High Court Of Gujarat
Gujarat Municipal Finance Board vs. DCIT
Section 10(20A), Art. 243W, Art. 243X, Art. 243Y, Art. 289
Asst. Year 1984-85, 1985-86, 1986-87, 1987-88, 1988-89,
1989-90, 1990-91, 1991-92, 1992-93, 1993-94
B.C. Patel & R.M. Doshit, JJ.
Special Civil Appln. No. 1202 of 1996
4th May, 1996
Counsel Appeared
K.H. Kaji with S.N. Soparkar & M.K. Kaji, for the Petitioner : B.J. Shelat for M/s M.R. Bhatt & Co., for the Revenue
B.C. PATEL, J.:
Gujarat Municipal Finance Board (hereinafter referred to as the Board) constituted under the provisions contained in the Gujarat Municipal Finance Board Act, 1979 (hereinafter referred to as “the Boards Act”) has filed this petition under Art. 226 of the Constitution of India, inter alia, praying to quash and set aside the notices dt. 24th March, 1995 for asst. yrs. 1984-85 to 1993-94 issued under s. 148 r/w s. 147 of the IT Act (hereinafter referred as the IT Act) and to permanently restrain the respondents from making any assessment in respect of the said assessment years. Succinctly stated, the facts leading to the filing of the present petition are as under :
The petitioner Board came into existence in 1979 under the Boards Act and has a perpetual succession and a common seal with powers subject to the provisions of the Boards Act. The Board used to receive grants on various occasions from the consolidated fund of the State and in discharge of its duties, the same was required to be disbursed for the purpose such as roads, drainage, street lights, water supply, scheme for primary facilities, sanitation, play ground, public toilets/bathrooms, community hall, service vehicles, etc., to the local authorities, i.e., a municipality or municipal corporation under the provisions contained in the Gujarat Municipalities Act (hereinafter referred to as the Municipalities Act) or the Bombay Provincial Municipal Corporations Act, 1949 (hereinafter referred to as “the BPMC Act”). The Board had some surplus amount with it and the same was invested, as a result of which there was income arising out of such investment. The State Government decided that the interest amount which may be earned be retained by the Board as a part of grant-in-aid given to it by the Government. This intimation was given, vide letter Annexure “A” dt. 28th May, 1982 and was reiterated vide letter dt. 15th April, 1996 at page 110 of the petition. In view of this amount of interest, the IT Department called upon the Board indicating that the Assessing Officer (AO) has reason to believe that the income of the Board chargeable to tax for the asst. yrs. 1984-85 to 1993-94 has escaped assessment within the meaning of the s. 147 of the IT Act and, therefore, proposed to assess for the said assessment years and called upon to deliver within 30 days from the date of service of the notices, returns in the prescribed form of the income of the Board for the assessment years in question. In reply thereto, the Board filed return under protest indicating therein that the entire income is not taxable under IT Act as the Board is a “State” and even otherwise, under Art. 289(1) of the Constitution, the whole of the income is exempt. It was pointed out that under s. 10(20A) of the IT Act, the Board is an authority constituted by an enactment for planning, development, etc., of the cities and towns through monitoring funds and activities of municipalities, nagar panchayats, etc. The Board also pointed out that the Board is a State Government authority and carries on functions for and on behalf of the State Government and, therefore, the income of the
Board is not liable to income-tax. It was also pointed out that the accounts of the Board are audited by the Comptroller and Auditor General of India as per Art. 149 of the Constitution of India and the audited annual accounts are placed before the legislative assembly and unsettled objections of the audit are subject to review by the Public Accounts Committee also.
