PETITIONER: ANDHRA PRADESH STATE ROAD TRANSPORTCORPORATION Vs. RESPONDENT: THE INCOME-TAX OFFICER AND ANR. DATE OF JUDGMENT: 05/03/1964 BENCH: GAJENDRAGADKAR, P.B. (CJ) BENCH: GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N. SHAH, J.C. AYYANGAR, N. RAJAGOPALA SIKRI, S.M. CITATION: 1964 AIR 1486 1964 SCR (7) 17 CITATOR INFO : RF 1975 SC1331 (110,171,179) F 1982 SC 697 (21A) RF 1986 SC1054 (1,11) F 1988 SC1708 (13) RF 1988 SC1737 (50) D 1989 SC1713 (10) ACT: Income-tax-Income of State Road Transport Corporation whether income of the State-Whether exempt-Constitution of India, Art. 289-Income-tax Act, 1922 (11 of 1922), s. 22. HEADNOTE: The Income-tax Officer (respondent No.(1) served a notice under s. 22 of the Income-tax Act on the appellant. Upon the receipt of the notice, the appellant appeared before the Income-tax Officer. The appellant pleaded before the Income-tax Officer that it did not fall under any of the five categories of assessees under s. 3 of the Income-tax Act. The appellant also raised the contention that it was a local authority exempt from income-tax. All these contentions were rejected by respondent No. 1 with the result that the impugned orders of assessment came to be passed. The appellant filed Writ Petitions before the High Court in which it challenged the impugned orders of assessment passed by respondent No. 1. In its Writ Petitions, the appellant claimed an ,order, writ or other appropriate direction quashing the assessment orders passed by respondent No. 1. The High Court dismissed these writ petitions. The High Court held that the appellant could not claim the exemption under Art. 289(1) because it was not a state-owned Corporation. The High Court granted a certificate under Art. 133 of the Constitution and hence the appeal. Held: (i) Art. 289 of the Constitution consists of three clauses. The first clause confers exemption from union taxation on the property and income of a State. Clause (2) then provides that the income from trade or busi- ness carried on by the Government of a State or on its behalf which would not have been taxable under cl. (1), can be taxed, provided a law is made by Parliament in that behalf. In other words cl. (2) is an exception to cl. (1). Clause (3) then empowers Parliament to declare by law that any trade or business would be taken out of the purview of cl. (2) and restored to the area covered by cl. (1) by declaring that the said trade or business is incidental to the ordinary functions of Government. In other words, cl. (3) is an exception to the exception prescribed by cl. (2). (ii) A trading activity carried on by the corporation (appellant) is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf because according to statute the Corporation has a personality of its own and this personality is distinct from that of the State or other shareholders. All the relevant provisions of the impugned Act also emphatically bring out the separate personality of the Corporation. Section 30 of the Act also does not suggest that the income of the 18 Corporation is the income of the State. All that s. 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development. Therefore, the income derived by the appellant from its trading activity cannot be said to be the income of the State either under cl. (1) or cl. (2) of Art. 289. The American doctrine of the immunity of State agencies or instrumentalities from Federal taxation has no application to the present case. Akadasi Padhan v. State of Orissa [1963] Supp. 2 S.C.R. 691, distinguished. Mark Graves, John J. Merrill and John P. Hennessy v. People of the State of New York Upon the Relation of James B.O'keefe, 83 Law. Ed. 927 and Clallan County v. United States of America, 68 Law Ed. 328, no application. State of West Bengal v. Union of India [1964] 1 S.C.R. 371, relied on. M'Culloch v. Maryland, (1819) 4 Wheat 316, Bank of Toronto v. Lambe (1887) 12 A.C. 575 and Webb v. Outrim [1907] A.C. 81, referred to. Tamlin v. Hansaford, [1950] K.B. 18, relied on. (iii)It is hardly necessary for the Act to make a provision that tax,if chargeable would be paid. In fact, the Companies Act which deals with companies does not make such a specific provision, though no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income-tax Act. There is no repugnancy between the charging section of the Income-tax Act and ss. 29 and 30 of the Act. All that ss. 29 and 30 of the impugned Act purport to do is to provide for the administration of the funds vesting in the Corporation and their disposal. These provisions are not inconsistent with the liability to pay tax which is imposed by the Income-tax Act. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.475-478 of
1963.
