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U.P. Forest Corporation Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1984)9ITD206(All.)
AppellantU.P. Forest Corporation
Respondentincome-tax Officer
Excerpt:
1. this is an appeal filed against the order dated 21-2-1980 of the learned commissioner (appeals) by the u.p. forest corporation--the assessee ('the corporation') for the assessment year 1976-77.2. the corporation was constituted by the up state government under gazette notification dated 25-11-1974 under section 3(1) of the u.p.forest corporation act, 1974 ('the 1974 act')- it is a body corporate having perpetual succession and a common seal capable of suing and being sued in its corporate name. it has power to acquire, hold and dispose of property. the act was brought into existence to provide for the better preservation supervision and development of forests and better exploitation of forest produce within the state and for matters connected therewith. section 3(3) provides that the.....
Judgment:
1. This is an appeal filed against the order dated 21-2-1980 of the learned Commissioner (Appeals) by the U.P. Forest Corporation--the assessee ('the corporation') for the assessment year 1976-77.

2. The corporation was constituted by the UP State Government under Gazette Notification dated 25-11-1974 under Section 3(1) of the U.P.Forest Corporation Act, 1974 ('the 1974 Act')- It is a body corporate having perpetual succession and a common seal capable of suing and being sued in its corporate name. It has power to acquire, hold and dispose of property. The Act was brought into existence to provide for the better preservation supervision and development of forests and better exploitation of forest produce within the State and for matters connected therewith. Section 3(3) provides that the corporation shall, for all purposes, be a local authority. Section 14 of the 1974 Act enumerates its functions, they being:-- (a) to undertake removal and disposal of trees and exploitation of forest resources entrusted to it by the State Government; (c) to undertake research programmes relating to forest and forest products and render technical advice to State Government on matters relating to forestry; (d) to manage, maintain and develop such forests as are transferred or entrusted to it by the State Government; and (e) to perform such functions as the State Government may from time to time require.

Section 15 of the 1974 Act enumerates the powers of the corporation.

Section 16 of the 1974 Act empowers the corporation to undertake projects at the instance of others, with the previous approval of the State Government. Section 17 of the 1974 Act provides that the corporation will have its own fund which shall be local fund to which all moneys received by it shall be credited. Section 18 of the 1974 Act empowers it to borrow money subject to such conditions as the State Government may determine. Section 19 of the 1974 Act provides that the State Government shall make subventions to the corporation after due appropriation by law of the State. Section 20 of the 1974 Act provides that the State Government may advance loans to the corporation and Section 21 of the 1974 Act empowers the corporation to establish a sinking fund for the purposes of repayment of any loan. Section 22 of the 1974 Act relates to the preparation of the budget of the corporation. Section 23 of the 1974 Act provides that the accounts of the corporation, shall be audited by the examiner of local fund accounts and that the State Government shall lay annually before each of House of Legislature the account and audit report of the corporation. Section 25 of the 1974 Act provides that the corporation shall be guided on questions of policy by the directions of the State Government. Section 29 of the 1974 Act provides that the Chairman, managing director or other members and employees of the corporation shall be treated as public servants for the purposes of Section 21 of the Indian Penal Code. Section 33 of the 1974 Act empowers the State Government to make rules and similarly Section 34 of the 1974 Act empowers the corporation to make regulations Since the corporation has been constituted as a local authority, it is precluded from having a share capital.

3. In pursuance of a notice under Section 139(2) of the Income-tax Act, 1961 ('the Act'), the corporation filed its return for the assessment year 1976-77 on 24-3-1977 under protest. Therein, the corporation declared a total net profit of Rs. 8,82,402.86 as per profit and loss account and claimed exemption of the entire income under Section 10(20) of the Act as a 'local authority'.

4. The corporation filed writ petition No. 1568 of 1977 before the Lucknow Bench of the Hon'ble High Court under Article 226 of the Constitution of India for quashing the proceedings and notices under Sections 139(2) and 142(1) of the Act. However, that writ petition was dismissed on 27-1-1978 as premature. The Hon'ble High Court held that the corporation was a 'local authority' and could show before the ITO that a particular income earned by it fell within Section 10(20) and was, therefore, exempt.

