Holding

The Authority is a distinct legal entity whose income is not the income of the State and, after the Finance Act, 2002 amendment, it does not fall within the definition of a local authority for exemption under Section 10(20) of the Income Tax Act, rendering the notice for TDS valid.

Summary

The Adityapur Industrial Area Development Authority (the Authority) challenged a notice issued by the Income Tax Department requiring the bank to deduct TDS on interest earned on its fixed deposits, arguing that its income was exempt under Article 289 of the Constitution and Section 10(20) of the Income Tax Act as a local authority. The High Court dismissed the petition, holding the notice valid. On appeal, the Supreme Court examined whether the Authority, a body corporate created under the Bihar Industrial Areas Development Authority Act, 1974, could be treated as a "local authority" or as the "income of the State" for the purpose of Article 289. The Court observed that the Authority has a distinct legal personality, its own assets, liabilities and funds, and only upon dissolution would its properties devolve to the State, thus its income is not the State’s income. Moreover, the Finance Act, 2002 omitted Section 10(20A) and added an explanation to Section 10(20) that does not include the Authority, removing any statutory exemption. Consequently, the notice was upheld and the appeal dismissed.

Issues considered

The legal status of the Authority under the Bihar Industrial Areas Development Authority Act and whether it qualifies as a "local authority" within Section 10(20) of the Income Tax Act.
Whether the Authority's income can be considered the "income of the State" and thus exempt under Article 289(1) of the Constitution.
The effect of the Finance Act, 2002 amendment (omission of Section 10(20A) and addition of an explanation to Section 10(20)) on the Authority's claim to exemption.

Legislation cited

Bihar Industrial Areas Development Authority Act, 1974s. Section 17, s. Section 7
Cantonments Act, 1924s. Section 3
Constitution of Indias. Article 289
Finance Act, 2002
General Clauses Act, 1897s. Section 3(3)
Income Tax Act, 1961s. Section 10(20), s. Section 10(20A)

Subjects

Article 289Income TaxTDSlocal authorityexemptiondistinct legal entityBihar Industrial Areas Development Authority ActFinance Act 2002state vs authoritycorporate personality

Judgment

ADITYAPUR INDUSTFJAL AREA DEVELOPMENT AUTHORITY A
v.
UNION OF INDIA AND ORS.

MAY 3, 2006

[B.P. SINGH AND S.H. KAPADIA, JJ.] B

Constitution of India-Article 289-lncome Tax Act, 1961-Sections
10(20) and 10(20A)-Bihar Industrial, Areas Development Authority Act,
1974-Sections 7 and 17-lncome of State Industrial Development
Authority-Notice issued by Revenue to the Banker of the Authority to C
....
deduct income tax at source from inter:est income accrued on fixed deposits
of the Authority-Writ Petition filed before High Court challenging the notice
was dismissed-Correctness of-Held, the Authority is a distinct legal entity-
Income of the Authority is not the income of the State and hence not entitled
to exemption under Article 289 of the Constitution-Authority is not a local D
authority entitled to exemption under section 10(20) of the Income Tax Act-
Finance Act, 2002---General Clauses Act, 1897; Section 3(3).

Revenue issued a notice to the Banker of the appellant-Authority to
deduct income tax at source from interest accrued on fixed deposits of the
Authority in view of omission of section 10(20A) and addition of an Explanation E
to Section 10(20) of the Income Tax Act, 1961 with effect from April I, 2003.
The appellant filed a Writ Petition before High Court challenging the notice
of the Revenue. The High Court dismissed the Writ Petition holding that the
notice was legal and valid.

In appeal to this Court, the appellant contended that it is a local authority F
having regard to section 3(3) of the General Clauses Act, 1897 and Section
7 of the Bihar Industrial Areas Development Authority Act, 1974 and hence
its income is exempt from Income Tax under section 10(20) of the Income
Tax Act, 1961; that it is an agency of the State not carrying on trade or
business and hence is covered under Article 289(1) of the Constitution of
India, which exempts the properties and income of a State from Union Taxation; G
and that the amendment to the Income Tax Act was not made by reference to
Article 289 of the Constitution.