Appeal from the order dated July 14, 1961 of the Andhra
Pradesh High Court in Writ Petition Nos. 516 to 519 of 1960.
D. Narsaraju, Advocate-General, Andhra Pradesh, P. R.
Ramchandra Rao and T. V. R. Tatachari, for the appellant (in
all the appeals).
K. N. Rajagopala Sastri, Gopal Singh and R. N. Sachthey,
for the respondents (in all the appeals).
Rajeshwari Prasad and S. P. Varma, for Intervener No. 1 (in
all the appeals).
B. Seri, S. C. Bose and P. K. Bose, for Intervener No. 2
(in all the appeals).
M. C. Setalvad, S. C. Bose and P. K. Bose, for Intervener
No. 3 (in all the appeals).
19
March 5. 1964. The judgement of the Court was delivered
by—
GAJENDRAGADKAR, C.J.-These four appeals arise from four,
writ petitions filed by the appellant, the Andhra Pradesh
State Road Transport Corporation, in the High Court of
Andhra Pradesh against the Income-tax Officer, and the
Appellate Assistant Commissioner of Income-tax, Hyderabad,
respondents 1 and 2 respectively, in which it claimed a writ
of prohibition restraining them from collecting any tax, or
taking any proceedings under the Indian Income Tax Act
against them. In its writ petitions, the appellant further
claimed an order, writ, or other appropriate direction
quashing the assessment orders passed by respondent No. 1 on
the 29th February, 1960. for the years 1958-59 and 1959-60.
For the first year, a tax of Rs. 13,60.963.86 nP. has been
imposed for the period 11-1-1958 to the 31-3-1958, and for
the latter year, a tax of Rs. 34,44,430.48 nP. has been
levied for the period 1-4-1958 to 31-3-1959. After hearing
the parties, the High Court has dismissed the appellant’s
writ petitions with costs. The appellant then applied for
and obtained a certificate from the High Court and it is
with the said certificate that these four appeals have been
brought to this Court.
It appears that the appellant was established under the Road
Transport Corporations Act, 1950 (No. 64 of 1950)
(hereinafter called the Act) by a notification issued by the
Andhra Pradesh Government and it has been functioning with
effect from the 11th January, 1958. Before the formation of
the appellant Corporation, the road transport was a depart-
ment of the Government of Hyderabad and after integration of
Hyderabad with Andhra Pradesh, it was run by the Government
of Andhra Pradesh. During the whole of this period, the
road transport was treated as exempt from income-tax. After
the appellant Corporation was, however, formed the Income-
tax Department took the view that the income made by the
appellant was liable to tax, and so, a notice under s. 22 of
the Income-Tax Act was served on the appellant on the 29th
January, 1959. In pursuance of the proceedings which were
taken after service of the notice, the impugned orders of
assessment were passed. Before the Income-tax Officer, it
was urged by the appellant that since the appellant was an
independent body carrying on the business of road transport,
it did not fall Linder any of the five categories of
assessees under s. 3 of the Income-tax Act; it was neither
an individual, nor a Hindu undivided family, nor a firm, nor
a company, nor an association of persons, and as it was
outside the said five categories of assessees, no tax could
be levied against it. It was further argued that the net
income of the appellant ultimately goes to the State of
Andhra Pradesh under s. 30 of the Act, and is such it was
immune from Union taxation under
20
Art. 289 of the Constitution. Yet, another contention was
raised in support of the plea that the noice issued by
respondent No. 1 was invalid, and that was that the
appellant was a local authority exempt from income-tax. All
these contentions were rejected by respondent No. 1, with
the result that the impugned orders of assessment came to be
passed. It is the validity of these orders that the
appellant challenged before the Andhra Pradesh High Court.
The High Court has held that the appellant is not a State-
owned Corporation and that it is not carrying on business on
behalf of the Government. It has also observed that the
trade or business which the appellant was carrying on was
not incidental to the ordinary functions of government, and
since no declaration had been made to that effect under Art.
