jurisdiction connotes authority and right and not a mere licence. The words 'within its own jurisdictional area' with reference to a municipality would mean that particular areas over which that municipality has jurisdiction as a municipality. If what Mr. Misra says were true there was no necessity of using the word 'own'. Mr. Misra has not been able to furnish any answer as to why the legislature used the word 'own' when the expression 'within its jurisdictional area' would have sufficed. In our judgment the word 'own' has been deliberately used in order to emphasise that the area contemplated is the one which belongs to that particular municipality as its own as different from areas belonging to another local authority but in which some service is rendered by that municipality. The same area cannot be owned by two different municipalities or two local authorities (i.e., a Cantonment Board, a notified area or a town area). The legislature must have been aware that some of the Acts dealing with local autonomy have provisions which permit a local authority to carry on certain activities within the limits of another local authority with the sanction of the Government. The legislature, therefore, used the word 'own' in order to make it beyond controversy that it is only that profit which is made by rendering service within the territorial limits of a municipality which is exempt from tax and the income made from the extend area will be liable to tax. The reason why the legislature did this is clearly understandable and is eminently just, the same being that within its territorial limits a municipality functions in order to serve its constituent. In the extended area it has no such obligation and the sole purpose for its activities there is commercial or profit making.
In re Glasgow Gas Commissioners the House of Lords had to consider the question of the capacity of a corporation in performing its duties and the Lord President observed as follows :
'Now, my Lords, I answer that question in the affirmative. It seems to me that the Corporation of the city of Glasgow is, by virtue of this statute, empowered to enter into a speculation as traders in gas. No doubt it may have been for the benefit of the community - that is perfectly true - but they have all the character and attributes of a trading company. They acquired the works for the purpose of manufacturing gas; they manufactured gas, and sold it to those who were willing to become buyers; but they cannot sell it to anybody, that is to say, they cannot compel anybody to take it who is not willing to do so, and willing to do so a their price. They are empowered and authorised, nay, bound to make provision for the paying off of the mortgage debt which they had incurred at the commencement of the concern, and after they have done that, whatever surplus there is belongs to the Corporation for its general purposes, that is to say, goes simply into the common good of the Corporation, which is, in other words, saying that the surplus belongs to this company -to this trading company - for its own uses and purposes.'
In the English law also it has been held on general principles that where a local authority carries on an undertaking like a tramway and water works the profits are liable to tax, at any rate, where the area of its activities extends beyond the rateable area : see Inland Revenue Commissioners v. Forth Conservancy Board; Glasgow Corporation Water Commissioners v. Miller, Dublin Corporation v. M. Adam; Harris v. Corporation of Burgh of Irvine. In Inland Revenue Commissioners v. Forth Conservancy Board, Lord Buckmaster observed as follows :
'The principle of exemption for the surplus of rates is, I think, to be found in this, that the rating authority collects money from the inhabitants of the district for the purposes of application to the expenses incurred on behalf of the inhabitants, and that any surplus rightly belongs to the inhabitants themselves, who receive its benefits in case of any surplus because it is carried forward towards the expenses of the ensuring year.'
See also Ostime v. Pontypridd and Rhondda Joint Water Board, where similar observations were made.
Having carefully considered the submissions of the learned counsel for the parties we have come to the conclusion that the words 'its own jurisdictional area' mean the territorial limits of a local authority. The view that we are taking finds support from the following observations of Chagla C.J. in Municipal Corporation for the City of Bombay v. Commissioner of Income-tax, where the question was as to what was the position of the Corporation of Bombay in areas beyond its territorial limits where it was supplying water :
'The third question is whether this supply is outside its jurisdictional area. The jurisdiction of the Municipality is the City of Bombay. Its jurisdiction does not extend outside that area merely because it owns properties outside the area. It is perfectly true that the water works which are situated outside the limits of Bombay are the property of the Municipality and the Advocate-Generals contention is that inasmuch as the water is supplied from the meter situated on the property of the Municipality, the supply of water is within the jurisdictional area of the Municipality. We are unable to accept that contention, because the mere owning of property does not extend the jurisdiction of the Bombay Municipality. That jurisdiction is essentially confined to the limits of the City of Bombay. It has also been contended by the Advocate-General that in doing what is has done, the Bombay Municipality has discharged a discretionary duty cast upon it by the statute and to that extent it has been doing a municipal function and not doing trade or business. It is suggested that the supply of water falls within section 63(k) as constituting a measure for the promotion of public health and convenience. In my opinion that whole of Chapter III which deals with duties and powers of the Municipal Authorities deals with those duties and powers which are to be discharged by the Municipal Authorities within the jurisdiction of the Municipality, viz., within the limits of the City of Bombay. These obligatory and discretionary duties of the Corporation are not to be discharged outside the limits of the city.'
