{"id":51423,"date":"1964-03-05T00:00:00","date_gmt":"1964-03-04T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/andhra-pradesh-state-road-vs-the-income-tax-officer-and-anr-on-5-march-1964"},"modified":"2015-06-15T01:07:26","modified_gmt":"2015-06-14T19:37:26","slug":"andhra-pradesh-state-road-vs-the-income-tax-officer-and-anr-on-5-march-1964","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/andhra-pradesh-state-road-vs-the-income-tax-officer-and-anr-on-5-march-1964","title":{"rendered":"Andhra Pradesh State Road … vs The Income-Tax Officer And Anr on 5 March, 1964"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Andhra Pradesh State Road … vs The Income-Tax Officer And Anr on 5 March, 1964<\/div>\n
Equivalent citations: 1964 AIR 1486, \t\t 1964 SCR (7)\t 17<\/div>\n
Author: P Gajendragadkar<\/div>\n
Bench: Gajendragadkar, P.B. (Cj), Wanchoo, K.N., Shah, J.C., Ayyangar, N. Rajagopala, Sikri, S.M.<\/div>\n
           PETITIONER:\nANDHRA PRADESH STATE ROAD TRANSPORTCORPORATION\n\n\tVs.\n\nRESPONDENT:\nTHE INCOME-TAX OFFICER AND ANR.\n\nDATE OF JUDGMENT:\n05\/03\/1964\n\nBENCH:\nGAJENDRAGADKAR, P.B. (CJ)\nBENCH:\nGAJENDRAGADKAR, P.B. (CJ)\nWANCHOO, K.N.\nSHAH, J.C.\nAYYANGAR, N. RAJAGOPALA\nSIKRI, S.M.\n\nCITATION:\n 1964 AIR 1486\t\t  1964 SCR  (7)\t 17\n CITATOR INFO :\n RF\t    1975 SC1331\t (110,171,179)\n F\t    1982 SC 697\t (21A)\n RF\t    1986 SC1054\t (1,11)\n F\t    1988 SC1708\t (13)\n RF\t    1988 SC1737\t (50)\n D\t    1989 SC1713\t (10)\n\n\nACT:\nIncome-tax-Income   of\tState  Road  Transport\t Corporation\nwhether\t income of the State-Whether exempt-Constitution  of\nIndia, Art. 289-Income-tax Act, 1922 (11 of 1922), s. 22.\n\n\n\nHEADNOTE:\nThe  Income-tax Officer (respondent No.(1) served  a  notice\nunder  s. 22 of the Income-tax Act on the  appellant.\tUpon\nthe receipt of the notice, the appellant appeared before the\nIncome-tax  Officer.   The  appellant  pleaded\tbefore\t the\nIncome-tax  Officer  that it did not fall under any  of\t the\nfive  categories of assessees under s. 3 of  the  Income-tax\nAct.  The appellant also raised the contention that it was a\nlocal\tauthority   exempt  from  income-tax.\t All   these\ncontentions  were  rejected  by respondent No.\t1  with\t the\nresult\tthat  the impugned orders of assessment came  to  be\npassed.\nThe appellant filed Writ Petitions before the High Court  in\nwhich it challenged the impugned orders of assessment passed\nby  respondent No. 1. In its Writ Petitions,  the  appellant\nclaimed\t an  ,order,  writ or  other  appropriate  direction\nquashing  the assessment orders passed by respondent No.  1.\nThe  High  Court dismissed these writ petitions.   The\tHigh\nCourt held that the appellant could not claim the  exemption\nunder\tArt.  289(1)  because  it  was\tnot  a\t state-owned\nCorporation.   The  High Court granted a  certificate  under\nArt. 133 of the Constitution and hence the appeal.\nHeld:\t  (i) Art. 289 of the Constitution consists of three\nclauses.   The\tfirst clause confers  exemption\t from  union\ntaxation on the property and income of a State.\nClause (2) then provides that the income from trade or busi-\nness  carried  on  by the Government of a State\t or  on\t its\nbehalf which would not have been taxable under cl. (1),\t can\nbe  taxed,  provided  a law is made by\tParliament  in\tthat\nbehalf.\t In other words cl. (2) is an exception to cl. (1).\nClause\t(3) then empowers Parliament to declare by law\tthat\nany  trade or business would be taken out of the purview  of\ncl.  (2)  and  restored to the area covered by\tcl.  (1)  by\ndeclaring  that the said trade or business is incidental  to\nthe  ordinary functions of Government.\tIn other words,\t cl.\n(3) is an exception to the exception prescribed by cl. (2).