Mr. Shelat, learned counsel for the Revenue, submitted that this Court should not interfere at the stage of show cause notice and that the Board should place all relevant materials before the assessment officer who shall decide the matter in question in accordance with law and if the Board is aggrieved, may prefer an appeal in accordance with law and cannot approach this Court by filing a petition under Art. 226 of the Constitution of India. It was contended that there is an income by way of interest and, therefore, the Board is liable to be assessed. It was contended that the Board cannot claim the benefit of the provisions contained in s. 10(20A) of the IT Act as the Board has not satisfied the need of housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both. It was contended by him that even reading the entire Boards Act, functions of the Board are very limited and is that of disbursing the amount of grant and loans, assessment of income of local bodies and giving advice to the local bodies or to the Government regarding sound municipal finance, and, therefore, the Board cannot claim the benefit of exemption under s. 10(20A) of the IT Act. With regard to Art. 289(1) of the Constitution of India, Mr. Shelat contended that the Board is a financial corporation established by an Act and as this Board has an income, it is liable to be taxed. With regard to the concurrence given by the State Government, it is contended that the Finance Department has agreed that interest amount may be retained as a grant-in-aid given to it by the Government, but looking to the letter as whole, it is only a proposal and, therefore, it cannot be said that the proposal is accepted by the Board and, therefore, it is a grant. It was further submitted that the amount is required to be disbursed for the purposes laid down under the Act and if there is any amount with the Board, the same should be kept in the bank account, if the Board wants to avoid liability to pay income-tax. Mr. Shelat has read out the entire affidavit filed by Dy. CIT and has argued that the Board is not discharging any sovereign functions of the State and, therefore, is not entitled to claim the benefit under Art. 289 of the Constitution of India.
It is undisputed that the Board is constituted under the Boards Act and received grant-in-aid for disbursing to the Municipal Corporations or the Municipalities as per the Act. It is also undisputed that some amount lying with the Board was invested as result of which, there was an income by way of interest. The case of the Board is it appears from the letter at Annexure “A” and at page 110 is that the amount earned by way of interest is nothing but grant- in-aid, and, therefore, not taxable. On the other hand, the Revenue has contended that the amount earned by way of interest is taxable.
The Boards Act is an Act to make provision for better management of Municipal Corporations and Municipalities in the State of their finance resources and for regulation of giving certain grants and loans by the State Government to those bodies. The Board is established for these purposes and for matters connected therewith. The establishment and constitution of the Board is under s. 3. Members and Chairman of the Board are to be appointed under s. 4 of the Act. It is required to be noted that the Chairman is not a salaried person but the Chairman is entitled to draw honorarium, sitting fees and allowances as may be prescribed. The Members other than those appointed by virtue of their office, shall be entitled to draw such sitting fees and allowances as may be prescribed. The members who are appointed by virtue of their office may be paid such compensatory allowance for the purpose of meeting the personal expenditure in attending the meetings of the Board or any committee thereof or for being appointed in connection with the work undertaken by or for the Board as may be prescribed. So far as duties and functions of the Board are concerned, s. 14 of the Boards Act is the relevant section, which reads as under :
“14. The duties and functions of the Board shall be as follows, namely— (a) subject to the Local Authorities Loans Act, 1914 or the Saurashtra Local Authorities Loans Act, 1951 and to any general or special order made by the State Government made in this behalf— (i) to grant loans to the local authorities, out of the fund, (ii) to distribute on behalf of the State Government grant-in-aid of the revenues of the local authorities, out of the amounts provided to the Board by the Government for that purpose for the performance by such authorities of their duties and functions under the Bombay Provincial Municipal Corporations Act, 1949, or as the case may be, the Gujarat Municipalities Act, 1963; (b) (i) to assess income of a local authority received during any financial year, from each of the sources mentioned in s. 82 of the Bombay Provincial Municipal Corporations Act, 1949, or as the case may be, s. 82 of the Gujarat Municipalities Act, 1963, and the expenditure incurred by a local authority in such financial
year in carrying out the obligatory and discretionary duties or functions imposed on it under the provisions of the
Bombay Provincial Municipal Corporations Act, 1949 or, as the case may be, of the Gujarat Municipalities Act,
1963, and, (ii) having regard to such assessment, to tender advice to the local authorities as to the ways and means to be adopted by them for increasing the income from any of these sources and the pattern to be followed in incurring expenditure in carrying out the obligatory and discretionary duties; (c) to recommend to the local authorities generally or to any local authority in particular, measures for— (i) improvement of assessment and collection of taxes and fees levied by the local authority; (ii) effecting economy in the expenditure incurred by a local authority such as reduction in the number of officers and servants employed by it, reduction of wasteful expenditure, improvement of administrative procedure and practice; (d) to recommend to the State Government principles which should govern the grant-in-aid of the revenues of the local authorities out of the consolidated fund of the State. (e)(i) to render advice to the local authorities in respect of preparation of their budget estimates; and
(ii) to make report to the State Government of its observations in relation to the budget estimates of local authorities generally or in relation to budget estimates of any local authority in particular; (f) to make recommendation to the State Government or, as the case may be, any local authority, as to any other matter referred to the Board in the interests of sound municipal finance.”