The Revenue contended that under Article 289(1) of the Constitution of

757 H
758 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A India, only the income of the State and not the income of any authority under
the State is exempt from Union taxation; that the appellant has a distinct legal
entity and hence it cannot claim that its income is the income of the State;
and that under section 17 of the Bihar Industrial Area Development Authority
Act, 1974, the State can dissolve any Authority and hence, as a necessary
B corollary, till the Authority is not dissolved, its properties, funds and dues
are those of the Authority and not of the State.

Dismissing the appeals, the Court

HELD: 1.1. As per section 17 of the Bihar Industrial Areas Development
C Authority Act, 1974, the income of the appellant-Authority constituted under
the said Act is its own income and that the Authority manages its own funds.
It has its own assets and liabilities. It can sue or be sued in its own name.
Even though, it does not carry on any trade or business within the
contemplation of Clause (2) of Article 289 of the Constitution of India, it still
is an Authority constituted under an Act of the Legislature of the State having
D a distinct legal personality, being a body corporate, as distinct from the State.
Section 17 of the Act further clarifies that only upon its dissolution its assets,
funds and liabilities devolve upon the State Government. Necessarily therefore,
before its dissolution, it5 assets, funds and liabilities are its own. It is,
therefore, futile to contend that the income of the Authority is the income of
State Government, even though the Authority is constituted under an Act
E enacted by the State Legislature by issuance of a Notification by the
Government thereunder. (764-G-H; 765-A-BI

1.2. The benefit conferred by Section 10(20A) of the Income Tax Act,
1961 on the assessee has been expressly taken away. Moreover, the explanation
p added to Section 10(20) enumerates the "local authorities" which do not cover
the assessee herein. The appellant/Authority could not claim exemption from
Union taxation under Article 289(1) of the Constitution oflndia. The impugned
notice issued by the Income Tax Authorities was, therefore, valid and legal.
(771-B-CI

G Andhra Pradesh State Road Transport Corporation v. Income Tax Officer
and Anr., (1964) 7 SCR 17, relied on.

Food Corporation of India v. Municipal Commillee, Jalalabad and Anr.,
(1999) 6 SCC 74; Board of Trustees for the Visakhapatnam Port Trust v. State
of A.P. and Ors., [19991 6 SCC 78; Food Corporation of India v. Municipal
H Committee, Jalalabad and Anr., AIR (19991 SC 2573; Municipal
ADITY APUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.0.1. [B.P. SINGH,)] 759

Commissioner of Dum Dum Municipality and Ors. v. Indian Tourism A
Development Corporation and Ors., 11995] 5 SCC 251; Central Warehousing
Corporation v. Municipal Corporation, (1994] Supp 3 SCC 316 and Western
Coalfields Ltd v. Special Area Development Authority, Korba and Anr. and
Bharat Aluminium Company ltd v. Special Area Development Authority,
Korba, & Ors., AIR (1982) SC 697, referred to.
B
Shri. Ramtanu Co-operative Housing Society Ltd and Anr. v. State of
Maharashtra and Ors., (1970] 3 SCC 323 and New Delhi Municipal Council
v. State of Punjab and Ors., 1199717 SCC 339, distinguished.

Basu's Commentary of the Constitution of India 6th Edition Volume L, C
referred to.

CIVIL ORIGINAL JURISDICTION: Civil Appeal No. 6382 of2003.

From the Judgment/Order dated 8.5.2003 of the High Court of Jharkhand
at Ranchi in W.P. (T) No. 1222 of2003.
D
KK. Venugopal, Vikas Singh, Manish Mohan, Amrita Narayan, Yunus
Mailk and Prashant Chaudhary for the Appellant.

T.S. Doabia, Manish Sharma and B.V. Balaram Das for the Respondent.