\n(ii) A\ttrading\t activity  carried  on\tby  the\t corporation\n(appellant)  is\t not a trading activity carried\t on  by\t the\nState  departmentally, nor is it a trading activity  carried\non  by a State through its agents appointed in\tthat  behalf\nbecause\t  according  to\t statute  the  Corporation   has   a\npersonality of its own and this personality is distinct from\nthat of the State or other shareholders.\nAll  the  relevant  provisions\tof  the\t impugned  Act\talso\nemphatically  bring  out  the separate\tpersonality  of\t the\nCorporation.   Section 30 of the Act also does\tnot  suggest\nthat the income of the\n18\nCorporation  is\t the income of the State.  All\tthat  s.  30\nrequires  is that a part of that income may be entrusted  to\nthe  State  Government\tfor  a\tspecific  purpose  of\troad\ndevelopment.  Therefore, the income derived by the appellant\nfrom its trading activity cannot be said to be the income of\nthe State either under cl. (1) or cl. (2) of Art. 289.\nThe  American doctrine of the immunity of State agencies  or\ninstrumentalities  from Federal taxation has no\t application\nto the present case.\nAkadasi Padhan v. State of Orissa<\/a> [1963] Supp. 2 S.C.R. 691,\ndistinguished.\nMark Graves, John J. Merrill and John P. Hennessy v.  People\nof  the\t State\tof  New York  Upon  the\t Relation  of  James\nB.O'keefe,  83\tLaw.  Ed. 927 and Clallan County  v.  United\nStates of America, 68 Law Ed. 328, no application.\nState of West Bengal v. Union of India<\/a> [1964] 1 S.C.R.\t371,\nrelied on.\nM'Culloch  v. Maryland, (1819) 4 Wheat 316, Bank of  Toronto\nv.  Lambe (1887) 12 A.C. 575 and Webb v. Outrim [1907]\tA.C.\n81, referred to.\nTamlin v. Hansaford, [1950] K.B. 18, relied on.\n(iii)It is hardly necessary for the Act to make a provision\nthat  tax,if  chargeable  would\t be  paid.   In\t fact,\t the\nCompanies\nAct which deals with companies does not make such a specific\nprovision,  though no one can seriously suggest\t that  there\nwould be repugnancy between the provisions of the  Companies\nAct and the Income-tax Act.  There is no repugnancy  between\nthe charging section of the Income-tax Act and ss. 29 and 30\nof  the\t Act.  All that ss. 29 and 30 of  the  impugned\t Act\npurport\t to do is to provide for the administration  of\t the\nfunds vesting in the Corporation and their disposal.   These\nprovisions  are not inconsistent with the liability  to\t pay\ntax which is imposed by the Income-tax Act.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos.475-478  of
\n1963.\n<\/p>\n
Appeal\tfrom  the order dated July 14, 1961  of\t the  Andhra
\nPradesh High Court in Writ Petition Nos. 516 to 519 of 1960.
\nD.   Narsaraju,\t Advocate-General,  Andhra  Pradesh,  P.  R.
\nRamchandra Rao and T. V. R. Tatachari,<\/a> for the appellant (in
\nall the appeals).\n<\/p>\n
K.   N.\t Rajagopala Sastri, Gopal Singh and R. N.  Sachthey,
\nfor the respondents (in all the appeals).\n<\/p>\n
Rajeshwari Prasad and S. P. Varma, for Intervener No. 1\t (in
\nall the appeals).\n<\/p>\n
B.   Seri, S. C. Bose and P. K. Bose, for Intervener No. 2
\n(in all\t  the appeals).\n<\/p>\n
M.   C. Setalvad, S. C. Bose and P. K. Bose, for Intervener
\nNo. 3 (in all the appeals).\n<\/p>\n
19<\/span><\/p>\n
March  5.  1964. The judgement of the  Court  was  delivered
\nby—\n<\/p>\n
GAJENDRAGADKAR,\t C.J.-These  four appeals arise\t from  four,
\nwrit  petitions filed by the appellant, the  Andhra  Pradesh
\nState  Road  Transport\tCorporation, in the  High  Court  of
\nAndhra\tPradesh\t against  the Income-tax  Officer,  and\t the
\nAppellate  Assistant Commissioner of Income-tax,  Hyderabad,
\nrespondents 1 and 2 respectively, in which it claimed a writ
\nof prohibition restraining them from collecting any tax,  or
\ntaking\tany  proceedings  under the Indian  Income  Tax\t Act
\nagainst them.  In its writ petitions, the appellant  further
\nclaimed\t an  order,  writ, or  other  appropriate  direction
\nquashing the assessment orders passed by respondent No. 1 on
\nthe 29th February, 1960. for the years 1958-59 and  1959-60.
