Holding

NOIDA, being constituted under the U.P. Industrial Area Development Act and designated as an industrial township, does not satisfy the constitutional definition of a municipality and therefore is not a "local authority" within the exhaustive definition of section 10(20) of the Income Tax Act, 1961.

Summary

The New Okhla Industrial Development Authority (NOIDA), created under the U.P. Industrial Area Development Act, 1976, challenged income‑tax notices on the ground that it qualified as a "local authority" and was therefore exempt under section 10(20) of the Income Tax Act, 1961 as amended by the Finance Act, 2002. The central issue was whether NOIDA, designated as an "industrial township" by a gubernatorial notification, fell within the definition of "Municipality" in clause (e) of Article 243P of the Constitution and thus the exhaustive definition of "local authority" in the Explanation to section 10(20). The Court examined the constitutional scheme of Part IX‑A, the meaning of the proviso to Article 243Q, and the effect of the Finance Act’s amendment, concluding that an industrial township is not a municipality and lacks the essential features of self‑government, elections, and statutory status required. Consequently, the Explanation to section 10(20) does not cover NOIDA, and the earlier reliance on the General Clauses Act is no longer applicable. The Court therefore dismissed the appeals, holding NOIDA is not a local authority for tax‑exemption purposes.

Issues considered

Whether the New Okhla Industrial Development Authority qualifies as a "local authority" within the meaning of the Explanation to section 10(20) of the Income Tax Act, 1961, as amended by the Finance Act, 2002.
Whether the notification designating NOIDA as an "industrial township" under the proviso to Article 243Q makes it a municipality as defined in clause (e) of Article 243P of the Constitution.
Whether the definition of "local authority" under section 3(31) of the General Clauses Act, 1897 continues to apply after the Finance Act, 2002 amendment.
Whether the omission of section 10(20A) by the Finance Act, 2002 removes any exemption that NOIDA might have claimed.

Legislation cited

Cantonments Act, 1924s. 389
Constitution of Indias. Article 243P(e), s. Article 243Q, s. Part IX‑A
Finance Act, 2002s. Amendment to section 10(20) (Explanation), s. Omission of section 10(20A)
General Clauses Act, 1897s. 3(31)
Income Tax Act, 1961s. 10(20), s. 10(20A), s. 131, s. 142, s. 194A
U.P. Industrial Area Development Act, 1976s. 11, s. 12, s. 3, s. 6

Subjects

tax exemptionlocal authoritymunicipalityindustrial development authorityIncome Tax ActFinance Act 2002constitutional interpretationprovisomunicipal functionsstatutory construction

Judgment

[2018] 7 S.C.R. 781 781

NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY A
v.
CHIEF COMMISSIONER OF INCOME TAX AND ORS.
(Civil Appeal Nos. 792-793 of 2014)
JULY 02, 2018 B
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961 – s.10(20) (as Amended by Finance
Act 2002 w.e.f. 01.04.2003) – Appellant-NOIDA, a local authority
or not – Appellant-NOIDA contended that it is covered by the cl(ii)
C
of Explanation to s.10(20) of the Act, 1961, which defines the
expression “local authority” as “Municipality as referred to in
Art.243P(e)” – Held: Special features of the Municipality as was
contemplated by the Constitutional provisions contained in Part IXA
cannot be said to be present in Authority (NOIDA) as delineated by
statutory scheme of the U.P. Industrial Area Development Act, 1976 D
under which the said authority was constituted – Though various
municipal functions are also being performed by the Authority as
per Act of 1976, but merely because certain municipal functions
were also performed by the authority, it cannot acquire the essential
features of the Municipality which are contemplated by Part IXA of
E
the Constitution – Appellant is not covered by the word/expression
of “Municipality” in cl(e) of Art.243P – Thus, appellant is not
covered by the definition of local authority as contained in
Explanation to s.10(20) of the Act of 1961 – U.P. Industrial Area
Development Act, 1976 – s.3 – Constitution of India – Part IXA,
Art.243P(e) – Finance Act, 2002. F
Constitution of India – Arts.243Q and 243P(e) – In exercise
of powers under the proviso to cl(i) of Art.243Q, the Governor
specified NOIDA to be an “industrial township” vide notification
dated 24.12.2001 – Whether industrial township can be equated
with Municipality as defined u/Art.243P(e) – Held: No – The object G
of issuance of notification is to relieve the mandatory requirement
of constitution of a Municipality in a State in the circumstances as
mentioned in proviso but exemption from constituting Municipality
does not lead to mean that the industrial establishment which is
H
781
782 SUPREME COURT REPORTS [2018] 7 S.C.R.

A providing municipal services to an industrial township is same as
Municipality as defined in Art. 243P(e).
General Clauses Act, 1897 – s.3(31) – Applicability of the
Act, 1897 in defining the term ‘local authority’ post amendment
(Finance Act 2002) to the I.T. Act, 1961 – Held: Prior to Finance
B Act, 2002 there being no definition of ‘local authority’ under the
I.T. Act, the provisions of s.3(31) of the Act, 1897 were pressed into
service while interpreting the extent and meaning of ‘local authority’
– The Explanation to s.10(20) now contain the exhaustive definition
of local authority, thus, definition of local authority as contained
in s.3(31) of the Act, 1897 no more applicable – Income Tax Act,
C 1961 – cl(ii) of Explanation to s.10(20) (as Amended by Finance
Act 2002)
Interpretation of Statutes – Interpretation of a proviso –
Principles discussed.
D Dismissing the appeals, the Court
HELD: 1. The appellant-New Okhla Industrial
Development Authority has been constituted under section 3 of
the U.P. Industrial Area Development Act, 1976. The only issue
which needs to be considered in these appeals is as to whether
E 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. The
cl(ii) of Explanation to s.10(20) of the Income Tax Act, 1961,
provides that the expression “local authority” means
“Municipality as referred to in clause (e) of Article 243P of the
Constitution”. The constitutional provisions as contained in Part
F IXA delineate that the Constitution itself provided for constitution
of Municipalities, duration of Municipalities, powers of Authorities
and responsibilities of the Municipalities. The Municipalities are
created as vibrant democratic units of self-government. The
special features of the Municipality as was contemplated by the
G constitutional provisions contained in Part IXA cannot be said to
be present in Authority as delineated by statutory scheme of Act,
1976. It is true that various municipal functions are also being
performed by the Authority as per Act, 1976 but the mere facts
that certain municipal functions were also performed by the
authority it cannot acquire the essential features of the
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 783
CHIEF COMMNR. OF INCOME TAX

Municipality which are contemplated by Part IXA of the A
Constitution. The appellant is not covered by the word/expression
of “Municipality” in clause(e) of Article 243P. Thus, the appellant
is not covered by the definition of local authority as contained in
Explanation to Section 10(20). [Paras 2, 14, 27 and 55][785-F;
789-E; 796-G-H; 797-A-C; 814-G-H]
B
2. The notification dated 24.12.2001 was issued by the
Governor in exercise of the powers under the proviso to clause
(1) of Article 243Q and specified the said appellant-Authority to
be an “industrial township”. The proviso to sub-clause (1) of
Article 243Q is an exception to the constitutional provisions which
provide that there shall be constituted in every State a Nagar C
Panchayat, a Municipal Council and a Municipal Corporation.
Exception is covered by proviso that where an industrial township
is providing municipal services the Governor having regard to
the size of the area and the municipal services either being
provided or proposed to be provided by an industrial D
establishment specify it to be an industrial township. The words
‘industrial township’ have been used in contradiction of a Nagar
Panchayat, a Municipal Council and a Municipal Corporation. The
object of issuance of notification is to relieve the mandatory
requirement of constitution of a Municipality in a State in the
circumstances as mentioned in proviso but exemption from E
constituting Municipality does not lead to mean that the industrial
establishment which is providing municipal services to an
industrial township is same as Municipality as defined in Article
243P(e). The word constituted used under Article 243P(e) read
with Article 243Q clearly refers to the constitution in every State F
a Nagar Panchayat, a Municipal Council or a Municipal
Corporation. Further, the words in proviso “a Municipality under
this clause may not be constituted” clearly means that the words
“may not be constituted” used in proviso are clearly in
contradistinction with the word constituted as used in Article
243P(e) and Article 243Q. Thus, notification dated 24.12.2001 G
under proviso to Article 243Q(1) is not akin to constitution of
Municipality. [Paras 23, 30][794-F; 800-B-F]
Agricultural Produce Market Committee, Narela, Delhi
v. Commissioner of Income Tax and another (2008) 9
H
784 SUPREME COURT REPORTS [2018] 7 S.C.R.

