U.P. Jal Nigam vs Commissioner of Income Tax

Prakash Krishna, J.—Income Tax Appellate Tribunal, Allahabad Bench, Allahabad has referred the following two questions u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') for the opinion of the High Court:

Whether on the facts and in the circumstances of the case, the I.T.A.T. was right in holding that the Assesseecorporation is not a ''local authority'' for purposes of theincome tax Act, 1961, notwithstanding such description in Section 3(3) of U.P. Water Supply and Sewerage Act, 1975?

Whether on the facts and in the circumstances of the case, the I.T.A.T. was right in upholding the order of the C.I.T. (Appeals), who had held that the Assessee corporation is a company within the meaning of section 2(26) of the Income Tax Act, 1961?

The assessment year involved is 1980-81. The facts are not much in dispute. The principal question which falls for determination is whether U.P. Jal Nigam, Lucknow is a ''local authority'' within the meaning of Section 10(20) of the Act.

Chapter-III of the Act provides for the incomes which do not form part of total income.

Prior to the amendment by the Finance Act, 2002, Section 10(20) of the Income Tax Act, 1961 provided as under:

CHAPTER III

INCOMES WHICH DO NOT FORM PART

OF TOTAL INCOME

Incomes not included in total income.-In computing the total income of a previous year of any person,any income falling within any of the following clauses shall notbe included-

xxx

xxx

(20) the income of a local authority which is chargeable under the head "Income from house property", "Capital gains", or "Income from the 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;

Before proceeding further, it may be placed on record that the aforesaid provision was amended subsequently by Finance Act, 2002. Explanation was added defining the expression ''local authority''. However, it is not a case of either party that the said explanation which came into force by the Finance Act, 2002 be read for deciding the present controversy, which relates to the assessment year 1980-81. This judgment is confined to the law as is stood in the relevant assessment year, addition of the Explanation subsequently notwithstanding.

The expression ''local authority'' though used in Section 10(20) of the Act, was not defined under the Income Tax Act at the relevant point of time. The said explanation has been defined under General Clauses Act, 1897 (hereinafter referred to as ''the Act, 1897''), vide Section 3(31) of the Act, 1897.

Heard Shri W.H. Khan, learned Senior Counsel along with Shri Ved Byas Mishra, learned Counsel for the applicant and Shri R.K. Upadhyay, learned standing counsel for the department.

Learned Counsel for the parties proceeded on the footing that for the purposes of the present controversy ''local authority'' as defined under the General Clauses Act is germane and the said definition is applicable to Section 10(20) of the Act.

The facts of the case may be noticed in brief:

For the relevant assessment year, the assessment under the Act was framed treating the status of the Assessee as that of a ''company''. The tax was levied accordingly. All the three authorities below have negated the submission of the applicant that its incomes do not form part of total income in view of Section 10(20) of the Act, being a local authority is exempt. The Income Tax Appellate Tribunal has dealt with the matter in depth. It examined the various provisions of U.P. Water Supply and Sewerage Act, 1975 (hereinafter referred to as ''the Act, 1975), ''local authority'' as defined in Section 3(31) of the Central General Clauses Act and also the decision of the Apex Court on the point in Union of India (UOI) and Others Vs. Shri R.C. Jain and Others, It was found that the Assessee corporation was created by the Government of Uttar Pradesh by enacting the U.P. Water Supply and Sewerage Act, 1975. It is a body corporate having perpetual succession and a common seal and capable of suing and being sued in its name. It has power to acquire, hold and dispose of the property. The U.P. Jal Nigam was brought into existence to provide for the establishment of a corporation, authorities and organization for the development and regulation of water supply and sewerage services and for matters connected therewith. It took into consideration Section 3(3), 6(1), 6(2), 7(1), 8(1), 40(1), 89(1) & (2), 97 & 98 of the Act, 1975 and concluded the matter in the following words; vide Para-10 & 11 of the order & reproduced below:

The arguments advanced on behalf of the Assessee have to be looked into in the back ground of the aforesaid position of law. The Assessee corporation was created by the Government of Uttar Pradesh by enacting the U.P. Water Supply and Sewerage Act, 1975 (U.P. Acton. 43 of 1975). It is a body corporate having perpetual succession and a common seal and capable of suing and being sued in its name. It has power to acquire, hold and dispose of the property. Preamble of the Act indicates that the Assessee corporation was brought into existence to provide for the establishment of a corporation, authorities and organization for the development and regulation of water supply and sewerage services and for matters connected therewith. Section 3(3) of the Act provides that the Assessee corporation shall for all purposes be deemed to be alocal authority. Section 4 of the Act relates to its constitution, according to which it shall consist of a Chairman, to be appointed by the State Government. It also provides that the Members other than the Chairman shall be a Managing Director, a Finance Director, both to be appointed by the Government, and the Secretary to the State Government in the Finance Department (Ex-officio), Secretary to the State Government in the Local Self Government Department (Ex-officio), the Director of Local Bodies, Uttar Pradesh (Ex-officio), the Director of Medical and Health Services U.P. (Ex-officio) and three elected Heads of Local Bodies in the State, to be nominated by the State Government. Section 6(1) provides that Chairman of the Corporation unless appointed ex-officio, shall hold office for three years unless his term is determined earlier by the State Government. Similar provision finds place in Section 6(2) with respect to the nominated members of the corporation. Sub-section (3) further provides that the Managing Director and the Finance Director shall hold office on such terms and conditions as the State Government may, by order, specify. As per provision contained in Section 7(1) of the Act, the Chairman, Managing Director and the Finance Director are to be paid such remuneration, as may be fixed by the State Government. According to Section 8(1) of the Act the terms and conditions of the employees are to be determined with the approval of the State Government. Section 40(1) provides that the corporation shall have its own fund to be called the Nigam Fund which shall be deemed to be a local fund and to which shall be credited all moneys received otherwise than by way of loans by or on behalf of the corporation. Section 89(1) of the Act lay down that in the discharge of its functions, the corporation shall be guided by such directions on questions of policy as may be given to it by the State Government. Sub-section (2) further says that if any question arises whether any matter is or is not a matter as respects which the State Government may issue a direction u/s (1), the decision of the State Government to make rule for carrying out the purposes of the Act. Sections 97 and 98 relate to the framing of the regulations and bye-laws which can be framed by the Corporation with the previous approval of the State Government.

A reading of the various provisions of the Act goes to suggest that the Assessee corporation does not posses the attributes and characteristics, necessary for being a local authority. The Chairman and all members of the corporation are appointed or nominated by the State Government. The corporation does not enjoy any degree of autonomy. In the discharge of its functions under the Act, the corporation is to be guided by the directions of the State Government, and on matters of policy the decision of the State Government is final. No Governmental functions as are usually entrusted to municipal bodies are entrusted to the Assessee. Above all it has no power to raise funds for furtherance of its activities and fulfillment of its project by levying taxes, rates of charges. Thus we are of the view that the assess cannot be said to be a local authority within the ambit of Section 3(31) of the General Clauses Act, 1897.

Shri W.H. Khan, learned Senior Counsel for the applicant submits that the Apex Court in the case of Union of India and Ors. v. R.C. Jain and Ors. (supra) has laid down the following five ingredients, which are required to be fulfilled cumulatively before an authority can be said to be a ''local authority'', in the light of the definition of ''local authority'' as given u/s 3(31) of the General Clauses Act.

The authorities must have separate legal existence as corporate bodies. It must be legally independent entities;

The body must function in a defined area and ordinarily, wholly or partly, directly or indirectly be elected by the inhabitants of the area;

The body must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them;

The body must be entrusted by Statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and sewerage, town planning and development, roads, markets, transportation, social welfare services etc. etc. Broadly such body may be entrusted with the performance of civic duties and functions, which would otherwise be Governmental duties and functions; and

The body must have the power to raise funds for the furtherance of their activities and the fulfillment of their projects by levying taxes, rates, charges, or fees. Essentially, control or management of the funds must vest in such body.