289(3), the appellant could not rely on Art. 289(1). The
contention that the appellant was a local authority which
was urged before the High Court was rejected, and the
argument that the charging section of the Income-tax Act was
repugnant with the material provisions of the Act, such as
sections 28, 29 and 30, was also held to be without any
substance by the High Court. Thus, since none of the
arguments urged by the appellant before the High Court was
accepted, the writ petitions filed by it were dismissed.
The main point urged before us by the learned Advocate-
General of Andhra Pradesh on behalf of the appellant is that
the income in respect of which the impugned order of assess-
ment has been passed by respondent No. 1, is exempt from
Union taxation under Art. 289(1) of the Constitution, and
that raises the question about the construction and effect
of the provisions of the three clauses of Art. 289. Let us,
therefore, read the said article:
“289. (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 authorising the imposition of, any tax to such
extent, if any, as Parliament may by law provide in respect
of a trade or business of any kind carried on by, or on
behalf of, the Government of a State, or any operations
connected therewith, or any property used or occupied or any
income accruing or arising in connection therewith.
(3) 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 government.”
21
The learned Advocate-General concedes that the transport
activity carried on by the appellant is strictly not inci-
dental to the ordinary functions of government. It is true
that in a modern democratic Welfare State, Government has to
undertake several economic activities some of which are
trade activities, while others are commercial activities,
because the pursuit of the welfare policies inevitably
requires that Government should help the process of economic
improvement of its citizens. However desirable these
socioeconomic activities may be and however legitimate may
be the attempt of the State Government to undertake them,
there is no denying the fact that the ordinary functions of
the Government to which clause (3) of Art. 289 refers must
be distinguished from these socioeconomic activities. The
Advocate-General, however, urges that though the trade
activities of the appellant may thus be distinguishable from
the ordinary functions of Government, they are nevertheless
included in Art. 289(1) and income derived by the appellant
from the said activities falls within the protection of Art.
289(1).
This argument proceeds on the assumption that clause (2) of
Art. 289 is an exception or proviso to clause (1) and as
such, whatever is included in clause (2) must be deemed to
have been included also in clause (1); otherwise, the
proviso cannot be logically explained. It is because the
trading or commercial activities of the government of a
State to which the said clause refers were originally
included in clause (1) that it became necessary to provide
by clause (2) that the said trading or commercial activities
carried on by the Government of a State would not claim the
benefit of exemption prescribed by clause (1). That is how
the Advocate-General seeks to include trading or business
activities mentioned in cl. (2) in cl. (1) itself. Logi-
cally, no exception can be taken to this approach.
The next stage in the argument urged by the Advocate-General
is that clause (2) is wide enough to include the trading
activities carried on by the appellant and as a result of
the width of its scope, the appellant’s activities can be
treated as the commercial activities carried on by the
Government of Andhra Pradesh itself. It will be noticed
that clause (2) refers to a trade or business of any kind
carried on by or on behalf of the Government of a State.
The argument is that the first part of the clause refers to
the trade or business carried on by the Government and that
means, carried on by the Government either departmentally or
by agents appointed by the Government in that behalf.
Whether the department carried on the business or an agent
specifically and exclusively appointed for that purpose
carries it on, it is the business carried on by the State.
The latter part of the clause refers to trade or business
carried on on behalf of the Government of a State and it is
22
suggested that this part of the clause is intended to take
in trade or business carried on by a Corporation like the
appellant which is either State-owned, or State-controlle.
The appellant Corporation, says the Advocate-General, ;Is
undoubtedly State-controlled and he would suggest that it is
also owned by the State of Andhra Pradesh. Therefore, the
commercial activity carried on by the appellant must be
deemed to be an activity carried on on behalf of the State
of Andhra Pradesh, and it is with this postulate that the
argument reverts to clause (1) of Art. 289 and urges that
the income received by the appellant in respect of
commercial activities carried on by it on behalf of the
Government of Andhra Pradesh is exempt from Union taxation.
In support of this argument, the Advocate-General has
relied. on a recent decision of this Court in Akadasi Padhan
v. State of Orissa & Others(1) In that case, this Court had
occasion to consider the scope and effect of the provisions
contained in Art. 19(6). It will be recalled that Art.