The Board is empowered to call for any written statement of accounts, report, statistics or other information from any local authority, other body or individual, which is required by it for the discharge and performance of its duties and functions under this Act and such authority, body or individual shall be bound to furnish such information. The Board is also empowered to enter on and inspect or cause to be entered on and inspected any work carried on by a local authority. Chapter IV of the Boards Act provides for contract, finance, accounts and audit. Sec. 17 of the Boards Act relates to Board’s fund, which reads as under : “17. (1) The Board shall have and maintain its own fund to which shall be credited all moneys received by or on behalf of the Board, including grants, subventions and loans made by the State Government. (2) The fund shall be applied subject to the provisions and for the purposes of this Act. (3) Except as otherwise directed by the State Government, all moneys forming part of the fund shall be deposited with the State Bank of India or any bank included in the Second Schedule to the Reserve Bank of India Act, 1934 or invested in such securities as may be approved by the State Government.” It is the duty of the State Government to make available grants for the Board under s. 18 of the Boards Act, which reads as under : “18. The State Government may, after appropriation duly made in this behalf, from time to time make grants and subventions to the Board for the purposes of this Act, on such terms and conditions as the State Government may determine.” Sec. 20 of the Boards Act provides for power to borrow, which reads as under :
20. The Board may, from time to time, with the previous sanction of the State Government and subject to the provisions of this Act and to such conditions as the State Government may, by general or special order, impose, borrow any moneys required for the purposes of this Act by making arrangements with the banks or other bodies or institutions approved by the State Government for this purpose.”
We have indicated earlier that accounts are required to be audited as provided under s. 21 of the Boards Act, which reads as under : “21(1). The Board shall cause to be maintained proper books of accounts and such other books as may be prescribed and shall prepare an annual statement of the accounts at such time and in such manner as may be prescribed. (2) The Board shall cause its accounts to be audited annually by such person as the State Government may direct. (3) As soon as the accounts of the Board have been audited the Board shall send a copy thereof together with a copy of the report of the auditor thereon to the State Government. (4) The Board shall comply with such directions of the State Government as the State Government may after perusal of the report of the auditor think fit to give. (5) The annual audited statement together with the report of the auditor received by the State Government under sub-s. (3) shall be laid before the State Legislature as soon as possible.”
6. Mr. Kaji, learned counsel, drew our attention to Art. 289 of the Constitution of India which deals with exemption of property and income of a State from Union taxation which reads as under : (1) The property and income of a State shall be exempt from Union taxation: (2) Nothing in cl. (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. Mr. Kaji also drew our attention to Arts. 243W, 243X and
243Y which is in Part IX-A of the Constitution, which reads as under : “243W. Subject to the provisions of this Constitution, the Legislature of a State may, by law, endow— (a) the Municipalities with such powers and authority as may be necessary to enable them to function as institution of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities, subject to such conditions as may be specified therein, with respect to— (i) the preparation of plans for economic development and social justice; (ii) the performance of functions and the implementation of the schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule. (b) The Committees with such powers and authority as may be necessary to enable them to carry out the responsibilities conferred upon them including those in relation to the matters listed in the Twelfth Schedule. 243X. The Legislature of a State may, by law— (a) authorise a Municipality to levy, collect, and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits; (b) assign to a Municipality such taxes, duties, tolls and fees levied and collected by the State Government for such purposes and subject to such conditions and limits. (c) to provide for making such grant-in-aid to the Municipalities from the consolidated fund of the State; and (d) provide for constitution of such funds for crediting all monies received respectively by or on behalf of the Municipalities and also for the withdrawal of such moneys therefrom, as may be specified in law. (a) the principles which should govern— (i) the distribution between the State and the Municipalities of the net proceeds of the taxes, duties, tolls and fees leviable by the State, which may be divided between them under this part and the allocation between the Municipalities at all levels of their respective shares of such proceeds; (ii) the determination of taxes, duties, tolls and fees which may be assigned to, or appropriated by, the Municipalities. 243Y(i). The Finance Commission constituted under Art. 243-I shall also review the financial position of the Municipalities and make recommendations to the Governor as to— (iii) the grants-in-aid to the Municipalities from the consolidated fund of the State. (b) the measures needed to improve the financial position of the Municipalities. (c) any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the Municipalities.