A SCC 434 : [2008] 12 SCR 387; Adityapur Industrial
Area Development Authority v. Union of India and others
(2006) 5 SCC 100 : [2006] 1 Suppl. SCR 757;
Kishansing Tomar Municipal Corporation Of The City
Of Ahmedabad Ad Others (2006) 8 SCC 352 : [2006] 7
Suppl. SCR 454; S. Sundaram Pillai and others v. V.R.
B
Pattabiraman and Others (1985) 1 SCC 591 : [1985] 2
SCR 643; Union of India and others v. R.C. Jain and
others (1981) 2 SCC 308 : [1999] 1 SCR 263; A.V.
Fernandez v. The State of Kerala AIR 1957 SC 657;
Rajasthan Rajya Sahakari Spinning and Ginning Mills
C Federation Limited v. Deputy Commissioner of Income
Tax, Jaipur (2014) 11 SCC 672 : [2014] 7 SCR 336;
State of Gujarat and others v. ESSAR Oil Limited and
another (2012) 3 SCC 522 : [2012] 2 SCR 1127;
Sundaram Pillai and others v. V.r. Pattabiraman and
others (1985) 1 SCC 591 : [1985] 2 SCR 643; Gujarat
D
Industrial Development Corporation v. Commissioner
of Income Tax (1997) 7 SCC 17 : [1999] 1 SCR 263;
Krishi Utpadan Mandi Samiti v. Union of India and
another (2004) 267 ITR 460; Agricultural Produce
Market Committee v. Commissioner of Income-tax
E (2006) 156 ITR 286 – referred to.
Case Law Reference
[2008] 12 SCR 387 referred to Para 5
[2006] 1 Suppl. SCR 757 referred to Para 5
F [2006] 7 Suppl. SCR 454 referred to Para 26
[1985] 2 SCR 643 referred to Para 29
[1999] 1 SCR 263 referred to Para 37
AIR 1957 SC 657 referred to Para 38
[2014] 7 SCR 336 referred to Para 43
G [2012] 2 SCR 1127 referred to Para 44
[1985] 2 SCR 643 referred to Para 50
[1999] 1 SCR 263 referred to Para 52
(2004) 267 ITR 460 referred to Para 52
(2006) 156 ITR 286 referred to Para 53
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 785
CHIEF COMMNR. OF INCOME TAX

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. A
792-793 of 2014.
From the Judgment and Order dated 28.02.2011 of the High Court
of Judicature at Allahabad in Writ Tax No.1338 of 2005 and Order dated
04.11.2011 in Civil Misc. Review Application No.95157/2011 in Writ Tax
No.1338 of 2005. B

Mr.Balbir Singh, Sr. Advocate, Jasmeet Singh, Naman Joshi,
Ashutosh Kumar, Ms. Ruhsheet J. Saluja, Hemant Jain, S. N. Tayag
Rajan, Ms. Rubal Maini, Sandeep Chilana, Mahinder Singh, R.S. Saluja,
Prabhu Dayal Chilana, Mohd. Raiz, Nitesh Shrivastava, Sarc &
Associates, Advs. for the Appellant. C

Mr. K. Radhakrishnan, Sr. Advocate, Shekhar Vyas, Arijit Prasad,
P. K. Mullick, R. P. Rao, H. R. Rao, D. L. Chidanand, R. Harishankar,
Mrs. Anil Katiyar, Advs. for the Respondents.
The Judgment of the Court was delivered by D
ASHOK BHUSHAN, J. 1. The appellant by these appeals has
challenged the Division Bench judgment of Allahabad High Court dated
28.02.2011 dismissing the writ petition filled by the appellant challenging
the notices issued by the Income Tax Authority under Section 142 of the
Income Tax Act, 1961 as well as the judgment dated 04.11.2011 rejecting E
the review application.
2. The facts giving rise to these appeals are:
The appellant-New Okhla Industrial Development Authority
(hereinafter referred to as the “Authority”) has been constituted under F
Section 3 of the U.P. Industrial Area Development Act, 1976 (hereinafter
referred to as the ‘Act, 1976’) by notification dated 17.04.1976. The
Act, 1976 was enacted by State Legislature to provide for the constitution
of an Authority for the development of certain areas in the State into
industrial and urban township and for matters connected therewith. Under
the Act, 1976 various functions have been entrusted to the Authorities. G
Notices under Section 142 of the Income Tax Act dated 28.07.1998 and
08.08.1998 were issued to the appellant. The appellant challenging the
said notices filed writ petition contending that appellant is a local authority,
hence, is exempted from payment of income tax under Section 10(20)
H
786 SUPREME COURT REPORTS [2018] 7 S.C.R.

A and Section 10(20A) of Income Tax Act, 1961 (hereinafter referred to
as “I.T.Act, 1961). The writ petition was allowed by the Division Bench
of the Allahabad High Court on 14.02.2000 holding that the appellant is
a local body. It was held that it is covered by the exemption under Section
10(20A) of I.T.Act, 1961. The Division Bench, however, did not go into
the question whether it is also exempt under Section 10(20).
B
3. By the Constitution (74th Amendment) Act, 1992, the Parliament
had inserted Part IXA of the Constitution providing for the constitution
of Municipalities. A notification dated 24.12.2001 was issued by the
Governor in exercise of the power under the proviso to clause (1) of
Article 243Q of the Constitution of India specifying the appellant to be
C
an “industrial township” with effect from the date of the notification in
the Official Gazette. A notice dated 29.08.2005 was issued by the
Assistant Commissioner of Income Tax to the appellant for furnishing
Income Tax Return for the assessment year 2003-2004 and 2004-2005.
Notice mentioned that after omission of Section 10(20A) w.e.f.
D 01.04.2003 the Authority has become taxable. Notice under Section
142(1) was also enclosed for the above purpose.
4. Notices were also issued to different Banks requiring different
information. The appellant vide its letter dated 20.09.2005 replied the
notice dated 29.08.2005 stating that it is a local authority and exempt
E from Income Tax hence notice under Section 142 be withdrawn. The
Income Tax authorities also issued notice to the different Banks to deduct
TDS as required under Section 194A of the Income Tax Act and remit
the same to the Central Government Account.
5. The appellant filed a writ petition praying for quashing the notice
F under Section 142 of the Income Tax Act dated 29.08.2005. The appellant
also challenged notice dated 31.08.2005 issued under Section 131 to the
Bankers of the appellant. Notice dated 21.09.2005 under Section 194A
was also sought to be quashed. The writ petition was contested by the
Income Tax Department. The High Court in the writ petition decided
the only question “whether New Okhla Industrial Development Authority
G (NOIDA) is a local authority after 01.04.2003 within the meaning of
Section 10(20) of the Income Tax Act, 1961”. The Division Bench of
the High Court relying on two judgments of this Court in Agricultural
Produce Market Committee, Narela, Delhi vs. Commissioner of
Income Tax and another, (2008) 9 SCC 434 and Adityapur
H Industrial Area Development Authority vs. Union of India and
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 787
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

others, (2006) 5 SCC 100, held that after 01.03.2003 the NOIDA is A
not a local authority within the meaning of Section 10(20) of the I.T.Act,
1961. The writ petition was consequently dismissed. Although, the
appellant had prayed for quashing notices issued to its Bankers and notice
under Section 194A but the High Court did not advert to the said issue.
We do not find any necessity to advert to the aforesaid issues, since,
B
different concerned Banks have already filed civil appeals challenging
the judgment of the High Court rendered in their writ petition which has
been separately challenged by a group of civil appeals being Civil Appeal
arising out of SLP(C) No.3168 of 2017-Commissioner of Income
Tax(TDS), Kanpur vs. Canara Bank where we have considered and
decided those issues by our judgment of this date. After dismissal of the C
writ petition dated 28.02.2011 the appellant filed a review application
which too was dismissed on 04.11.2011. Aggrieved by those two judgments
Civil Appeal Nos.792-793 of 2014 have been filed by the appellant.
6. We have heard Shri Balbir Singh, learned senior counsel
appearing for the appellant and Shri K Radhakrishnan, learned senior D
counsel appearing for the Revenue. We have also heard various learned
counsel appearing for different Banks.
7. Learned counsel for appellant submits that both the judgments
of this Court relied on by the High Court for dismissing the writ petition
were not applicable and clearly distinguishable. He submits that judgment E
of this Court in Agricultural Produce Market Committee,
Narela(supra) was a case where this Court was concerned with status
of Agricultural Produce Market Committee which was not akin to the
appellant in view of the statutory provisions contained in Act, 1976, hence,
reliance on such case was misplaced.
F
8. With regard to judgment of this Court in Adityapur Industrial
Area Development Authority(surpa), it is submitted that this Court
essentially has considered in the above case regarding the exemption
under Article 289 of the Constitution of India whereas appellant does
not rely on Article 289. He further submits that Governor of U.P. has
issued notification dated 24.12.2001 under the proviso to Article G
243Q(1)(a) which provision was not considered in the above mentioned
two cases, hence, the present case is clearly distinguishable from the
aforesaid two judgments. It is submitted that Municipal Services are
being provided by the authority, hence, it is a local authority entitled to
the benefit of Section 10(20) of the I.T. Act, 1961. The constitutional H
788 SUPREME COURT REPORTS [2018] 7 S.C.R.