5. The ITO held that the corporation was engaged purely in trade activity relating to the exploitation of forests, that its income did not qualify for exemption under Section 10(20) and that its income was taxable. Accordingly, the assessment was completed by the ITO on a total income of Rs. 39,58,920.

6. In appeal, the learned Commissioner (Appeals) originally passed a remand order dated 31-12-1979 in pursuance to which the remand report dated 17-1-1980 was submitted by the [AC (Assessment). The learned Commissioner (Appeals) upheld the ITO's finding that the corporation was not entitled to the exemption under Section 10(20). However, he allowed some relief regarding certain disallowances and the claim of depreciation with which we are not concerned. The corporation had also filed a revised return on 20-1-1979 in the course of the proceedings under Section 144B of the Act. Since the corporation's ground of appeal regarding the non-consideration by the ITO of this revised return had not been dealt with, the corporation moved an application before the learned Commissioner (Appeals) under Section 154 of the Act. The learned Commissioner (Appeals), therefore, passed an order under Section 154 on 20-3-1980. He held that the revised return was not valid as the original return had been filed under Section 139(1) after the expiry of the time limits prescribed under Sub-sections (1) and (2) of Section 139. He, therefore, rejected the ground taken on behalf of the corporation.

8. So far as the assessability of the corporation is concerned, two contentions were raised on its behalf before us. The first contention and which is the preliminary contention, was that the income made by it, was in reality the income of the State Government of U.P. and was, therefore, exempt under Article 289(1) of the Constitution of India. In that connection, it was argued that the corporation was only an agent or an instrumentality of the State Government. The second contention and which was purely an alternative contention was that the income of the corporation qualified for exemption under Section 10(20). We take up the preliminary contention first.

9. Shri S.P, Gupta, the learned Counsel for the corporation, referring to the preamble and the various provisions of the 1974 Act, and submitted that the corporation was a limb, agency of instrumentality of the State and that all its funds belonged to the State. Referring to para 14 at page 559 of Volume 18 of American Jurisprudence and to Notes No. 18 to 22 at page 201 of the Palmer's Company Law (23rd edition), he submitted that the veil of corporate structure could be lifted to find whether its income belonged to the State. He also submitted that if Government/Sovereign functions were delegated to the corporation, they would fall under Article 289(1) of the Constitution of India. In this connection, reference was also made by him to Article 48 A of the Constitution of India relatable to the Directive Principles of the State policy as also to entries 7,43,44 and 52 of List I, entry 19 of List II and entry No. 17A of List III of Seventh Schedule of the Constitution of India. He also referred to the following decisions: Andhra Pradesh State Road Transport Corporation v. ITO [ 1964] 52 ITR 524 (SC), Ramtanu Co-operative Housing Society Ltd. v. State of Maharashtra AIR 1970 SC 1771, Patel Pretnji Jiva v. State of Gujarat [1971] 3 SCC 815, Ramana Dayaram Shetty v. International Airport Authority of India AIRState of U.P. v. Vijay Bahadur Singh AIR He submitted that the corporation was created as a third arm or limb of the Government only for some functional advantage. He sought to argue that the State Legislature could not create a corporation otherwise than for discharging its functions Governmental as well as those incidental to Governmental functions. He also submitted that if the functions which were being carried on by the corporation had been carried out by a department of the Government, there would have been no tax and that, therefore, why would the State Government have invited taxation by constituting the corporation. Referring to Section 3(3) of the 1974 Act, wherein it is provided that the corporation shall be a local authority, Shri Gupta argued that income was earned by the local authority, but that for the purposes of tax liability, it was State's income. Shri Gupta particularly relied upon the observations of the Supreme Court in the case of Vijay Bahadur Singh (supra) in para 3 at page 1237 to the effect that it was wholly State owned corporation and that its profits were in truth the profits of the State itself. On the other hand, Shri K.K. Roy, the learned departmental representative, submitted that though the definition of 'the State' under Article 12 of the Constitution of India included a local authority, that definition was confined to Part III of the Constitution of India and could not be imported for purposes of Article 289 of the Constitution of India.