(2) The Governor shall cause every recommendation made by the Commission under this Article together with an explanatory memorandum as to the action taken thereon to be laid before the Legislature of the State.”
Mr. Kaji submitted that after the amendment in the Constitution, it is mandatory to have grants-in-aid for the Municipalities from the consolidated fund of the State. He submitted that it is the duty of the Finance Commission now to make recommendation to the Hon’ble Governor as to the grants-in-aid to the Municipalities from the consolidated fund of the State. It is the duty of the State to provide for making such grants-in-aid to the Municipalities from the consolidated fund of the State and provide for constitution of such fund for crediting of monies received respectively by and on behalf of the Municipalities and also for withdrawal of such monies therefrom as the case may be specified in law in view of Art. 243H of the Constitution. Mr. Kaji submitted that the State is empowered to endow the Municipalities with such powers and authority as may be necessary to enable them to function as institution of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities for preparation of plans for economic development and social justice, performance of functions and implementation of the schemes as may be entrusted to them including those in relation to the matters listed in the 12th Schedule.
Mr. Kaji submitted that looking to the provisions which are referred to hereinabove, it is very clear that the Board is merely a distributing agency on behalf of the State. He further pointed out that it is for this Board to recommend to the State Government the principles which govern the grant-in-aid to the local authorities. Looking to the duties and functions of the Board, it is very clear that the Board is assigned to assess the income of the local authority received during any financial year from each of the sources mentioned in s. 82 of the Gujarat Municipalities Act,
1963. The Board has also to assess the expenditure incurred by the local authority in discharge of its obligatory as well as discretionary duties. It has also to advise the local authorities the ways and means to be adopted for increasing the income and the pattern to be followed for incurring expenditure. This Board has also to recommend for improvement of assessment and collection of taxes and fees levied by the local authority and effecting economy in the expenditure incurred by a local authority. Mr. Kaji submitted that looking to those functions which are to be discharged by the Board the only conclusion that can be drawn is that the Board is discharging the function on behalf of the State. Looking to the provisions contained in the Constitution of India and the BPMC Act and the Gujarat Municipalities Act, it is the duty of this Board to monitor the activities of the local authorities with a view to see that each Rupee is spent fruitfully.
It is very clear from the provisions contained in Arts. 243X and 243Y of the Constitution that the State Legislature should provide for making available grants-in-aid to the Municipalities from the consolidated fund of the State and may provide for constitution of such fund for crediting all moneys received. Looking to the duties, it is very clear that it has to advise as to how the grants-in-aid to the Municipality from the consolidated fund of the State is to be disbursed. Article 243Y indicates the measures to improve the financial position of the Municipalities and the provisions in the Boards Act are in consonance with the provisions contained in the Constitution. Thus, from the aforesaid provisions, it clearly appears that the Board is acting on behalf of the Government and for the Government. It may be required to be noted that constitutional provision is amended by 74th Amendment of 1992 whereas the Boards Act is enacted in 1979, much before the amendment in the Constitution.
10. Mr. Kaji, learned advocate, submitted that in view of Art. 289 of the Constitution of India, income of the State is exempted from Union taxation. He pointed out that the Board is constituted under the Act and it is discharging duties and functions under the Act, which are the functions of the State. Looking to the qualifications of the members, he submitted that experts have been selected to advise with regard to the expenses and municipal taxes, etc. Some of the Members are Government Officers and some may not be, but the function of this Board is to see that the local authorities discharge their duties properly and looking to the scheme of the Act, it is clear that the Board is acting for the Government. It has no trading activities. It has to receive grant-in-aid and if permitted, to borrow monies for the purpose of distribution of amount to the local authorities. Mr. Kaji submitted that this Board is not engaged in any trade or business. As per s. 17(3) of the Boards Act, monies are required to be deposited with the State Bank or any bank included in the scheduled bank by Reserve Bank or is required to be invested in such securities as may be approved by the State. If the money is received by the Board by way of grant-in-aid and is invested in securities which is approved by the Government, then it has acted as per the direction of the State Government. Even as per the letter annexed at Annexure “A” it is very clear that the amount of interest which may be earned is to be retained by the Board as a part of grant-in-aid given to it by the Government. Mr. Kaji further submitted that by letter, dt. 15th April, 1996 (at page 110) the Government has reiterated that interest is an additional grant, the same was clarified even earlier by letter, dt. 20th May, 1989 (Annexure “A”). In the letter dt.