19(6) authorrises the State, inter (ilia, to make any law
relating to the carrying on by the State or by a Corporation
owned or controlled by the State, of any trade, business,
industry or service, whether to the exclusion, complete or
partial, of citizens or otherwise. One of the points which
fell to be considered in the Akadasi Padhan case was the
effect of the words “a law relating to the carrying on by
the State of any trade or business.” Dealing with this
question, this Court held that though normally, the trade
specified in the clause would be carried on by the State
departmentally or with the assistance of public servants
appointed in that behalf, there may be cases of some trades
or business in which it would be open to the State to employ
the services of agents, provided the agents work on behalf
of the State and not for themselves. Relying upon this
decision, the Advocate-General argues that when clause (2)
of Art. 289 refers to trade or business carried on by tile
Government of a State, it includes trade or business carried
on by the Government either departmentally or with the
assistance of agents appointed in that behalf, and so, be
argues that these two categories of carrying on business
having been included in the first part, what the second part
is intended to cover is trade or business carried on by the
Government of a State through the instrumentality of a
corporation like the appellant, and so. the trade or
business carried on by the appellant is trade or business
carried on on behalf of the Government of Andhra Pradesh
within the meaning of Art. 289(2) and that makes the income
earned out of the said trade or business income of the State
under Art. 289(1).
(1) [1963] Supp. 2 S.C.R. 691.
23
In substance, this argument is really based on the American
doctrine of the immunity of State agencies or instru-
mentalities from Federal taxation. When this doctrine was
accepted by American decisions, it was normally confined to
such State agencies as were concerned with functions which
were essentially governmental in character. But, says the
Advocate-General, since Art. 289(2) takes in trade
activities carried, on by a corporation like the appellant,
the question as to whether the trade is a function which is
essentially governmental in character is irrelevant. In
support of his contention, the Advocate-General has relied
upon two American decisions; first of these is the decision
in the case of Mark Graves. John J. Merrill and John P.
Hennessy v. People of the State of New York Upon the
Relation of James B. O’keefe(1). In that case Stone J. who
spoke for the Supreme Court of America. has observed that
when the national government lawfully acts through a
corporation which it owns and controls, those activities are
governmental functions entitled to whatever tax immunity
attaches to those functions when carried on by the
government itself through its departments. In other words,
this observation shows that the Court was inclined to take
the view that for the purpose of claiming exemption from
taxation, it did not make a material difference whether the
operation was carried on by the State departmentally or with
the assistance of a corporation.
In Clallan County v. United States of America, (2) it was
held by the Supreme Court of America that a State cannot tax
the property of a corporation organised by the Federal
government to produce material for war purposes, the
property of which is conveyed to it by, or bought with the
money of, the United States, and used solely for the
purposes of its creation. Holmes J. who delivered the
opinion of the Court emphasised the fact that in the case
before the Court not only the agent was created, but all the
agent’s property was acquired and used for the sole purpose
of producing a weapon for the war. “This is not like the
case of a corporation,” added the learned Judge, “having its
own purposes as well as those of the United States, and
interested in profit on its own account. The incorporation
and formal erection of a new personality was only for the
convenience of the United States, to carry out its ends, and
so, it is unnecessary to consider whether the fact that the
United States owned all the stock and furnished all the
property to the corporation, taken by itself, would be
enough to bring the case within the policy of the rule that
exempts property of the United States.”
83 Law. Ed. 927.
68 Law. Ed. 328, 331.
24
Both these decisions would not assist us in determining the
question as to whether the income received by the appellant
is the income of the State of Andhra Pradesh within the
meaning of Art. 289(1), because the decision of the problem
raised before us by the appellant must be reached not on any
academic considerations of the claims for exemption from
taxation which the State instrumentalities can put forward,
but on the construction of Art. 289 itself. Art. 289(1)
exempts from Union taxation the property and income of a
State, and the Advocate-General can succeed only if he is
able to establish that the income derived by the appellant
in respect of which the impugned assessment order has been
passed is the income of the State of Andhra Pradesh. There-
fore, the American doctrine on which strong reliance was
placed by the Advocate-General would be of no assistance to
his case. If the trading activity carried on by the
appellant is sought to be brought into Art. 289(1) solely as
a result of the construction of Art. 299(2), the test on
which the validity of the Advocate-General’s argument must
necessarily be judged, is whether or not the requirement of
Art. 289(1) is satisfied and that requirement clearly is
that the income like the property for which exemption from
Union taxation is claimed must be the income or property of
a State.