A scheme envisages performance of municipal functions even by a body
which may not be elected and yet performs municipal functions. Article
243Q envisaged such authority and also having been recognised such an
authority by issuing the notification, it is a local authority and is entitled
for the benefit of exemption. There does not exist any elected municipality
for the industrial development area and it is the appellant which is entrusted
B
to discharge municipal functions as enumerated in the 12th Schedule
under Article 243P of the Constitution. The appellant was not only a
creation of a statute but has been statutorily charged to perform functions,
including municipal functions. The appellant is a local body having local
fund and its accounts are audited by the Examiner of the Local Fund
C accounts. The appellant also has authorisation by law to levy tax in
contradistinction to a mere development authority.
9. Learned counsel appearing for the Revenue refuting the
submissions of appellant contends that in view of the Explanation added
to Section 10(20) of the I.T.Act, 1961 by Finance Act, 2002, the appellant
D is no longer covered by the definition of ‘local authority’. The definition
of ‘local authority’ as contained in Explanation is not an inclusive definition
but being an exhaustive definition unless the appellant is covered by any
of the clauses mentioned in the Explanation it cannot claim an exemption.
It is further submitted that omission of Section 10(20A) by the same
Finance Act clearly indicates that those authorities which were treated
E as local authority prior to Finance Act is no longer entitled to avail the
benefit of exemption. It is evident from the Constitution 74th Amendment
Act, 1992 that the Parliament has introduced certain minimum safeguards
so that municipalities could act as vibrant democratic units of self-
government so as to not leave them to the vagaries of laws being enacted
F by different State Legislatures. The Parliament was focussed on making
provisions of local self-government alone and not on the aspect of
municipal services and Legislation on municipalities operates in a different
legislative field as compared to Legislation on Industrial Development
Authorities. After the Constitution Amendment both U.P. Municipality
Act, 1916 and U.P. Municipal Corporation Act, 1959 have been amended
G in the light of constitutional provisions as contained in Part IXA of the
Constitution whereas no amendments have been made in Act, 1976 which
clearly indicates that the authority was never treated as municipality
within the meaning of Article 243Q. There are large number of factors
which must be possessed by the municipality under the constitutional
H scheme which is absent in the authority.
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 789
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

10. Hence, Constitution never recognised industrial township as A
referred to in proviso to Article 243Q as equivalent to municipality. Further,
the notification under the proviso to Article 243Q dated 24.12.2001 itself
indicates that no municipality has been constituted in the area in which
appellant operated. The Authority clearly is not a local authority. The
Finance Act, 2002 brought substantial changes in the definition of local
B
authority by defining local authority exclusively and by omitting Section
10(20A), the benefits earlier enjoyed by various authorities which were
treated local authorities were taken away. The provisions of Section 10
sub-section (20) are clear and taking plain and literal meaning of the
provision, the appellant is not entitled for exemption; the High court has
rightly dismissed the writ petition filed by the appellant. C
11. Learned counsel appearing for the Banks have also adopted
the submissions made by the learned counsel for the Revenue in support
of their contention that the appellant is a local authority within the meaning
of Section 10 sub-section (20) of the I.T. Tax, 1961.
12. Learned counsel for both the parties have relied on various D
judgments of this Court which shall be referred to while considering the
submissions made by the parties.
13. We have considered the submissions made by the learned
counsel for the parties and perused the records.
E
14. The only issue which needs to be considered in these appeals
is as to 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.
Before we proceed further, it is necessary to notice the provisions of
Section 10(20) which existed prior to its amendment by Finance Act,
2002 and after amendment w.e.f. 01.04.2003: F
Section 10(20) prior to amendment by the Section 10(20) after amendment by the
Finance Act , 2002 Finance Act, 2002

the i ncome of a local authority which is the income of a local authority which is
chargeable under the head “Income from chargeable under the head “Income from
house property”, “Capital gains” or house property”, “Capital gains” or
“Income from other sources” or from a “Income from other sources” or from a G
trade or business carried on by it which trade or business carried on by it which
accrues or arises from the supply of a accrues or arises from the supply of a
commodity or service [(not being water or commodity or service [(not being water or
electricity) within its own jurisdictional electricity) within its own jurisdictional
area or from the supply of water or area or from the supply of water or
electricity within or outside its own electricity within or outside its own
jurisdictional area; jurisdictional area; H
790 SUPREME COURT REPORTS [2018] 7 S.C.R.

A 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 Constitution87; or

(ii) Municipality as referred to in clause (e) of
article 243P of the Constitution88; or

B (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 389
of the Cantonments Act, 1924 (2 of 1924);
“10(20A) any income of an authority constituted
C in India by or under any law enacted either for Section 10(20A):Omitted by the Finance Act,
the purpose of dealing with and satisfying the 2002 w.e.f. 1.4.2002
need for housing accommodation or for the
purpose of planning, development or
improvement of cities, towns and villages, or for
both;”

15. The constitutional provisions contained in Part IXA of the
D Constitution of India as inserted by Constitution 74th Amendment Act,
1992 also need to be noted. Article 243P contains the definitions. Article
243P(e) defines Municipality which is to the following effect:
“243P(e)”Municipality” means an institution of self-
government constituted under Article 243Q;”
E
16. Article 243Q provides for the Constitution of Municipalities
which is to the following effect:
“243Q. Constitution of Municipalities.- (1) There shall be
constituted in every State,-
F (a) a Nagar Panchayat (by whatever name called) for a
transitional area, that is to say, an area in transition from a
rural area to an urban area;
(b) a Municipal Council for a smaller urban area; and
(c) a Municipal Corporation for a larger urban area,
G
in accordance with the provisions of this Part:
Provided that a Municipality under this clause may not be
constituted in such urban area or part thereof as the Governor
may, having regard to the size of tile area and the municipal
services being provided or proposed to be provided by an
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 791
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

industrial establishment in that area and such other factors A
as he may deem fit, by public notification, specify to be an
industrial township.
(2) In this article, a transitional area, a smaller urban area
or a larger urban area means such area as the Governor
may, having regard to the population of the area, the density B
of the population therein, the revenue generated for local
administration, the percentage of employment in non
agricultural activities, the economic importance or such other
factors as he may deem fit, specify by public notification for
the purposes of this Part.”
C
17. Article 243R pertains to Composition of Municipalities which
is to the following effect:
“243R. Composition of Municipalities.-(1) Save as provided
in clause ( 2 ), all the seats in a Municipality shall be filled by
persons chosen by direct election from the territorial D
constituencies in the Municipal area and for this purpose
each Municipal area shall be divided into territorial
constituencies to be known as wards.
(2) The Legislature of a State may, by law, provide-
(a)for the representation in a Municipality of- E
(i) persons having special knowledge or experience in
Municipal administration;
(ii) the members of the House of the People and the members
of the Legislative Assembly of the State representing
F
constituencies which comprise wholly or partly the
Municipal area;
(iii) the members of the Council of States and the members
of the Legislative Council of the State registered electors
within tile Municipal area;
G
(iv) the Chairpersons of the Committees constituted under
clause ( 5 ) of article 243S:
Provided that the persons referred to in paragraph (i) shall
not have the right to vote in the meetings of the Municipality;
H
792 SUPREME COURT REPORTS [2018] 7 S.C.R.