The above criteria has been laid down by the Apex Court in the light of definition of local authority given in Section 3(31) of the General Clauses Act in connection with a question as to whether Delhi Development Authority is a local authority for the purposes of payment of bonus to its employees in view of the Payment of Bonus Act, 1965. Elaborating the argument, it was submitted with the help of the scheme of the Act, 1975 that the Assessee fulfills all the conditions cumulatively. It was also submitted that Jal Sansthan is a body subordinate to the Jal Nigam and Jal Nigam is having power to superintend and control over them has been held to be local authority by Division Bench of this Court in Kendriya Nagrik Samiti, Kanpur and Others Vs. Jal Sansthan, Kanpur and Others, The said decision has been noticed by the Apex Court in its subsequent decision namely, Housing Board of Haryana Vs. Haryana Housing Board Employees Union and others, but without any adverse comment. Certain other decisions were also referred which will be considered in later part of the judgment.

In contra, Shri R.K. Upadhyay, learned standing counsel supports the impugned order of the Tribunal and submits that the U.P. Jal Nigam does not qualify the definition of ''local authority'' as given in Central General Clauses Act. The U.P. Jal Nigam is not a autonomous body. It has no power to levy and realize tax, fees etc. The body of Jal Nigam does not consist of elected representatives of local area. Submission is that in view of the judgment of the Apex Court in the case of The Commissioner of Income Tax, Lucknow Vs. U.P. Forest Corporation, (the decision was also referred by the Assessee), the Assessee cannot be treated as ''local authority''.

So far as the second question is concerned, he submits that it does not arise out of the order of the Tribunal as there was no controversy before Tribunal as to whether the Assessee is a company or not?

Considered the respective submissions of the learned Counsel for the parties.

Section 3(31) of the General Clauses Act defines the Local Authority as follows:

Local Authority shall mean a Municipal Committee, District Board, Body of Port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.

''Local Fund is not defined in the General Clauses Act.

In Municipal Corporation of Delhi Vs. Birla Cotton, Spinning and Weaving Mills, Delhi and Another, the Apex Court described some of the attributes of local bodies in this manner.

Local bodies are subordinate branches of government activity. They are democratic institutions managed by the representatives of the people. They function for public purposes and take away a part of the Government affairs in local areas. They are political sub-divisions and agencies which exercise apart of State functions. As they are intended to carryon local self-government the power of taxation is a necessary adjunct to their other powers. They function under the supervision of the Government.

Learned standing counsel for the department does not dispute that besides the five ingredients mentioned in the earlier part of the judgment, any other or further ingredient is required to be fulfilled by an authority to be treated as ''local authority''.

Keeping in mind what we have said above, we may now have a close look at the provisions of the U.P. Water Supply and Sewerage Act, 1975. But before doing so, it may be placed on record that in the State of Uttar Pradesh, it is the duty of the Mahapalikas, Municipal Boards and other such bodies amongst other to provide water supply services and sewerage services. Prior to the enactment of the U.P. Water Supply and Sewerage Act, 1975, the property tax which included a general tax, water tax, drainage tax was levied u/s 173 of the Nagar Mahapalika Adhiniyam.

To provide for the establishment of a corporation, authorities and organization for the development and regulation of water supply and sewerage services and for matters connected therewith to the U.P. Water Supply and Sewerage Act was enacted. Section 3 of the Act, 1975 provides for establishment of the Nigam (U.P. Jal Nigam), by notification in the Gazette by the State Government. It shall be a body corporate having perpetual succession and a common seal, vide its Sub-section (2). Its Sub-section (3) & (4) provide that the Nigam shall for all purposes be deemed to be a ''local authority'' and have its head office at Lucknow and may have offices at such other places as may be considered.

The Constitution of the Nigam has been given in Section 4 of the Act. It says that the Nigam shall consist of a Chairman appointed by the State Government. The other members shall be secretaries of various State Government Departments as mentioned in various clauses of Sub-sections (2) of Section 4, as ex officio and five elected heads of local bodies in the State, to be nominated by the State Government.

