Vidarbha Irrigation Development … vs Joint Commissioner Of Income-Tax on 22 July, 2005

ORDER

K.P.T. Thangal, Vice President

1. This appeal by the assessee is for the assessment year 1998-99.

2. The assessee is a Statutory Corporation set up under the Vidarbha Irrigation Development Corporation Ordinance, 1997 dated 12-3-1997, which was subsequently replaced by Vidarbha Irrigation Development Corporation Act, 1997 (Maharashtra Act No. XXVI of 1997) [for short ‘VIDC Act’], which came into effect from 12-3-1997. Assessee being aggrieved by the orders of the revenue authorities, approached the Tribunal and vide its order dated 28th February, 2003, Tribunal allowed assessee’s appeal partly.

3. Before the Assessing Officer, assessee claimed the status as “Local Authority”. It was rejected by the Assessing Officer. Assessee carried the matter before the CIT(A).

4. Assessee’s second plea that the assessee’s income is exempted under Section 10(20A) of the Income-tax Act, 1961 was also rejected.

5. The next objection of the assessee was against the order of the CIT(A) in holding that assessee-Corporation is not an instrumentality of the State and is not a State within the meaning of Article 289 of the Constitution of India and thereby holding that the assessee is not having any immunity from tax.

6. The other grounds taken by the assessee are on merit; regarding treatment of interest income, income from house property and claim for set off and carry forward of loss under the head “Income from business”.

7. Aggrieved again by the order of the first appellate authority, assessee approached the Tribunal. The Tribunal gave partial relief to the assessee. Aggrieved by the above order, assessee approached the Hon’ble High Court.

8. Vide Their Lordships order dated 27th July, 2004, the Hon’ble High Court held, two substantial questions of law do arise from the decision of the Tribunal which is set out (in Para 3) of Their Lordships order. It is reproduced below :

(i) Whether the income of the assessee is not exigible to tax by virtue of the exemption under Section 10(20A) of the Income-tax Act, 1961?

(ii) Whether the Assessing Authority and the Tribunal were in gross error in holding that business of assessee has not commenced and as such, its income under Section 28 of the Income-tax Act, 1961 cannot be computed?

9. After elaborate discussion running into 54 pages, vide para 45 of Their Lordships judgment, the Tribunal’s order was set aside and reminded the matter back to the file of the Tribunal to reconsider the issue in the light of observations made in by Their Lordships as well the law laid down by the Apex Court and to decide the same as expeditiously as possible. It is how the matter seized by the Tribunal for the second time. The Tribunal is directed to consider two questions of law framed by Their Lordships, set out hereinabove in Para 8 of the order.

10. In this case assessment was completed on 9-3-2001, fixing the tax payable at Rs. 5,05,83,200.

11. The assessee furnished the return on 30-11-1998, declaring nil income. In the computation of income accompanying the return, loss was declared at Rs. 1,40,31,211 and claimed to be eligible for carry forward. Assessee is Government of Maharashtra Undertaking, came into existence vide Ordinance, dated 12-3-1997, i.e., Vidarbha Irrigation Development Corporation Ordinance, 1997. Though the assessee had shown the status as “Domestic Company”, the status was claimed as “Local Authority”, which was rejected by the Assessing Officer, in the light of the following decisions :

(1) Veljibhai Muljibhai Soneji v. State of Bombay

(2) Calcutta State Transport Corporation v. CIT

(3) CIT v. U.P. Forest Corporation .

12. It was held, assessee is fully covered by the decision of the Apex Court in the case of U.P. Forest Corpn. (supra). Assessee’s claim for carry forward of loss was also rejected. Assessing Officer further rejected assessee’s claim that the assessee has set up its business. Assessee’s FDR interest amounting to Rs. 8,82,54,420 was brought to tax as income from other source and house property income was taken at Rs. 18,89,693. Assessee’s claim of interest payment on Bond was however allowed.

13. Assessee objected before the first appellate authority for not treating assessee’s status as “Local Authority” and not allowing exemption under Section 10(20) of the Income-tax Act, 1961. Alternatively assessee objected the denial of carry forward and set off against future profit of the Corporation.

14. The CIT(A) set out at page 5 of her order the attributes of a “Local Authority”. Firstly, she noted, it should have a separate legal existence as Corporate bodies and must not be a mere Government agency. Secondly, it should function in a “defined area!’ and should wholly or partially, directly or indirectly be an elected body, by virtue of election by inhabitants of the area. Thirdly, there should be certain degree of autonomy, though not complete and not necessarily fully independent. Further, so as to constitute “Local Authority”, body must be entrusted by statute with such Government 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, transportation, social welfare services, etc. In other words, it should be entrusted with performance of civic duties and functions which otherwise would be duties and functions of the Government; and lastly, must have the power to raise funds for furtherance of the activities and fulfilment of projects by levying taxes, rates, charges or fees. Essentially, control and management of the fund must be vested with the authority. CIT(A) held, as far as the assessee concerned, it had no separate legal existence, which is clear from Section 3(2) of VIDC Act, 1997.

15. It has been observed by the CIT(A), by virtue of the judgment of Hon’ble Supreme Court, 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 many, if not all, the distinctive attributes and characteristics. One of the most essential feature, CIT(A) observed, as noted above, that assessee must be legally entitled to or entrusted by the Government with control and management of a Municipal or local fund, which means that the local authority must be entrusted by statute with such governmental functions and duties as are entrusted to Municipal bodies, such as those connected with providing amenities to the inhabitant of the locality like health and education services, water and sewerage, town planning and development of roads, markets, transportation, social welfare services, etc. In short, it should be entrusted with duties and functions similar to a Government body. As far as the assessee concerned, CIT(A) held, that assessee does not fall within the scope and parameters laid down by the judgment of Hon’ble Supreme Court in the case of Municipal Corporation of Delhi v. Birla Cotton Spg. & Wvg. Mills . She held that the Preamble of VIDC Act makes this clear. The Preamble of this Act mentions that it is “an Act to make special provision for mobilisation of resources for completion of some ongoing irrigation projects in time-bound manner for promotion and operation of said irrigation projects in Vidarbha region and command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers allocated to the State of Maharashtra under the Water Dispute Tribunal Award and other allied and incidental activities including everyday control by establishing VIDC”. She further noted, while rejecting assessee’s claim, that Section 18 of VIDC Act clearly indicates that the main purpose of incorporating Vidarbha Irrigation Development Corporation (‘VIDC’) was to complete some ongoing irrigation projects in time-bound manner and to promote and operate some schemes for the generation of hydro-electric energy. Some allied activities connected with the above two main objectives are also to be undertaken, like fisheries, sericulture, tissue culture, horticulture, promotion of tourism, water sports and many other related activities. Hence, the learned first appellate authority held, if the objectives for which VIDC has been brought into existence are compared with those of Delhi Development Authority (for short ‘DDA’), it is more than evident that the functions assigned to the assessee are not governmental functions which normally entrusted to municipal bodies. Completion of irrigation projects and generation of hydro-electrical energy generally are not the functions of Municipal bodies, as such not a governmental function. It has nothing comparable with the functions of a Municipal body or Municipal Corporation. Assessee was brought into existence only to complete the ongoing irrigation projects in a time-bound manner and for harnessing electricity.

16. The CIT(A) further held that the activity of DDA was limited to the area within the Union Territory of Delhi. She held, that is why particularly in Section 10(20) of the Income-tax Act, 1961, exemption is provided in respect of certain incomes earned by local authorities using the term “within its own jurisdiction”. In other words, the area should be defined and clearly demarcated. In the case of the assessee, initially 10 projects were handed over to them and later additional 86 projects were handed over for time-bound completion. These projects were scattered in 11 Districts of Vidarbha. Within the same region, in respect of the same rivers, i.e., Godavari and Tapi State Irrigation Department is also involved in completion of certain projects and two other corporations are also there to manage the projects in respect of Godavari and Tapi rivers. The CIT(A) further relied upon the judgment of the Hon’ble Andhra Pradesh High Court in the case of A.P. Stale Road Transport Corporation v. ITO [1963] 47 ITR 101, wherein Their Lordships observed that if the area of operation is whole of the State, then such bodies cannot be treated as a “Local Authority”.

17. The CIT(A) further held, assessee also does not satisfy the condition laid down by the Apex Court in the case of Birla Cotton Spg. & Wvg. Mills (supra), i.e., the assessee is not a local authority elected by the inhabitants of the area; whereas in the case of DDA it consisted of a Chairman, Vice Chairman and other official and non-official members who were elected. However, this reasoning of CIT(A) was tried to be countered by the assessee, stating that as per Section 4(1) of the VIDC Act, the Corporation consist members like Minister of Irrigation, non-official Members nominated, Chief Secretary and the like [quoted at page 19, para 43 of the CIT(A)’s order]. Assessee further submitted that 5 MLAs and 3 MLCs are nominated by the Government as the Members of VIDC; hence, assessee satisfies the condition. However, this was rejected by the learned first appellate authority.