The legislature is the best judge to decide in what words it would express itself and merely because it has not used the words 'territorial limits' but the words 'its own jurisdictional area' does not mean that the two expressions have not the same meanings. Though the case is to be decided on the language of our statute and not on the basis of English law we may state that our conclusions are in line with the statement of law contained in paragraph 216, at page 121, volume XX, Halsburys Laws of England, Simonds Edition, where the following has been stated :
'216. Local authorities trading activities. - Local authorities are frequently empowered to, an in fact do carry on trading activities, for example, water undertaking and, in the past, the manufacture and sale of gas or electricity. To the extent that the product of those activities is used for the provisions of public amenities in the area of the local authority, the principle of mutual trading applies and no profits emerge. To the extent, however, that the product or service are supplied to consumers, who contract for the supply, the balance of profit is liable to tax.
Where water is supplied within an area of compulsory supply and the expense is met by rate, the result is the same as in the case of a rate lived to meet any other expense, and any balance is not profit liable to tax. When, however, water is supplied on a contract basis within the area of compulsory supply or is supplied on a voluntary and not on a compulsory basis or is supplied on any basis outside the compulsory supply the profit is liable to tax. If an authority supplies water within the area of compulsory supply on a basis which does not render the authority liable to tax and also supplies water on a contract basis or outside the area of compulsory supply, the expense of supplying water on the first mentioned basis cannot, it seems, be charged against the profits made for a supply on a contract basis or outside the area of compulsory supply.'
Mr. Misra placed reliance upon Municipal Board, Agra v. Commissioner of Income-tax. In that case the question that arose for decision was whether the profits made by the Municipal Board, Agra, by supplying water to the Cantonment Board, Agra, which in it turn supplied the same to the persons residing within its jurisdiction, was liable to tax. It was held by this court that the services rendered by the Agra Municipal Board to the Agree Cantonment Board were in the nature of trading activities and the profits made were taxable. One of the submissions that was made by Mr. Banerji, who appeared in that case for the Municipal Board of Agra, was that the jurisdictional area need not be the same as the limits of the Municipal Board under section 3 of the Municipalities Act. The submission was rejected and Malik C.J., who delivered the judgment of the court, observed as follows :
'Ordinary the jurisdictional area of a municipal board must be the same as its limits under section 3 and the rules, regulations, bye-laws and orders passed by the Board can apply within that area and not outside.'
Mr. Banerji had also submitted that where the benefit of a municipal undertaking is extended beyond its municipal limits under section 8(2) the jurisdiction area must be deemed to have been extended to the area to which the benefit has been extended at least for the purpose of that undertaking. The learned judge did not express any final opinion on that question and observed as follows :
'The question does not really arise in this case as in our view the benefit of the undertaken to supply water to the residents of the Municipal Board has not been extended beyond the limits of the municipality and the municipality has not undertaken to supply water to the residents of the Cantonment Board. It is not, therefore, necessary to express any final opinion on the point. It may be possible for a municipal board to extend the benefit of any municipal undertaking beyond its municipal area in such a way that the rules and regulations framed by it relating to that undertaken become applicable to that area also. In that case it may possible to urge that the jurisdictional area of the municipal board has been extended, but as we have already said there is nothing to show in the statement of the case that the jurisdictional area of the board has been extended for the purposes of water supply to the cantonment.'
This case, therefore, does not support the submissions of Mr. Misra. It is true that the words underlined to some extent do help the stand of the assessee but in our judgment those words are in the nature of obiter dicta and not binding upon us.
Mr. Misra submitted that the Act contemplates cases where tax is chargeable from a citizen of this country on income earned in a foreign land as also on a person who though a non-resident of India does carry on business here. Mr. Misra contended that in such cases a foreign land would be included in the jurisdictional area of India. We have found it difficult either to appreciate or to accept the argument. There is nothing in the Act which gives the authorities under it power to function outside the territorial limits of the country. When the revenue authorities in this court charge tax from an Indian resident carrying on business in a foreign country their jurisdictional area is not extended but the person being an Indian citizen is liable to pay tax. Similarly in a case where a foreigner carries on business in India and earns income here the jurisdictional areas of the revenue authorities does not extended to the foreign land to which he belongs but the person is liable to assessment because he earns profits in India.