The various functions of Jal Nigam have been mentioned in Section 14 thereof. Section 14 (iv), (v), (vi) & (vii) of the Water Supply and Sewerage Act, 1975 are as follows:

(iv) to review and advise on the tariff, taxes and charges of water supply in the areas of Jal Sansthans and local bodies which have entered into an agreement with the Nigam u/s 46;

(v) to assess the requirement for materials and arrange for their procurement and utilization;

(vi) to establish State standards for water supply and sewerage services; and

(vii) to perform all functions, not stated herein which were being performed by the Local Self-Government Engineering Department before the commencement of this Act.

Section 15 (i) (v) & (viii) in addition to other powers of Jal Nigam provides as follows:

(i) to inspect all water supply and sewerage facilities in the State by whomsoever they are operated;

(v) to lay down the schedule of fees for all services rendered by the Nigam to the State Government, local bodies, institutions or individuals; and

(viii) to approve tariffs for water supply and sewerage services applicable to respective local areas comprised within the jurisdiction of Jal Sansthans and such local bodies as have entered into an agreement with the Nigam u/s 46.

Chapter-IV deals with Vesting of Properties, Assets, Liabilities and Obligations and transfer of Employees. It contains provisions for vesting and transfer of property to Nigam. Section 31 says that June 18, 1975, is the ''appointed date''. From the said ''appointed date'' all the properties and assets (including waterworks, buildings, laboratories, etc. etc.) which immediately before the appointed date were vested in the State Government for the purposes of the Local Self-Government, Engineering Department shall vest in and stand transferred to the Nigam and all the rights, liabilities and obligations of the State Government whether arising out of any contract or otherwise pertaining to the said departments shall be the rights, liabilities and obligations of the Nigam. In other words, the aforesaid section provides for vesting of assets and liabilities of the State Government in respect of the aforesaid department shall be vested on or after appointed date in the Nigam. It also contains the provision of transfer of employees to Nigam and Jal Sansthan. The Nigam will stand in the shoes of State Government for the purposes of the Local Self-Government, Engineering Department.

Chapter-V, contains Section 40 which deals with the Property, Contract, Finance, Accounts and Audits, says that the Nigam shall have its own fund to be called the Nigam Fund, which shall be deemed to be a ''local fund'' wherein all moneys received otherwise than by way of loans by or on behalf of the Nigam be credited. The State Government may give loans to the Nigam vide Section 45. The Nigam shall prepare a statement of its accounts and will submit it to the State Government. The accounts of the Nigam shall be audited by auditor appointed by the State Government, vide Section 50.

Chapter-VI of the Act, 1975 deals with Taxes, Fees and Charges. It contains Sections 55 to 64 and provides for levy of water tax, water charges and sewerage tax by Jal Sansthan. It contains no provision for levy of any such tax by Jal Nigam. The bone of contention of the Income Tax Department that there being no such express provision empowering Jal Nigam to levy tax, fees and charges shall be considered at the later part of the judgment.

We have given a bird''s eye of view of the scheme of the Act, 1975. In this backdrop the question posed whether Jal Nigam fulfills all the five ingredients to qualify as the local authority is to be considered. U.P. Jal Nigam has separate legal existence as body corporate. It is having perpetual succession and a common seal and capable of suing and being sued in the name of U.P. Jal Nigam. It is an independent body created by the Statute i.e. Act, 1975. It cannot be said that it is merely a Government agency.

Section 31 of the Act dealing with the vesting and transfer of property to Nigam also indicates that the Nigam has got its separate existence. It possesses rights and liabilities independently after the appointed date of the State Government. Such employees, who were employees in the Local Self-Government, Engineering Department of the State Government have been transferred to the Nigam on and from the appointed date.

Functions and Powers of U.P. Jal Nigam have been enumerated in Sections 14 and 15 of the Act, 1975. It has been formed to provide the services of water supply and sewerage, which were being earlier supplied by the U.P. Municipalities, to the public. Jal Nigam has been established for the development and regulation of water supply and sewerage services and for matters connected therewith. The service of water supply and sewerage is governmental function and was earlier entrusted to the municipal authorities namely, Municipal Corporation, Municipalities and the District Board. The U.P. Jal Nigam has been given power to prepare, execute, promote and finance scheme for supply of water and for sewerage and sewage disposal, to render all necessary services in regard to water supply and sewerage to the State Government and local bodies etc. like the Municipal Committees, the District Board, Gram Panchayat, Jal Nigam represents the units of Local Self Government and thus, fulfills the first ingredient.