\nFor  the first year, a tax of Rs. 13,60.963.86 nP. has\tbeen
\nimposed\t for the period 11-1-1958 to the 31-3-1958, and\t for
\nthe  latter  year, a tax of Rs. 34,44,430.48  nP.  has\tbeen
\nlevied for the period 1-4-1958 to 31-3-1959.  After  hearing
\nthe  parties, the High Court has dismissed  the\t appellant’s
\nwrit  petitions with costs.  The appellant then applied\t for
\nand  obtained  a certificate from the High Court and  it  is
\nwith the said certificate that these four appeals have\tbeen
\nbrought to this Court.\n<\/p>\n
It appears that the appellant was established under the Road
\nTransport   Corporations   Act,\t 1950  (No.  64\t  of   1950)
\n(hereinafter called the Act) by a notification issued by the
\nAndhra\tPradesh Government and it has been functioning\twith
\neffect from the 11th January, 1958.  Before the formation of
\nthe appellant Corporation, the road transport was a  depart-
\nment of the Government of Hyderabad and after integration of
\nHyderabad with Andhra Pradesh, it was run by the  Government
\nof  Andhra  Pradesh.  During the whole of this\tperiod,\t the
\nroad transport was treated as exempt from income-tax.  After
\nthe  appellant Corporation was, however, formed the  Income-
\ntax  Department\t took the view that the income made  by\t the
\nappellant was liable to tax, and so, a notice under s. 22 of
\nthe  Income-Tax Act was served on the appellant on the\t29th
\nJanuary,  1959.\t In pursuance of the proceedings which\twere
\ntaken  after service of the notice, the impugned  orders  of
\nassessment  were passed.  Before the Income-tax Officer,  it
\nwas  urged by the appellant that since the appellant was  an
\nindependent body carrying on the business of road transport,
\nit  did\t not  fall  Linder any of  the\tfive  categories  of
\nassessees  under s. 3 of the Income-tax Act; it was  neither
\nan individual, nor a Hindu undivided family, nor a firm, nor
\na  company,  nor an association of persons, and\t as  it\t was
\noutside the said five categories of assessees, no tax  could
\nbe  levied against it.\tIt was further argued that  the\t net
\nincome\tof  the appellant ultimately goes to  the  State  of
\nAndhra\tPradesh under s. 30 of the Act, and is such  it\t was
\nimmune from Union taxation under
\n20<\/span>
\nArt.  289 of the Constitution.\tYet, another contention\t was
\nraised\tin  support  of the plea that the  noice  issued  by
\nrespondent  No.\t 1    was invalid,  and\t that  was  that the
\nappellant was a local authority exempt from income-tax.\t All
\nthese  contentions were rejected by respondent No.  1,\twith
\nthe result that the impugned orders of assessment came to be
\npassed.\t  It  is  the  validity of  these  orders  that\t the
\nappellant challenged before the Andhra Pradesh High Court.
\nThe  High Court has held that the appellant is not a  State-
\nowned Corporation and that it is not carrying on business on
\nbehalf\tof  the Government.  It has also observed  that\t the
\ntrade  or business which the appellant was carrying  on\t was
\nnot incidental to the ordinary functions of government,\t and
\nsince no declaration had been made to that effect under Art.
\n289(3),\t the appellant could not rely on Art.  289(1).\t The
\ncontention  that the appellant was a local  authority  which
\nwas  urged  before  the High Court  was\t rejected,  and\t the
\nargument that the charging section of the Income-tax Act was
\nrepugnant  with the material provisions of the Act, such  as
\nsections  28,  29 and 30, was also held to  be\twithout\t any
\nsubstance  by  the  High Court.\t Thus,\tsince  none  of\t the
\narguments  urged by the appellant before the High Court\t was
\naccepted, the writ petitions filed by it were dismissed.