Besides, there is another reason why the Advocate-General
cannot derive any assistance from the American doctrine of
the exemption from taxation in regard to State instru-
mentalities. The said doctrine has been categorically
rejected by this Court in State of West Bengal v. Union of
India(1) Speaking for the majority of the Court, Sinha C. J.
observed that “it was futile to attempt the resuscitation of
the now exploded doctrine of the immunity of
instrumentalities which originating from the observations of
Marshall, C. J., in M’ Culloch v. Maryland,(2) has been
decisively rejected by the Privy Council as inapplicable to
the interpretation of the respective powers of the States
and the Centre under the Canadian and Australian
Constitutions (vide Bank of Toronto v. Lambel(3) and Webb v.
Outrim(4) and has practically been given up even in the
United States.” Thus, it is necessary to revert to the
construction of Art. 289 in deciding whether the appellant
is right in claiming immunity from Union taxation.
We have already seen that Art. 289 consists of three
clauses, the first clause confers exemption from Union tax-
ation on the property and income of a State. In Special
Reference No. 1 of 1962. In re. Sea Customs Act (1878),
Section
(1) [1964] 1 S.C.R. 371. 407. (3) (1887) 12 A.C. 575.
(2) (1819) 4 Wheat, 316 at p. 436. (4) [1907] A.C. 81
25
20(2),(1) a Special Bench of this Court by a majority as e
that the immunity granted to the States in respect of Union
taxation, under Art. 289(1) does not extend to duties of
customs including export duties or duties of excise. In
that case, the question which directly arose for decisions
was to determine the scope and effect of the nature of
taxation from which exemption could be claimed by the
property and income of a State under Art. 289(1). With that
aspect of the matter, however, we are not concerned in the
present appeals.
The scheme of Art. 289 appears to be that ordinarily, the
income derived by a State both from governmental and non-
governmental or commercial activities shall be immune from
income-tax levied by the Union, provided, of course, the in-
come in question can be said to be the income of the State.
This general proposition flows from clause (1).
Clause (2) then provides an exception and authorises the
Union to impose a tax in respect of the income derived by
the Government of a State from trade or business carried on
by it, or on its behalf; that is to say, the income from
trade or business carried on by the Government of a State or
on its behalf which would not have been taxable under clause
(1), can be taxed, provided a law is made by Parliament in
that behalf. If clause (1) had stood by itself, it may not
have been easy to include within its purview income derived
by a State from commercial activities, but since clause (2),
in terms, empowers Parliament to make a law levying a tax on
commercial activities carried on by or on behalf of a State,
the conclusion is inescapable that these activities were
deemed to have been included in cl.(1) and that alone can be
the justification for the words in which cl. (2) has been
adopted by the Constitution. It is plain that cl. (2)
proceeds on the basis that but for its provision, the
trading activity which is covered by it would have claimed
exemption from Union taxation under cl. (1). That is the
result of reading clauses (1) and (2) together.
Clause (3) then empowers Parliament to declare by law that
any trade or business would be taken out of the purview of
cl. (2) and restored to the area covered by cl. (1) by
declaring that the said trade or business is incidental to
the ordinary functions of government. In other words, cl.
(3) is an exception to the exception prescribed by cl. (2).
Whatever trade or business is declared to be incidental to
the ordinary functions of government, would cease to be
governed by cl. (2) and would then be exempt from Union
taxation. That, broadly stated, appears to be the result of
the scheme adopted by the three clauses of Art. 289.
(1) [1964] 3 C.S.R. 787.