The Judgment of the Court was delivered by E

B.P. SINGH, J. Adityapur Industrial Area Development Authority - the
appellant herein challenged, by a writ petition, the notice issued by the
Deputy Commissioner of Income Tax, TDS Circle, Jamshedpur dated February
14, 2003 to the Manager of the Central Bank of India, Jamshedpur bringing F
to the notice of the Manager of the Bank that the Finance Act, 2002 had .
brought about changes in the Income Tax Act and while Section I0(20A) had
been omitted, an Explanation was added to Section I 0(20) of the Act. The
provisions of the Income Tax Act, 1961 as they stood after the amendment
obliged the: Bank to deduct income tax at source from the interest accrued on
fixed deposit receipts of the appellant/Authority. The Manager of the Bank G
was required to comply with the provisions and deduct tax at source and
report compliance. The High Court of Jharkhand at Ranchi in the aforesaid
writ petition pronounced its judgment on May 8, 2003 dismissing the writ
petition holding that in view of the amended provisions of the Income Tax
Act, the notice was valid and legal. The appellant/Authority has impugned
H
760 SUPREME COURT REPORTS [20061 St;PP. I S.C.R.

A the judgment and order of the High Court in this appeal by special leave.
The appellant/Authority has been constituted under the Bihar Industrial
Areas Development Authority Act, 1974 to provide for planned developn:ient
of industrial area, for promotion of industries and matters appurtenant thereto.
The appellant/Authority is a body corporate having perpetual succession and
B a common seal with power to acquire, hold and dispose of properties, both
moveable and immovable, to contract, and by the said name sue or be sued.
The Authority consists of a Chairman, a Managing Director and five other
Directors appointed by the State Government. The Authority is responsible
for the planned development of the industrial area including preparation of
C the master plan of the area and promotion of industries in the area and other
amenities incidental thereto. The Authority has its own establishment for
which it is authorized to frame regulations with prior approval of the State
Government. The State Government is authorized to entrust the Authority
from time to time with any work connected with planned development, or
maintenance of the industrial area and its amenities and matters connected
D thereto. Section 7 of the Act obliges the Authority to maintain its own fund
to which shall be credited moneys received by the Authority from the State
Government by way of grants, loans, advances or otherwise, all fees, rents,
charges, levies and fines received by the Authority under the Act, all moneys
received by the Authority from disposal of its moveable or immovable assets
E and all moneys received by the Authority by way of loan from financial and
other institutions and debentures floated for the execution of a scheme or
schemes of the Authority duly approved by the State Government. Unless the
State Government otherwise, directs, all moneys received by the Authority
shall be credited to its funds which shall be kept with the State Bank of India
and/ or one or more of the Nationalized Banks and drawn as and when
F required by the Authority.
Article 289 of the Constitution of India provides as follows:-

"289. Exemption of property and income of a State from Union
taxation.-(!) The property and income of a State shall be exempt
G from Union taxation.

(2) Nothing in clause (I) 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
H operations connected therewith, or any property used or occupied for
ADITYAPUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.O.l. (BP. SINGH, J.) 761

the purposes of such trade or business, or any income accruing or A
arising in connection therewith.

(3) Nothing in clause (2) shall apply to any trade or business, or to
any class of trade of business which Parliament may by law declare
to be incidental to the ordinary functions of Government."
B
It is also necessary to notice the relevant provisions of the Income Tax
Act, 1961. Chapter 1IJ of the Income Tax Act relates to incomes which do not
form part of total income. The relevant part of Section IO as it stood before
its amendment by the Finance Act of 2002 read as follows:-

"I 0. In computing the total income of a previous year of any person, C
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 D
head "Income from house property", "Capital gains" or
"Income from other sources" or from a trade or business
carried on by it which accrues or arises from the supply of
a commodity or service (not being water or electricity) within
its own jurisdictional area or from the supply of water or
electricity within or outside its own jurisdictional area ; E
(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." F
By the Finance Act, 2002 with effect from April I, 2003 an Explanation

t was added to Section I0(20) and Section I0(20A) was omitted. The Explanation
added to Section I0(20) is as follows :-

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

(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 H
762 SUPREME COURT REPORTS [20061 SUPP. l S.C.R.

