Supreme Court Clarifies “Local Authority” Definition under Section 10(20) of the Income Tax Act: NOIDA vs. CCIT (2018)

Date of the Judgment: July 2, 2018
Citation: (2018) INSC 600
Judges: A.K. Sikri, J., Ashok Bhushan, J.

Can an industrial development authority, performing municipal functions, be considered a ‘local authority’ for income tax exemption? The Supreme Court of India addressed this crucial question in a case involving the New Okhla Industrial Development Authority (NOIDA). The court examined whether NOIDA qualifies for tax exemption under Section 10(20) of the Income Tax Act, 1961, after amendments made in 2002, which redefined the term ‘local authority.’ This judgment clarifies the scope of ‘local authority’ and its implications for various bodies performing municipal functions. The judgment was delivered by a two-judge bench comprising Justice A.K. Sikri and Justice Ashok Bhushan, with Justice Ashok Bhushan authoring the opinion.

Case Background

The New Okhla Industrial Development Authority (NOIDA) was established on April 17, 1976, under the U.P. Industrial Area Development Act, 1976. The Authority was created to develop industrial and urban areas in Uttar Pradesh. Initially, NOIDA was granted income tax exemptions under Section 10(20) and Section 10(20A) of the Income Tax Act, 1961. However, the Income Tax Department later issued notices to NOIDA in 1998, questioning its tax-exempt status. NOIDA challenged these notices, leading to a ruling by the Allahabad High Court in 2000, which recognized NOIDA as a local body exempt under Section 10(20A).

The scenario changed when the Constitution (74th Amendment) Act, 1992, introduced Part IXA of the Constitution, dealing with municipalities. On December 24, 2001, the Governor of Uttar Pradesh issued a notification specifying NOIDA as an “industrial township.” Subsequently, the Income Tax Department issued a notice on August 29, 2005, stating that after the omission of Section 10(20A) effective April 1, 2003, NOIDA was now taxable. This notice was followed by further notices to NOIDA and its bankers, leading NOIDA to file a writ petition challenging these actions.

Timeline:

Course of Proceedings

The Allahabad High Court initially ruled in favor of NOIDA, exempting it from income tax under Section 10(20A) of the Income Tax Act, 1961. However, after the omission of Section 10(20A) and the introduction of an explanation to Section 10(20) by the Finance Act, 2002, the Income Tax Department issued fresh notices, asserting that NOIDA no longer qualified as a ‘local authority’ for tax exemption. The High Court, in its subsequent judgment on February 28, 2011, relied on the Supreme Court’s judgments in Agricultural Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and another, (2008) 9 SCC 434 and Adityapur Industrial Area Development Authority vs. Union of India and others, (2006) 5 SCC 100, and dismissed NOIDA’s writ petition, holding that NOIDA was not a local authority within the meaning of Section 10(20) after April 1, 2003. NOIDA’s review application was also dismissed on November 4, 2011. Aggrieved by these decisions, NOIDA filed Civil Appeals Nos. 792-793 of 2014 before the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of Section 10(20) of the Income Tax Act, 1961, which provides an exemption for the income of a ‘local authority.’ The Finance Act, 2002, amended this section by adding an explanation that defines ‘local authority’ exhaustively. Before the amendment, Section 10(20) read:

“the income of a local authority which is chargeable under the head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or 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;”

After the amendment, the definition of ‘local authority’ was specified as:

“Explanation.—For the purposes of this clause, the expression “local 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 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 Act, 1924 (2 of 1924);”

Additionally, Section 10(20A) of the Income Tax Act, 1961, which exempted the income of authorities dealing with housing or urban development, was omitted by the Finance Act, 2002.

The constitutional provisions under Part IXA of the Constitution, particularly Article 243P(e) and Article 243Q, are also relevant. Article 243P(e) defines ‘Municipality’ as “an institution of self-government constituted under Article 243Q.” Article 243Q provides for the constitution of municipalities, including Nagar Panchayats, Municipal Councils, and Municipal Corporations. However, it also includes a proviso that allows the Governor to specify an area as an “industrial township,” where a municipality may not be constituted.