Besides referring to the provisions of the 1974 Act, reference was also made by him to the provisions of the Damodar Valley Corporation Act, 1948, the Road Transport Corporation Act, 1950. The State Finance Corporations Act, 1951 and the Food Corporation Act, 1964, and on their basis he submitted that the corporation was not an agency or instrumentality of the State. He submitted that though the Government exercised some control over the corporation, the functions of the corporation were neither Governmental nor incidental to Governmental functions. Referring to the annual report of the corporation, Shri Roy submitted that there was no monopoly of the corporation and that it was being run as a commercial undertaking with a profit motive. He submitted that there was no diversion of the income to the State Government by overriding title and that royalty was being paid by the corporation to the State Government. Reliance was also placed by him on the opinion of the legal remembrancer to the Government of UP as contained in his D.O. letter dated 28-4-1975 wherein it was stated that the corporation was not a subordinate department of the State Government but an independent legal entity, though subject to the control of the State Government. Reliance was also placed by him on the following decisions-- CIT v. Thakar Das Bhargava [1960] 40 ITR 301 (SC), CIT v. Imperial Chemical Industries India (P.) Ltd. [1969] 74 ITR 17 (SC), Kerala Financial Corporation v. WTO [1971] 82 ITR 477 (Ker.) (FB), Sabhajit Tewari v. Union of India AIR 1975 SC 1329, Calcutta State Transport Corporation v. CIT [1977] 108 ITR 922 (Cal), Mahavir v.State of UP AIR 1979 All. 3, Ishwari Khetan Sugar Mills (P.) Ltd. v.State of UP AIR 1980 SC 1955, Ajay Hasia v. Khalid Mujib Sehravardi AIR 1981 SC 487, 497, State of Punjab v. Raja Ram AIRWestern Coalfields Ltd. v.Special Area Development Authority AIR 10. We have considered the rival submissions as also the decisions referred to above. Section 3(3) clearly provides that the corporation shall, for all purposes, be a local authority. In view of this specific provision and in view of the decision dated 27-1-1978 of the Lucknow Bench of the Hon'ble High Court in the writ petition filed by the assessee and referred to above, it is clear that the corporation is a local authority. The decision of the Supreme Court in the case of Patel Premji Jiva (supra) that the market committee constituted under Gujarat Agricultural Produce Markets Act, 1963, is a local authority would, therefore, not help us. Similar would be the position of the decision in the case of Mahavir (supra) where the mandi samity was held to be a local authority and the decision in the case of R. C. Jain (supra) where the Supreme Court held that the Delhi Development Authority was a local authority. However, in the latter case it was held by the Supreme Court that the local authorities must have separate legal existence as corporate bodies and that they must not be mere Governmental agencies but must be legally independent entities. Also not of assistance to us is the decision of the Hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. (supra) which was held to be not a local authority. In fact, under Section 2(31)(vi) of the 'local authority' is a distinct assessable entity which is included in the definition of 'person'. In ihe case of Kerala Financial Corpn. (supra) the word 'individual' in Section 3 of the Wealth-tax Act, 1957, was held to include a corporation.

11. No doubt, Article 12 of the Constitution of India defines 'the State' to include a local authority for purposes of Part III dealing with the Fundamental Rights. On behalf of the corporation no assistance was sought to be derived and rightly so, from Article 12 as this definition of 'State' is not relevant for the purposes of Article 289 of the Constitution of India which deals with the exemption of property and income of State from Union taxation. Therefore, the decision of the Supreme Court in the case of Sabhajit Tewari (supra) where it was held that the Council for Scientific and Industrial Research was not an authority under Article 12, is not of assistance to us. So also is the other decision of the Supreme Court in the case of Ajay Hasia (supra) where the question examined was whether a society registered under the Societies Registration Act is an authority falling within the definition of 'the State' under Article 12.