\nThe  main  point urged before us by  the  learned  Advocate-
\nGeneral of Andhra Pradesh on behalf of the appellant is that
\nthe income in respect of which the impugned order of assess-
\nment  has  been passed by respondent No. 1, is\texempt\tfrom
\nUnion  taxation under Art. 289(1) of the  Constitution,\t and
\nthat  raises the question about the construction and  effect
\nof the provisions of the three clauses of Art. 289.  Let us,
\ntherefore, read the said article:\n<\/p>\n
“289. (1) The property and income of a State shall be exempt
\nfrom Union taxation.\n<\/p>\n
(2)  Nothing  in  clause (1) shall prevent  the\t Union\tfrom
\nimposing, or authorising the imposition of, any tax to\tsuch
\nextent, if any, as Parliament may by law provide in  respect
\nof  a  trade or business of any kind carried on\t by,  or  on
\nbehalf\tof,  the Government of a State,\t or  any  operations
\nconnected therewith, or any property used or occupied or any
\nincome accruing or arising in connection therewith.
\n(3)  Nothing  in  clause  (2) shall apply to  any  trade  or
\nbusiness,  or  to  any class of\t trade\tor  business,  which
\nParliament  may\t by  law declare to  be\t incidental  to\t the
\nordinary functions of government.”\n<\/p>\n
21<\/span><\/p>\n
The  learned  Advocate-General concedes that  the  transport
\nactivity  carried on by the appellant is strictly not  inci-
\ndental to the ordinary functions of government.\t It is\ttrue
\nthat in a modern democratic Welfare State, Government has to
\nundertake  several  economic activities some  of  which\t are
\ntrade  activities, while others are  commercial\t activities,
\nbecause\t the  pursuit  of the  welfare\tpolicies  inevitably
\nrequires that Government should help the process of economic
\nimprovement  of\t its  citizens.\t  However  desirable   these
\nsocioeconomic  activities may be and however legitimate\t may
\nbe  the attempt of the State Government to  undertake  them,
\nthere is no denying the fact that the ordinary functions  of
\nthe  Government to which clause (3) of Art. 289 refers\tmust
\nbe  distinguished from these socioeconomic activities.\t The
\nAdvocate-General,  however,  urges  that  though  the  trade
\nactivities of the appellant may thus be distinguishable from
\nthe ordinary functions of Government, they are\tnevertheless
\nincluded in Art. 289(1) and income derived by the  appellant
\nfrom the said activities falls within the protection of Art.
\n289(1).\n<\/p>\n
This argument proceeds on the assumption that clause (2)  of
\nArt.  289  is an exception or proviso to clause (1)  and  as
\nsuch,  whatever is included in clause (2) must be deemed  to
\nhave  been  included  also in  clause  (1);  otherwise,\t the
\nproviso\t cannot be logically explained.\t It is\tbecause\t the
\ntrading\t or  commercial activities of the  government  of  a
\nState  to  which  the said  clause  refers  were  originally
\nincluded  in clause (1) that it became necessary to  provide
\nby clause (2) that the said trading or commercial activities
\ncarried on by the Government of a State would not claim\t the
\nbenefit of exemption prescribed by clause (1).\tThat is\t how
\nthe  Advocate-General seeks to include trading\tor  business
\nactivities  mentioned in cl. (2) in cl. (1)  itself.   Logi-
\ncally, no exception can be taken to this approach.
\nThe next stage in the argument urged by the Advocate-General
\nis  that  clause (2) is wide enough to include\tthe  trading
\nactivities  carried on by the appellant and as a  result  of
\nthe  width of its scope, the appellant’s activities  can  be
\ntreated\t as  the  commercial activities carried\t on  by\t the
\nGovernment  of\tAndhra Pradesh itself.\tIt will\t be  noticed
\nthat  clause (2) refers to a trade or business of  any\tkind
\ncarried\t on  by or on behalf of the Government of  a  State.
\nThe argument is that the first part of the clause refers  to
\nthe trade or business carried on by the Government and\tthat
\nmeans, carried on by the Government either departmentally or
\nby  agents  appointed  by the  Government  in  that  behalf.
\nWhether\t the department carried on the business or an  agent
\nspecifically  and  exclusively appointed  for  that  purpose
\ncarries\t it on, it is the business carried on by the  State.
\nThe  latter part of the clause refers to trade\tor  business
\ncarried on on behalf of the Government of a State and it is
\n22<\/span>
\nsuggested  that this part of the clause is intended to\ttake
\nin  trade or business carried on by a Corporation  like\t the
\nappellant  which is either State-owned, or  State-controlle.
\nThe  appellant Corporation, says the  Advocate-General,\t ;Is
\nundoubtedly State-controlled and he would suggest that it is
\nalso  owned by the State of Andhra Pradesh.  Therefore,\t the
\ncommercial  activity  carried on by the\t appellant  must  be
\ndeemed\tto be an activity carried on on behalf of the  State
\nof  Andhra Pradesh, and it is with this postulate  that\t the
\nargument  reverts to clause (1) of Art. 289 and\t urges\tthat
\nthe   income  received\tby  the\t appellant  in\trespect\t  of
\ncommercial  activities\tcarried on by it on  behalf  of\t the
\nGovernment of Andhra Pradesh is exempt from Union taxation.