18. The CIT(A) further observed that unlike DDA, assessee-Corporation does not have any power to compulsorily levy any fee or betterment charge. What the assessee charges is recovery for the volume of electricity or water utilized.

19. Coming to the autonomy enjoyed by the assessee, assessee’s contention was rejected by the first appellate authority, as the assessee was not falling within the scope of the judgment of Hon’ble Supreme Court in the case of Housing Board of Haryana v. Haryana Housing Board Employees Union . One of the reasons why the decision went against the assessee in the case of Haryana Housing Board Employees Union (supra) was that it had no independent functioning. Similar is the case with the assessee. The non-official Members are nominated by the State Government. Their services can be terminated prematurely by the Government, if so desired. The Special Invitees to the meeting of the Corporation had no right to vote. Even the subordinate officials can be appointed only if the State Government approves it. In short, she held, assessee’s Members had no independent powers or not can function independently and the Members are not elected but selected and nominated by State Government. Hence, assessee’s plea was rejected by the learned first appellate authority on the point.

20. The Tribunal, in the first inning, concurred with the view taken by the CIT(A). The decision of the Tribunal was challenged before the Hon’ble High Court and the Hon’ble High Court, while setting aside the Tribunal’s order, made the observations, which are to be treated as guidelines for deciding the issue now before us and it is briefly given below for appreciation of guidance.

21. The Hon’ble High Court held, it was necessary for the Tribunal to consider the issue vis-a-vis provisions of Section 10(20A) of the Income-tax Act, 1961, in the light of the provisions of VIDC Act, Maharashtra Irrigation Act, 1976 and Bombay Canal Rules, 1934, and only thereafter it would have been possible to conclude the issue one way or the other. However, the Hon’ble High Court observed, Tribunal in Para 51 of its impugned order concluded the issue mainly on the basis of purpose and object for which the assessee-Corporation was constituted as mentioned in the Preamble of VIDC Act and without taking into consideration the scheme of the substantive provisions of VIDC Act, Maharashtra Irrigation Act, 1976 and Bombay Canal Rules, 1934. Their Lordships observed, “Tribunal overlooked these aspects and concluded the issue about purpose and objectives of the Corporation relying on the Preamble of VIDC Act”. Hence, Their Lordships directed the Tribunal to reconsider the issue in the light of the provisions of VIDC Act, Maharashtra Irrigation Act, 1976 and Bombay Canal Rules, 1934.

22. The first question of law framed for the consideration of the Tribunal by Their Lordships reads as under :

(i) Whether the income of the assessee is not exigible to tax by virtue of the exemption under Section 10(20A) of the Income-tax Act, 1961?

23. For the appreciation of facts and for the consideration of question of law, it is essential to go through the relevant provisions, Section 10(20A). The same reads as under :

10(20). The income of a local authority which is chargeable under the head “Income from house property”, “Capital gains” or “Income from other sources” or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service [(not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area];

Explanation.For the purposes of this clause, the expression “local authority” means

(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or

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

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in Section 3 of the Cantonments Act, 1924 (2 of 1924);

Section 10(20A) omitted by the Finance Act, 2002, w.e.f. 1-4-2003. Prior to its omission, clause (20A), as inserted by the Finance Act, 1970, w.r.e.f. 1-4-1962, reads as under :

10(20A) any income of 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.

24. The learned Counsel for the assessee submitted, Section 10(20A) of the Income-tax Act, 1961 has two parts. The first part stipulates that the authority must be constituted by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation. If that be so, then, such authority will be exempted from tax. The second part provides that income of such authority, whose objective is planning, development or improvement of cities, towns and villages or for both, is also exempted from tax. If cither of the condition is satisfied, income of such authority is exempted from tax under Section 10(20A). The learned Counsel for the assessee submitted, the requisite conditions for grant of exemption under Section 10(20A) of the Income-tax Act, 1961, are – (i) authority must be constituted in India by or under any awenacted; and (it) it should be enacted for the purpose of – (a) planning; or (b) development; or (c) improvement of cities, towns and villages or for both.

25. Assailing the order of the CIT(A), the learned Counsel for the assessee submitted, one of the main reasoning of the CIT(A) to reject assessee’s contention is that the assessee was not established for the purpose of planning, development or improvement of cities, towns and villages. Inviting our attention to page 22 para 49 of the order of the CIT(A), wherein he observed that VIDC does not have any power of compulsory extraction of any charges, fee, tax, etc., it also does not have any taxing power, it can only recover payment as per volume of water supplied by it; the learned Counsel for the assessee submitted, this observation of the CIT(A) is without merit.

26. The learned Counsel for the assessee further submitted that as per Section 50 of VIDC Act, rehabilitation is to be carried out only by the State Government and not by the assessee. The learned Counsel submitted, a glance through the provisions of VIDC Act will clearly establish that the assessee satisfies all the conditions contemplated under Section 10(20A) for grant of exemption. It is established for the promotion and operation of irrigation projects, for the development and scheme for generation of hydro-electric energy and for flood control. The “Hydroelectric Power Project” is defined in Section 2(c) of VIDC Act. The “area of operation” is defined as area of Godavari and Tapi Rivers Valley specified in the Schedule and other area or areas to which the provisions of the Act are extended by the Government by Notification in the Official Gazette. Section 12 of VIDC Act gives powers to the State Government to appoint an Executive Director. Section 17 of VIDC Act deals with the powers of the State Government to depute Government employees to the Corporation engaged in the field of planning, design, land development in the irrigation projects, power projects, etc. Section 18 of the VIDC Act enumerates the functions of the Corporation – (a) promotion and operation of irrigation projects and scheme of hydro-electrical energy; (b) to plan, investigate, design, construct and manage irrigation projects and their command area development; and (c) empowers the assessee to plan, investigate, design, construct and manage schemes of generation of hydro-electrical energy. Assessee is also to promote irrigation-related activities such as fisheries, pisciculture, floriculture, horticulture, sericulture, tissue-culture, etc. and also assessee is to promote tourism, water sports and other related activities on and around the irrigation and hydro-electric power projects. Assessee is empowered to develop the land around or nearby lake and in other suitable locations with irrigation facilities and other infrastructure facilities and lease part or whole of such developed properties to the interested parties. Assessee also has to prepare annual plan and five-year working development plan.

27. Inviting our attention to Section 19 of the VIDC Act, which deals with general powers of the Corporation, counsel submitted, assessee-Corporation had power to construct or cause to be constructed dams, barrages, reservoirs, power houses, power structures, electrical transmission lines and sub-stations, navigation works, irrigation, flood control and drainage, canals and such other works and structures as may be required. Assessee’s power also includes the power to take measures to prevent pollution of any water under assessee’s control and to take measures deemed necessary to prevent discharges into such water of effluents, which are harmful to water supply, irrigation, public health and fish life.

28. Assessee is also empowered to stock its reservoirs or water courses with fish and to sell fish or fishing rights and prohibit taking out fish from the water under its control. Further, assessee is empowered to assist in the establishment of water users’ association and other organizations formed under the Maharashtra Co-operative Societies Act, 1961, for the better use of facilities made available by the Corporation. Assessee has power to lease out rights for water sports, other recreational activities related to the use of reservoir and its surrounds and reservoir water. In addition, assessee is empowered to establish, maintain and operate laboratories, etc., for the development of Godavari and Tapi River Valley. Assessee’s counsel submitted, these activities results into development and improvement of villages, towns and cities.

29. Section 20 of the VIDC Act empowers the assessee-Corporation, from time to time, to determine and levy water charges for supply of water for irrigation, industrial and domestic purposes. Vide Section 22 of the VIDC Act; any other person is restricted in taking up any similar developmental activity. Assessee is empowered to co-ordinate with other authorities to minimize the inconvenience caused. Section 24 of the VIDC Act, in fact gives a clear power to the assessee-Corporation to carry out all or any other functions and exercise all or any of the powers of the State Government or appropriate authority and Assessing Officer is authorized to carry out all or any of the functions and exercise all or any of the powers of the Canal Officer, notwithstanding anything contained in the Maharashtra Irrigation Act, 1976 and the provisions of Bombay Canal Rules, 1934, within the area of operation of the assessee-Corporation. Assessee’s counsel submitted, in other words, the sovereign function of the State has been delegated to the assessee-Corporation, which are necessary to perform the duties and carry out the functions entrusted to assessee-Corporation.