12. Article 285 of the Constitution of India relates to the exemption of the property of the Union from State taxation and is, therefore, not relevant for our purposes. Article 289 which deals with the exemption of property and income of a State from Union taxation is in the following terms.

(1) The property and income of a State shall be exempt from Union taxation.

(2) Nothing in Clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operations connected therewith, or any property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.

(3) Nothing in Clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of Government.

The drive of Article 289, so far as it is material for the purposes of this case, is that unless a trade or business or a class of trade or business is declared by the Parliament to be incidental to the ordinary functions of the Government, the Union can impose or authorise the imposition of any tax by an Act of Parliament in respect of a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connected therewith or any income accruing or arising in connection therewith. In the annual report of the corporation (November 1974 to September 1975), it is clearly mentioned that it is a commercial undertaking. In the advice dated 28-4-1975 of the legal remembrancer to the UP Government also it has been accepted as a trading corporation. Thus the decision of the Supreme Court in the case of Ramtanu Cooperative Housing Society Ltd. (supra) that the Maharashtra Development Corporation established under the Maharashtra Industrial Development Act, 1961, is not a trading corporation is not strictly relevant. It is not the case of the corporation that its trade or business has been declared by Parliament to be Incidental to the ordinary functions of the Government. Therefore, in terms of Article 289 there would be no bar to the imposition of income-tax under the Act, in respect of the trade and business carried on by the corporation even if it be on behalf of the U.P. Government. Therefore, Article 289 also does not assist the corporation.

13. The cases of Thakar Das Bhargava (supra) and Imperial Chemical Industries (India) (P.) Ltd. (supra) which deal with the rule of overriding obligation and diversion of income by overriding title would not be of assistance to us on the established facts and averments made on behalf of the corporation which has only claimed to be an agent or instrumentality of the U.P. State Government and has not taken up the case that there was an overriding obligation or title in respect of the State Government with reference to the income derived by the corporation.

14. Next comes the question of the corporation being a department of the Government. The corporation has rightly not taken up this stand.

Even in the advice of the legal remembrancer it has been clearly stated that the corporation is not a subordinate department of the State Government. Therefore, the reference to the case of Raja Ram (supra) para 5 whereof deals with the question as to what is a Government department, is not relevant. In that case, it was held that the Food Corporation of India is not a Government department.

15. Then we come to the crucial question of the alleged agency or instrumentality which the corporation has claimed for itself on behalf of the U,P. State Government. In this connection, the decision of the Supreme Court in the case of Ramana Dayaram Shetty (supra) is very relevant. In para 14 of that judgment the Supreme Court observed that where a corporation is wholly controlled by Government not only in its policy-making but also in carrying out the functions entrusted to it by the law establishing it, there can be no doubt that it would be a instrumentality or agency of the Government. But ordinarily where a corporation is established by statute, it is autonomous in its working subject only to a provision, often times made, that it shall be bound by any directions that may be issued from time to time by the Government in respect of policy matters. Addressing itself to the question as to when does such a corporation become the instrumentality or agency of the Government, the Supreme Court noticed various features. It held that if the entire share capital of the corporation is held by the Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government.