15th April, 1996, it has been reiterated that the interest on the deposits made by the Board was from the beginning and is a grant-in-aid by the State to the Board, and not belonging to the Board, and is meant for disbursement to the municipalities for various schemes to be formulated by the Board for catering to the needs of the weaker sections as clarified earlier in annexure “A”. Therefore, he submitted that the Board is acting on behalf of the State and any amount of interest received by the Board cannot be taxed because it is an income of the State Government. He further submitted that if Art. 289 of the Constitution is perused, it is clear that income of the Board is not taxable. Article 289(1) mandates that the property and income of a State shall be exempt from Union taxation. Clause (2) of Art. 289 carves out an exception to cl. (1) in the sense that it states that nothing in cl. (1) shall prevent the Union from imposing or authorising the imposition of any tax to such extent if any and Parliament may by way provide in respect of a trade or business of any kind carried out by, or on behalf of the Government or State or any operation connected therewith or any property used or occupied for the purpose of such trade or business or any income accruing or arising in connection therewith. Clause (3) points out that nothing in cl. (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. Thus, cl. (2) creates an exception to cl. (1). However, cl. (3) creates an exception upon an exception. If it is found that there is trading or business activity, a tax may be imposed and if any property is used or occupied for the purpose of trade or business it is liable to tax. Thus, reading cl. (2) it is very clear that if the income is derived from the commercial activities, or the property of a State in respect of a trade or business of any kind carried on by or on behalf of a Government of a State or any operations connected therewith or any property used or occupied for the purpose of such trade or business shall not be immuned from Union taxation. However, in the instant case, it is necessary to bear in mind as to what is a “Governmental function” or what is a “trade” or “business”. In the later one, it is not very easy to determine. Ordinarily, the word “business” connotes some real substantial and systematic or organised course of activity or conduct with a purpose, certainly, the Board is not carrying on any trading or business activities.
From the Boards Act, it is also clear that the Board is controlled by the State and Board has to discharge the functions on behalf of the Government. It is also clear that at all the material stages and in all material particulars, the activity of the Board is controlled by the State. There is no capital contribution by the Central Government or there is nothing to indicate that citizens can be admitted as shareholders. As pointed out earlier, there are no trading
activity of the Board. There is no question of profit and loss that would be made as a result of this activity and, as pointed out, it has no trading activity. There is no question of bringing out duality between the Board on the one hand and the State or the Central Government or the shareholder on the other hand because the property of the Board is owned by the State itself. In the instant case, there is no question of trade or business but the amount which was lying with the Board was invested for which interest is received which the State Government is treating as a part of the grant-in-aid, and, therefore, the question of taxing that amount does not arise. In our view the Board has received the interest, but as the same is treated as grant-in-aid by the State as per letter at annexure “A”, the same cannot be taxed because the amount of interest is purported to be earned by the State and is grant-in-aid and not as an income of the Board.
11. Mr. Kaji, learned counsel, further submitted that in the instant case, even under s. 10(20A) of the IT Act, income is exempted. He submitted that it is necessary that the authority constituted under the law should be dealing with and satisfy the need for housing accommodation only. According to his submission, even if the authority constituted under the law is for the purpose of planning, development or improvement of cities, towns and villages, income generated by the authority can be exempted. Mr. Shelat, learned advocate, submitted that the function of the Board is to distribute on behalf of the State Government the grants-in-aid to the local authorities for the performance by such authorities of their duties and functions and s. 14 nowhere provides that it is for this Board to do anything for the purpose of planning, development or improvement of cities, towns and villages. Sec. 10(20A) if minutely read it becomes clear that any income of an authority constituted in India by or under any law enacted for the purpose of performance of planning, development or improvement of cities, town and villages are covered and thus exempted. It may be that the authority itself is engaged in planning, development or improvement of cities, town and villages or the authority under the Act by monitoring the activities of the local authorities achieves the object of either planning, development or improvement of cities, town and villages. The Boards Act is enacted with the object for better management of Municipal Corporations and Municipalities in the State of their financial resources and for regulation of giving certain grants and loans by the State Government. This Board is constituted with the object of providing grants to the local authorities and that local authorities are spending the amount for public need. We have enumerated in the earlier part of this judgment that the local authorities are spending the amount for construction of buildings, schools, roads, drainage, water supply, etc., that is the daily need of the people. It is not necessary that the Board itself must be engaged in the act of improvement of cities, town and villages. The Board which is discharging its functions under the Act which are governmental functions is disbursing the grants-in-aid, for the purposes of improvement, planning of cities. The question is : what is the purpose of this Board or what is the object of this Board. With the object of profit if the Board is engaged directly or indirectly in the work of development or improvement, it can certainly be said that there is a business or trading, but we find that there is no such object.