\nIn  support  of\t this  argument,  the  Advocate-General\t has
\nrelied. on a recent decision of this Court in Akadasi Padhan
\nv. State of Orissa & Others<\/a>(1) In that case, this Court\t had
\noccasion to consider the scope and effect of the  provisions
\ncontained  in  Art. 19(6).  It will be\trecalled  that\tArt.
\n19(6)  authorrises the State, inter (ilia, to make  any\t law
\nrelating to the carrying on by the State or by a Corporation
\nowned  or controlled by the State, of any  trade,  business,
\nindustry  or service, whether to the exclusion, complete  or
\npartial, of citizens or otherwise.  One of the points  which
\nfell  to  be considered in the Akadasi Padhan case  was\t the
\neffect\tof the words “a law relating to the carrying  on  by
\nthe  State  of\tany trade or business.”\t Dealing  with\tthis
\nquestion,  this Court held that though normally,  the  trade
\nspecified  in  the clause would be carried on by  the  State
\ndepartmentally\tor  with the assistance of  public  servants
\nappointed in that behalf, there may be cases of some  trades
\nor business in which it would be open to the State to employ
\nthe  services of agents, provided the agents work on  behalf
\nof  the\t State and not for themselves.\t Relying  upon\tthis
\ndecision,  the Advocate-General argues that when clause\t (2)
\nof  Art. 289 refers to trade or business carried on by\ttile
\nGovernment of a State, it includes trade or business carried
\non  by\tthe  Government either departmentally  or  with\t the
\nassistance  of agents appointed in that behalf, and  so,  be
\nargues\tthat  these two categories of carrying\ton  business
\nhaving been included in the first part, what the second part
\nis intended to cover is trade or business carried on by\t the
\nGovernment  of\ta  State through the  instrumentality  of  a
\ncorporation  like  the\tappellant,  and\t so.  the  trade  or
\nbusiness  carried on by the appellant is trade\tor  business
\ncarried\t on  on behalf of the Government of  Andhra  Pradesh
\nwithin the meaning of Art. 289(2) and that makes the  income
\nearned out of the said trade or business income of the State
\nunder Art. 289(1).\n<\/p>\n
(1) [1963] Supp. 2 S.C.R. 691.\n<\/p>\n
23<\/span><\/p>\n
In substance, this argument is really based on the  American
\ndoctrine  of  the  immunity of\tState  agencies\t or  instru-
\nmentalities  from Federal taxation.  When this doctrine\t was
\naccepted by American decisions, it was normally confined  to
\nsuch  State agencies as were concerned with functions  which
\nwere  essentially governmental in character.  But, says\t the
\nAdvocate-General,   since   Art.  289(2)  takes\t  in   trade
\nactivities carried, on by a corporation like the  appellant,
\nthe question as to whether the trade is a function which  is
\nessentially  governmental  in character is  irrelevant.\t  In
\nsupport\t of his contention, the Advocate-General has  relied
\nupon two American decisions; first of these is the  decision
\nin  the\t case of Mark Graves.  John J. Merrill and  John  P.