However, it observed that as is quite often the case, a corporation established by the statute may have no shares or shareholders in which case it would be a relevant factor to consider whether the administration is in the hands of a board of directors appointed by the department, though this consideration also may not be determinative because even where the directors are appointed by the Government, they may be completely free from governmental control in the discharge of their functions. In the present case, as we have already seen, there is no share capital since the corporation has been constituted as a local authority. The Supreme Court held that it was not possible to formulate an all inclusive or exhaustive test which would adequately answer this question and that there was no cut and dried formula which would provide the correct division of corporations into those which are instrumentalities or agencies of the Government and those which are not. Examining the matter further in paras 14 to 19 of the said decision, the Supreme Court observed that where the financial assistance of the State is so much as to meet almost the entire expenditure of the corporation, it would afford some indication of the corporation being impregnated with the governmental character. It was also held that if the functions [of the corporation were of public importance and closely related to the governmental functions, it would be a relevant factor in classifying the corporation as an instrumentality or agency of the Government. Then the Supreme Court enumerated in para 19 of the said decision several factors which may have to be considered in determining whether a corporation is an agency or instrumentality of the Government. They were summarised as under: (i) whether there is any financial assistance given by the State, and if so, what is the magnitude of such assistance, (ii) whether there is any other form of assistance, given by the State, and if so, whether it is of the usual kind or it is extraordinary, (in) whether there is any control of the management and policies of the corporation by the State and what is the nature and extent of such control, (iv) whether the corporation enjoys State conferred or State protected monopoly status, and (v) whether the functions carried out by the corporation are public functions closely related to governmental functions.

The Supreme Court observed that the particularisation of the above factors was not exhaustive and that it was not possible to make an exhaustive enumeration of the tests which could invariably and in all cases provide an unfailing answer to the question whether a corporation is a governmental instrumentality or agency. The Supreme Court also cautioned that even amongst the above mentioned factors, no one single factor will yield a satisfactory answer to the question and that the cumulative effect of these various factors will have to be considered and then a decision arrived at on the basis of a particularised enquiry into the facts and circumstances of each case. This decision, therefore, is of importance for judging the nature of the corporation under consideration. Here it may be also noticed that the nature of the Andhra Pradesh State Road Corporation constituted under the Road Transport Corporations Act, 1950, came up for consideration before the Supreme Court in the case of Andhra Pradesh State Road Transport Corpn.

(supra). It was held by the Supreme Court that though the majority of its shares were owned by the Andhra Pradesh Government and its activities were controlled by the State, the corporation had a separate personality of its own, the trading activities were the trading activities of the corporation and the profit and loss arising therefrom were the profit and loss of the corporation. It was also held that the income derived by that corporation from its trading activities could not be said to be the income of the Andhra Pradesh State under Article 289. In that case, before the formation of the corporation the road transport was a department of the Andhra Pradesh Government. Its net income went to the State under Section 30 of the Road Transport Corporations Act. It was a trading corporation. In that case, the Advocate General had conceded that the transport activity carried on by the Andhra Pradesh State Road Transport Corporation was strictly not incidental to the ordinary functions of the Government. Under Section 23(3) of the Road Transport Corporations Act, the State was one of the shareholders of the corporation and under Section 23(1) the capital contribution by Central and State Government was in the proportion of 1:3. The Supreme Court referred to its own decision in the case of Akadasi Padhan v. State of Orissa AIR 1963 SC 1047 where it was held that there may be cases of some trades or business in which it would be open to the State to employ the services of the agents, provided the agents worked on behalf of the State and not for themselves. The Supreme Court in para 19 of the judgment in the case of Andhra Pradesh State Road Transport Corpn. (supra) recorded the incidents of the corporation and after examining the provisions of the Road Transport Corporations Act, it held in para 21 that the income derived by that corporation from its trading activity was not the income of the State under Article 289(1) due to the following: (i) There was no provision making income of the corporation the income of the State.

(ii) All the relevant provisions emphatically brought out the separate personality of the corporation and the fact that trading activity as also the profit and loss were of the corporation.

(iii) Section 28 providing for the payment of the interest and dividend brought about the duality between the corporation and the State, Central Government.

(iv) Section 38(2)(c) showed that property vested in the corporation. It was only during supersession that it was to vest in the State Government Section 39(2) relating to the distribution of assets on liquidation also showed the same.

(v) The utilisation of fund as under Sections 28 to 30 did not show it as the income of the State.

(vi) It was not suggested or shown that when income is made over to the State under Section 30 it becomes a part of the general revenue of the State. It was income impressed with an obligation for a specific purpose.