A (b) the manner of election of the Chairperson of a
Municipality.”
18. Article 243S provides for Constitution and composition of Wards
Committees, etc. Article 243T provides for reservation of seats of SC
and ST for every Municipality and number of seats reserved. Article
B 243U provides for duration of Municipalities sub-clause(1)states that
every Municipality, unless sooner dissolved under any law for the time
being in force, shall continue for five years from the date appointed for
its first meeting and no longer.
19. Article ZF provides for continuance of existing laws and
C Municipalities which is to the following effect:
“243ZF. Continuance of existing laws and Municipalities.-
Notwithstanding anything in this Part, any provision of any
law relating to Municipalities in force in a State immediately
before the commencement of the Constitution (Seventy-fourth
D Amendment) Act, 1992, which is inconsistent with the
provisions of this Part, shall continue to be in force until
amended or repealed by a competent Legislature or other
competent authority or until the expiration of one year from
such commencement, whichever is earlier:

E Provided that all the Municipalities existing immediately before
such commencement shall continue till the expiration of their
duration, unless sooner dissolved by a resolution passed to
that effect by the Legislative Assembly of that State or, in the
case of a State having a Legislative Council, by each House
of the Legislature of that State.”
F
20. It is also relevant to notice certain provisions of Act, 1976,
before we proceed further to examine the issue. The authority has been
constituted by notification dated 17.04.1976 exercising power under
Section 3 of Act, 1976. Section 3 provides for Constitution of the Authority
which is to the following effect:
G
“3.(1) The State Government may, by notification, constitute
for the purposes of this Act, An authority to be called (Name
of the area) Industrial Development Authority, for any
industrial development area.

H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 793
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

(2) The Authority shall be a body corporate. A
(3) The Authority shall consist of the following:–
(a) The Secretary to the Government, Uttar Pradesh, Member
Industries Department or his Nominee not below Chairman
the rank of Joint Secretary-ex-official. Member Chairman
B
(b) The Secretary to the Government, Uttar Pradesh, Member
Public works Department or his nominee not below the rank
of Joint Secretary ex-official. Member
(c) The Secretary to the Government, Uttar Pradesh, Local
Member Self-Government or his nominee not below the rank C
of joint Secretary-ex official. Member
(d) The Secretary to the Government, Uttar Pradesh, Finance
Member Department or his nominee not below the rank of
Joint Secretary-ex official.
(e) The Managing Director, U.P. State Industrial Development D
Member Corporation-ex official.
(f) Five members to be nominated by the State Government
Member by notification. Member
(g) Chief Executive Officer. Member Secretary
E
(4) The headquarters of the Authority shall be at such place
as may be notified by the State Government.
(5) The procedure for the conduct of the meetings for the
Authority shall be such as may be prescribed.
(6) No act or proceedings of the Authority shall be invalid by F
reason of the existence of any vacancy in or defect in the
constitution of the Authority.”
21. Section 6 provides for the function of the Authority which is to
the following effect:
G
“6.(1) The object of the Authority shall be to secure the
planned development of the industrial development area.
(2) Without prejudice to the generality of the objects of the
Authority, the Authority shall perform the following
functions :–
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794 SUPREME COURT REPORTS [2018] 7 S.C.R.

A (b) to prepare a plan for the development of the industrial
development area;
(c) to demarcate and develop sites for industrial, commercial
and residential purpose according to the plan;
(d) to provide infrastructure for industrial, commercial and
B residential purposes;
(e) to provide amenities;
(f) to allocate and transfer either by way of sale or lease or
otherwise plots of land for industrial, commercial or residential
C purposes;
(g) to regulate the erection of buildings and setting up of
industries: and
(h) to lay down the purpose for which a particular site or
plot of land shall be used, namely for industrial or commercial
D or residential purpose or any other specified purpose in such
area.”
22. Section 7 deals with power of the Authority in respect of
transfer of land. Section 8 deals with power to issue directions in respect
of creation of building. Section 9 deals with ban on erection of building in
E contravention of regulations. Section 10 deals with power to require
proper maintenance of site or building. Section 11 empowers the Authority
to levy of tax. By Section 12 certain provisions of U.P. Urban Planning
and Development Act, 1973 has been made applicable.
Chapter VII deals Finance, Accounts and Audit.
F 23. We may also notice the notification dated 24.12.2001 issued
by the Governor in exercise of the powers under the proviso to Clause
(1) of Article 243Q. The notification is as follows:
“NOTIFICATION

G No.6709/77-4-2001-56 Bha/99
In exercise of the powers under the proviso to Clause (1) of
Article 243Q of the Constitution of India, the Governor,
having regard to the size of the New Okhla Industrial
Development Area, which has been declared as an industrial
development area by Government Notification No.4157-HI/
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NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 795
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

XVIII-11, dated April 17, 1976 and the municipal services A
being provided by the New Okhla Industrial Development
Authority in that area, is pleased to specify the said New Okhla
Industrial Development Area to be an “industrial township”
with effect from the date of publication of this notification in
the official gazette.
B
By order,

Sd/-
(Anoop Mishra)
Secretary.” C
24. The submissions made by the parties can be dealt with in the
following two heads:
A. The status of the Authority by virtue of notification dated
24.12.2001 issued under Clause (1) of Article 243Q.
D
B. Whether the appellant is a local authority “within the meaning
of Section 10 sub-section (20) as explained in Explanation added by
Finance Act, 2002.
(A) Part IXA of the Constitution:
25. The Statement of Objects and Reasons of the Constitution E
th
74 Amendment Act, 1992, briefly outlined the object and purpose for
which Constitution Amendment was brought in. It is useful to refer to
the Statement of Objects and Reasons of the Constitution Amendment
which is to the following effect:
“STATEMENT OF OBJECTS AND REASONS F
In many States local bodies have become weak and ineffective
on account of a variety of reasons, including the failure to
hold regular elections, prolonged supersessions and
inadequate devolution of powers and functions. As a result,
Urban Local Bodies are not able to perform effectively as G
vibrant democratic units of self-government.
2. Having regard to these inadequacies, it is considered
necessary that provisions relating to Urban Local Bodies are
incorporated in the Constitution particularly for-
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796 SUPREME COURT REPORTS [2018] 7 S.C.R.

A (i) putting on a firmer footing the relationship between the
State Government and the Urban Local Bodies with respect
to-
(a) the functions and taxation powers; and
(b) arrangements for revenue sharing;
B
(ii) Ensuring regular conduct of elections;
(iii) ensuring timely elections in the case of supersession; and
(iv) providing adequate representation for the weaker sections
like Scheduled Castes, Scheduled Tribes and women.”
C
26. The Kishansing Tomar Municipal Corporation Of The City
Of Ahmedabad Ad Others, 2006 (8) SCC 352, noticing the object and
purpose of Constitution 74th Amendment Act, 1992 stated as following:
“12. It may be noted that Part IX-A was inserted in the
Constitution by virtue of the Constitution (Seventy-fourth)
D
Amendment Act, 1992. The object of introducing these
provisions was that in many States the local bodies were not
working properly and the timely elections were not being held
and the nominated bodies were continuing for long periods.
Elections had been irregular and many times unnecessarily
E delayed or postponed and the elected bodies had been
superseded or suspended without adequate justification at
the whims and fancies of the State authorities. These views
were expressed by the then Minister of State for Urban
Development while introducing the Constitution Amendment
Bill before Parliament and thus the new provisions were added
F
in the Constitution with a view to restore the rightful place in
political governance for local bodies. It was considered
necessary to provide a constitutional status to such bodies
and to ensure regular and fair conduct of elections. In the
Statement of Objects and Reasons in the Constitution
G Amendment Bill relating to urban local bodies, it was stated:”
27. The constitutional provisions as contained in Part IXA delineate
that the Constitution itself provided for constitution of Municipalities,
duration of Municipalities, powers of Authorities and responsibilities of
the Municipalities. The Municipalities are created as vibrant democratic
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 797
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