The U.P. Industrial Area Development Act, 1976, under which NOIDA was constituted, outlines the functions of the Authority, including planned development, provision of infrastructure, and regulation of buildings. Section 11 of the Act empowers the Authority to levy taxes.

Arguments

NOIDA argued that it should be considered a ‘local authority’ under Section 10(20) of the Income Tax Act, 1961, for the following reasons:

• NOIDA contended that the judgments of the Supreme Court in Agricultural Produce Market Committee, Narela and Adityapur Industrial Area Development Authority were not applicable to its case. It argued that the former dealt with an Agricultural Produce Market Committee, which is different from NOIDA, and the latter focused on Article 289 of the Constitution, which NOIDA was not relying on.
• NOIDA further argued that the Governor of U.P. had issued a notification on December 24, 2001, under the proviso to Article 243Q(1)(a) of the Constitution, which was not considered in the aforementioned cases. This notification recognized NOIDA as an “industrial township.”
• NOIDA submitted that it provides municipal services and is therefore a local authority. It contended that the constitutional scheme allows for municipal functions to be performed by a body that may not be elected. NOIDA also argued that it is entrusted to discharge municipal functions as enumerated in the 12th Schedule under Article 243P of the Constitution.
• NOIDA highlighted that it is a statutory body with its own local fund, audited by the Examiner of Local Fund accounts, and has the power to levy taxes, unlike a mere development authority.

The Income Tax Department countered these arguments, stating that:

• The Income Tax Department contended that the Explanation added to Section 10(20) of the Income Tax Act, 1961, by the Finance Act, 2002, provides an exhaustive definition of ‘local authority,’ which does not include NOIDA. The department argued that unless NOIDA fits into one of the clauses mentioned in the Explanation, it cannot claim exemption.
• The department also argued that the omission of Section 10(20A) by the same Finance Act indicates that authorities previously treated as local authorities are no longer entitled to exemption.
• The department submitted that the Parliament, through the Constitution 74th Amendment Act, 1992, aimed to establish municipalities as vibrant democratic units of self-government, not merely providers of municipal services. The department argued that legislation on municipalities operates in a different legislative field than legislation on Industrial Development Authorities.
• The department stated that the notification under the proviso to Article 243Q, dated December 24, 2001, indicates that no municipality has been constituted in the area where NOIDA operates. The Authority, therefore, is not a local authority.
• The department contended that the Finance Act, 2002, brought substantial changes by defining ‘local authority’ exclusively and omitting Section 10(20A), thereby removing benefits previously enjoyed by various authorities.

The Banks supported the Income Tax Department’s stance, arguing that NOIDA is not a local authority under Section 10(20) of the Income Tax Act, 1961.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

✓ Whether the appellant is a local authority within the meaning of Section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases

• Agricultural Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and another, (2008) 9 SCC 434: The Supreme Court held that an Agricultural Produce Market Committee is not a ‘local authority’ under Section 10(20) of the Income Tax Act, 1961, as amended by the Finance Act, 2002. The court noted that the definition of ‘local authority’ in the Explanation to Section 10(20) is exhaustive and does not include such committees.
• Adityapur Industrial Area Development Authority vs. Union of India and others, (2006) 5 SCC 100: The Supreme Court held that an Industrial Area Development Authority is not a ‘local authority’ under Section 10(20) of the Income Tax Act, 1961, as amended by the Finance Act, 2002. The court also rejected the claim of exemption under Article 289(1) of the Constitution.
• Kishansing Tomar vs. Municipal Corporation Of The City Of Ahmedabad And Others, 2006 (8) SCC 352: This case discussed the object and purpose of the Constitution 74th Amendment Act, 1992, emphasizing the need for vibrant democratic units of self-government.
• S. Sundaram Pillai and others vs. V.R. Pattabiraman and others, 1985(1) SCC 591: This case laid down the principles of statutory interpretation of a proviso and an explanation.
• Saij Gram Panchayat vs. State of Gujarat and others, 1999 (2) SCC 366: This case held that the Gujarat Industrial Development Act operates in a different sphere from Parts IX and IXA of the Constitution, which deal with local self-government.
• Union of India and others vs. R.C. Jain and others, 1981 (2) SCC 308: This case discussed the attributes of a ‘local authority’ but was held to be no longer applicable after the amendment to Section 10(20) of the Income Tax Act, 1961.
• A.V. Fernandez vs. The State of Kerala, AIR 1957 SC 657: This case emphasized the need for strict interpretation of fiscal statutes.
• Rajasthan Rajya Sahakari Spinning and Ginning Mills Federation Limited vs. Deputy Commissioner of Income Tax, Jaipur, 2014(11) SCC 672: This case reiterated the principle of strict interpretation of taxing statutes.
• State of Gujarat and others vs. ESSAR Oil Limited and another, 2012 (3) SCC 522: This case held that a person claiming an exemption must establish clearly that they are covered by the exemption provision.
• Gujarat Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC 17: This case held that the Gujarat Industrial Development Corporation was entitled to exemption under Section 10(20A) of the I.T. Act when the provision was in existence.
• Krishi Utpadan Mandi Samiti vs. Union of India and another, (2004) 267 ITR 460 (Allahabad High Court): The Allahabad High Court held that a Krishi Utpadan Mandi Samiti is not a local authority under Section 10(20) of the Income Tax Act, 1961.
• Agricultural Produce Market Committee vs. Commissioner of Income-tax, (2006)156 ITR 286 (Delhi High Court): The Delhi High Court held that an Agricultural Produce Market Committee is not a local authority under Section 10(20) of the Income Tax Act, 1961.