(vii) The absence of a provision similar to Section 43 of the State Financial Corporation Act, 1951 and Damodar Valley Corporation Act, 1948, did not show that no tax will be payable. It only showed that tax was payable as a company.

We may now examine the decision of the Supreme Court in the case of Vijai Bahadur Singh (supra). In that case the corporation was not a party. The question involved therein related to the Government's power to reject the highest bid at the auction of various lots. It was held that the power of rejection of the highest bid was not restricted to the bid being inadequate and that there was no illegality since subsequent to the provisional acceptance of bids, the Government had revised its policy and had decided to get the work done through the assessee-corporation. The mention by the Supreme Court in para 3 of that decision that the corporation was wholly a Government owned corporation dedicated to the better preservation and development of forests and the better exploitation of forest produce and that its profits were in truth the profits of the State itself, was not made in the same context as in the cases of Andhra Pradesh State Road Transport Corporation (supra) and Ramana Daya-ram Shetty (supra) and, therefore, they do not help the corporation. The particular features of the present corporation are that it has been constituted as a local authority for which reason it is precluded from having a share capital.

It can borrow money from the State Government and it can issue debentures or stock. It was launched with a loan of Rs. 15 lakhs from the Government. If it were an agency or instrumentality of the State Government, the question of borrowing any money could not have arisen.

The corporation indisputably pays royalty to the State Government. The financial assistance given to the corporation is not in its entirety.

There is also no extraordinary assistance referred to by the Supreme Court in the case of Ramana Dayaram Shetty (supra). There is some control of the State Government over the corporation but the corporation is an autonomous body. The corporation cannot be said to enjoy State conferred or State protected monopoly status. Section 16 of the 1974 Act enables the corporation to undertake the execution of any forest project of the State Government or with the previous approval of the State Government at the request of any other person on such terms and conditions as may be agreed upon. No doubt, Section 43 of the State Financial Corporations Act, 1951 and the Damodar Valley Corporation Act, 1948, provide that those corporations shall be liable to pay tax on income levied by the Central Government in the same way and to the same extent as a company but it only shows that tax was payable as a company and the absence of a similar provision in the 1974 Act could not mean that it was to be free from taxation. There is no provision making income of the corporation the income of the State. These moneys cannot go Jo the consolidated fund of the State. It has a separate fund under Section 17 which is designed the 'local fund'. It has a separate budget. A perusal of the relevant provisions of the 1974 Act also bring out the separate personality of the corporation and show that the trading activity and profit and loss are those of the corporation. It is unnecessary for us to examine the legislative entry under which the 1974 Act was enacted. Equally unnecessary is also the consideration of Article 48A relating to the Directive Principles of State Policy regarding the safeguard of the forests. The lifting or the piercing of the veil of the corporate structure of the instant corporation also does not reveal a face different from the one discussed above. Also, we are not concerned with the wisdom of the State and the Legislature in enacting the 1974 Act. We have only to see if on the basis of the corporation as established, it is exigible to income-tax or not.

Therefore, having regard to the features of the corporation in question and the provisions of the 1974 Act and examining them in the light of the judgments of the Supreme Court, referred to above in which the tests were given and applied, we are clearly of the view that the corporation cannot claim for itself the agency or instrumentality of the State of U.P. This preliminary objection taken on behalf of the assessee-corporation, therefore, fails.

16. The next question relates to the claimability of the exemption under Section 10(20), by the corporation. Shri Gupta referred to the remand order dated 31-12-1979 of the learned Commissioner (Appeals), the assessment order passed by the ITO for the assessment year in question, the directions dated 22-9-1979 given by the IAC (Assessments) to the ITO order dated 27-1-1978 and of the Hon'ble High Court in the corporation's writ petition supra and para 2 of the order dated 21-2-1980 of the learned Commissioner (Appeals) impugned before us and submitted that the income-tax authorities as also the Hon'ble High Court had clearly held that the corporation was a local authority.