units of self-government. The duration of Municipality was provided for A
five years contemplating regular election for electing representatives to
represent the Municipality. The special features of the Municipality as
was contemplated by the constitutional provisions contained in Part IXA
cannot be said to be present in Authority as delineated by statutory scheme
of Act, 1976. It is true that various municipal functions are also being
B
performed by the Authority as per Act, 1976 but the mere facts that
certain municipal functions were also performed by the authority it
cannot acquire the essential features of the Municipality which are
contemplated by Part IXA of the Constitution. The main thrust of the
argument of the learned counsel for the appellant that the High Court
having not adverted to the notification dated 24.12.2001 issued under C
proviso to Article 243Q(1) the judgments relied on by the High Court for
dismissing the writ petition is not sustainable. We thus have to focus on
proviso to Article 243Q(1). For the purpose and object of the industrial
township referred to therein whether industrial township mentioned therein
can be equated with Municipality as defined under Article 243P(e). Article
D
243P(e) provides that the “Municipality means an institution of self-
government constituted under Article 243Q. Whether the appellant is a
institution of self-government constituted under Article 243Q is the main
question to be answered? Sub-clause (1) of Article 243Q provides that
there shall be constituted in every State- a Nagar Panchayat, a Municipal
Council and a Municipal Corporation, in accordance with the provisions E
of this Part. The proviso to sub-clause (1) provides that: “Provided that
a municipality under this clause may not be constituted in such urban
area or part thereof as the Governor may, having regard to the size of
the area and the municipal services being provided or proposed to be
provided for an industrial establishment in that area and such other factors
F
as may he may deem fit, by public notification, specify to be an industrial
township.”.
28. Thus, proviso does not contemplate constitution of an industrial
establishment as a Municipality rather clarifies an exception where
Municipality under clause (1) of Article 243Q may not be constituted in
an urban area. The proviso is an exception to the constitution of G
Municipality as contemplated by sub-clause (1) of Article 243Q. No
other interpretation of the proviso conforms to the constitution scheme.
29. A Constitution Bench of this Court had noticed the principles
of statutory interpretation of a proviso in S. Sundaram Pillai and others
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798 SUPREME COURT REPORTS [2018] 7 S.C.R.

A vs. V.R. Pattabiraman and others, 1985(1) SCC 591. The following
has been laid down by this Court in paragraphs 37 to 43:
“37. In short, generally speaking, a proviso is intended to
limit the enacted provision so as to except something which
would have otherwise been within it or in some measure to
B modify the enacting clause. Sometimes a proviso may be
embedded in the main provision and becomes an integral part
of it so as to amount to a substantive provision itself.
38. Apart from the authorities referred to above, this Court
has in a long course of decisions explained and adumbrated
C the various shades, aspects and elements of a proviso. In State
of Rajasthan v. Leela Jain,AIR 1965 SC 1296, the following
observations were made:
“So far as a general principle of construction of a proviso
is concerned, it has been broadly stated that the function
D of a proviso is to limit the main part of the section and
carve out something which but for the proviso would have
been within the operative part.”
39. In the case of STO, Circle-I, Jabalpur v. Hanuman Prasad ,
AIR 1967 SC 565, Bhargava, J. observed thus:
E “It is well-recognised that a proviso is added to a principal
clause primarily with the object of taking out of the scope
of that principal clause what is included in it and what the
legislature desires should be excluded.”
40. In Commissioner of Commercial Taxes v. R.S. Jhaver, AIR
F 1968 SC 59, this Court made the following observations:
“Generally speaking, it is true that the proviso is an
exception to the main part of the section; but it is recognised
that in exceptional cases a proviso may be a substantive
provision itself.”
G 41. In Dwarka Prasad v. Dwarka Das Saraf , AIR 1975 SC
1758 Krishna Iyer, J. speaking for the Court observed thus:
(SCC pp. 136-37, paras 16, 18)
“There is some validity in this submission but if, on a fair
construction, the principal provision is clean a proviso
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 799
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

cannot expand or limit it. Sometimes a proviso is engrafted A
by an apprehensive draftsman to remove possible doubts,
to make matters plain, to light up ambiguous edges. Here,
such is the case.
* * *
If the rule of construction is that prima facie a proviso B
should be limited in its operation to the subject-matter of
the enacting clause, the stand we have taken is sound. To
expand the enacting clause, inflated by the proviso, sins
against the fundamental rule of construction that a proviso
must be considered in relation to the principal matter to C
which it stands as a proviso. A proviso ordinarily is but a
proviso, although the golden rule is to read the whole
section, inclusive of the proviso, in such manner that they
mutually throw light on each other and result in a
harmonious construction.”
D
42. In Hiralal Rattanlal v. State of U.P. , 1973 (1)SCC 216,
this Court made the following observations: [SCC para 22,
p. 224: SCC (Tax) p. 315]
“Ordinarily a proviso to a section is intended to take out a
part of the main section for special treatment. It is not E
expected to enlarge the scope of the main section. But cases
have arisen in which this Court has held that despite the
fact that a provision is called proviso, it is really a separate
provision and the so-called proviso has substantially
altered the main section.”
F
43. We need not multiply authorities after authorities on this
point because the legal position seems to be clearly and
manifestly well established. To sum up, a proviso may serve
four different purposes:
(1) qualifying or excepting certain provisions from the main
G
enactment:
(2) it may entirely change the very concept of the intendment
of the enactment by insisting on certain mandatory
conditions to be fulfilled in order to make the enactment
workable:
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800 SUPREME COURT REPORTS [2018] 7 S.C.R.

A (3) it may be so embedded in the Act itself as to become an
integral part of the enactment and thus acquire the tenor
and colour of the substantive enactment itself; and
(4) it may be used merely to act as an optional addenda to
the enactment with the sole object of explaining the real
B intendment of the statutory provision.”
30. Applying rules of interpretation as laid down by this Court, it is
clear that proviso is an exception to the constitutional provisions which
provide that there shall be constituted in every State a Nagar Panchayat,
a Municipal Council and a Municipal Corporation. Exception is covered
C by proviso that where an industrial township is providing municipal
services the Governor having regard to the size of the area and the
municipal services either being provided or proposed to be provided by
an industrial establishment specify it to be an industrial township. The
words ‘industrial township’ have been used in contradiction of a Nagar
Panchayat, a Municipal Council and a Municipal Corporation. The object
D of issuance of notification is to relieve the mandatory requirement of
constitution of a Municipality in a State in the circumstances as mentioned
in proviso but exemption from constituting Municipality does not lead to
mean that the industrial establishment which is providing municipal
services to an industrial township is same as Municipality as defined in
E Article 243P(e). We have already noticed that Article 243P(e) defines
Municipality as an institution of self-government constituted under Article
243Q, the word constituted used under Article 243P(e) read with Article
243Q clearly refers to the constitution in every State a Nagar Panchayat,
a Municipal Council or a Municipal Corporation. Further, the words in
proviso “a Municipality under this clause may not be constituted” clearly
F means that the words “may not be constituted” used in proviso are clearly
in contradistinction with the word constituted as used in Article 243P(e)
and Article 243Q. Thus, notification under proviso to Article 243Q(1) is
not akin to constitution of Municipality. We, thus, are clear in our mind
that industrial township as specified under notification dated 24.12.2001
G is not akin to Municipality as contemplated under Article 243Q.
31. At this juncture, we may also notice the two judgments as
relied on by the High Court and three more judgments where Article
243Q came for consideration. The first judgment which needs to be
noticed is Adityapur Industrial Area Development Authority (supra).
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 801
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

The Adityapur Industrial Development Authority was constituted under A
the Bihar Industrial Area Development Authority Act, 1974. In paragraph
2 of the judgment the constitution of the authority was noticed which is
to the following effect:
“2. The appellant Authority has been constituted under the
Bihar Industrial Area Development Authority Act, 1974 to B
provide for planned development of industrial area, for
promotion of industries and matters appurtenant thereto. The
appellant Authority is a body corporate having perpetual
succession and a common seal with power to acquire, hold
and dispose of properties, both movable and immovable, to
contract, and by the said name sue or be sued. The Authority C
consists of a Chairman, a Managing Director and five other
Directors appointed by the State Government. The Authority
is responsible for the planned development of the industrial
area including preparation of the master plan of the area
and promotion of industries in the area and other amenities D
incidental thereto. The Authority has its own establishment
for which it is authorised to frame regulations with prior
approval of the State Government. The State Government is
authorised to entrust the Authority from time to time with any
work connected with planned development, or maintenance
of the industrial area and its amenities and matters connected E
thereto. Section 7 of the Act obliges the Authority to maintain
its own fund to which shall be credited moneys received by
the Authority from the State Government by way of grants,
loans, advances or otherwise, all fees, rents, charges, levies
and fines received by the Authority under the Act, all moneys F
received by the Authority from disposal of its movable or
immovable assets and all moneys received by the Authority
by way of loan from financial and other institutions and
debentures floated for the execution of a scheme or schemes
of the Authority duly approved by the State Government.
Unless the State Government directs otherwise, all moneys G
received by the Authority shall be credited to its funds which
shall be kept with State Bank of India and/or one or more of
the nationalised banks and drawn as and when required by
the Authority.”
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802 SUPREME COURT REPORTS [2018] 7 S.C.R.