\nHennessy  v.  People  of  the State of\tNew  York  Upon\t the
\nRelation of James B. O’keefe(1).  In that case Stone J.\t who
\nspoke  for the Supreme Court of America. has  observed\tthat
\nwhen  the  national  government\t lawfully  acts\t through   a
\ncorporation which it owns and controls, those activities are
\ngovernmental  functions\t entitled to whatever  tax  immunity
\nattaches   to  those  functions\t when  carried\ton  by\t the
\ngovernment itself through its departments.  In other  words,
\nthis  observation shows that the Court was inclined to\ttake
\nthe  view  that for the purpose of claiming  exemption\tfrom
\ntaxation, it did not make a material difference whether\t the
\noperation was carried on by the State departmentally or with
\nthe assistance of a corporation.\n<\/p>\n
In  Clallan County v. United States of America, (2)  it\t was
\nheld by the Supreme Court of America that a State cannot tax
\nthe  property  of  a corporation organised  by\tthe  Federal
\ngovernment  to\tproduce\t material  for\twar  purposes,\t the
\nproperty  of which is conveyed to it by, or bought with\t the
\nmoney  of,  the\t United\t States, and  used  solely  for\t the
\npurposes  of  its  creation.  Holmes J.\t who  delivered\t the
\nopinion\t of the Court emphasised the fact that in  the\tcase
\nbefore the Court not only the agent was created, but all the
\nagent’s property was acquired and used for the sole  purpose
\nof  producing a weapon for the war.  “This is not  like\t the
\ncase of a corporation,” added the learned Judge, “having its
\nown  purposes  as well as those of the\tUnited\tStates,\t and
\ninterested in profit on its own account.  The  incorporation
\nand  formal erection of a new personality was only  for\t the
\nconvenience of the United States, to carry out its ends, and
\nso, it is unnecessary to consider whether the fact that\t the
\nUnited\tStates\towned all the stock and\t furnished  all\t the
\nproperty  to  the  corporation, taken by  itself,  would  be
\nenough to bring the case within the policy of the rule\tthat
\nexempts property of the United States.”\n<\/p>\n
83 Law.\t Ed. 927.\n<\/p>\n
68 Law.\t Ed. 328, 331.\n<\/p>\n
24<\/span><\/p>\n
Both these decisions would not assist us in determining\t the
\nquestion as to whether the income received by the  appellant
\nis  the\t income of the State of Andhra\tPradesh\t within\t the
\nmeaning of Art. 289(1), because the decision of the  problem
\nraised before us by the appellant must be reached not on any
\nacademic  considerations  of the claims for  exemption\tfrom
\ntaxation which the State instrumentalities can put  forward,
\nbut  on\t the construction of Art. 289 itself.\tArt.  289(1)
\nexempts\t from  Union taxation the property and income  of  a
\nState,\tand the Advocate-General can succeed only if  he  is
\nable  to establish that the income derived by the  appellant
\nin  respect of which the impugned assessment order has\tbeen
\npassed is the income of the State of Andhra Pradesh.  There-
\nfore,  the  American doctrine on which strong  reliance\t was
\nplaced by the Advocate-General would be of no assistance  to
\nhis  case.   If\t the  trading activity\tcarried\t on  by\t the
\nappellant is sought to be brought into Art. 289(1) solely as
\na  result  of the construction of Art. 299(2), the  test  on
\nwhich  the validity of the Advocate-General’s argument\tmust
\nnecessarily be judged, is whether or not the requirement  of
\nArt.  289(1)  is satisfied and that requirement\t clearly  is
\nthat  the income like the property for which exemption\tfrom
\nUnion taxation is claimed must be the income or property  of
\na State.\n<\/p>\n
Besides,  there is another reason why  the  Advocate-General
\ncannot\tderive any assistance from the American doctrine  of
\nthe  exemption\tfrom  taxation in regard  to  State  instru-
\nmentalities.   The  said  doctrine  has\t been  categorically
\nrejected  by this Court in State of West Bengal v. Union  of
\nIndia<\/a>(1) Speaking for the majority of the Court, Sinha C. J.
\nobserved that “it was futile to attempt the resuscitation of
\nthe    now   exploded\tdoctrine   of\tthe   immunity\t  of
\ninstrumentalities which originating from the observations of
\nMarshall,  C.  J., in M’ Culloch v.  Maryland,(2)  has\tbeen
\ndecisively rejected by the Privy Council as inapplicable  to
\nthe  interpretation of the respective powers of\t the  States
\nand   the   Centre  under  the\t Canadian   and\t  Australian
\nConstitutions (vide Bank of Toronto v. Lambel(3) and Webb v.
\nOutrim(4)  and\thas practically been given up  even  in\t the
\nUnited\tStates.”  Thus,\t it is necessary to  revert  to\t the
\nconstruction  of Art. 289 in deciding whether the  appellant
\nis right in claiming immunity from Union taxation.
\nWe  have  already  seen\t that Art.  289\t consists  of  three
\nclauses, the first clause confers exemption from Union\ttax-
\nation  on  the property and income of a State.\t In  Special
\nReference  No. 1 of 1962.  In re.  Sea Customs\tAct  (1878),
\nSection
\n(1) [1964] 1 S.C.R. 371. 407.\t (3) (1887) 12 A.C. 575.