Referring to Section 10(20) of the 1961 Act and Section 1(2) of the 1974 Act, read with this preamble, he pointed out that the jurisdictional area of the corporation was its territorial area. For this purpose, reference was also made by him to the decision of the Hon'ble Allahabad High Court in the case of City Board v. CIT [1962] 46 ITR 1214. He also submitted that the place where the supply of the commodity was made was relevant and not the fact that the corporation dealt with parties outside the State of U.P. In this connection reference was made by him to another decision of the Hon'ble Allahabad High Court in Municipal Board v. CIT[ 1951] 19 ITR 21. He also referred to Sections 14 and 15 of the 1974 Act and pointed out that the operational area of the corporation could be larger than the forest area entrusted to it by the State Government for the purposes of supervision, development and exploitation. Referring to the decision of the Hon'ble Supreme Court in the case of Ramtanu Co-operative Housing Society (supra), he reiterated that the State Legislature had no jurisdiction to create a corporation purely for trading activities though such activities could be incidental to the main activity of the corporation. He, therefore, said that the main activity of the corporation was that given in the preamble to the Act and, therefore, the trading activity was only incidental thereto. Referring to the requirements of Section 10(20), Shri Gupta argued that the corporation was entitled to the exemption of the income from the trade or business carried on by it which accrued or arose from the supply of the forest produce within its own jurisdictional area.

17. On the other hand, Shri K.K. Roy, the learned departmental representative, firstly, sought to argue that the corporation was not a local authority. He sought to refer to the decision of the Hon'ble Gujarat High Court in Arundhati Balkrishna v. CIT [1982] 138 ITR 245 and of the Hon'ble Supreme Court in R.C. Jain's case (supra). Reference was also made by him to the fact that in the assessment order the status of the corporation was shown as 'company'. Next, he argued that a functional test had to be applied in terms of the decision of the Hon'ble Allahabad High Court in the case of City Board (supra). He also argued that if the forest produce was sold or supplied outside UP, it would amount to trade or business carried on by it outside its own jurisdictional area. According to him, the supply should be only in the forest area which was entrusted to the corporation. Next, he submitted that there was no statutory duty cast on the corporation to sell or supply any commodity. He next, pointed out that there was no concept of mutuality involved in the corporation and that in order to be able to take advantage of the exemption under Section 10(20) there should be no profit motive, whereas the corporation had such a motive. Reference was also made by him in this connection to the decision of the Hon'ble Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs.

Association [1980] 121 ITR 1. Next, he referred to the decision of the Hon'ble Andhra Pradesh High Court in Andhra Pradesh State Road Transport Corporation v. ITO [1963] 47 ITR 101, wherein it had been held that the Andhra Pradesh State Road Transport Corporation constituted under the Road Transport Corporations Act was not a local authority and was not immune from taxation under the Indian Income-tax Act, 1922. Reference was also made by him to another decision of the Hon'ble Supreme Court in the case of Ishwari Khetan Sugar Mills (P.) Ltd, (supra) referred to by him earlier. Lastly, he referred to the corporation's reply for the assessment year 1978-79 filed before the IAC (Assessments). Summing up his arguments, Shri Roy submitted that the corporation was not entitled to the exemption under Section 10(20).

18. We have considered the rival submissions as also the decisions referred to above. Firstly, the fact that the corporation is a local authority having been accepted by the income-tax authorities and by the Hon'ble High Court and there being an express provision in Section 3(3) that the corporation shall, for all purposes, be a local authority, the department cannot be permitted to challenge this position before us and seek to argue that the corporation is not a local authority. The fact that in the assessment order, the ITO had shown the status of the corporation as a company cannot be conclusive. In fact, it appears to be a mere mistaken mention or a typographical error because we find from the photostat copies of the return that the return was riled by the corporation declaring its status as that of a local authority. In any view, the ITO could not have assessed the corporation in a status other than that in which the return had been filed by it. The result is that as already held by us, we have to proceed on the basis that the corporation is a local authority.