30. The learned Counsel for the assessee took us through the Maharashtra Irrigation Act, 1976, i.e., Maharashtra Act No. XXXVIII of 1976. “Canal Officer” is defined as “any officer duly appointed by the State Government by an order in writing for all or any of the purposes of this Act specified in the order, and includes in relation to a canal constructed, maintained, controlled or managed by the Company, a Company Officer, and by a Zilla Parishad, a Parishad Officer, and the expression ‘Canal Officer duly empowered in this behalf, or any like expression means a Canal Officer empowered by the Appropriate Authority by an order in writing for all or any of the purpose of this Act specified in the order and also includes a person acting under the general or special order of such Canal Officer.” Again inviting our attention to Section 11 (Part III) of the Maharashtra Irrigation Act, 1976, learned Counsel for the assessee submitted, it deals with Notification when water supply to be applied for the purposes of canal or for regulation, supply or storage of water. Assessee’s counsel submitted, this is in fact delegation of a part of the sovereign power of the Government.

31. Again inviting our attention to Section 22 of the Maharashtra Irrigation Act, 1976, which deals with construction of drainage works, assessee’s counsel submitted, whenever it appears to the Appropriate Authority that any drainage work is necessary for the public health or for reclamation of land, or for the improvement of cultivation etc. etc., the person authorized by the Appropriate Authority may exercise in connection therewith the powers conferred on Canal Officers by Sections 13, 14 and 15 and shall be liable to the obligations imposed upon Canal Officers by Sections 17 and 77. Again the learned Counsel invited our attention to Sections 23 to 26 of the Maharashtra Irrigation Act, 1976, which deals with the construction of field-channels, which amounts to implementation of planning, development or improvement of cities, towns and villages or for both as contemplated under Section 10(20A) of the Income-tax Act, 1961. Again the learned Counsel for the assessee invited our attention to Section 34 of the Maharashtra Irrigation Act, 1976, which deals with the schemes for compulsory construction of field-channels. The learned Counsel for the assessee also relied on Sections 46, 58, 61, 62 and 72 of the Maharashtra Irrigation Act, 1976, which deals with the modes of supply of canal water, power to charge minimum rate, application for supply of water and the mode of agreement – when an agreement is to be entered; consent to agreement necessary where land is in possession of occupier other than the holder; and supplier of water under the scheme, etc.

32. Inviting our attention to provisions of Rules 11 and 12 of the Bombay Canal Rules, 1934, learned Counsel submitted, the stand of the revenue that the area of action of the assessee has not been demarcated is incorrect. Inviting our attention to Section 49 of the VIDC Act, learned Counsel for the assessee submitted, assessee-Corporation has to prepare and submit to the State Government annual reports and returns, with particular reference to – (a) irrigation command area development and flood control; (b) water supply; (c) hydro electrical energy; (d) recreation facilities; (e) use of lands; (f) resettlement of displaced persons; and (g) other activities of the Corporation. Under Section 49(2), the assessee-Corporation has to furnish to the State Government such returns, statistics, reports, accounts and other information with respect to its conduct of affairs, properties or activities or in regard to any proposed work or scheme as the State Government may, from time to time, require. These are the sovereign functions of the State, which had been delegated to the assessee by virtue of VIDC Act.

33. Particularly the learned Counsel for the assessee brought our attention to Section 50 of the VIDC Act, which deals with rehabilitation and resettlement of the project affected persons. It reads as under :

50. The rehabilitation and resettlement of the persons affected due to the irrigation and the Hydro-electric Power Projects shall be carried out by the State Government in accordance with the provisions of the Maharashtra Project Affected Persons Rehabilitation Act, 1986 :

Provided that, all the expenditure required to be incurred by the State Government for the rehabilitation and the resettlement of persons affected by the irrigation and Hydroelectric Power Project shall be borne by the Corporation.

34. Again, the learned Counsel brought our attention to Section 70 of the VIDC Act, vide which the Stale Government is empowered to dissolve the Corporation if it is so necessary.

34A. The learned Counsel for the assessee submitted, in fact the Corporation has stepped into the shoes of the State Government and performs all duties and acts which prior to the appointed date were performed by the State Government, through the Irrigation Department. The functions of the Irrigation Department are for the development of cities, towns and villages. The Corporation is a development authority discharging sovereign functions of the State. Further, learned Counsel for the assessee submitted, water and electricity arc essential resources and adequate supply of both of it are very essential for the development and improvement of cities, towns and villages. Productivity of land in villages and the basic survival of human being in cities, towns and villages as well proper functioning of industries heavily depends on supply of water and power. Adequate and timely availability of water is most important factor for the optimum agricultural produce and it has a direct effect of development and improvement of villages. learned Counsel further submitted, the assessee-Corporation, apart from completion of some ongoing projects in time bound manner, has also to promote and operate the existing projects. Revenue itself has accepted that functions under the statute are for promotion and operation of irrigation and power project. The learned Counsel for the assessee further submitted, assessee-Corporation constructs dam on various rivers as a measure of flood control to villages. Such construction of dams is definitely improvement of villages and towns. He further submitted, assessee-Corporation constructs canals and regulates water to various villages and towns. This is nothing but development of towns and villages. Improved irrigation facilities boost the development of villages. In fact many villages arc bound to get developed as a result of such construction of canals and supply of water to villages. assessee’s counsel further submitted, water scheme of towns would stand developed with the help of irrigation facilities and such water schemes helps in development of towns.

35. Inviting our attention to Section 20 of VIDC Act, again the learned Counsel submitted, the Section stipulates that water will be supplied for irrigation, industrial and domestic purpose to the State Government, local authorities, Government agencies, Cultivators and Water Users’ Association. This, the learned Counsel submitted, is nothing but a developmental activity of towns and villages. The learned Counsel further submitted, assessee had entered into agreement with MIDC/CIDCO for sale of water and such sale is credited to the Profit and Loss Account. The sale is at subsidised rates.

36. Inviting our attention to Paper Book II, Page 150 [Page 35, Para 86 of CIT(A)’s order], the learned Counsel further submitted, even the revenue in fact admits that the purpose for which the Corporation has been brought into existence is in the nature of general public utility. Bringing again our attention to Sections 18 and 19 of the VIDC Act, which deals with functions of the Corporation and general powers of the Corporation, the learned Counsel submitted, these Sections make it clear that the objects to be achieved by the assessee-Corporation are nothing but development, planning and improvement of cities, villages and towns.

37. The learned Counsel for the assessee further submitted that by the activities of the assessee, villages are formed. Electricity and water supply, which are the basic necessities, required for the development and growth of cities, villages and towns are the main functions of the assessee. Before the formation of the Corporation, the Irrigation Wing of the State Government performed these functions. Even the revenue cannot have a case that the same function when performed by the State Government’s Irrigation Department, it was sovereign function but when the same function is delegated to the assessee-Corporation by virtue of the VIDC Act, it ceases to be a sovereign function. The learned Counsel for the assessee submitted, Section 23 of the VIDC Act deals co-ordination with authorities like State Government, Railway Authorities, local authorities and statutory bodies. The assessee is empowered to deal with them with a view to minimize inconvenience that may be caused by submergence of railways, lands and roads and communications and the assesses has to bear the cost of any realignment or resettlement of any population rendered necessary by such submergence.

38. Inviting our attention to the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corporation v. CIT , the learned Counsel submitted, the word “development” in Section 10(20A) has to be understood in a wider sense and establishment of industries is one of the modes of development – such an interpretation would preserve the object of Section 10(20A) of the Income-tax Act, 1961.

39. The learned Counsel submitted, it is important to note that by virtue of Section 15 of the VIDC Act, from the appointed date, the assigned projects of the Corporation and their assets comprising movable and immovable including irrigation projects, hydroelectric power project, projects under construction, specified in that behalf, situated in the area of operation of the Corporation, which immediately before the appointed date vested in the State Government and were under the control of the Irrigation Department stand vested in the Corporation, and all income derived and expenses incurred in that behalf is brought on books of the Corporation; and the rights, liabilities and obligations of the State Government, whether arising out of any contract or otherwise pertaining to the said projects of the State Government shall be deemed to be rights, liabilities and obligations of the Corporation. Therefore, it is clear that from the appointed date, assessee-Corporation stepped into the shoes of the State Government and performed all the duties and functions, which prior to the appointed date were performed by the State Government through its Wing – Irrigation Department. It is clear Corporation was established to perform sovereign function of the State Government, which was performed before the appointed date by the Irrigation Department. Assessee-Corporation is entitled to undertake any other project or activities entrusted by the State Government in furtherance of the objectives, for which the Corporation is established. The power and functions of the Corporation clearly demonstrates that the Corporation is created to discharge the sovereign functions of the State.

40. The learned Counsel for the assessee assailed the stand of the Department that the objects of the Corporation are only to complete the incomplete irrigation projects. The learned Counsel submitted, Corporation is required to do planning for the purpose of construction of irrigation projects, its maintenance, management, as well as supply of water for the various purposes mentioned in the VIDC Act. The activities of the assessee construction of dams, canals and to supply water therefrom, and such activities carried out by the Corporation are undoubtedly developmental activities, which causes development of cities, towns and villages. Productivity of the land in villages is the basic need of the human survival in cities, towns and villages and such functions depend on water supply and power generated. The learned Counsel submitted, a glance through the object of the assessee-Corporation will definitely demonstrate that it satisfies all the requirements so as to fall within the ambit of Section 10(20A) of the Income-tax Act, 1961.