A Constitution; or
(iii) Municipal Committee and District Board, legally entitled to, or
entrusted by the Government with, the control or management of
a Municipal or local fund; or
(iv) Cantonment Board as defined in section 3 of the Cantonments
B Act, 1924 (2 of 1924)."

It would thus be seen that the income of a local authority chargeable
under the head "Income from house property", "Capital gains" or "Income
from other sources" or from a trade or business carried on by it was earlier
C excluded in computing the total income of the Authority of a previous year.
However, in view of the amendment, with effect from April l, 2003, the
Explanation "local authority" was defined to include only the authorities
enumerated in the Explanation, which does not include an authority such as
the appellant. At the same time Section 10 (20A) which related to income of
an authority constituted in India by or under any law enacted for the purpose
D of dealing with and satisfying the need for housing accommodation or for the
purpose of planning, development or improvement of cities, towns and villages,
which before the amendment was not included in computing the total income,
was omitted. Consequently, the benefit conferred by (20A) on such an authority
was taken away.

E The High Court by its impugned judgment and order held that in view
of the fact that Section \0(20A) was omitted and an Explanation was added
to Section I0(20) enumerating the "locai authorities" contemplated by Section
10(20), the appellant/Authority could not claim any benefit under those
provisions after April 1, 2003. It further held that the exemption under Article
F 289( I) was also not available to the appellant/Authority as it was a distinct
legal entity, and its income could not be said to be the income of the State
so as to be exempt from Union taxation. The said decision of the High Court
is impugned in this appeal.

Shri K.K. Venugoal, learned Senior Advocate appearing on behalf of the
G appellant submitted that having regard to Section 3(3) of the General Clauses
Act and the provisions of Section 7 of the Bihar Industrial Areas Development
Authority Act, 1974, it must be held that the appellant is a local Authority.
According to him the appellant/Authority must be held to be a local Authority
within the meaning of Section 10(20) of the Income Tax Act. He further
submitted that Article 289 ( 1) exempted from Union taxation, the properties
H
ADITYAPUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.0.1 [B.P. SINGH,J.] 763

and income of a State. Referring to Clause (2) of Article 289, he submitted that A
it contemplates a trade or business being carried on by or on behalf of the
Government of a State. That brings in the concept of agency under the
Contract Act. Therefore, by necessary implication, an agency of the State, not
carrying on trade or business, is not covered by Clause (2) of Article 289 and,
therefore, the exemption must extend to such an agency of the State
Government. He also relied on some decisions of this Court. He also submitted B
that the amendment referred to above in Section 10 of the Income Tax Act
is not made by reference to Article 289 of the Constitution of India and that
was perhaps not present to the mind of the Legislature. He commended a
public policy approach in such matters.

Mr. T.S. Doabia, learned senior counsel appearing on behalf of the
c
Union of India, repelled the submissions urged on behalf of the appellants
by contending that unless the income generated by an agency or
instrumentality of the State went to the coffers of the State directly and
remained the income of the State, the agency, whether Corporation, Company
o:· an Authority, could not claim the exemption from Union taxation under D
Article 289 (I). The true test to be applied in the context of Article 289 (I)
of the Constitution was whether the income accruing is the income of the
State. What is exempted under Article 289 (I) from Union taxation is the
income of the State and not the income of any authority under the State. In
the facts of this case he submitted that the appellant/Authority being a E
distinct legal entity, earning income and managing its own funds, cannot claim
that its income is the income of the State. In particular, he laid emphasis on
Section 17 of the Bihar Industrial Area Development Authority Act, 1974
which reads as follows:-

"When the State Government is satisfied that the purpose for which F
the Authority was established under this Act has been substantially
achieved so as to render the continuance of the Authority unnecessary,
the Government may by notification in the official Gazette, declare that
the Authority shall be dissolved with effect from such date as may
be specified in the notification and the authority shall be deemed to
be dissolved accordingly from the said date and all the properties, G
funds and dues realizable by the authority alongwith its liabilities
• shall devolve upon the State Government."