\n(2)  (1819) 4 Wheat, 316 at p. 436. (4) [1907] A.C. 81
\n25<\/span>
\n20(2),(1)  a Special Bench of this Court by a majority as  e
\nthat the immunity granted to the States in respect of  Union
\ntaxation,  under  Art. 289(1) does not extend to  duties  of
\ncustoms\t including  export duties or duties of\texcise.\t  In
\nthat  case, the question which directly arose for  decisions
\nwas  to\t determine  the scope and effect of  the  nature  of
\ntaxation  from\twhich  exemption could\tbe  claimed  by\t the
\nproperty and income of a State under Art. 289(1).  With that
\naspect\tof the matter, however, we are not concerned in\t the
\npresent appeals.\n<\/p>\n
The  scheme of Art. 289 appears to be that  ordinarily,\t the
\nincome\tderived by a State both from governmental  and\tnon-
\ngovernmental  or commercial activities shall be immune\tfrom
\nincome-tax levied by the Union, provided, of course, the in-
\ncome in question can be said to be the income of the  State.
\nThis general proposition flows from clause (1).
\nClause\t(2)  then provides an exception and  authorises\t the
\nUnion  to impose a tax in respect of the income\t derived  by
\nthe Government of a State from trade or business carried  on
\nby  it,\t or on its behalf; that is to say, the\tincome\tfrom
\ntrade or business carried on by the Government of a State or
\non its behalf which would not have been taxable under clause
\n(1),  can be taxed, provided a law is made by Parliament  in
\nthat behalf.  If clause (1) had stood by itself, it may\t not
\nhave been easy to include within its purview income  derived
\nby a State from commercial activities, but since clause (2),
\nin terms, empowers Parliament to make a law levying a tax on
\ncommercial activities carried on by or on behalf of a State,
\nthe  conclusion\t is inescapable that these  activities\twere
\ndeemed to have been included in cl.(1) and that alone can be
\nthe  justification for the words in which cl. (2)  has\tbeen
\nadopted\t by  the  Constitution.\t It is plain  that  cl.\t (2)
\nproceeds  on  the  basis that but  for\tits  provision,\t the
\ntrading\t activity which is covered by it would have  claimed
\nexemption  from Union taxation under cl. (1).  That  is\t the
\nresult of reading clauses (1) and (2) together.
\nClause\t(3) then empowers Parliament to declare by law\tthat
\nany  trade or business would be taken out of the purview  of
\ncl.  (2)  and  restored to the area covered by\tcl.  (1)  by
\ndeclaring  that the said trade or business is incidental  to
\nthe  ordinary functions of government.\tIn other words,\t cl.
\n(3) is an exception to the exception prescribed by cl.\t(2).
\nWhatever  trade or business is declared to be incidental  to
\nthe  ordinary  functions of government, would  cease  to  be
\ngoverned  by  cl. (2) and would then be\t exempt\t from  Union
\ntaxation.  That, broadly stated, appears to be the result of
\nthe scheme adopted by the three clauses of Art. 289.
\n(1)  [1964] 3 C.S.R. 787.\n<\/p>\n
26<\/span><\/p>\n
Reading\t the  three  clauses  together,\t one   consideration
\nemerges\t beyond all doubt and that is that the\tproperty  as
\nwell as the income in respect of which exemption is  claimed
\nunder cl. (1), must be the property and income of the State,
\nand  so,  the same question faces us again:  is\t the  income
\nderived\t by the appellant from its transport activities\t the
\nincome\tof the State?  If a trade or business is carried  on
\nby  the State departmentally and income is derived from\t it,
\nthere would be no difficulty in holding that the said income
\nis  the\t income\t of the State.\tIf a trade  or\tbusiness  is
\ncarried\t  on  by  a  State  through  its  agents   appointed
\nexclusively  for  that purpose, and the agents carry  it  on
\nentirely  on  behalf  of  the State and\t not  on  their\t own
\naccount,  there would be no difficulty in holding  that\t the
\nincome made from such trade or business is the income of the
\nState.\t But  difficulties arise when we  are  dealing\twith
\ntrade or business carried on by a corporation established by
\na  State  by  issuing  a  notification\tunder  the  relevant
\nprovisions  of the Act.\t The corporation, though  statutory,
\nhas  a\tpersonality  of\t its own  and  this  personality  is
\ndistinct  from that of the State or other shareholders.\t  It
\ncannot\tbe said that a shareholder owns the property of\t the
\ncorporation  or\t carries  on the  business  with  which\t the
\ncorporation  is concerned.  The doctrine that a\t corporation
\nhas  a separate legal entity of its own is so firmly  rooted
\nin  our\t notions derived from common law that it  is  hardly
\nnecessary to deal with it elaborately; and so, prima  facie,
\nthe  income  derived  by  the  appellant  from\tits  trading
\nactivity cannot be claimed by the State which is one of\t the
\nshareholders of the corporation.\n<\/p>\n
It  may\t that the statute under which the  notification\t has
\nbeen  issued  constituting  the\t appellant  corporation\t may
\nprovide\t expressly  or\tby necessary  implication  that\t the
\nincome derived by the corporation from its trading  activity
\nwould  be  the\tincome of the State.  The  doctrine  of\t the
\nseparate entity or personality of the corporation is  always
\nsubject to the exceptions which statutes may create, and  if
\nthere is a statutory provision which clearly indicates\tthat
\ndespite\t the  concept  of the separate\tpersonality  of\t the
\ncorporation,  the  trade  carried on by it  belongs  to\t the
\nshareholders who brought the corporation into existence\t and
\nthe income received from the said trade likewise belongs  to
\nthem,  that  would  be another matter.\t It  would  then  be
\npossible to hold that as a result of the specific  statutory
\nprovisions the income received from the trade carried on  by
\nthe  corporation  belongs  to  the  shareholders  who\thave
\nconstituted  the said corporation, and so, we must  look  to
\nthe Act to determine whether the income in the present\tcase
\ncan be said to be the income of the State of Andhra Pradesh.