41. The learned Counsel for the assessee further submitted, assessee-Corporation is “State” within the meaning of Article 289 of the Constitution. On the basis of the provisions of VIDC Act, learned Counsel pointed out that the activities of the Corporation are required to be understood on the backdrop of the provisions of the Act, which clearly demonstrates that the functions and duties of the assessee-Corporation are sovereign in nature, developmental in character, which undoubtedly improves the cities, towns and villages, attracting the provisions of Section 10(20A) of the Income-tax Act, 1961. The learned Counsel submitted that merely looking to the Preamble of the VIDC Act is not sufficient so as to find out whether the assessee falls within the ambit of Section 20(20A). Preamble can be looked only if the provisions are ambiguous and incapable of conveying the meaning enumerated in the provisions and not otherwise. Assessee’s counsel heavily relied on the decision of the Apex Court in the case of Gujarat Industrial Development Corporation (supra) and the decision of the Hon’ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corporation .

42. The learned Counsel for the assessee submitted, for the development of any city, town or village, water is an essential requirement and the assessee performs such function. As per the section, same functions are performed by the local bodies, Municipality, etc., which according to the revenue authorities, is entitled for benefit under Section 10(20A) of the Income-tax Act, 1961. Assessee is essentially doing the same function. Assessee is a Corporation established for that purpose. Industry cannot run without water and power. Assessee-Corporation performs the functions of planning and execution, erection of dams and hydro-electric project and therefore, is doing a pivotal role in the industrial revolution in the region which definitely constitutes planning, development and improvement of cities, towns and villages or both.

43. Relying upon the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corpn. (supra), counsel submitted, for the purpose of Section 10(20A), the word “development” should be understood in wider sense. Establishment of industries, Hon’ble Supreme Court held, is one of the modes of development and such an interpretation would preserve the object of Section 10(20A). The learned Counsel further submitted, when the object is such, an interpretation which would preserve it should be accepted even if the provision is capable of more than one interpretation. In the instant case, since it is dealing with the welfare of the public, even if two interpretations possible, the one in favour of the assessee should be preferred over the other.

43A. Further relying upon the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra), the learned Counsel for the assessee submitted, assessee’s Preamble is similar to the one that was dealt with by the Hon’ble Rajasthan High Court. learned Counsel submitted, the land development defined in this case is similar to development as specified in Section 18 of the VIDC Act, agriculture land development cannot be isolated from the development of villages.

44. Counsel for the assessee also relied upon the written submissions made before the CIT(A) as a part of the submission, which is evidenced at Paper Book I, Pages 107 to 112. Among other; particularly stressed the submission given at Para 7 with reference to the provisions of Sections 23 and 50 of the VIDC Act. Drawing our attention to Sections 23 and 50 of the VIDC Act, learned Counsel submitted, any inconvenience caused or likely to be caused by the activities of the assessee by submergence of railways, lands and roads and communications, cost of realignment or resettlement of any population rendered necessary by such submergence is to be undertaken by the State Government and the assessee has to reimburse or bear the expenditure incurred by the State Government for the rehabilitation and resettlement of persons affected by the irrigation and hydroelectric power project activities of the assessee in furtherance of its objectives. Hence, the learned Counsel submitted, the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corpn. (supra) clearly applies to the case of the assessee.

45. He further submitted, for most of the developmental functions performed by the local bodies, Municipalities, Corporations or any commercial establishment, water and electricity essentially to be provided by the assessee-Corporation. Therefore, the assessee is helping in fulfilling the essential necessities of supply of water for the developmental purpose. learned Counsel submitted, development of a place can be accelerated through varieties of schemes and establishment of industries is one of the modes of developing an area, as held by the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corpn. {supra), and, therefore, the activity of the assessee is essentially the one contemplated within the ambit of provisions of Section 10(20A).

46. Again inviting our attention to para 39 of the judgment of Hon’ble Bombay High Court (Nagpur Bench) in the instant case of the assessee, the learned Counsel for the assessee submitted, the interpretation given by the Tribunal to Section 10(20A) did not find favour of the Hon’ble High Court. learned Counsel quoted the observation of Their Lordships in para 39, which reads as under, to bring home the point:

However, the conclusion arrived at by the Appellate Tribunal in respect of question No. 1 mentioned hercinabove in the present appeal appears to be not correct and in our view, needs to be reconsidered by the Appellate Tribunal.

Hence the learned Counsel for the assessee concluded that the order of the revenue authorities on the point is to be reversed.

47. Replying to the above, the learned standing counsel for the revenue, Shri Anand Jaiswal submitted, assessee is a developmental authority. It exists for mobilisation of the resources that required for development. A reading of the various provisions of the VIDC Act makes it clear that the existence of the assessee will come to an end once it completes the work entrusted. Particularly, he brought our attention to Section 70 of the VIDC Act, which reads as under :

70. (1) Where the State Government is satisfied that the purposes for which the Corporation was established under this Act have been substantially achieved so as to render the continued existence of the Corporation, in the opinion of the State Government unnecessary, the Government may, by notification in the Official Gazette, declare that the Corporation shall stand dissolved with effect from such date as may be specified in the notification, and the Corporation shall be deemed to be dissolved accordingly and upon such dissolution the members (including the Chairman and the Vice-Chairman) shall vacate their respective offices.

(2) From the said date

(a) all properties, funds and dues which are vested in, or realisable by, the Corporation shall vest in, or be realisable by, the State Government;

(b) all liabilities which are enforceable against the Corporation shall be enforceable against the Slate Government.

48. The learned standing counsel for the revenue submitted, generation of electricity, preservation of water and belter management of it through construction of dams, canals, etc. leads to development. But it is not direct and immediate planning, development or improvement of cities, towns or villages as contemplated under Section 10(20A).

49. Inviting our attention to Page 21F (Paper Book No. I), the learned standing counsel for the revenue submitted, assessee-Corporation (VIDC) has been constituted under VIDC Act, 1997, for the purpose of timely completion of 10 ongoing major irrigation projects mentioned in the Schedule to the Act. Further, the area of operation has been subsequently enlarged for full utilization of its share of water as per the Inter State Water Disputes Tribunal Award, i.e., to say completion of 86 new irrigation projects, 4 major irrigation projects, 27 medium irrigation projects and 55 minor irrigation projects, for which fund was also made available by the Government. Hence, the learned standing counsel for the revenue submitted, assessee is not entitled for the benefits contemplated under Section 10(20A).

50. The learned standing counsel for the revenue submitted, in fact the assessee is not planning, developing or improving villages, towns or cities at all. The development of village etc. means it should be done in the area in a planned and organised manner. Indirect development of any village, town, city, etc. is not what contemplated under the section. Assessee’s activity may result in development, but the assessee is not doing the development.

51. Distinguishing the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corpn. (supra), the learned standing counsel submitted, the facts are entirely different. Particulary, he brought our attention to Para 8, which reads as under :

8. The scheme of the Gujarat Act, as is seen from a survey of the relevant provisions referred to above, would indicate that the Corporation set up thereunder is to chalk out plans for development of industrial area and industrial estate in different places which may locate in cities or towns or villages. Such schemes would normally involve planning and development of such areas….

52. The learned standing counsel for the revenue brought our attention to the decision of the Hon’ble Supreme Court in the case of Aswini Kumar Ghose v. Arabinda Base , wherein Their Lordships observed – “It is not a sound principle of construction to brush aside words in a statute as being inapposite surplusage, if they can have appropriate application in circumstances conceivably within the contemplation of the statute”. Again the learned standing counsel for the revenue brought our attention to the observation of the Apex Court in the case of Mohammad Ali Khan v. CWT AIR 1997 SC 1165, which reads as under :

7. In case of taxing statute it has been held by this Court in several cases that one must have regard to the strict letter of the law and if the revenue satisfies the Court that the case falls strictly in the provisions of law, the subject can be taxed. This being the position, a fair reading of Section 5(1)(iii) of the Act would reveal that only the building or the part of the building in occupation of the Ruler which has been declared by the Central Government to be the official residence under the Merged States (Taxation Concessions) Order, 1949, will not be included in the net wealth of the assessee. The contention advanced by the learned Counsel for the appellant that once a building has been declared as the official residence and a portion of the said building is under occupation of the assessee then the said building should come under the purview of Section 5(1)(iii) of the Act even if the substantial portion of the same has been rented out by the assessee to the tenant or for any other purpose would make the expression “in the occupation of a Ruler” redundant and those words in the provision would not have its play.