26
Reading the three clauses together, one consideration
emerges beyond all doubt and that is that the property as
well as the income in respect of which exemption is claimed
under cl. (1), must be the property and income of the State,
and so, the same question faces us again: is the income
derived by the appellant from its transport activities the
income of the State? If a trade or business is carried on
by the State departmentally and income is derived from it,
there would be no difficulty in holding that the said income
is the income of the State. If a trade or business is
carried on by a State through its agents appointed
exclusively for that purpose, and the agents carry it on
entirely on behalf of the State and not on their own
account, there would be no difficulty in holding that the
income made from such trade or business is the income of the
State. But difficulties arise when we are dealing with
trade or business carried on by a corporation established by
a State by issuing a notification under the relevant
provisions of the Act. The corporation, though statutory,
has a personality of its own and this personality is
distinct from that of the State or other shareholders. It
cannot be said that a shareholder owns the property of the
corporation or carries on the business with which the
corporation is concerned. The doctrine that a corporation
has a separate legal entity of its own is so firmly rooted
in our notions derived from common law that it is hardly
necessary to deal with it elaborately; and so, prima facie,
the income derived by the appellant from its trading
activity cannot be claimed by the State which is one of the
shareholders of the corporation.
It may that the statute under which the notification has
been issued constituting the appellant corporation may
provide expressly or by necessary implication that the
income derived by the corporation from its trading activity
would be the income of the State. The doctrine of the
separate entity or personality of the corporation is always
subject to the exceptions which statutes may create, and if
there is a statutory provision which clearly indicates that
despite the concept of the separate personality of the
corporation, the trade carried on by it belongs to the
shareholders who brought the corporation into existence and
the income received from the said trade likewise belongs to
them, that would be another matter. It would then be
possible to hold that as a result of the specific statutory
provisions the income received from the trade carried on by
the corporation belongs to the shareholders who have
constituted the said corporation, and so, we must look to
the Act to determine whether the income in the present case
can be said to be the income of the State of Andhra Pradesh.
In this connection, we may usefully refer to the observa-
tions made by Lord Denning in Tamlin v. Hansaford: (1). “In
27
the eye of the law,” said Lord Denning, “the corporation is
its own master and is answerable as fully as any other
person or corporation. It is not the Crown and has none of
the immunities or privileges of the Crown. Its servants are
not civil servants, and its property is not Crown property.
It is as much bound by Acts of Parliament as any other
subject of the King. It is, of course, a public authority
and its purposes, Po doubt, are public purposes, but it is
not a government department nor do its powers fall within
the province of government.” These observations tend to show
that a trading activity carried on by the corporation is not
a trading activity carried on by the State departmentally,
nor is it a trading activity carried on by a State through
its agents appointed in that behalf.
That takes us to the provisions of the Act which will assist
us in determining the question as to whether the income in
question can legitimately be held to be the income of the
State of Andhra Pradesh. The Act was passed to provide for
the incorporation and regulation of Road Transport Corpora-
tions. Section 3 authorises the State Government to issue a
notification in the Official Gazette establishing a Road
Transport Corporation for the whole or any part of the State
under such name as may be specified in the notification,
after taking into account considerations specified by
clauses (a), (b) and
(c). Section 4 then provides that every corporation
shall be a body corporate by the name notified under s.