He submitted that the Government has powers to d!ssolve the appellant/
Authority with effect from such date as it may specify in the Notification.
With effect from that date the properties, funds and dues realizable by the H
764 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A Authority along with its liabilities devolve upon the State Government. It,
therefore follows as a necessary corollary that till such time as the Authority
is not dissolved, its properties, funds and dues are those of the Authority
itself and not of the State. If it were otherwise there was no need for Section
17 to prescribe that as from the date of dissolution of the Authority, properties.
B funds and dues realizable by the Authority along with its liabilities shall
devolve upon the State Government.

A mere perusal of Article 289( I) discloses that a claim of exemption
under it must proceed on the foundation that the exemption is claimed in
respect of property and income of a State. Once it is held that the property
C and income is that of the State, a question may well arise whether it is still
taxable in view of the provision of Clause (2) of Article 289 which dominantly

-
is in the nature of a proviso. Clause (2) empowers the Union to impose any
tax to such extent as Parliament may by law provide, in respect of a trade or
business of any kind carried on by, or on behalfof, the Government of a State,
or any operation connected therewith. Thus, even the income of the State
D within the meaning of Clause (I) of Article 289 may be taxed by law made by
the Parliament, if such income is derived from a trade or business of any kind
carried on by or on behalf of the Government of a State or any operations
connected therewith. Clause (I) of Article 289, therefore empowers Parliament
to frame law imposing a tax on income of a State which 1s earned by means
E of trade or business of any kind carried by or on behalf of the State
Government.

It is true, as submitted by Sri Venugopal, that Clause (2) of Article 289
empowers the Parliament to make a law imposing a tax on income earned only
from trade or business of any kind carried by or on behalf of the State. It does
F not authorize the Parliament to impose a tax on the income of a State if such
income is not earned in the manner contemplated by Clause (2) of Article 289.
This, to our mind, does not answer the question which arises for our
consideration in this appeal. Clause (2) of Article 289 pre-supposes that the
income sought to be taxed by the Union is the income of the State, but the
question to be answered at the threshold is whether in terms of Clause (I)
G of Article 289, the income of the appellant/ Authority is the income of the
State. Having regard to the provisions of the Bihar Industrial Areas
Development Authority Act, 1974, particularly Section 17 thereof, we have no
•
manner of doubt that the income of the appellant/Authority constituted under
the said Act is its own income and that the appellant/ Authority manages its
H own funds. It has its own assets and liabilities. It can sue or be sued in its
ADITY APUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.0.1. [B.P. SINGH, J.] 765

own name. Even though, it does not carry on any trade or business within A
the contemplation of Clause (2) of Article 289, it still is an Authority constituted
under an Act of the Legislature of the State having a distinct legal personality,
being a body corporate, as distinct from the State. Section 17 of the Act
further clarifies that only upon its dissolution its assets, funds and liabilities
devolve upon the State Government. Necessarily therefore, before its
diss.olution, its assets, funds and liabilities are its own. It is, therefore, futile B
to contend that the income of the appellant/ Authority is the income of State
Government, even though the Authority is constituted under an Act enacted
by the State Legislature by issuance of a Notification by the Government
thereunder.

According to Basu's Commentary on the Constitution of India (Sixth
c
Edition, page 50, volume 'L') Articles 285 and 289 are analogous to each other

- inasmuch as while Article 285 exempts Union property from State taxation,
Article 289 exempts the State property from taxation. While clause (I) of
Article 289 exempts from Union taxation any income of a State, derived from·
governmental or non-governmental activities, clause (2) provides an exception, D
namely, that income derived by a State from trade or business will be taxable,
provided a law is made by Parliament in that behalf. Clause (3) of Article 289
is an exception of the exception prescribed by clause (2) of Article 289 and
it provides that income derived from particular trade or business may be made
immune from Union taxation if Parliament declares such trade or business E
as incidental to the ordinary functions of Government (emphases supplied).
The reason is obvious. Under the constitution, the State has no power to tax
any income other than agricultural income. Under the Constitution, power to
tax "income" is vested only in the Union. Therefore, while any property of
the Union is immune from State taxation under Article 285(1 ), income derived
by the State from business, as distinguished from governmental purposes, F
shall not have exemption from Union taxation unless the Parliament declares
such trade or business as incidental to the ordinary functions of Government
of the State [See Article 289(3)) (emphasis supplied).