In the end Mr. Misra pointed out that section 8(2) of the Municipalities Act would suggest that the municipal law permits the extension of the benefit of any municipal undertaken beyond the limits of that municipality. We have found it difficult to understand how this provision can lend support to the submissions of Mr. Misra. All that sub-section (2) of section 8 of the Municipalities Act means is that a municipality can, after obtaining the necessary section, extend the benefit of clauses (a) to (n) to the areas outside its territorial limits. It was necessary to make such a provision because normally a municipality is not expected to render service to non-constituents and unless there was provision permitting such an extension the extension of the benefits would have been without jurisdiction. The provisions of sub-section (2) of section 8 are therefore of an enabling nature which permit municipal board to extend the benefit of its undertaking but that does not mean that the extended areas are 'its own jurisdictional areas'. There cannot be any principle behind the submission that the income that a municipality receives from rendering optional services (as for example supplying of electric energy) in areas situated within the jurisdiction of another municipality is liable to be tax-free. We have already said above that in such a case the position of the municipality in supplying electric energy is that of a mere licensee or that of a trader. Even the State can carry on commercial and trading activities but in doing so its does not exercise its sovereign functions (see article 19(6)(ii) of the Constitution). Similarly, when municipality which is by virtue of article 12 of the Constitution included in the expression 'State' carries on trading activities it does not perform its municipal functions. It is not then acting as a municipality but as an ordinary trader. Having given our anxious consideration to the submissions made by learned counsel for the parties we answer this question in the negative and against the assessee.
The last question is whether the supply of electric energy to the consumers in the extended area was business within the meaning of section 10 of the Act. Section 2(4) of the Act reads as follows :
'2. (4) Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce of manufacture.'
Anything done for the purpose of earning profits would be trade. We do not therefore, see how it can be contended that in supplying electrical energy to the extended areas the assessee was not carrying on any trade or business. The only argument Mr. Misra could advance was that inasmuch as every licensee under the Electricity Act is under a statutory duty to supply electrical energy to the residents of that area, the obligations upon the licensee are statutory and not commercial. If that submission were substantial not only the assessee or a municipal board supplying electrical energy to areas outside its territorial limits would be exempt from the payment of tax but all licensees, whether private individuals or public companies or corporations, would be exempt from paying tax. On the face of it the argument is without substance. The mere fact that a licence is granted to carry on business of supplying energy does not mean that the licensee is not carrying on a business. We have no difficulty in holding that it is business though controlled in the sense that it cannot be carried on except under a licence. Under the provisions of the Essential Commodities Act, 1955, a large number of orders were framed as, for example, Rice Movement (Control) Order, Wheat Movement (Control) Order, Cotton Cloth (Control) Order, and Cloth and Yarn (Control) Order, requiring that only the persons holding a licence should carry on the business in the controlled commodities. It has never been urged or held that the licensee under those Orders do not carry on business. Examples of trades carrying on their business in conformity with the statutory provisions are many and well known. There was no statutory duty on the assessee to have applied for a licence to have supplied electrical energy to the extended areas. There are no provisions in the Municipalities Act or any other statute under which the assessee had to supply electrical energy to the extended areas. The obligation on it to supply electrical energy was created by its applying of and obtaining a licence under the Electricity Act. If the assessee had not applied for the licence there would have been no statutory duty cast on it to supply electrical energy. The duties that flow from the licence have not been created by the Municipalities Act but by the Indian Electricity Act. The act of applying for a licence was a voluntary act of the assessee. We have, therefore, not been able to appreciate the argument of Mr. Misra that in supplying electrical energy to the extended areas the licensee acts under a statutory duty.
In the end reliance was placed on behalf of the assessee on Government Order No. 2455/XI-1898, dated September 20, 1918 (Municipal Department), to the Commissioner, Meerut division, in which the State Goverment had declared under section 8(2), (3), of the U.P. (Municipalities Act the expenditure incurred by the assessee on the extension of its electrical supply system to the extended areas as an appropriate charge. We have not been able to understand as to how this notification can support the assessees claim that in supplying electrical energy to the extended areas it was not carrying on business. By virtue of the notification permission was given to the assessee to extend the undertaking to the notified areas. The word 'business' has even a wider content than the word 'trade'. (see Hesketh Estates, Ltd. v. Craddock). In Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, S.R. Das J. observed : 'The word business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose.' We have not been able to discover any reason and the learned counsel for the assessee has not been able to point out any to us on the basis of which we can hold that the assessee was not carrying on business in supplying electrical energy to the extended areas. We would answer the fourth question in the affirmative and against the assessee.
The assessee shall pay to the Commissioner of Income-tax a sum of Rs. 400 as costs. We assess the fee of the learned counsel for the parties at the same figure.
Reference answered accordingly.