13. In the case of Gujarat Industrial Development Corpn. vs. CIT (1985) 45 CTR (Guj) 68 : (1985) 151 ITR 255 (Guj) : TC 32R.690, the following two questions were referred to the Court for opinion of this Court : Whether the Tribunal was right in holding that the income of the assessee-Corporation was not exempt under Art. 289(1) of the Constitution of India? Whether the Tribunal was right in holding that the income of the assessee-Corporation was not exempt from payment of income-tax under the provisions of s. 10(20A) of the IT Act, 1961 ?
14. The Board is constituted under the Act and is playing an important role in implementing the schemes under the BPMC Act and the Gujarat Municipalities Act. Constitution (Art. 243W) provides that the legislature of a State may by law endow the Municipalities with such powers and authority as may be necessary to enable them to function as institution of self-government and such law may contain provisions for the devolution of powers and responsibilities upon Municipalities subject to such conditions as may be specified with respect to the preparation of plans for economic development and social justice and for the performance of the functions and the implementation of schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth Schedule. In Twelfth Schedule as many as 18 items are mentioned, which are reproduced below :
Urban planning including town planning. Regulation of land use and construction of buildings. Planning for economic and social development. Roads and bridges. Water supply for domestic, industrial and commercial purposes. Public health, sanitation, conservancy and solid waste management. Fire services. Urban forestry, protection of the environment and promotion of ecological aspects. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded. Slum improvement and upgradation. Urban poverty
alleviation. Provision of urban amenities and facilities such as parks, gardens, playgrounds. Promotion of cultural, educational and aesthetic aspects. Burials and burial grounds; cremations, cremation grounds and electric crematoriums. Cattle ponds, prevention of cruelty to animals. Vital statistics including registration of births and deaths. Public amenities including street lighting, parking lots, bus stops and public conveniences. Regulation of slaughter houses and tanneries.
The amount spent by the local authority out of the consolidated fund disbursed by the Board clearly suggests that the amount is spent for discharging the aforesaid functions. Therefore, the Board is serving an important public purpose. Looking to the provisions contained in the Constitution which we have enumerated hereinabove and the provisions contained in the BPMC Act and the Gujarat Municipalities Act, it is very clear that the Board is constituted in aid of discharging the functions of the Municipalities. Sec. 126A of the BPMC Act has been amended and sub-ss. (1) and (2) thereof read as under : “126A. (1). The State Government may after considering recommendations of the Gujarat Municipal Finance Board, determine whether for augmenting the finances of the Corporation or any of the purposes of this Act it is necessary to make any grant to the Corporation and, if so, the amount thereof. (2) The grant so determined shall be made to the Corporation every year but it may be revised after a period of every five years having regard to the recommendations of the Gujarat Municipal Finance Board in respect of the revision of grants to Corporation. Sec. 144 of the Gujarat Municipalities Act, 1963 has also been amended on the same lines. Sec. 20A of the BPMC Act provides for financial assistance to the Corporation wherein we find mention of s. 126A of the BPMC Act. Reading this, it is very clear that the State Government has to consider the recommendations of the Board and make grants to the Corporation and, therefore, it is amply clear that for improvement of cities and towns, the Board is existing and in aid to the Government, it is discharging its functions. Object is required to be gathered from various provisions indicated therein and that requires a liberal interpretation. In view of the duties discharged by the Board, it is very clear that the Board is existing to assist the State Government for improvement of cities and towns. From the object also, it is very clear that the Board is established for better management of Municipal Corporations and Municipalities, and for regulation of giving of certain grants by the State Government to the local authorities and that makes it clear that it is established for securing public purposes, viz., purposes which are being discharged by the local authorities. In the absence of anything to indicate that the Board has carried on any business or trade, it would be futile to say that the interest should be considered as an income, looking to the facts and circumstances of this case and also considering the direction of the State to treat the same as a grant-in-aid.