Applying the above test to the facts of the present case it is clear that
the benefit, conferred by Section 10(20A) of the Income Tax Act, 1961 on the G
assessee herein, has been expressly taken away. Moreover, the explanation
added to Section I 0(20) enumerates the "local authorities" which do not cover
the assessee herein. Therefore, we do not find any mer.it in the submission
advanced on behalf of the assessee.
H
766 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A In [ 1964] 7 SCR 17 : Andhra Pradesh State Road Transport Corporation
v. Income Tax Officer and Anr., the question arose as to whether the income
derived from trading activity by the Andhra Pradesh Road Transport
Corporation established under the Road Transport Corporation Act, 1950 was
not the income of the State of Andhra Pradesh within the meaning of Article
B 289 (I) of the Constitution and hence exempted from Union taxation. This
Court considered the scheme of Article 289 and observed as follows :-

"The scheme of Art. 289 appears to be that ordinarily the income
derived by a State both from governmental and non-governmental or
commercial activities shall be immune from income-tax levied by the
C Union, provided, of course, the income in question can be said to be
the income of the State. This general proposition flows from cl. (I).

-
Clause (2) then provides an exception and authorities the Union
to impose a tax in respect of the income derived by the Government
of a State from trade or business carried on by it, or on its behalf; that
D is to say, the income from trade or business carried on by the
Government of a State or on its behalf which would not have been
taxable under cl. (I), can be taxed, provided a law is made by Parliament
in that behalf. If clause (I) had stood by itself, it may not have been
easy to include within its purview income derived by a State from
commercial activities, but since cl. (2), in terms, empowers the Parliament
E to make a law levying a tax on commercial activities carried on by or
on behalf of a State, the conclusion in inescapable that these activities
were deemed to have been included in cl. (I) and that alone can be
the justification for the words in which cl. (2) has been adopted by
the Constitution. It is plain that cl. (2) proceeds on the basis that but
F for its provision, the trading activity which is covered by it would
havP. claimed exemption from Union taxation under cl. (I). That is the
result of reading els. (I) and (2) together.

Clause (3) then empowers the Parliament to declare by law that
any trade or business would be taken out of the purview of cl. (2) and
G restored to the area covered by cl. (I) by declaring that the said trade
or business is incidental to the ordinary functions of government. In
other words, cl. (3) is an exception to the exception prescribed by cl.
(2). Whatever trade or business is declared to be incidental to the
ordinary functions of government, would cease to be governed by cl.
(2) and would then be exempt from Union taxation. That, broadly
H
ADITY APUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.0.1. [B.P. SINGH; J.] 767

stated, appears to be the result of the scheme adopted by the three A
clauses of Art. 289".

Reading these three Clauses together this Court held that the property
as well as the income in respect of which exemption is claimed under Clause
(I) must be the property and income of the State, and thus the crucial
question to be answered is: "Is the income derived by the State from its B
transport activities the income of the State"? It was observed that if a trade
or business is carried on by a State departmentally or through its agents
appointed exclusively for that purpose, there would be no difficulty in holding
that the income made from such trade or business is the income of the State.
Difficulties arise when one is dealing with trade or business carried on by a C
Corporation established by a State by issuing a Notification under the relevant
provisions of the Act. In this context, the Court observed:

" .......The corporation, though statutory, has a personality of its
own and this personality is distinct from that of the State or other
shareholders. It cannot be said that a shareholder owns the property D
of the corporation or carries on the business with which the corporation
is concerned. The doctrine that a corporation has a separate legal
entity of its own is so firmly rooted in our notions derived from
common law that it is hardly necessary to deal with it elaborately; and
so, prima facie, the income derived by the appellant from its trading
activity cannot be claimed by the State which is one of the shareholders E
of the corporation".