3 having perpetual succession and a common seal, and shall
sue or be sued by the said name. Section 5 deals with the
constitution of Road Transport Corporation; sub-section (3)
provides for the representation both of the Central
Government and of the State Government in the Corporation in
such proportion as may be agreed to by both the Governments
and of nomination by each Government of its own
representatives therein; it also contemplates that if
capital is raised by the issue of shares to other parties,
provision has to be made for the representation of such
shareholders. Section 17 authorises the appointment of
Advisory Councils. Section 18 prescribes the general duty
of the corporation. Section 23(1) provides for the capital
of the corporation; under this sub-section, the capital
contributed by the Central Government and the State
Government is in the proportion of I : 3. Sub-section (3)
authorises the division of the capital of the corporation
into such number of shares as the State Government may
determine-, and it provides that the number of shares which
shall be subscribed by the State Government, the Central
Government and other parties shall also be determined by the
State Government in consultation with the Central
Government. This provision contemplates the possibility of
other shareholders joining the State Government and the
Central Government. Section 24 permits additional capital
of the corporation to be raised. Section 25 requires that
28
the share of the corporation shall be guaranteed by the
State Government as to the payment of the principal and the
payment of the annual dividend at such minimum rate as may
be fixed by the State Government. Section 26 confers powers
of borrowing on the corporation. Section 27 constitutes a
fund of the Corporation. Section 28 provides for the
payment of interest and dividend. Section 29(1) requires
the Corporation to make such provisions for depreciation and
for reserve and other funds as the State Government may,
from time to time, direct. Section 29(2) provides that the
management of the said funds, the sums to be carried from
time to time to the credit thereof and the application of
the moneys comprised therein shall be determined by the
Corporation. There is a proviso to this sub-section which
prohibits the utilisation of these funds for any purpose
other than that for which it was created without the
previous approval of the State Government. Section 30 deals
with the disposal of net profits: it says that after provi-
sion is made as required by sections 28 and 29, the Corpora-
tion may utilise such percentage of its net annual profits
as may be specified in this behalf by the State Government
for the purposes therein specified, and it adds that out of
the balance, such amount as may, with the previous approval
of the State Government and the Central Government, be
specified in this behalf by the Corporation, may be utilised
for financing the expansion programmes of the Corporation
and the remainder, if any, shall be made over to the State
Government for the purpose of road development. Section 31
gives power to the Corporation to spend such sums as it
thinks fit on objects authorised by the Act. Section 32
deals with the budget; s. 33 with accounts and audit; and s.
34 provides that the directions issued by the State
Government after consultation with the Corporation shall be
followed by the Corporation, and it adds that such
directions may include instructions relating to the
recruitment, conditions of service and training of its
employees, wages to be paid to the employees, reserves to be
maintained by it and disposal of its profits or stocks.
Under Section 38, power is conferred on the State Government
to supersede the Corporation for reasons specified by s.
38(1). On supersession, all property vested in the Corpora-
tion vests during the period of supersession, in the State
Government; that is the effect of s. 38(2)(c). Section 39
deals with the liquidation of a Corporation and clause (2)
of this section provides that in the event of such
liquidation, the assets of the Corporation, after meeting
the liabilities, if any, shall be divided among the Central
and the State Government and such other parties, if any, as
may have subscribed to the capital in proportion to the
contribution made by each of them to the total capital of
the Corporation. That, in brief, is the position ,of the
relevant provisions of the Act.
29
There is no doubt that the bulk of the capital is contribut-
ed by the State Government and a small proportion by the
Central Government, and in that sense, the majority of
shares, are at present owned by the State Government. There
is also no doubt that the Corporation is a State-controlled
corporation in the sense that at all material stages and in
all material particulars, the activity of the Corporation is
controlled by, the State-, but it is clear that other
citizens may be admitted to the group of shareholders, and
from that point of view, the Act contemplates contribution
of the capital for the Corporation not only by the Central
and the State Governments, but also by the citizens. The
main point which we are examining at this stage is: is the
income derived by the appellant from its trading activity,
income of the State under Art. 289(1)? In our opinion, the
answer to this question must be in the negative. Far from
making any provision which would make the income of the
Corporation the income of the State, all the relevant
provisions emphatically bring out the separate personality
of the corporation and proceed on the basis that the trading
activity is run by the corporation and the profit and loss
that would be made as a result of the trading activity would
be the profit and loss of the corporation. There is no
provision in the Act which has attempted to lift the veil
from the face of the corporation and thereby enable the
shareholders to claim that despite the form which the
Organisation has taken, it is the shareholders who run the