16. In the case of Gujarat Industrial Development Corporation (supra) this Court held as under (pages 264/5) : “Apart from that, the question which is required to be considered is as to whether the purpose of the Corporation or the object of the Corporation is to develop any city, any town or any particular area. The answer would be in the negative. Industrial activity is one of the facets of general development. Developing any city, any town, any village or any area would require roads, buildings, sanitation, parks, sports, educational institutions and several other amenities. It will be an integrated activity by which an area could develop. Therefore, any corporation which is established for the purpose of developing a particular activity town, village or an area would mean a body set up with a larger purpose which could be achieved only if not only industry but several other requirements of that particular area met by that corporation. A city or a town or an area could be well developed without any industry. There could be good trade and commerce. So many institutions, banks, museums and other institutions which might attract the people may develop and the town or area may develop even without a single industry. But we are not concerned as to whether by establishing any industry the area develops or not. The question before us is as to whether this particular corporation is established for the purpose of planning, development or improvement of cities, town and villages in Gujarat State. If it is not and it is established only for the purpose of one particular facet of development, it would not fall within s. 10(20A) of the Act. Now, therefore, it is more than clear from the preamble and from the whole reading of the Act that the whole Act is intended to establish a Corporation for the purpose of establishing industries in towns, villages and other places in the Gujarat State.”
17. If any corporation is permitted to carry on business in its own name, then the matter is altogether different. In the instant case, the Board is not permitted to do any business whatsoever. Its function is to aid the Government in disbursing the grants-in-aid to the local authorities with a view to improve cities and towns. In the Act, there is nothing to show that this Board is entitled to do anything independently which would suggest that the Board is engaged in a trade or business. It is an admitted position that the Board is established to distribute on behalf of the
State Government the grants-in-aid to the local authorities, etc., as defined in s. 14 of the Boards Act. For improvement of cities and towns one has to see that the Twelfth Schedule of the Constitution and the Board has to disburse the amount of grant to the local authorities for such development or improvement. Thus, on fact, it is clear that the Board is not established to carry on trade or business and it is not established for one particular facet of development but looking to the Twelfth Schedule of the Constitution and Art. 243W the Board acts for the State and on behalf of the State.
18. Mr. Kaji, learned counsel, has also placed reliance on the decision in the case of CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) : TC 38R.619 to substantiate his case that Board has never received income and what was received was nothing but grant-in-aid. In the penultimate paragraph of this judgment the Court held as under:
“….. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee the same consequences, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person whom it is payable.”
19. Mr. Kaji also relied on the judgment in the case of Somaiya Organo Chemicals Ltd. vs. CIT (1994) 117 CTR (Bom) 1 : (1995) 216 ITR 291 (Bom) : TC 38R.697 wherein the Court held as under : “….It is collected as part of the price but is earmarked for the storage fund. It cannot, therefore, be considered as a part of the income of the assessee. The assessee is under a statutory obligation to set aside this amount of Rs. 6 per kilolitre for the said fund at the inception. There is, therefore, a clear diversion at the source of this amount. In any event, the assessee has lost domain over this amount of Rs. 6 per kilolitre. It has to be utilised in the manner statutorily laiddown…..Hence, this amount over which the assessee has lost its domain, cannot be considered as a part of its real income or its profit. It is, therefore, required to be excluded under s. 28 of the IT Act, 1961 for the purpose of calculation of income. “…..The Court has, therefore, made a clear distinction between the nature of income and nature of wealth for the purposes of the WT Act. The title to the fund, therefore, is not conclusive in deciding whether the amount which is deposited in that fund constitutes a diversion of the amount deposited in that account at source or not. What is necessary is to see whether there is a diversion at source and whether the assessee has lost domain and control over the amount so diverted.”
