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Petitioner: GUJARAT MUNICIPAL FINANCE BOARD VS Respondent: DEPUTY COMMISSIONER OF INCOME- JUDGMENT
Court Name: Gujarat High Court Judge(s): B. C. Patel, Ms. R. M. Doshit Title:GUJARAT MUNICIPAL FINANCE BOARD vs DEPUTY COMMISSIONER OF INCOME-
JUDGMENT
Reported As: 1998 PTD 1023 Result: Order accordingly Judgment JUDGMENT ' B.C. PATEL, J.---The 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 Article 226 of the Constitution of India, inter alia, praying to quash and set aside the notice, dated March 24, 1995, for the assessm ent years 1984-85 to 1993-94 issued under section 148 read with section 147 of the Income-tax Act, 1961 (hereinafter referred to as "the Income Tax 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 the 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, schemes for primary facilities, sanitation, playground, 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 B.P.M.C. 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 the grant-in-aid given to it by the Government. This intimation was given, vide
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letter Annexure "A", dated May 28, 1982, and was reiterated, vide letter, dated April 15, 1996, at page 110 of the petition. In view of this amount of interest, the Income-tax Department called upon the Board indicating that the Assessing Officer has reason to believe that the income of the Board chargeable to tax for the assessm ent years 1984-85 to 1993-94 has escaped assessment within the meaning of section 147 of the Income-tax Act and, therefore, proposed to assess for the said assessm ent years and called upon it 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 returns under protest indicating therein that the entire income is not taxable under the Income-tax Act as the Board is a "State" and even otherwise, under Article 289(1) of the Constitution, the whole of the income is exempt. It was pointed out that under section 10(20-A) of the Income-tax 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 Article 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 view 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 Assessing 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 Article 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 section 10(20-A) of the Income- tax Act as the 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, the 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 section 10(20-A) of the Income-tax Act. With regard to Article 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 the interest amount may be retained as a grant-in- aid given to it by the Government, but looking to the letter as a 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 the Deputy Commissioner of Income-tax 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 Article 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 a result of which, there was an income by way of interest. The case of the Board as it appears from the letter at Annexure "A" and at page 110
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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 section 3. The members and chairman of the Board are to be appointed under section 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 allowance as may be prescribed. The members other than those appointed by virtue of their office, shall be entitled to draw such sitting fee 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, section 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 section 82 of the Bombay Provincial Municipal Corporations Act, 1949, or, as the case may be, section 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 assessm ent, 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 assessm ent 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 estimated; 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."
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' 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. Section 17 of the Boards Act relates to the 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 grant for the Board under section 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." ' Section 20 of the Board 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 section 21 of the Board Act, which reads as under: "21.(1) The Board shall cause to be maintained proper books of account 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 subsection (3) shall be laid before the State Legislature as soon as possible." ' Mr. Kaji, learned counsel, drew our attention to Article 289 of the Cong don of India which deals with exemption of property and income of a Stat from Union taxation which reads as under: "(1) The property and income of a State shall be exempt from Union taxation; (2) Nothing in clause (1) shall prevent the Union from imposing or authorizing 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."
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' Mr. Kaji also drew our attention to Articles 243-W, 243-X and 243-Y which is in Pan IX-A of the Constitution, which read as under: "243-W. 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 institutions 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." "243-X. The Legislature of a State may, by law,--- (a) authorize 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) provide for making such grants-in-aid to the municipalities from the consolidated fund of the State; and (d) provide for constitution of such funds for crediting all moneys received, respectively, by or on behalf of the municipalities and also for the withdrawal of such money therefrom, as may be specified in law." 243-Y 1) The Finance Commission constituted under Article 243-I shall also review the financial position of the municipalities and make recommendations to the Governor as to--- (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; (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 recommendations to the honorable 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 moneys therefrom as may be specified in law in view of Article 243-H 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
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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 plans for economic development and social justice, performance of functions and implementation for the schemes as may be entrusted to them including those in relation to the matters listed in the Twelfth 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 section 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 these 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 B.P.M.C. 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 Articles 243-X and 243-Y 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 of crediting all moneys received. Looking to the duties,, it is very clear that it has to advise as to how the grant-in- aid to the municipality from the consolidated fund of the State are to be disbursed. Article 243-Y 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 the Constitutional provision is amended by the Seventy-fourth Amendment of 1992, whereas the Boards Act is enacted in 1979, much before the amendment in the Constitution. ' Mr. Kaji, the learned advocate submitted that in view of Article 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 amounts to the local authorities. Mr. Kaji submitted that this Board is not engaged in any trade or business. As per section 17(3) of the Board Act, moneys are required to be deposited with the State Bank or any bank included in the Second Schedule to the Reserve Bank of India Act, 1934, or are 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 are 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
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grant-in-aid given to it by the Government. Mr. Kaji further submitted that by letter, dated April 15, 1996 (at page 110), the Government has reiterated that interest is an additional grant the same was clarified even earlier by letter dated May 20, 1989 (Annexure "A"). In the letter dated April 15, 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 Article 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 Article 289 carves out an exception to clause (1) in the sense that it states that nothing in clause (1) shall prevent the Union from imposing or authorizing the imposition of, any tax to such extent, if any, as Parliament may by way provide in respect of a trade or business of any kind carried on by, or on behalf of the Government or State, or any operations 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 clause (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to the ordinary functions of the Government. Thus, clause (2) creates an exception to clause (1). However, clause (3) creates an exception upon an exception. If it is…
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