This Court considered the scheme of the Act under which the State
Corporation was constituted and held :-

" ......... The main point which we are examining at this stage is: is F
the income derived by the appellant from its trading activity, income
of the Stage under Art. 289 (I)? In our opinion, the answer to this
question must be in the negative. Far from making any provision
which would make the income of the Corporation the income of the
State, all the relevant provisions emphatically bring out the separate G
personality of the Corporation and proceed on the basis that the
trading activity is run by the Corporation and the profit and loss of
the Corporation. There is no provision in the Act which has attempted
to lift the veil from the face of the Corporation and thereby enable the
shareholders to claim that despite the form which the organization has
H
768 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A taken, it is the shareholders who run the trade and who can claim the
income coming from it as their own. Section 28 which provides for the
payment of interest clearly brings out the duality between the
Corporation on the one hand and the State and Central Governments
on the other. Take for instance the case of supersession of the
Corporation authorized by S. 38. Section 38 (2) ( c) emphatically brings
B out the fact that the property really vests in the corporation, because
it provides that during the period of supersession, it shall vest in the
State Government ............................................................................................... .

c ... ................... ............................. ......... Therefore, we are satisfied that the
income derived by the appellant from its trading activity cannot be
said to be the income of the State under Art. 289 (l ), and if that is
so, the facts that the trading activity carried on by the appellant may
be covered by Art. 289 (2), does not really assist the appellant's case.
...
Even if a trading activity falls under cl. (2) of Art. 289, it can sustain
D a claim for exemption from Union taxation only if it is shown that the
income derived from the said trading activity is the income of the
State. That is how ultimately, the crux of the problem is to determine
whether the income in question is the income of the State and on this
vital test, the appellant fails".

E Considerable reliance was placed on the principles laid down in the
aforesaid decision by learned counsel appearing for the Gnion of India. He
submitted that having regard to the provisions of the Act under which the
appellant/Authority is established, the same conclusion may be reached. In
particular, empha~izing the fact that as in Andhra Pradesh Road Transport
F Corporal ion case, sci in the instant case as well, Section 17 of the Act
provides that upon dissolution of the appellant/Authority, the properties,
funds and dues realizable by the Authority along with its liabilities shall
devolve upon the State Government. Impliedly, therefore, such properties,
funds and dues vest in the Authority till its dissolution, and only thereafter
it vests in the State Government. He also referred to various other provisions
G of the Act and submitted that there was nothing in the Act which attempted
to lift the veil from the face of the Corporation. Even though the Authority
was created under an Act of the Legislature, it was still an Authority which
had a distinct personality of its own, having perpetual succession and a
common seal, with powers to acquire, hold and dispose of property, and to
H contract, and could sue and be sued in its own name. Shri Venugopal, on the
ADITYAPUR INDUSTRIAL AREA DEVELOPMENT AUTHORITYv. U.O.L [B.P. SINGH, J.] 769

other hand, tried to distinguish the judgment on the ground that the Andhra A
Pradesh Road Transport Corporation is being run on business lines, and a
Corporation that runs on business lines is distinguishable and different from
a Corporation which is not run on those lines. Even if such a distinction is
drawn, that will not have the effect of making the income of the Corporation
the income of the State Government having regard to the other features B
noticed above.

Shri Venugopal then relied upon two decisions of this Court reported
in [1970] 3 SCC 323 Shri Ramtanu Co-operative Housing Society Ltd. and
Anr. v. State of Maharashtra and Ors., and [1997] 7 SCC 339 New Delhi
Municipal Council v. State of Punjab and Ors. In Shri Ramtanu Co-operative C
Housing Society; the question which arises for consideration in the instant
appeal did not arise at all. The question was whether the State of Maharashtra
was competent to enact the Maharashtra Industrial Development Act, 1961
and whether the impugned Legislation fell within Entry 43 List I of the
Seventh Schedule of the Constitution, so that only the Parliament was
empowered to enact such Legislation and not the State of Maharashtra. In D
that context, this Court considered the true character scope and intent of the
Act by reference to the purposes and the provisions of the Act. Having
considered the various provisions of the Act including those relating to the
functions and powers of the Corporation, this Court concluded that in pith
and substance the Act was meant for the establishment, growth and E
organization of industries, acquisition of land in that behalf and carrying out
the purposes of the Act by setting up the Corporation as one of the limbs
or agencies of the Government. It held that even though the Corporation
received moneys from disposal of lands, buildings and other properties and
also received rents and profits, such receipts arose not out of any business
or trade but out of sole purpose of establishment, growth and development F
of industries. The Corporation was not a trading Corporation, as it was not
involved in buying or selling activity. The true character of the Corporation
was to act as an architectural agent of the development and growth of
industrial towns by establishing and developing industrial estates and industrial
areas. It, therefore, negative the argument that the Corporation being a trading G
one, the impugned Legislation fell within Entry 43 of List I of the Seventh
Schedule.