20. This Court has again considered the decision reported in 41 ITR 367 (supra) and reiterating the view, the Court in the case of Rajkot Dist. Coop. Milk Producers Union vs. CIT (1993) 113 CTR (Guj) 130 : (1993) 204 ITR 590 (Guj) : TC 38R.738 held that payment to be made as a result of statutory or contractual obligation even though it may be related to the profits, may be in the nature of an obligation as a result of which profits to that extent are diverted by an overriding title. Head Note on the said judgment at page 591 reads as under : “In 1969, the assessee, a cooperative society, approached the Gujarat Government to hand over the milk conservation project which was till then run by the Government. As the said project was running into losses, the Government agreed to transfer the working of that project temporarily. The assessee was given a right to run the dairy project on a leave and licence basis on a nominal fee of Rs. 1 per month. The assessee was under an obligation to maintain separate accounts for the dairy project in the same manner in which they were maintained earlier by the Government. Profits, if any, were first applied to the accumulated losses of the project. The assessee claimed deduction of Rs. 78,273 paid by it to the Gujarat Government towards losses as per the terms and conditions of the leave and licence agreement. The ITO disallowed that claim treating that payment as application of its income by the assessee and this was confirmed by the Tribunal. On a reference : Held that it was clear that even though the assessee was given a right to run the project a separate account with respect to profits made or losses suffered in running that project was to be maintained. In this context, the agreement which referred to profits would mean profits made by running the milk project and could not mean profits earned by the assessee. In the sense that the assessee was free to distribute or use the profits in the manner it liked. The said clause spoke of physical receipt of profits by the assessee and not receipt of profits in the eye of law. Out of these profits accumulated losses were required to be wiped out and only thereafter net profits were to go to the assessee. Profits in the hands of the assessee would be that amount which remained with it after the payment contemplated by the agreement was made to the Government. This was a clear case of diversion of profits by overriding title. The assessee was entitled to deduction of Rs. 78,273 from its total income.”
21. Mr. Kaji, learned advocate, submitted that really speaking, the income taxable under the IT Act is the real income of the assessee. In determining the real income, the question is not of physical receipt of income but what is received in the eye of law. Relying on the decision in the case of Udayan Chinubhai vs. CIT (1978) 111 ITR 584 (Guj) : TC 38R.653 he submitted that in the instant case, even if interest is received, that itself is not a determining factor as it does not amount to receipt in law because the same is to be treated as grant-in-aid in view of the directive of the State Government at Annexure “A”.
22. In view of the aforesaid decision, even if there is a receipt, in view of the principles of diversion, this will not amount to income of the Board and, therefore, the same is not taxable.
23. Mr. Shelat, learned counsel for the Revenue, submitted that so far as the letter at Annexure “A” is concerned, it is merely a proposal only, looking to the later part of the letter, which reads as under : “I shall be grateful, if you can formulate a concrete proposal in this regard on which Government’s approval can be obtained at an early date.”
24. Really speaking, this letter is in three parts. The first part, which deals with the decision of the Finance Department, and it reads that : “This is regarding the interest that Gujarat Municipal Finance Board has earned out of its deposits in the different banks. The Finance Department has agreed that the interest amount may be retained by the Board as a part of the grant-in-aid given to it by the Government.”
The second part deals with keeping a separate identity for the interest amount and conveys that the amount is to be utilised for catering to the urban needs of the economically weaker sections specially those living in smaller municipal areas where the municipalities are facing acute financial problems.
The third part is soliciting to formulate a concrete proposal to utilise the fund on which Government’s approval can be obtained. The Government’s approval is not on the first part of the letter which sanctions the interest amount to be treated as grant-in-aid, but the Government’s approval is to be sought with regard to the proposal of utilisation of the fund. This is further made clear by letter at page 110 wherein it is stated that : “….It is hereby reiterated that the interest on the deposits made by the GMFB was from the beginning and is a grant-in-aid given by the State Government to the GMFB not belonging to GMFB and which can primarily be disbursed to municipalities for the various schemes to be formulated by the Board for catering to the needs of weaker sections as clarified earlier.” Thus, interpreting this letter, it is very clear that the Finance Department has given direction to treat the interest received as part of grants-in-aid. Therefore, the interpretation as suggested by the deponent in the affidavit and as canvassed by the learned counsel for the Revenue, Mr. Shelat, cannot be accepted.
In the light of the aforesaid, it is not possible to agree with the contentions raised by Mr. Shelat for the Revenue. This petition is required to be allowed, and is allowed. The notices issued by the IT Department at Annexure “D” collectively are quashed and set aside. Rule made absolute accordingly. No order as to costs.
[Citation : 221 ITR 317]