At this juncture, it was seriously contended by learned standing counsel for the department that the Jal Nigam does not fulfill condition No. 2 as the members of the Jal Nigam are not directly elected representatives. Section 4 (2)(g) deals with the Constitution of Nigam. It provides that five members would be five elected heads of the local bodies in the State, nominated by the State Government. The submission that these five persons, who are nominated as members of the Nigam ignores the fact that they are elected by the public. Therefore, the argument that the Nigam does not fulfill ingredient No. 2 of the R.C. Jain''s case has no substance. Out of various elected heads of local bodies, the choice has been given to the State Government to nominate five of them as members of the Nigam. It does not mean that these five persons later on, on nomination ceases to be elected representatives. The Jal Nigam fulfills ingredient No. 2.

The third requirement to be a ''local authority'' is that such authority must be an autonomous body. A feeble attempt was made by Shri R.K. Upadhyay, Advocate for the department, who submits that since the State Government has overall control over the Jal Nigam, Jal Nigam is not an autonomous body. In the case of Union of India and Ors. v. R.C. Jain and Ors. (supra) it has been laid down that one of the criteria to be local authority is that such authority must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them.

In paragraph-9 of the judgment, what ''Autonomy'' means, has been explained by holding that even if, Central Government has usual supervisory powers which every State Government exercises over municipalities, district boards etc. Such powers of supervision do not make the municipalities disautonomous and mere satellites. The autonomy, which has been explained therein, means the authority enjoys autonomy in its fields.

As seen hereinabove, the power has been given to Jal Nigam to prepare and carry out schemes of water supply and sewerage. To inspect all water supply and sewerage facilities in the State by whomsoever they are operated and exercise such other related powers, do show that Jal Nigam is an autonomous body. It is independent in discharge of its functions. It carries on its works and functions statutorily assigned to it, independently, within the frame works of Act, 1975.

So far as the fourth ingredient is concerned, it does not require much elaborating as evidently Jal Nigam has been constituted by the Act, 1975 for the purposes of providing services of water supply and sewerage, which was being performed earlier by the municipal bodies like Municipalities, Nagar Nigam, District Board etc. It could not be disputed and was not disputed that supply of water is essentially a Governmental function. In other words, Jal Nigam is entrusted by the Act, 1975 to perform part of the Governmental function and duties.

Last requirement is that such authority must have the power to raise funds for the furtherance of its activities and fulfillment of their projects by levying taxes, rates charges or fees. Seriously disputing the power of Jal Nigam to levy taxes, fees and charges, learned standing counsel submits that such power has been given to Jal Sansthans and not to Jal Nigam. The above argument was built-up by making reference to Chapter-VI of the Act, 1975 wherein, the power of taxes, fees and charges have been entrusted expressly to Jal Sansthans. This kind of argument was advanced in the case of Union of India and Ors. v. R.C. Jain and Ors. (supra) also and was repelled by the Apex Court. The argument was that at any rate, Delhi Development Authority was collecting fees and not tax, and therefore, its fund is not a local fund as no part of it flowed directly from any power vested in Delhi Development Authority. Meeting the said argument, it was observed that in deciding the question whether a authority is local authority or not, the relevant thing is to find out as to whether such authority is authorized by Statute to make a compulsory exactions of money and not with the further question whether money so exacted is to be utilized for specific or general purposes. It was held that there is no consolidated fund and no separate development fund. There is only one fund, the fund of the Delhi Development Authority.

By applying the above ratio to the facts of the present case, we find no difficulty to hold that its various functions as mentioned in Section 14 and powers as mentioned in Section 15, U.P. Jal Nigam is a ''local authority'' and its fund is ''local fund''. Section 17 provides that the Nigam may include in the cost of any scheme or work, supervision and cent age charge at such rate not exceeding such limit as may be prescribed, as it may determine under Clause (v) of Sub-section (2) of Section 15. The Jal Nigam has been empowered to lay down the schedule of fees for all services rendered to the State Government, local bodies, institutions or individuals. This empowers Jal Nigam to realize fees for the services rendered by it from the State Government, local bodies, institutions or individuals.