53. The learned standing counsel for the revenue submitted, the area, which is sought to be developed by the assessee, is not any village, town or city but the submergence area and command area of the irrigation project. The learned standing counsel submitted, this aspect is further made clear from the fact that the provision itself contemplates that the authority could be dealing with housing accommodation or planning, development and improvement of cities, towns and villages or both. This clearly shows the intent of the Legislature in granting exemption to authorities, which are carrying on civic activities. It is only such authorities that are contemplated under this provision. Relying upon the decision of the Hon’ble Supreme Court in the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh , wherein the Constitutional Bench held – “While, no doubt, it is not permissible to supply a clear and obvious lacuna in a statute and imply a right of appeal, it is incumbent on the Court to avoid a construction, if reasonably permissible on the language, which would render a part of the statute devoid of any meaning or application”. The learned standing counsel for the revenue also relied on the following decisions :

(1) State of Bombay v. Ali Gulshan .

(2) J.K. Cotton Spinning and Weaving Mills Co. Ltd. v. State of Uttar Pradesh .

54. The learned standing counsel for the revenue further submitted, even in the case of Gujarat Industrial Development Corporation v. CIT , the Hon’ble Supreme Court held -“the provisions of Section 10(20A) applies specifically to development of cities, towns and villages, which clearly indicates that the term ‘development’ deals with development of city, town or village and docs not deal with general development; but it should be specific and should be the development of civic in nature”.

55. Replying to the above, the learned Counsel for the assessee submitted, to exemption under Section 10(20A), the activity should be in the nature of civic activity and it should be within the city, village or town, is not well founded and is contrary to law as laid down by the Apex Court in the case of Gujarat Industrial Development Corpn. (supra) and the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corpn. (supra). learned Counsel for the assessee submitted, if once the authority is constituted for development, planning and improvement of city, town or village, the income stand exempted under Section 10(20A). So the provisions of the Act do not provide that activity of development, planning and improvement should be carried within the city, town or village. He further objected the submission of the learned standing counsel for the revenue that the developmental activity which develops the city, town or village should be in the city, town or village itself is entirely misconceived and such a reading of Section would not only violate the provisions of Section 10(20A), but would also amount to reading something more in the Section and rewriting it, which is domain of the Legislature.

56. We have heard the rival submissions. We have gone through the orders of the revenue authorities and the decisions cited by the contending parties.

Before entering into controversy, let us see Section 10(20A). It reads as under :

10(20A). any income of 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.

57. This Section was inserted by the Finance Act, 1970, with retrospective effect from 1st April, 1962. It was brought into statute book as Legislature felt that the income of the Housing Boards or statutory authorities set up for the purpose of dealing with or specifying needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages necessarily to be exempted from tax. Articles 285 and 289 of the Constitution of India provides for the immunity of the property of the Union of India and States from mutual taxation, which is one of the basic federal principal. Article 289 declares that property and income of the State shall be immune from Union taxation except of commercial undertakings carried on by the States, unless such undertakings are declared by the Parliament to be incidental to the ordinary functions of the Government. In effect, both the Articles envisage inter Governmental immunity from taxation – that of the Union, absolute, but that of the State, qualified. The Hon’ble Supreme Court in the case of Sea Customs Act [1878] Section 20(2), In re AIR 1963 SC 1760 held that immunity conferred by clause (1) of Article 289 is only in respect of tax on property and the property includes not only lands and buildings, but all forms of property. In the case in Gujarat Industrial Development Corporation v. CIT the Hon’ble Gujarat High Court held that the assessee-Corporation was neither a State nor entitied for exemption under Article 289(1) nor an authority entitled to exemption under Section 20(20A) of the Income-tax Act, 1961. This decision was reversed by the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corporation v. CIT , which is heavily relied by the learned Counsel for the assessee. Reversing the decision of the Hon’ble Gujarat High Court in Gujarat Industrial Development Corporation v. CIT . Their Lordships held, the word “development” in Section 10(20A) of the Income-tax Act, 1961 should be understood in a wider sense. There is no warrant to exclude all development programmes relating to any industry from the purview of the word “development” in the said sub-section. There is no indication in the Act that development envisaged therein should be confined to industrial activities. Development of a place can be accelerated through varieties of schemes and establishment of industries is one of the modes of developing an area. Their Lordships further held “The position is, therefore, clear that authorities constituted by law for facilitating all kinds of development of cities, towns and villages for public purposes shall not be subjected to the liability to pay income-tax. The Division Bench of the High Court seems to have interpreted the exemption clause too rigidly and narrowly which resulted in the anomaly of bringing authorities like appellant-Corporation within the tentacles of income-tax liability while the authorities dealing with housing schemes which provide houses to private individuals would stand outside the taxing sphere”.

58. The Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra) held that an authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need of housing accommodation or for the purpose of planning, development and improvement of cities, towns and villages or for both, are exempted from taxation. Their Lordships further held, “The condition whether the respondent-Corporation is an authority constituted in India by or under any law does not require any interpretorial exercise for the purpose to answer it. The second requirement is that such an authority must have been constituted for the purpose of dealing with and satisfying the need of housing accommodation, like the Housing Board or for the purpose of planning, development and improvement of cities, towns and villages or for both. This obviously refers to the preamble regarding the purpose for which the enactment has been made and also the relevant definition and the functions which are assigned to such duly constituted authority. The predominant activities of the Corporation is related to agricultural and development activity of the same for the purpose of plan development; and the agricultural land cannot be isolated from the development of villages and, therefore, the lands fall within the ambit of Corporation engaging into the activities of planning, development and improvement of agricultural lands which related to planning, development and improvement of villages. Thus, the answer being self-evident and finally determined by the Apex Court, is also need not be made subject to a reference application for re-examination”.

59. Keeping in view the above two decisions and also the decision of the CIT(A), it is necessary for us now to go through the various provisions and rules framed thereunder to arrive at a conclusion whether the VIDC is an authority exempted from income-tax.

60. Before the CIT(A), the assessee claimed that it is a “Local Authority” entitled to exemption under Section 10(20) of the Income-tax Act, 1961. The CIT(A) considered, each one of the attributes of which an authority must possess to come within the definition of “Local Authority” as laid down by the Apex Court in the case of Union of India v. R.C. Jain . The CIT(A) held – (a) that assessee-Corporation cannot be treated at parwith a Municipal Committee, District Board or Body of Port Commissioner and it does not handle any Governmental functions and duties as are usually entrusted to Municipal bodies; (b) assessee does not have a defined jurisdiction and in any case, the area of operation belonging to the assessee-Corporation cannot be called a local area; (c) assessee does not have any power to levy any tax, duty or cess. The water charges collected by the assessee are nothing but price for sale of water. Thus, there is no compulsory exaction. It cannot levy betterment charges; (d) the funds of VIDC cannot be termed as local fund; (e) assessee does not have popular representation; and (f) assessee-Corporation does not function independently.

61. Coming to the claim of the assessee, i.e., assessee is an authority entitled to exemption under Section 10(20A) of the Income-tax Act, 1961, CIT(A) noted that assessee is not involved in implementation of any housing programme or not constituted for the purpose of planning, development or improvement of cities, towns and villages or for both but was formed for the purpose of completing some ongoing irrigation projects and hydro-electric power projects. This activity does not amount to planning, development or improvement of any city, town or village though the activity of the Corporation remotely and indirectly will have impact on the planning, development or improvement of city, town or village.

62. Coming to the other argument of the assessee that it is a “State” whose income is exempted under Article 289(1), CIT(A) held that assessee is a body corporate having perpetual succession and a common seal capable of suing and being sued in its name with power to borrow and spend. On dissolution the properties, funds and dues realizable by the Corporation and liabilities of the Corporation shall vest in the State Government. CIT(A) held, in the light of the ratio laid down by the Hon’ble Andhra Pradesh High Court in the case of A.P. State Road Transport Corpn. (supra), as affirmed by the Hon’ble Supreme Court in the case of Andhra Pradesh State Road Transport Corporation v. ITO [1964] 52 ITR 524 and also in the light of the decision of the Hon’ble jurisdictional High Court in the case of Vidarbha Housing Board v. ITO ,assessee cannot be treated as a “State” and, therefore, the income cannot be exempted resorting to Article 289(1) of the Constitution of India.

63. It is the case of the revenue that though the assessee is an authority constituted in India under the law, it is not an authority constituted for the purpose of dealing with and satisfying the need for housing accommodation or it is not an authority constituted for the purpose of planning, development or improvement of cities, towns and villages or for both.

64. We arc unable to fully agree with the above finding. In the case of Gujarat Industrial Development Corporation (supra), the Hon’ble Supreme Court, dealing with Section 10(20A), held that the word “development” should be understood in its wide sense. Hon’ble Supreme Court further held, “there is no warrant to exclude all development programmes relating to any industry from the purview of the word ‘development’ in the said definition”. Their Lordships further held “there is no indication in the Act that development envisaged therein should confine to non-industrial activities. The development of a place can be accelerated through varieties of schemes and establishment of industries is one of the modes of developing an area”.