19. Section 10(20) provides that in computing the total income of a previous year of any person, any income falling within any of the following clauses, shall not be included: (20) the income of a local authority which is chargeable under the head 'Interest on securities', '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 analysis of the above provision shows that the following incomes of a local authority would not be includible in the total income:-- (v) income from a trade or business carried on by it which accrues or arises from the supply of commodity or service (not being water or electricity) within its own jurisdictional area, and (vi) income from the supply of water or electricity within or outside its own jurisdictional area.

For the purposes of this case, it is item (v) above which is relevant.

So far as the meaning of the expression 'own jurisdictional area' is concerned it is clear from the decision of the Allahabad High Court in the cases of Municipal Board (supra) and City Board (supra), that it means the territorial limits of the local authority. The preamble to the 1974 Act refers to the better exploitation of forest produce within the State [Emphasis supplied]. Section 1(2) of the 1974 Act, provides that it extends to the whole of UP. Sections 14 and 15 of the Act, which provide for the functions and powers of the corporations, show that the territorial limit and the functions are inter-connected and that the operational area of the corporation may be larger than the forest area or the forest resources, the exploitation of which is entrusted by the State Government to the corporation. Therefore, the argument made on behalf of the revenue that the forest produce sold or supplied to outside UP, parties could not be said to be the income from trade or business accruing or arising within its own jurisdictional area, cannot be accepted. Having regard to the wordings and analysis of the provisions of Section 10(20) extracted above, there is no room for importing any considerations of mutuality or absence of profit motive.

The existence of a statutory duty on the part of the corporation to sell or supply forest produce can also not be insisted upon. It is sufficient if the local authority in question carries on trade or business in the supply of forest produce within its jurisdictional area. If such a thing happens as in this case, the income of the local authority which accrues or arises from such an activity would be exempt under Section 10(20). We also find that the auctions are held by the corporation in its jurisdictional area and there is nothing on the record to show that the income from the trade or business carried on by the corporation from the sale or supply of forest produce is outside its own jurisdictional area. The reference on behalf of the revenue to the decision of the Hon'ble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) is misplaced as Section 10(20) of the 1974 Act does not exclude an activity for profit. No doubt, in the cases of Hira Mills Ltd. v. C/r[1965] 57 ITR 103 and Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 the Hon'ble Bombay High Court and the Hon'ble Supreme Court dealt with the question as to where an income can be said to accrue or arise. But the ITO does not say that in the present case the income accrued or arose to the corporation from the supply of forest produce outside its own jurisdictional area. In fact, for the assessment year in question, there was no supply of forest produce even to a purchaser outside the State of UP. The ITO was not right in being influenced by the fact that the corporation does not remove or dispose of trees at the request of general public and in observing that it was not supplying anything. The corporation was certainly dealing with the sale and supply of forest produce on the basis of public auction and by negotiations as the letters on the record show. As already observed above, the observation of the learned Commissioner (Appeals) that the business of the corporation could not be held to be a business of supply of a commodity or services, was not correct. In the case of sales made to Hindustan Copper Ltd., Rajasthan, the order of the learned Commissioner (Appeals) records the fact that timber was despatched by the corporation. There is nothing to show that in that case the contract for the supply of forest produce or the income accrued or arose outside the corporation's own jurisdictional area.

Again, the learned Commissioner (Appeals) has referred to an order dated 3-7-1975 addressed by Hindustan Copper Ltd. to the corporation and at the same time it is mentioned that that order was not acted upon and later it was amended and superseded by another order and that eventually supply was made after the end of the year under appeal in accordance with the order placed on 9-12-1975, i.e., in the subsequent year. At any rate, even if on facts any particular income would have been established by the ITO to have accrued or arisen from the supply of forest produce outside the own jurisdictional area of the corporation, it would not nullify the activity of the corporation as a whole but it could only take it outside the exemption provided under Section 10(20). On facts, therefore, we are clearly of the view that for the assessment year in question, the income of the corporation fell within the exemption provided under Section 10(20).

20 to 24. (These paras are not reproduced here as they involve minor issues].


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