trade and who can claim the income coming from it as their
own. Section 28 which provides for the payment of interest
clearly brings out the duality between the Corporation on
the one hand, and the State and Central Governments on the
other. Take, for instance, the case of supersession of the
corporation authorised by s. 38. Section 38(2)(c)
emphatically brings out the fact that the property really
vests in the Corporation, because it provides that during
the period of supersession, it shall vest in the State
Government. Similarly, s. 39(2) which deals with the
distribution of assests in case of liquidation, brings out
the same feature. It has been urged before us by the
Advocate-General that s. 50 contemplates that after
provision is made as required by sections 28 and 29 and
funds are utilised as prescribed by s. 30, the balance has
to be given to the State Government for the purpose of road
development, and that, it is suggested, indicates that the
income belongs to the State Government. This argument is
clearly not well-founded. When we are deciding the question
as to whether the income derived by the Corporation is the
income of the State, the provision made by s. 30 for making
over to the State Government the balance that may remain as
indicated therein, is of no assistance. The income is
undoubtedly the income of the Corporation. All that s. 30
requires is that a part of that income may be entrusted to
the
30
State Government for a specific purpose of road developmen-
nt is not suggested or shown that when such income is made
over to the State, it becomes a part of the general revenue
of the State. It is income which is impressed with an
obligation and which can be utilised by the State Government
only for the specific purpose for which it is entrusted to
it. Therefore, we are satisfied that the income derived by
the appellant from its trading activity cannot be said to be
the income of the State under Art. 289(1), and if that is
so, the fact that the trading activity carried on by the
appellant may be covered by Art. 289(2), does not really
assist the appellant’s case. Even if a trading activity
falls under cl. (2) of Art. 289, it can sustain a claim for
exemption from Union taxation only if it is shown that the
income derived from the said trading activity is the income
of the State. That is how ultimately, the crux of the
problem is to determine whether the income in question is
the income of the State, and on this vital test, the
appellant fails.
There is one more point which was faintly argued before us
by the learned Advocate-General. He frankly told us that he
did not propose to challenge the correctness of the
conclusion recorded by the High Court that the appellant is
not a local authority; but he was not prepared to give up
his contention that there is repugnancy between the charging
section of the Income-tax Act and sections 29 and 30 of the
Act. He suggested that in view of the repugnancy on which
he relied, the Act which is Act No. 64 of 1950 should
prevail over the Income Tax Act which is an enactment of
1922. None of the assumptions made by the learned Advocate-
General in support of this plea can be said to be valid.
Though the original Income-tax Act was passed in 1922, as is
well-known, every year a fresh Finance Act is passed and it
is by virtue of such successive Finance Acts that income-tax
is assessed from year to year, and so, the argument that the
Act on which the appellant relies is later in point of time
must fail. Besides, there is really no repugnancy at all.
Basing himself on the provisions of sections 29 and 30, the
Advocate-General contends that these two provisions show
that the Act did not contemplate the payment of income-tax.
This argument is entirely misconceived. It is hardly
necessary for the Act to make a provision that tax, if
chargeable, would be paid. In fact, the Companies Act which
deals with companies does not make such a specific
provision, though no one can seriously suggest that there
would be repugnancy between the provisions of the Companies
Act and the Income Tax Act. All that sections 29 and 30
purport to do is to provide for the administration of the
funds vesting in the Corporation and their disposal. It is
clearly far-fetched, if not fantastic, to suggest that these
provisions are inconsistent with the liability to pay tax
which is imposed by the Income Tax Act. The Advocate-
General, no doubt, attempted to derive some support
31
to his argument by relying on section 43 of the State
Financial Corporations Act 1951), as well as s. 43 of the
Damodar alley Corporation Act, 1948 (No. 14 of 1948). Sec-
tion 43 which occurs in both the said Acts provides that the
Corporation shall be liable to pay any taxes on income
levied by the Central Government in the same manner and to
the same extent as a company. It is urged that where the
legislature wanted to provide for the liability of the
Corporation to pay the taxes on income levied by the Central
Government, it has made specific provisions in that behalf
and since no such provision has been made in the Act, it
follows that the legislature intended that no tax should be
levied on the income earned by the Corporation established
under the Act. We do not think there is any substance in
the argument. The whole object which section 43 is
presumably intended to achieve is to provide that the tax
should be levied on the basis that the Corporation is a
company and nothing more. If no such provision was made in
the Act, that has no bearing on the liability of the
Corporation to pay the tax on its income. Therefore, we are
satisfied that the High Court was right in rejecting the
argument that by virtue of the repugnancy between the mater-
ial provisions of the Act and the charging section of the
Income Tax Act, it should be held that the appellant was not
liable to pay tax on its income.
The result is, the appeals fail and are dismissed with
costs. One hearing fee.
Appeals dismissed.
32