65. Now the question to be posed is whether development of a place is accelerated through establishment of Corporation like assessee and whether it is one of the modes of development of an area. When we carefully analyse Section 10(20A), the wordings used are “for the purpose of planning, development or improvement of cities, towns and villages, or for both”. From the above it is clear that the area of activities of the authority is not necessarily to be confined to a city, to a particular town or to a particular village. The field of action/activity may be extended to many villages, towns and cities. Therefore, the first objection of the revenue that the area of activity of VIDC is not marked area-wise does not stand to reason.

66. A perusal of the order of the Assessing Officer makes it clear that the main thrust of the argument of the assessee before the revenue authorities was that the assessee falls within the scope of “Local Authority” as defined under Section 10(20), of Chapter III, which deals with income which do not form part of the total income. This plea of the assessee was rejected, and rightly so, by the Assessing Officer, following the decisions of the Hon’ble Supreme Court in the cases of Veljibhai Muljibhai Soneji (supra), Calcutta State Transport Corporation (supra) and in the case of U.P. Forest Corporation (supra).

67. In the case of U.P. Forest Corpn. (supra), the Hon’ble Supreme Court held, so as to constitute a local authority, even if it is incorporated by an Act of Legislature, the following conditions are to be satisfied :

(a) Members of the Corporation, either wholly or partly, directly or indirectly, must be elected by the inhabitants of the area.

(b) The second essential attribute of a “Local Authority” is that it needs to have a function and duties normally entrusted to the Municipal bodies, such as providing civic amenities to the inhabitants of the locality like health, education, town planning, market, transportation, etc.

(c) The most important essential attribute is that the “Local Authority” should have power to raise funds by levying taxes, rates, charges or fees.

68. In the instant case of the assessee none of these essentials are satisfied. It was one of the contentions taken by the assessee in the instant case before the revenue authorities that Irrigation Minister is ex-officio Chairman; one of the non-official Member is nominated by the State Government as Vice Chairman; other officials like Chief Secretary and Secretary of the various departments are ex-officio Members; and five of the MLAs and 3 of the MLCs are also Members of the assessee and thus it has a ‘popular representation’. We are afraid; this is not what Hon’ble Supreme Court has stated that the “Members of the Corporation, either wholly or partly, directly or indirectly, must be elected by the inhabitants of the area”. Section 3(2) of the VIDC Act does not say that ex-officio Chairman “must be elected by the inhabitants of the area”. So also in the case of MLAs and MLCs. In short, the revenue authorities rightly rejected assessee’s claim of status of “Local Authority”. The local citizens of the area should elect them directly or indirectly. Perhaps the case of Irrigation Minister, MLAs/MLCs can be considered as indirect election. On a careful study this is also to be rejected. Therefore, this plea of the assessee was rightly rejected and held that the assessee is not a “Local Authority” as defined under General Clauses Act, 1897.

69. Now before the Tribunal, the main thrust of the argument of the assessee is that the assessee falls within the ambit of Section 10(20A). Thus, there is a clear difference between “Local Authority” used in Section 10(20) and the word “Authority” used in Section 10(20A). “Local Authority”, as noted, is not defined in Income-tax. Therefore, the definition given under another Central Act, i.e., General Clauses Act, Section 3(31) was taken note of. Under General Clauses Act, Section 3(31), “Local Authority” is defined as ‘Local Authority’ shall mean a Municipal Committee, a District Board, a body of Port Commissioners, or other authority legally entitled to or entrusted by the Government with the control or management of a Municipal or local fund.

70. We are of the view that the word “Authority” used in Section 10(20A) does not necessarily require for a direct or indireet elected character unlike the word “Local authority” used in Section 10(20). The authority should be one constituted firstly in India; secondly by or under any law enacted; and thirdly 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. In Section 10(20) necessarily the Local Authority’s area of activity must be “within its own jurisdictional area”; whereas it appears in Section 10(20A) the area of activity is not limited to area but limited to the activity itself. The activity must be limited to either dealing with or satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both.

71. In the case of Rajasthan Land Development Corporation (supra), Hon’ble Rajasthan High Court held that a Corporation constituted by a Legislative enactment, engaged in the activities of planning, development and improvement of agricultural lands, having regard to the scheme of Rajasthan Land Development Corporation Act, 1975, is an assessee entitled to exemption under Section 10(20A). In this case the Hon’ble High Court held, the assessee-Corporation was dealing with activities related to agricultural and development activity of the same for the purpose of plan development; and further held, the agricultural land cannot be isolated from the development of villages and, therefore, Their Lordships held, the lands fall within the ambit of Corporation engaged in the activities of planning, development and improvement of agricultural lands, which related to planning, development and improvement of villages.

72. In the instant case of the assessee there is no doubt that the Corporation is constituted by a legislative enactment to engage in the activities of “promotion and operation of some irrigation projects in Vidarbha region, command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers allocated to the State of Maharashtra under the Water Disputes Tribunal Award and other allied and incidental activities including flood control”. To hold that the activity of the assessee does not amount to planning, development or improvement of cities, towns and villages will not stand the scrutiny. It is true, assessee is not directly planning, developing or improving the cities, towns and villages. Assessing Officer as well as the CIT(A) held that the “Authority” should be constituted by or under any law enacted either for the purpose of dealing with and satisfying the needs of housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, and both the authorities held, it should be direct and immediate. However, the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corpn. (supra) and the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra), makes it clear that it need not necessarily to be direct and immediate. As noted hereinabove, in the case of Gujarat Industrial Development Corporation (supra), Hon’ble Supreme Court held, the word “development” in Section 10(20A) has to be understood in a wide sense. Their Lordships held, the development programmes relating to an industry does not warrant a restricted meaning. Their Lordships further held, development of a place can be accelerated through varieties of schemes and establishment of industries is one of the modes of developing an area. If that be so, definitely the development of a place is also accelerated through establishment of canals, promotion and operation of irrigation projects and through development and schemes for generation of hydro-electric energy. The mobilization of the resources for the completion of the projects is incidental just like the capital is a necessity to establish an industry. The mode of mobilization of resources is not important criteria. It is the activity, which is important. Looking from this angle also we are of the view that the assessee is an “Authority” constituted by the Legislature and it develops the area within its activity.

73. It is not disputed that the assessee, under the provisions of VIDC Act, to construct hydro-electric power projects, which may be added subsequently to the existing ones and this activity also result in making available drinking water and the water is essential for the development of cities, towns and villages. The establishment of industry, the Hon’ble Rajasthan High Court held in the case of Rajasthan Land Development Corporation (supra) tantamount to planning, developing and improving the cities, towns and villages. On the same line, construction of power projects will also lead to planning, development and improvement of cities, towns and villages. It is true, as contended by the learned standing counsel for the revenue, that the VIDC Act was not passed for the purpose of enabling the assessee to perform functions set out in Section 10(20A) directly. But the Hon’ble Supreme Court held in the case of Gujarat Industrial Development Corporation (supra), that direct nexus is not essential.

74. The distinction pointed out by the learned standing counsel for the revenue, with reference to the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corporation (supra), i.e., in that case the Corporation was set up to chalk out the plans for development of industrial area and industrial estate in different places; whereas in the instant case of the assessee, the assessee-Corporation is set up for the purpose of “mobilization of resources” for completion of some on-going irrigation projects in time bound manner and for the promotion and operation of the said irrigation projects in Vidarbha region and command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers etc. is entirely different and the decision is not applicable. It is a proposition difficult to accept.

75. Again turning to Section 10(20A), it does not speak of establishment of industry. Yet the Hon’ble Supreme Court held that establishment of industry is for the purpose of planning, development and improvement of cities, towns and villages. If that be so, as we have already noted hereinabove, mobilization of resources and completion of irrigation projects in time-bound manner and also generation of hydro-electric energy by harnessing the water allocated to the State of Maharashtra under Water Disputes Tribunal Award and other allied and incidental activities including flood control cannot be held as not helping or not for the purpose of planning, development or improvement of cities, towns and villages.

76. We arc also of the view that the relief sought for by the assessee is to be accepted in view of the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra). In this case it was contended that the assessee is a Corporation established under a statute and has been established for the purpose of rural development and its entire income, therefore, exempted under Section 10(20A). The claim of the assessee was not accepted by the appellate authorities and by the Tribunal. The preamble of the Rajasthan Land Development Corporation Act, 1975, is reproduced by the Hon’ble Rajasthan High Court vide para 10 of Their Lordships’ order. It reads as under :

An Act to constitute a corporation for the execution of projects relating to land development with a view to preventing damage to land and loss in agricultural productivity and to securing optimum utilisation of land and water resources in the State of Rajasthan and for other matters connected therewith or incidental thereto.