A 32. On the question as to whether the Adityapur Industrial Area
Development Authority was covered within the meaning of local authority
as per Section 10(20) as amended by the Finance Act, 2002, the High
Court held that the appellant authority could not have claimed benefit
under the provisions after 01.04.2003. In paragraphs 6 and 7 following
was held:
B
“6. It would thus be seen that the income of a local authority
chargeable under the head “Income from house property”,
“Capital gains” or “Income from other sources” or from a
trade or business carried on by it was earlier excluded in
computing the total income of the Authority of a previous year.
C However, in view of the amendment, with effect from 1-4-2003
the Explanation “local authority” was defined to include only
the authorities enumerated in the Explanation, which does
not include an authority such as the appellant. At the same
time Section 10(20-A) which related to income of an authority
D constituted in India by or under any law enacted for the
purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development
or improvement of cities, towns and villages, which before
the amendment was not included in computing the total
income, was omitted. Consequently, the benefit conferred by
E sub-section (20-A) on such an authority was taken away.
7. The High Court by its impugned judgment and order held
that in view of the fact that Section 10(20-A) was omitted and
an Explanation was added to Section 10(20) enumerating the
“local authorities” contemplated by Section 10(20), the
F appellant Authority could not claim any benefit under those
provisions after 1-4-2003. It further held that the exemption
under Article 289(1) was also not available to the appellant
Authority as it was a distinct legal entity, and its income could
not be said to be the income of the State so as to be exempt
G from Union taxation. The said decision of the High Court is
impugned in this appeal.”
33. One of the submissions which was raised before this Court
was that exemption under Article 289(1), was also available to the
appellant-Authority. The said submission was considered and negativated.
H
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 803
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

Apart from rejecting the claim under Article 289(1), this court noticing A
Section 10(20) has held in paragraph 13:
“13. Applying the above test to the facts of the present case it
is clear that the benefit, conferred by Section 10(20-A) of the
Income Tax Act, 1961 on the assessee herein, has been
expressly taken away. Moreover, the Explanation added to B
Section 10(20) enumerates the “local authorities” which do
not cover the assessee herein. Therefore, we do not find any
merit in the submission advanced on behalf of the assessee.”
34. In the present case although exemption under Article 289 was
not claimed or contended but the above judgment cannot be said to be C
not relevant to the present case since, the Court has also dwelled upon
Section 10(20) as amended w.e.f. 01.04.2003. We, thus, do not accept
the submission of the appellant that the above case was not relevant for
the present case and was wrongly relied on by the High Court.
35. The second judgment which is relied on by the High court is D
Agricultural Produce Market Committee, Narela (supra). The
Agricultural Produce Market Committee was constituted under the Delhi
Agricultural Produce Marketing (Regulation) Act, 1998. The question
arose as to whether Agricultural Market Committee is a “local authority”
under the Explanation to Section 10(20) of the Income Tax Act, 1961. In
the above context it was noticed that all Agricultural Market Committees E
at different places were enjoying exemption from income tax under
Section 10(20) prior to its amendment by the Finance Act, 2002 w.e.f.
01.04.2003. The definition of ‘local authority’ under Section 3(31) of
General Clauses Act, 1897 is as follows:
“”local authority” shall mean a municipal committee, district F
board, body or port Commissioners or other authority legally
entitled to, or entrusted by the Government with, the control
or management of a municipal or local fund;”
36. In the above case this Court noticed in extenso the provisions
of Delhi Agricultural Produce Marketing (Regulation) Act, 1998 and G
provisions of Section 10(20) of the Income Tax Act, 1961. Definition of
local authority as contained in Explanation to Section 10(20) and Section
3(31) of the General Clauses Act was also noticed and discussed. This
Court held that the definition of local authority in General Clauses Act
under Section 3(31) is no longer applicable after the amendment of Section
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804 SUPREME COURT REPORTS [2018] 7 S.C.R.

A 10(20) by Finance Act, 2002. Following was laid down by this Court in
paragraphs 31 and 32:
31. Certain glaring features can be deciphered from the above
comparative chart. Under Section 3(31) of the General
Clauses Act, 1897, “local authority” was defined to mean “a
B Municipal Committee, District Board, Body of Port
Commissioners or other authority legally entitled to … the
control or management of a municipal or local fund”. The
words “other authority” in Section 3(31) of the 1897 Act have
been omitted by Parliament in the Explanation/definition
clause inserted in Section 10(20) of the 1961 Act vide the
C Finance Act, 2002. Therefore, in our view, it would not be
correct to say that the entire definition of the word “local
authority” is bodily lifted from Section 3(31) of the 1897 Act
and incorporated, by Parliament, in the said Explanation to
Section 10(20) of the 1961 Act. This deliberate omission is
D important.
32. It may be noted that various High Courts had taken the
view prior to the Finance Act, 2002 that AMC(s) is a “local
authority”. That was because there was no definition of the
word “local authority” in the 1961 Act. Those judgments
E proceeded primarily on the functional tests as laid down in
the judgment of this Court vide para 2 in R.C. Jain. We quote
hereinbelow para 2 which reads as under: (SCC pp. 311-12)
“2. Let us, therefore, concentrate and confine our attention
and enquiry to the definition of ‘local authority’ in Section
F 3(31) of the General Clauses Act. A proper and careful
scrutiny of the language of Section 3(31) suggests that an
authority, in order to be a local authority, must be of like
nature and character as a Municipal Committee, District Board
or Body of Port Commissioners, possessing, therefore, many,
if not all, of the distinctive attributes and characteristics of a
G Municipal Committee, District Board, or Body of Port
Commissioners, but, possessing one essential feature, namely,
that it is legally entitled to or entrusted by the Government
with, the control and management of a municipal or local
fund. What then are the distinctive attributes and
H characteristics, all or many of which a Municipal Committee,
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 805
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

District Board or Body of Port Commissioners shares with A
any other local authority? First, the authorities must have
separate legal existence as corporate bodies. They must not
be mere governmental agencies but must be legally
independent entities. Next, they must function in a defined
area and must ordinarily, wholly or partly, directly or indirectly,
B
be elected by the inhabitants of the area. Next, they must enjoy
a certain degree of autonomy, with freedom to decide for
themselves questions of policy affecting the area administered
by them. The autonomy may not be complete and the degree
of the dependence may vary considerably but, an appreciable
measure of autonomy there must be. Next, they must be C
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,
D
transportation, social welfare services, etc. etc. Broadly we
may say that they may be entrusted with the performance of
civic duties and functions which would otherwise be
governmental duties and functions. Finally, they must have
the power to raise funds for the furtherance of their activities
and the fulfilment of their projects by levying taxes, rates, E
charges, or fees. This may be in addition to moneys provided
by Government or obtained by borrowing or otherwise. What
is essential is that control or management of the fund must
vest in the authority.”
37. The Court further held that Explanation under Section 10(20) F
provides an exhaustive definition and the tests laid down by this Court in
an earlier case i.e. Union of India and others vs. R.C. Jain and others,
1981 (2) SCC 308, are no longer applicable. In paragraph 35 following
was stated:
“35. One more aspect needs to be mentioned. In R.C. Jain the G
test of “like nature” was adopted as the words “other
authority” came after the words “Municipal Committee,
District Board, Body of Port Commissioners”. Therefore, the
words “other authority” in Section 3(31) took colour from
the earlier words, namely, “Municipal Committee, District
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806 SUPREME COURT REPORTS [2018] 7 S.C.R.