Section 40 (1) declares that the fund of the Jal Nigam shall be deemed to be local fund. In the said fund, it shall credit all moneys received otherwise than by way of loans by or on behalf of the Nigam.

Upshot of the above discussions is that U.P. Jal Nigam is statutory authority under the Act, 1975 is formed to perform the Governmental function i.e. to provide services of water supply and sewerage, which was being earlier done by the municipal bodies on and from the appointed date. All the assets and liabilities of the State Government for the purposes of the Local Self-Government, Engineering Department have been transferred and vested to the Nigam. Thus, in our considered view, U.P. Jal Nigam is a local authority for the purposes of Section 10(20) of the Act.

In Commissioner of Income Tax, Lucknow v. U. P. Forest Corporation (supra),the Forest Corporation was not considered as ''local authority'' for the following two reasons. The Apex Court did not agree with the assesses therein. It held firstly that ''other authority in Section 3(31) of the General Clauses Act will not include the U.P. Forest Corporation''. It was laid down that the words ''other authorities'' will draw their color from the expression Municipal Committee, District Board or Body of Port Commissioners. Secondly, the powers and functions of U.P. Forest Corporation do not bear any relation to the powers and functions of the Municipal Committee, District Board or Body of Port Commissioners, which is merely a trading organization. Here, the U.P. Jal Nigam is not carrying on any business nor it has been found so even by the assessing authority or any other authority under the Act. Also the Powers and Functions of U.P. Jal Nigam as demonstrated above, have bearing to the powers and functions of municipality committee. Therefore, the decision laid down in the case of U.P. Forest Corporation is distinguishable on facts.

In the case on hand, the powers and functions of U.P. Jal Nigam are akin to the various powers and functions amongst others of the municipalities or district boards. It has already been demonstrated that Jal Nigam was established to improve the water supply and sewerage services in the State, which was being performed earlier by the municipal bodies. Due to rapid growth in the population and vast expansion of urbanization and fast development of science, it appears that the State Government though it fit to entrust the work of water supply and sewerage services to a specialized body (U.P. Jal Nigam), instead of leaving it in the hands of unspecialized persons, discharging the municipal functions. It has not been found as a fact even by the Income Tax Appellate Tribunal that the U.P. Jal Nigam has been formed to trade in water supply or it is a trading organization. The Constitution of Jal Nigam shows that it has popular representatives as its five members are amongst the elected representatives. It has got power of superintendence over the Jal Sansthans and the Jal Sansthans have been held to be ''local authority''.

The overall picture shows that it is discharging the functions of municipal bodies, so far as it relates to supply of water is concerned, having control over Jal Sansthans, who are authorized to levy and realize the water tax and water charges on the basis of annual letting value of building.

In Calcutta State Transport Corporation Vs. Commissioner of Income Tax, West Bengal, , it has been held that Road Transport Corporation is not a ''local authority'' within the meaning of Section 10(20) of the Income Tax Act as its powers and functions bear no relation to the powers and functions of municipal committee, district board or body of port commissioners. It is more in the nature of trading organization.

In view of the above discussions, we hold that the Tribunal was not right in holding that the Assessee Corporation is not a "local authority" for the purposes of Income Tax Act. In other words, U.P. Jal Nigam was a "local authority" for the relevant assessment year 1980-81 within the meaning of Section 10(20) of the Act. The question No. 1 is therefore, answered in negative i.e. in favour of the Assessee and against the department.

Question No. 2 really does not arise out of the order of Tribunal as there was no such controversy as to whether the Assessee Corporation is a company within the meaning of Section 2(26) of the Act. The Assessee was assessed treating its status as that of a company by the department. The said stand of the department was questioned by the Assessee by putting forward the plea that its income is exempt u/s 10(20) of the Act, being a ''local authority''. In this factual scenario, there is no real controversy as sought to be raised through question No. 2. It is decided accordingly.