One of the objects was construction, renovation, re-designing, realigning and lining of water courses. The word “land development” has also been defined under Section 2(i) of the Act. The same is also reproduced here as under :

11. The word “land development” has been defined under Section 2(i) of the Act as under :

(j) ‘land development’ means any of the following works, –

(i) construction, renovation, re-designing, re-aligning and lining of water courses;

(ii) land levelling and land shaping, including re-alignment of field boundaries;

(iii) digging, renovation, re-designing and re-aligning of field drains;

(iv) providing of drop structures, culverts and farm roads in the fields;

(v) land reclamation by use of engineering, biological and chemical measures, including leaching;

(vi) contour bunding and nala bunding;

(vii) growing of trees, plants, shrubs and grasses;

(viii) development of permanent and temporary pastures, farm forestry and commercial afforestation;

(ix) such other works as may be necessary or incidental to development of land or ground or flow water potential and for optimizing the utilization of land and water resources; and

(x) repairing and maintenance of any of the foregoing works.

Their Lordships held, the object of the Act is clearly to have a planned development of the predominant activities related to the villages, viz., agriculture and agricultural lands. Further Their Lordships observed “the predominant activities of the Corporation is related to agricultural and development activity of the same for the purpose of plan development; and the agricultural land cannot be isolated from the development of villages and, therefore, the lands fall within the ambit of Corporation engaging into the activities of planning, development and improvement of agricultural lands which related to planning, development and improvement of villages. Thus, the answer being self-evident and finally determined by the Apex Court, in our opinion, is also need not be made subject to a reference application for re-examination.

77. Now coming to the object of the VIDC Act, it is for the promotion and operation of irrigation projects in Vidarbha region, command area development and schemes for generation of hydro-electric energy to harness the water of Godavari and Tapi rivers allocated to the Slate of Maharashtra under the Water Disputes Tribunal Award and other allied and incidental activities including flood control of the region. The term “Hydro Electric Power Project” and “Irrigation Project” are defined in clause 2(c) and 2(e), which reads as under :

2(c). ‘Hydro-Electric Power Project’ means and includes the planning, construction, maintenance and management of Hydro-Electric Power Projects, within the area of operation of the Corporation and shall also include such hydro-electric power projects as are assigned, handed over or transferred to the Corporation by the State Government;

2(e) ‘Irrigation Project’ means the planning, construction, maintenance and management of

(i) Major Irrigation Project having irrigable command area of more than 10,000 hectares,

(ii) Medium Irrigation Project having irrigable command area of more than 2,000 hectares and up to 10,000 hectares,

(iii) Minor Irrigation Project having irrigable command area of more than 250 hectares and up to 2,000 hectares.

And shall include command area development, flood control and other allied activities;

78. Could we say that planning, construction, maintenance and management of irrigation projects having irrigable command area is not for the purpose of development and can this isolately be treated from development of villages, towns and cities? If the development of agricultural land is not isolated from the development of villages, by no stretch of imagination the establishment of irrigation project and hydro-electric power project could be isolated from the development of villages, towns, cities, etc.

79. Coming to the functions and powers of Corporation, it is defined in Chapter IV. For the brevity and clear understanding, Sections 18 and 19 are reproduced here as under :

18. The function of the Corporation shall be,

(a) to promote and operate,

(i) some irrigation projects mentioned in the schedule and command area development including flood control; and

(ii) some schemes for the generation of hydro-electrical energy;

(b) to plan, investigate, design, construct and manage those irrigation projects and their command area development;

(c) to plan, investigate, design, construct and manage the schemes of the generation of hydro-electrical energy;

(d) to enter into contracts in respect of the works and any other matters transferred to the Corporation along with assets and liabilities under this Act;

(e) to invite tenders, bids, offers and enter into contracts for the purposes of all the activities of the Corporation;

(f) to promote participation of any person or body or association of individuals, whether incorporated or not, in planning, investigation, designing, construction and management of irrigation projects, and command area development and Hydro-Electric Power Projects including flood control;

(g) to undertake schemes or works, either jointly with other corporate bodies, or institutions, or with Government or local authorities, or on agency basis in furtherance of the purposes for which the Corporation is established and all matters connected therewith;

(h) to promote irrigation-related activities such as fisheries, pisciculture, floriculture, horticulture, sericulture, tissueculture, etc.;

(i) to promote tourism, water sports and other related activities on and around the irrigation and hydro-Electric Power Projects;

(j) to develop the land around or nearby lake and in other suitable locations with irrigation facilities and other infrastructure facilities and lease part or whole of such developed properties to the interested parties;

(k) to prepare annual plan and five-year working development plan;

(l) to prepare annual budget;

(m) to undertake any other project and other activities entrusted by the State Government in furtherance of the objectives for which the Corporation is established.

19(1). The Corporation shall have the power to accord technical sanction, acceptance of all tenders, sanctioning budget and making financial provisions, settling dispute arising out of contracts and any other thing which may be necessary or expedient for the purposes of carrying out its functions under this Act.

(2) Without prejudice to the generality of the foregoing provision, such power shall include power,

(a) to acquire and hold property, both movable and immovable as the Corporation may deern necessary for the performance of any of its functions, duties, activities and to lease, sell, exchange or otherwise transfer any property held by it on such conditions as may be deemed proper by the Corporation;

(b) to construct or cause to be constructed such dams, barrages, reservoirs, power houses, power structures, electrical transmission lines and sub-stations, navigation works, irrigation, flood control and drainage canals and such other works and structures as may be required;

(c) to take measures to prevent pollution of any water under its control and to take all measures deemed necessary to prevent discharges into such water of effluents which are harmful to water supply, irrigation, public health or fish life;

(d) to stock its reservoirs or water courses with fish and to sell fish or fishing rights and prohibit taking out fish from the water under its control;

(e) to assist in the establishment of water users’ association and other organizations formed under the Maharashtra Co-operative Societies Act, 1961 for the better use of facilities made available by the Corporation;

(f) to lease rights for water sports, other recreational activities related to the use of reservoir and its surroundings and reservoir water;

(g) to establish, maintain and operate laboratories, experimental and research stations and farms for conducting experiments and research for

(i) utilizing the water, electrical energy and other resources in the most economical manner for the

development of the Godavari and Tapi River Valley in Vidarbha region;

(ii) determining the effect of its operations on the flow conditions in the Godavari and Tapi River and its tributaries in Vidarbha region;

(iii) providing navigation condition in the Godavari and Tapi River and its tributaries in Vidarbha region;

(h) to engage suitable qualified consultant or person having special knowledge or skill to assist the Corporation in the performance of its functions;

(i) to do all such other things including making interest bearing monetary advances to the contractors executing works on the projects of the corporation and perform such acts as may be necessary for, or incidental or conducive to any matters which are necessary for furtherance of the objectives for which the Corporation is established.

80. A perusal of the Sections 18 and 19 of the VIDC Act makes it clear that the Corporation has given general power to construct or cause to construct dams, barrages, reservoirs, power houses, power structures, electrical transmission lines and sub-stations, navigation works, irrigation, flood control and drainage canals and such other works and structures as may be required. The Corporation is also empowered to prevent pollution of water and is empowered to prevent discharges into such water of effluents, which are harmful to water supply, irrigation, public health or fish life.

81. Under Section 23 of the VIDC Act, assessee has to co-ordinate with other authorities to minimise inconvenience caused by submergence. This Section reads as under :

23. The Corporation shall keep co-ordination with the State Government, Railway Authorities, local authorities and statutory bodies with a view to minimizing the inconvenience likely to be caused by the submergence of railways, lands and roads and communications and shall bear the cost of any realignment thereof or resettlement of any population rendered necessary by such sub-mergence.

82. Chapter VII of the VIDC Act deals with miscellaneous and supplementary provisions. Sections 49 and 50 of the VIDC Act particularly denote the functions that normally undertaken by welfare Government. These Sections read as under:

49(1). The Corporation shall prepare and submit to the State Government, in such form as may be prescribed, an annual report within six months after the end of every financial year of its activities during the previous financial year, with particular reference to,

(a) irrigation, command area development and flood control,

(b) water supply,

(c) hydro-electrical energy,

(d) recreation facilities,

(e) use of lands,

(f) resettlement of displaced persons; and

(g) other activities of the Corporation.

(2) The Corporation shall also furnish to the State Government such returns, statistics, reports, accounts and other information with respect to its conduct of affairs, properties or activities or in regard to any proposed work or scheme as the State Government may, from time to time, require.

50. The rehabilitation and resettlement of the persons affected due to the irrigation and the hydro-Electric Power Projects shall be carried out by the State Government in accordance with the provisions of the Maharashtra Project Affected Persons Rehabilitation Act, 1986;

Provided that, all the expenditure required to be incurred by the State Government for the rehabilitation and the resettlement of persons affected by the irrigation and Hydro-Electric Power Project shall be borne by the Corporation.

83. In short, in the light of the decision of the Hon’ble Supreme Court in the case of Gujarat Industrial Development Corporation (supra) and also the decision of the Hon’ble Rajasthan High Court in the case of Rajasthan Land Development Corporation (supra), we are of the view that the assessee definitely falls within the scope of Section 10(20A).