A Board or Body of Port Commissioners”. This is how the
functional test is evolved in R.C. Jain 2. However, as stated
earlier, Parliament in its legislative wisdom has omitted the
words “other authority” from the said Explanation to Section
10(20) of the 1961 Act. The said Explanation to Section 10(20)
provides a definition to the word “local authority”. It is an
B
exhaustive definition. It is not an inclusive definition. The
words “other authority” do not find place in the said
Explanation. Even, according to the appellant(s), AMC(s) is
neither a Municipal Committee nor a District Board nor a
Municipal Committee nor a panchayat. Therefore, in our view
C functional test and the test of incorporation as laid down in
R.C. Jain2 is no more applicable to the Explanation to Section
10(20) of the 1961 Act. Therefore, in our view the judgment
of this Court in R.C. Jain2 followed by judgments of various
High Courts on the status and character of AMC(s) is no
more applicable to the provisions of Section 10(20) after the
D
insertion of the Explanation/definition clause to that sub-
section vide the Finance Act, 2002.”
38. This Court held that Agricultural Marketing Committee is also
not covered by the words “Municipal Committee, District Board, Body
of Port Commissioners” as used in Explanation of Section 10(20).
E
39. In this context, we also refer to the judgment of this Court in
Saij Gram Panchayat vs. State of Gujarat an others, 1999 (2) SCC
366. This Court had occasion to consider in the above case Gujarat
Industrial Development Act, 1962, the provisions of Article 243Q and
Gujarat Municipalities Act, 1963.
F
40. This Court held that Gujarat Industrial Development Act
operates in a totally different sphere from Parts IX and IXA of the
Constitution and the Gujarat Panchayats Act, 1961. In paragraph 16 of
the judgment following was held:

G “The Gujarat Industrial Development Act operates in a
totally different sphere from Parts IX and IX-A of the
Constitution as well as the Gujarat Panchayats Act, 1961 and
the Gujarat Municipalities Act, 1962 — the latter being
provisions dealing with local self-government, while the former
being an Act for industrial development and orderly
H establishment and organisation of industries in a State.”
NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY v. 807
CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

41. It is, however, true that in the above case this Court was not A
concerned with the issue which has arisen in the present case and the
Court was concerned with a different controversy.
42. We, thus, conclude that authority constituted under Act, 1976
with regard to which notification under proviso to Article 243Q(1) dated
24.12.2001 has also been issued is not akin to the Municipality constituted B
under Article 243Q(1).
B. Section 10(20) as amended by the Finance Act, 2002
43. We have already noticed that by the Finance Act, 2002 an
Explanation has been added to Section 10(20) of the I.T. Act, 1961 and
Section 10(20A) has been omitted. Prior to Finance Act, 2002 there C
being no definition of ‘local authority’ under the I.T. Act, the provisions
of Section 3(31) of the General Clauses Act, 1897 were pressed into
service while interpreting the extent and meaning of local authority. The
Explanation having now contained the exhaustive definition of local
authority, the definition of local authority as contained in Section 3(31) of D
General Clauses Act, 1892 is no more applicable. Section 3 of the General
Clauses Act begins with the words “In this Act, and in all Central Acts
and Regulations made after the commencement of this Act, unless there
is anything repugnant in the subject or context,-.... The definition given
of the local authority under Section 3(31) does not now govern the field
in view of the express omission of the expression “all other authority”. E
This Court has already in Agricultural Produce Market Committee,
Narela (supra), held that definition under Section 3(31) of the General
Clauses Act is now no more applicable to interpret local authority under
Section 10(20) of the I.T. Act. Before we proceed further it shall be
useful to notice certain well settled principles of statutory interpretation F
of fiscal statutes. This Court in A.V. Fernandez vs. The State of Kerala,
AIR 1957 SC 657 laid following:
“(29) It is no doubt true that in construing fiscal statutes
and in determining the liability of a subject to tax one must
have regard to the strict letter of the law and n ot merely to G
the spirit of the statute or the substance of the law. If the
Revenue satisfies the Court that the case falls strictly within
the provisions of the law, the subject can be taxed. If on the
other hand, the case is not covered within the four corners of
the provisions of the taxing statute, no tax can be imposed by
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A inference or by analogy or by trying to probe into the
intentions of the legislature and by considering what was the
substance of the matter. We must of necessity, therefore, have
regard to the actual provisions of the Act and the rules made
thereunder before we can come to the conclusion that the
appellant was liable to assessment as contended by the Sales
B
Tax Authorities.”
44. This Court in Rajasthan Rajya Sahakari Spinning and
Ginning Mills Federation Limited vs. Deputy Commissioner of
Income Tax, Jaipur, 2014(11) SCC 672 again reiterated that there
has to be strict interpretation of taxing statutes and further the fact that
C one class of legal entities are given some benefit which is specifically
stated in the Act does not mean that the legal entities not referred to in
the Act would also get the same benefit. Following was laid down in
paragraph 23:
“23. We are also of the view that in all the tax matters one has
D to interpret the taxation statute strictly. Simply because one
class of legal entities are given some benefit which is
specifically stated in the Act does not mean that the legal
entities not referred to in the Act would also get the same
benefit. As stated by this Court on several occasions, there is
E no equity in matters of taxation. One cannot read into a section
which has not been specifically provided for and therefore,
we do not agree with the submissions of the learned counsel
appearing for the appellant and we are not prepared to read
something in the section which has not been provided for.
The judgments referred to hereinabove support the view which
F we have expressed here.”
45. It shall be useful to refer to Explanatory Notes on Finance
Act, 2002. Explanatory Notes both on Section 10(20) and Section 10(20A)
are relevant and contained in paragraph 12.2 to 12.4 and 13.1 to 13.4.
Paragraphs 12.2. to 12.4 under the heading: Income of certain Local
G Authorities to become taxable are to the following effect:
“12.2 Through Finance Act, 2002, this exemption has been
restricted to the Panchayats and Municipalities as referred
to in Articles 243(d) and 243(p)(e) of the Constitution of India
respectively. Municipal Committees and District Boards, legally
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entitled to or entrusted by the Government with the control or A
management of a Municipal or a local fund and Cantonment
Boards as defined under section 3 of the Cantonments Act,
1924.
12.3 The exemption under clause (20) of section 10 would,
therefore, not be available to Agricultural Marketing Societies B
and Agricultural Marketing Boards, etc., despite the fact that
they may be deemed to be treated as local authorities under
any other Central or State Legislation. Exemption under this
clause would not be available to port trusts also.
12.4 This amendment will take effect from 1st April, 2003 and C
will, accordingly, apply in relation to the assessment year
2003 2004 and subsequent assessment years.”
46. Further paragraphs 13.1 to 13.4 of the Explanatory Notes
contained heading: “Income of certain Housing Boards etc. to
become taxable” on deletion of Clause (20A), are as stated below: D
“13.1 Under the existing provisions contained in clause (20A)
of section 10, income of the Housing Boards or other statutory
authorities set up for the purpose of dealing with or satisfying
the need for housing accommodations or for the purpose of
planning, development or improvement of cities, towns and E
villages is exempt from payment of income tax.
13.2 Through Finance Act, 2002 clause (20A) of section 10
has been deleted so as to withdraw exemption available to
the abovementioned bodies. The income of Housing Boards
of the States and of Development Authorities would, therefore, F
also become taxable.
13.3 Under section 80G, donation made to housing authorities,
etc. referred to in clause (20A) of section 10 is eligible for
50% deduction from total income in the hands of the donors.
Since clause (20A) of section 10 has been deleted, donation
G
to the housing authorities etc. would not be eligible for
deduction in the hands of the donors and this may result in
drying up of donations. To continue the incentive to donation
made to housing authorities etc., section 80G has been
amended so as to provide that 50% of the sum paid by an
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A assessee to an authority constituted in India by or under any
law enacted either for the purpose of dealing with and
satisfying the need for housing accommodation or for the
purpose of planning, development or improvement of cities,
towns and villages, or for both, shall be deducted from the
total income of such assessee.
B
13.4 These amendments will take effect from lst April, 2003
and will, accordingly, apply in relation to the assessment year
2003 2004 and subsequent assessment years.”
47. The explanatory note clearly indicates that by Finance Act,
C 2002 the exemption under Section 10(20) has been restricted to the
Panchayats and Municipalities as referred to in Articles 243P(d) and
243P(e). Further by deletion of Clause (20A), the income of the Housing
Boards of the States and of Development Authorities became taxable.
48. On a writ petition filed by the appellant before the Allahabad
D High Court where the notices issued in the year 1998 under Section 142
of the Income Tax Act was challenged vide its judgment dated 14.02.2000
the High Court held that appellant’s case comes squarely under Section
10(20A) of the Income Tax Act, hence, the appellant was liable to be
exempted under the said Act, although, the High Court did not express
any opinion on the question whether appellant was exempted under
E Section 10(20) in that judgment.
49. After omission of Section 10(20A) only provision under which
a Body or Authority can claim exemption is Section 10(20). Local authority
having been exhaustively defined in the Explanation to Section 10(20)
an entity has to fall under Section 10(20) to claim exemption. It is also
F useful to notice that this Court laid down in State of Gujarat and others
vs. ESSAR Oil Limited and another, 2012 (3) SCC 522, that a person
invoking an exception or an exemption provision to relieve him of the tax
liability must establish clearly that he is covered by the said provision. It
is useful to extract paragraph 88 which is to the following effect:
G “88. This Court in Novopan case, 1994 Supp (3) SCC 606,
held that the principle that in case of ambiguity, a taxing statute
should be construed in favour of the assessee, does not apply
to the construction of an exception or an exempting provision,
as the same have to be construed strictly. Further this Court
also held that a person invoking an exception or an exemption
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CHIEF COMMNR. OF INCOME TAX [ASHOK BHUSHAN, J.]