This decision does not help the appellant because even if it is held that
the appellant/Authority is not a trading Authority, yet that does not answer
the question whether the income of the Authority is the income of the State H
770 SUPREME COURT REPORTS [2006] SUPP. I S.C.R.

A so as to attract Clause (I) of Article 289.
Similarly, the decision in New Delhi lvfunicipal Council v. State of
Punjab and Ors., (supra) does not advance the case of the appellant. It was
held that the property/ municipal taxes levied by the New Delhi Municipal
Council under the relevant Act constituted Union taxation within the meaning
B of Clause (I) of Article 289 of the Constitution of India. The levy of property
taxes under the aforesaid enactments on lands or buildings belonging to the
State Government was invalid and incompetent by virtue of the mandate
contained in Clause (I) of Article 289. However, if any land or building is used
or occupied for the purpose of any trade or business, meaning thereby a trade
C or business carried on with profit motive, by or on behalf of the State
Government, such land or building shall be subject to the levy of the property
taxes levied by the said enactments. In other words, State property exempted
under Clause (I) means such property as is used for the purpose of the
Government and not for the purpose of trade or business. That was a case
where the question arose in relation to the levy of property tax on lands and
D buildings owned by the State Governments which was ''property of the State
Government". In the instant case, we are concerned with the income of the
appellant/ Authority and the same principles apply. The exemption can be
claimed only if the income can be said to be the income of the State Government.
In the facts of this case, it is not possible to hold that the income of the
E appellant/ Authority is the income of the State Government.

Learned counsel for the Union of India also relied upon two decisions
reported in [1999) 6 SCC 74 Food Corporation of India v. Municipal
Committee, Jalalabad and Anr., and [ 1999) 6 SCC 78 Board of Trustees for
the Visakhapatnam Port Trust v. State of A.P. and Ors., and submitted that
p this Court has consistently taken the view that a Corporation having the
attributes of a Company must be held to be distinct from the Central
Government, and not eligible for exemption from taxation under Article 285.
The High Court also in its impugned judgment and order has referred to
several decisions of this Court wherein this Court dealing with cases arising
under Article 285 of the Constitution of India, which exempts properties of
G the Union from State taxation, took a similar view. We may usefully refer to
the cases reported in: AIR (1999) SC 2573 Food Corporation of India v.
Municipal Committee, Jalalabad & Anr., [1995) 5 SCC 251 Municipal
Commissioner of Dum Dum Municipality and Ors. v. Indian Tourism

H
Development Corporation and Ors., [1994] Supp 3 SCC 316 Central
Warehousing Corporation v. Municipal Corporation, and AIR (1982) SC 697
-
1' ADITYAPUR INDUSTRIAL AREA DEVELOPMENT AUTHORITY v. U.O.l. [B.P. SINGH, J] 771

Western Coalfields Ltd. v. Special Area Development Authority, Korba and A
Anr. and Bharat Aluminium Company Ltd. v. Special Area Development
Authority, Korba and Ors.

Having considered all aspects of the matter we hold that the High Court
is right in concluding that the appellant/ Authority could not claim exemption
from Union taxation under Article 289 (I) of the Constitution of India. The B
impugned notice issued by the Income Tax Authorities was, therefore, valid
and legal and could not be successfully challenged in the writ petition.
Accordingly, this appeal is dismissed but without any order as to costs.

B.S. Appeal dismissed. C