84. Coming to the decisions relied by the revenue authorities in the case of Veljibhai Muljibhai Soneji (supra); Calcutta State Transport Corporation’s case (supra) and in the case of U.P. Forest Corporation (supra), these decisions do not fit into the facts of the instant case of the assessee.

85. Now coming to Section 24 of VIDC Act, it empowers the Corporation to carry out all or any of the functions and exercise all or any of the powers of the State Government or appropriate authority. It further empowers any officer of the Corporation to carry out all or any of the functions and exercise all or any of the powers of the Canal Officer as defined in Bombay Canal Rules, 1934 and also Maharashtra Irrigation Act, 1976. Section 24 reads as under :

24. Notwithstanding anything contained in the Maharashtra Irrigation Act, 1976 and the Bombay Canal Rules, 1934,

(a) the Corporation may carry out all or any of the functions and exercise all or any of the powers of the State Government or the appropriate authority; and

(b) any officer of the Corporation authorize in this behalf by the Corporation may carry out all or any of the functions and exercise all or any of the powers of the Canal Officer,

under the provisions of the said Act and rules, within the area of operation of the Corporation.

Reading of the above Section makes it clear that the assessee is also empowered to carry out the functions of the State Government or appropriate authority. In other words, some of the sovereign functions of the Government are also being delegated to the assessee-Corporation.

86. Thus, the revenue authorities were not correct in holding that the assessee is not entitled to benefit under Section 10(20A), particularly relying on the decisions which deal with the powers of the “Local Authority”. The Hon’ble Supreme Court in the case of Gujarat Industrial Development Corporation {supra) has held, the word ‘development’ in Section 10(20A) is to be construed liberally.

87. Before parting with, we also like to bring the following facts on record, which also indicates that assessee is in fact discharging a sovereign function :

Reading of Section 70 of the VIDC Act, reproduced at page 24, para 45 of this order, makes it clear that once the Corporation’s existence ceased to exist by operation of law, from such date as may be specified in the Notification, the Corporation shall be deemed to be dissolved and accordingly all the properties, funds and dues vested in or realisable by the Corporation shall vest in the State Government and also all the liabilities incurred by the Corporation are enforceable against the State Government; which indicates that assessee is discharging a part of the sovereign function. The liability of the State Government is not confined to the extent of properties/funds that vested in the Government, but to the actual extent. From any point of view, the Corporation needs to be treated as an “Authority” as contemplated under Section 10(20A).

88. Hence, we answer Question No. (I) in favour of the assessee and against the revenue.

89. Coming to Question No. (II) framed by the Hon’ble High Court and directed to decide on the facts; it is reproduced in Para 8 of this order.

90. The facts leading to the dispute is as under :

One of the contentions by the assessee before the Tribunal was whether the assessee had commenced the business during the previous year or not. It was contended that the assessee involved not only in the business of providing water for irrigation but also in providing necessary infrastructure like dams, canals and supply and generation of power etc. It was contended; assessee took over from the State Government existing and on-going irrigation projects, which were at different stages of progress. In other words, technically the business was actually going on even before the assessee took over from the State Government. It was further submitted; though construction and other works were going on, assessee sold the water during the previous year relevant to the assessment year under consideration and received a consideration of Rs. 1,12,09,306. Thus, the assessee submitted; assessee not only commenced the business but also generated revenue. It was also contended that the assessee has made huge borrowings by issue of bonds and it is for the business of the Corporation.

91. The learned Counsel for the assessee submitted, the dam has already been constructed and water accumulated. The canals were dug out from the dam. Canals are planned for various lengths. Even if 5 kms. of canal is constructed, the irrigation facility commences. Assessee is selling water. Merely because the projects are still going on, it does not mean that the assessee has not commenced its business. Even if the project is technically incomplete because it has not been completed according to plan, yet the business has commenced. The relevant question is whether the business could be continued with the project with the stage it has already reached. For example, generation of electricity is a big project. Without the completion and expanded unit if the electricity could be generated in a small scale and sold, it cannot be concluded that the business has not commenced. The learned Counsel for the assessee invited our attention to documents contained at pages 31,34,39,40 and 42. He further submitted, the status report for 1997-98 clearly indicates that the business has been commenced. The report is evidenced at pages 48 to 51 of the Paper Book. The business commenced even before the change of ownership. Hence it is to be considered that from the date of transfer the assessee has commenced the business actually. For the above proposition, the learned Counsel for the assessee relied on the decision of the Hon’ble Madras High Court in the case of CIT v. Ponds India Ltd. [2002] 253 ITR 686 122 Taxman 706. Inviting our attention to the written submissions made before the Hon’ble High Court, the learned Counsel for the assessee submitted; this should be treated as a part of the submission before the Tribunal (Pages 52 to 66 of the Paper Book – Volume I).

92. The learned Counsel for the assessee submitted; in the irrigation project, dam is constructed where water is accumulated and canals are taken out from the dam to regulate the water flow. The canals are very long running into 50 kms. or much more. However, construction of canal of a small portion itself is the starting point for the commencement of business. Water is drawn to nearby agricultural fields from the canal. Assessee never stated that the assessee has not commenced the business. Assessee only stated that the projects were going on and are yet to be completed. The authorities have misread the letter dated 16-2-2001 and reached a wrong conclusion. The stand of the revenue that the assessee cannot ask for two different methodsone for writing books of account for the purpose of business and another for tax purpose is contrary to law laid down by the Apex Court in the case of United Commercial Bank v. CIT [1999] 240 ITR 355 106 Taxman 601. It was a case where the assessee prepared financial statement of accounts as per provisions of Banking Regulation Act, 1949 and disclosing the investment in securities at cost. The Hon’ble Supreme Court in the case cited supraheld that “it is open for the purpose of assessee to prepare books of account in particular manner whereas make a claim before the Income-tax Authority to show and get assessed on real income”. In this case, the learned Counsel for the assessee submitted, the Hon’ble Supreme Court held “preparation of the Balance Sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the Balance Sheet in the statutory form on the basis of the cost of the investments”.

93. Relying upon the decision of the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT , the learned Counsel for the assessee submitted; what is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. The learned Counsel for the assessee also relied on the following decisions:

(i) Kedarnath Jute Mfg. Co. Ltd. v. CIT

(ii) CIT v. Ralli Wolf Ltd.

(iii) Khimji Visram & Sons (Gujarat) (P.) Ltd. v. CIT

94. The learned Counsel for the assessee further relied on the decision of the jurisdictional High Court in the case of CIT v. V.S. Dempo & Co. (P.) Ltd. and submitted; the way in which the entries are made by an assessee in the books of account is no determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.

95. Supporting the contention that the assessee had commenced the business even before the change of authority from Government to assessee-Corporation, learned Counsel for the assessee submitted, getting clue from the decision of the Hon’ble Madras High Court in the case of Ponds India Ltd. (supra); that an undertaking had been set up long prior and which had commenced its business several years earlier, cannot be regarded as new undertaking set up in the year in which ownership passed from one to another. It is not the year in which the assessee owned the undertaking forms the matter; what is material is the year in which it was set up. The change of ownership does not result and amounts to setting up a new undertaking.

96. The learned Counsel for the assessee also distinguished the decision of the Privy Council relied upon by the revenue authorities in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36.

97. The learned standing counsel for the revenue, on the other hand, supported the orders of the revenue authorities, and submitted the contention of the assessee that the assessee had commenced the business even before acquiring the right of ownership is totally false. Vide letter dated 16-2-2001 assessee categorically admitted that none of the projects undertaken were completed or ready for intended use. This itself falsifies assessee’s submission. Once given a statement to this effect, now the assessee cannot go back and say that the business has commenced. Mere sale of water is not a business or function contemplated by the statute. The functions under the statute are for promotion and operation of irrigation and its power projects. Mere sale of water from existing standing bodies where water stored is not a business contemplated under VIDC Act. The system of accounting followed clearly proved that the assessee had not commenced its business. For the above proposition, the learned standing counsel for the revenue relied on the decision in the case of CIT v. L and T Mcneil Ltd 238 ITR 663 (sic).

98. Considering the rival submissions and going through the decisions cited by the contending parties, we are of the view that there is no doubt that the assessee had commenced its entrusted activity – business. Assessee-Corporation was formed for completion of the already existing projects or for further entrusted projects. There is no doubt that even before the projects were entrusted to the assessee, some portion of the canals were completed and water supplied to various fields and water charges were being collected by the Irrigation Department of the State. Merely because the assessee had taken over construction activities it does not mean that the assessee has not commenced the business. It is almost exactly like an industrial undertaking. If an existing undertaking is purchased by a new assessee; it does not mean that the new assessee had not commenced its business. The new owner may expand the existing undertaking and its capacity. To say that only when it is in full swing and completed the entire expansion the business commenced is an incorrect appreciation. We have no doubt that the view canvassed by the learned standing counsel has no legal sanctity.

99. Thus, we answer Question No. (II) also in favour of the assessee and against the revenue.

100. In the result, appeal of the assessee stands allowed.