provision to relieve him of the tax liability must establish A
clearly that he is covered by the said provision and in case of
doubt or ambiguity, benefit of it must go to the State.”
50. For interpreting an explanation this Court in s. Sundaram
Pillai and others vs. V.r. Pattabiraman and others, 1985 (1) SCC
591, laid down in paragraphs 47 and 53 as follows: B
“47. Swarup in Legislation and Interpretation very aptly sums
up the scope and effect of an Explanation thus:
“Sometimes an Explanation is appended to stress upon a
particular thing which ordinarily would not appear clearly
from the provisions of the section. The proper function of an C
Explanation is to make plain or elucidate what is enacted in
the substantive provision and not to add or subtract from it.
Thus an Explanation does not either restrict or extend the
enacting part; it does not enlarge or narrow down the scope
of the original section that it is supposed to explain.... The D
Explanation must be interpreted according to its own tenor;
that it is meant to explain and not vice versa.” (pp. 297-98)
53. Thus, from a conspectus of the authorities referred to
above, it is manifest that the object of an Explanation to a
statutory provision is— E
“(a) to explain the meaning and intendment of the Act itself,
(b) where there is any obscurity or vagueness in the main
enactment, to clarify the same so as to make it consistent with the
dominant object which it seems to subserve,
F
(c) to provide an additional support to the dominant object of the
Act in order to make it meaningful and purposeful,
(d) an Explanation cannot in any way interfere with or change
the enactment or any part thereof but where some gap is left
which is relevant for the purpose of the Explanation, in order to
suppress the mischief and advance the object of the Act it can G
help or assist the Court in interpreting the true purport and
intendment of the enactment, and
(e) it cannot, however, take away a statutory right with which
any person under a statute has been clothed or set at naught the
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A working of an Act by becoming an hindrance in the interpretation
of the same.”
51. This Court in Adityapur Industrial Area Development
Authority (supra) after considering Section 10(20) as amended by the
Finance Act, 2002 and consequences of deletion of Section 10(20A) has
B laid down following in paragraph 13:
“13. Applying the above test to the facts of the present case it
is clear that the benefit, conferred by Section 10(20-A) of the
Income Tax Act, 1961 on the assessee herein, has been
expressly taken away. Moreover, the Explanation added to
C Section 10(20) enumerates the “local authorities” which do
not cover the assessee herein. Therefore, we do not find any
merit in the submission advanced on behalf of the assessee.”
52. It is also relevant to notice that this Court in Gujarat Industrial
Development Corporation vs. Commissioner of Income Tax, 1997
D (7) SCC 17, after considering the provisions of Section 10(20A) of I.T.
Act held that Gujarat Industrial Development Corporation is entitled for
exemption under Section 10(20A). The Gujarat Industrial Development
Corporation was held to be entitled for exemption under Section 10(20A)
at the time when the provision was in existence in the statute book and
after its deletion from the statute book the exemption is no more available.
E Now, reverting back to Section 10(20) as amended by Finance Act,
2002, the same has also come for consideration before different High
Courts. A Division Bench of the Allahabad High court in Krishi Utpadan
Mandi Samiti vs. Union of India and another, (2004) 267 ITR 460
stated following:
F “A bare perusal of the Explanation of Section 10(20) shows
that now only four entities are local authorities for the purpose
of Section 10(20), namely, (i) Panchayat, (ii) Municipality;
(iii) Municipal Committee and District Board; (iv) Cantonment
Board Krishi Utpadan Mandi Samiti is not one of the entities
G mentioned in the Explanation to Section 10(20).
It may be noted that the Explanation to Section 10(20) uses
the word ‘means’ and not the word ‘includes’. Hence, it is not
possible for this Court to extend the definition of ‘local
authority’ as contained in the Explanation to Section 10(20),
vide P. Kasilingam v. P.S.G. College of Technology, AIR 1995
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SC 1395 (para 19). It is also not possible to refer to the A
definitions in other Acts, as the IT Act now specifically defines
‘local authority’.
It is well settled that in tax matters the literal rule of
interpretation applies and it is not open to the Court to extend
the language of a provision in the Act by relying on equity, B
inference, etc.
It is the first principle of interpretation that a statute should
be read in its ordinary, natural and grammatical sense as
observed by the Supreme Court of India:
“In construing a statutory provision the first and foremost C
rule of construction is the literary construction. All that
the Court has to see at the very outset is what does the
provision say. If the provision is unambiguous and if from
the provision the legislative intent is clear, the Court need
not call into aid the other rules of construction of statutes. D
The other rules of construction are called into aid only
when the legislative intent is not clear” vide Hiralal
Ratanlal v. STO, AIR 1973 SC 1034;”
53. A Division Bench of the Delhi High Court also in Agricultural
Produce Market Committee vs. Commissioner of Income-tax, E
(2006)156 ITR 286 had occasion to consider Section 10(20) as amended
w.e.f. 01.04.2003 where the High court in paragraph 8 has stated the
following:
“8. The most striking feature of the Explanation is that the
same provides an exhaustive meaning to the expression “local F
authority”. The word “means” used in the Explanation leaves
no scope for addition of any other entity as a ‘local authority’
to those enlisted in the Explanation. In other words, even if
an entity constitutes a ‘local authority’ for purposes of the
General Clauses Act, 1897 or for purposes of any other
enactment for that matter, it would not be so construed for G
purposes of section 10(20) of the Act unless it answers the
description of one of those entities enumerated in the
Explanation. Mrs. Ahlawat did not make any attempt to bring
her case under clauses (i), (ii) and (iv) of the Explanation
and in our opinion rightly so because the appellant committee
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A cannot by any process of reasoning be construed as a
Panchayat as referred to in clause (d) of Art. 243 of the
Constitution of India, a municipality in terms of clause (e) of
Art. 243P of the Constitution of India or a Cantonment Board
as defined under section 3 of the Cantonments Act, 1924.
What she argued was that looking to the nature of the functions
B
enjoined upon the appellant committee, it must be deemed to
be a municipal committee within the meaning of that expression
in clause (iii) of the Explanation. We regret our inability to
accept that submission. We say so for two distinct reasons.
Firstly because the expression “municipal committee” appears
C in a taxing statute and must, Therefore, be construed strictly.
It is fairly well-settled by a long line of decisions rendered by
the Supreme Court that while interpreting a taxing statute,
one has simply to look to what is clearly stated therein. There
is, in fiscal statutes, no room for any intendment nor is there
any equity about the levy sanctioned under the same. The
D
following passage from Cape Brandy Syndicate v. IRC 1921
(1) KB 64 has been approved by the Apex Court in the
decisions rendered by their Lordships.
“in a taxing Act one has to look merely at what is clearly
said. There is no room for any intendment. There is no
E equity about a tax. There is no presumption as to a tax.
Nothing is to be read in, nothing is to be implied, One can
only look fairly at the language used.”
54. We fully endorse the views taken by the High Court in the
above two judgments.
F
55. Now, reverting back to Explanation to Section 10(20), these
are entities which mean the local authority. The submission of the appellant
is that the appellant is covered by Clause (ii) of the Explanation i.e.
“Municipality as referred to in clause (e) of Article 243P of the
Constitution”. We, while discussing above provisions, have already held
G that the appellant is not covered by the word/expression of “Municipality”
in clause (e) of Article 243P. Thus, the appellant is not clearly
included in sub-clause (ii) of Explanation. It is not even the case of the
appellant that the appellant is covered by Section 10(20) except clause
(ii).
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56. Thus, we are of the considered opinion that the appellant is A
not covered by the definition of local authority as contained in Explanation
to Section 10(20).
57. In view of what has been stated above, we dismiss these
appeals.
B

Ankit Gyan Appeals dismissed.

C

D

E

F

G

H