Legal Provisions

• Section 10(20) of the Income Tax Act, 1961: This section provides an exemption for the income of a ‘local authority.’ The court analyzed the amended version of this section with the added explanation.
• Section 10(20A) of the Income Tax Act, 1961: This section, which exempted the income of authorities dealing with housing or urban development, was omitted by the Finance Act, 2002.
• Article 243P(e) of the Constitution: This article defines ‘Municipality’ as an institution of self-government constituted under Article 243Q.
• Article 243Q of the Constitution: This article provides for the constitution of municipalities and includes a proviso allowing the Governor to specify an area as an “industrial township.”
• Section 3(31) of the General Clauses Act, 1897: This section defines ‘local authority,’ but the court held that this definition is no longer applicable for interpreting Section 10(20) of the Income Tax Act, 1961, after the 2002 amendment.
• U.P. Industrial Area Development Act, 1976: This Act provides for the constitution of the Authority and its functions.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Agricultural Produce Market Committee, Narela, Delhi vs. Commissioner of Income Tax and another, (2008) 9 SCC 434*: The Court followed this judgment, reiterating that the definition of ‘local authority’ under Section 10(20) is exhaustive and does not include entities like Agricultural Produce Market Committees.
• Adityapur Industrial Area Development Authority vs. Union of India and others, (2006) 5 SCC 100*: The Court followed this judgment, reiterating that Industrial Area Development Authorities are not ‘local authorities’ under Section 10(20) and that the omission of Section 10(20A) has consequences.
• Kishansing Tomar vs. Municipal Corporation Of The City Of Ahmedabad And Others, 2006 (8) SCC 352*: The Court referred to this case to understand the purpose of the Constitution 74th Amendment Act, 1992, and the importance of municipalities as democratic units of self-government.
• S. Sundaram Pillai and others vs. V.R. Pattabiraman and others, 1985(1) SCC 591*: The Court applied the principles of statutory interpretation of a proviso and an explanation laid down in this case.
• Saij Gram Panchayat vs. State of Gujarat and others, 1999 (2) SCC 366*: The Court referred to this case to highlight that industrial development acts operate in a different sphere from local self-government provisions.
• Union of India and others vs. R.C. Jain and others, 1981 (2) SCC 308*: The Court held that the tests laid down in this case are no longer applicable after the amendment to Section 10(20).
• A.V. Fernandez vs. The State of Kerala, AIR 1957 SC 657*: The Court reiterated the principle that fiscal statutes must be interpreted strictly.
• Rajasthan Rajya Sahakari Spinning and Ginning Mills Federation Limited vs. Deputy Commissioner of Income Tax, Jaipur, 2014(11) SCC 672*: The Court reiterated the principle of strict interpretation of taxing statutes.
• State of Gujarat and others vs. ESSAR Oil Limited and another, 2012 (3) SCC 522*: The Court reiterated that a person claiming an exemption must establish clearly that they are covered by the exemption provision.
• Gujarat Industrial Development Corporation vs. Commissioner of Income Tax, 1997 (7) SCC 17*: The Court referred to this case to show that the exemption under Section 10(20A) was available when the provision was in existence but not after its deletion.
• Krishi Utpadan Mandi Samiti vs. Union of India and another, (2004) 267 ITR 460 (Allahabad High Court)*: The Court endorsed the view of the Allahabad High Court that the definition of ‘local authority’ in Section 10(20) is exhaustive.
• Agricultural Produce Market Committee vs. Commissioner of Income-tax, (2006)156 ITR 286 (Delhi High Court)*: The Court endorsed the view of the Delhi High Court that the definition of ‘local authority’ in Section 10(20) is exhaustive.
• Section 10(20) of the Income Tax Act, 1961: The Court interpreted the amended version of this section and the added explanation, concluding that the definition of ‘local authority’ is exhaustive.
• Section 10(20A) of the Income Tax Act, 1961: The Court noted the omission of this section by the Finance Act, 2002, indicating that authorities previously treated as local authorities are no longer entitled to exemption.
• Article 243P(e) of the Constitution: The Court interpreted the definition of ‘Municipality’ under this article, emphasizing the need for institutions of self-government.
• Article 243Q of the Constitution: The Court interpreted the provisions for the constitution of municipalities and the proviso for industrial townships, concluding that the proviso does not equate an industrial township with a municipality.
• Section 3(31) of the General Clauses Act, 1897: The Court held that this definition is no longer applicable for interpreting Section 10(20) of the Income Tax Act, 1961, after the 2002 amendment.

The Final Verdict

The Supreme Court, after considering the arguments and authorities, held that NOIDA is not a ‘local authority’ within the meaning of Section 10(20) of the Income Tax Act, 1961, as amended by the Finance Act, 2002. The Court dismissed the appeals filed by NOIDA, upholding the judgment of the Allahabad High Court.

Key Takeaways

• Exhaustive Definition: The definition of ‘local authority’ under the Explanation to Section 10(20) of the Income Tax Act, 1961, is exhaustive and does not include bodies like NOIDA, which are not municipalities as defined under Article 243P(e) of the Constitution.
• Impact of 2002 Amendments: The Finance Act, 2002, significantly altered the definition of ‘local authority’ and omitted Section 10(20A), thereby removing benefits previously enjoyed by various authorities.
• Strict Interpretation: Fiscal statutes must be strictly interpreted, and any entity claiming an exemption must clearly demonstrate that it falls within the ambit of the exemption provision.
• Municipalities as Democratic Units: The Constitution 74th Amendment Act, 1992, aims to establish municipalities as vibrant democratic units of self-government, not merely providers of municipal services.
• Industrial Township vs. Municipality: The notification under the proviso to Article 243Q(1) of the Constitution, specifying an area as an “industrial township,” does not equate it with a municipality.

Flowchart of the Decision