\nIn  this connection, we may usefully refer to  the  observa-
\ntions made by Lord Denning in Tamlin v. Hansaford: (1).\t “In
\n27<\/span>
\nthe eye of the law,” said Lord Denning, “the corporation  is
\nits  own  master  and is answerable as fully  as  any  other
\nperson or corporation.\tIt is not the Crown and has none  of
\nthe immunities or privileges of the Crown.  Its servants are
\nnot civil servants, and its property is not Crown  property.
\nIt  is\tas  much bound by Acts of Parliament  as  any  other
\nsubject\t of the King.  It is, of course, a public  authority
\nand  its purposes, Po doubt, are public purposes, but it  is
\nnot  a government department nor do its powers\tfall  within
\nthe province of government.” These observations tend to show
\nthat a trading activity carried on by the corporation is not
\na  trading activity carried on by the State  departmentally,
\nnor  is it a trading activity carried on by a State  through
\nits agents appointed in that behalf.\n<\/p>\n
That takes us to the provisions of the Act which will assist
\nus  in determining the question as to whether the income  in
\nquestion  can legitimately be held to be the income  of\t the
\nState of Andhra Pradesh.  The Act was passed to provide\t for
\nthe incorporation and regulation of Road Transport  Corpora-
\ntions.\tSection 3 authorises the State Government to issue a
\nnotification  in  the Official Gazette establishing  a\tRoad
\nTransport Corporation for the whole or any part of the State
\nunder such     name as may be specified in the notification,
\nafter taking into   account   considerations  specified\t  by
\nclauses (a), (b) and\n<\/p>\n
(c).\t  Section  4  then provides that  every\t corporation
\nshall be a body\t    corporate by the name notified under  s.
\n3  having perpetual succession and a common seal, and  shall
\nsue  or be sued by the said name.  Section 5 deals with\t the
\nconstitution of Road Transport Corporation; sub-section\t (3)
\nprovides   for\tthe  representation  both  of  the   Central
\nGovernment and of the State Government in the Corporation in
\nsuch proportion as may be agreed to by both the\t Governments
\nand   of   nomination  by  each\t Government   of   its\t own
\nrepresentatives\t therein;  it  also  contemplates  that\t  if
\ncapital\t is raised by the issue of shares to other  parties,
\nprovision  has\tto be made for the  representation  of\tsuch
\nshareholders.\tSection\t 17 authorises\tthe  appointment  of
\nAdvisory  Councils.  Section 18 prescribes the general\tduty
\nof the corporation.  Section 23(1) provides for the  capital
\nof  the\t corporation; under this  sub-section,\tthe  capital
\ncontributed   by  the  Central\tGovernment  and\t the   State
\nGovernment  is in the proportion of I : 3.  Sub-section\t (3)
\nauthorises  the division of the capital of  the\t corporation
\ninto  such  number  of shares as the  State  Government\t may
\ndetermine-, and it provides that the number of shares  which
\nshall  be  subscribed by the State Government,\tthe  Central
\nGovernment and other parties shall also be determined by the
\nState\tGovernment   in\t consultation\twith   the   Central
\nGovernment.  This provision contemplates the possibility  of
\nother  shareholders  joining the State\tGovernment  and\t the
\nCentral\t Government.  Section 24 permits additional  capital
\nof the corporation to be raised.  Section 25 requires that
\n28<\/span>
\nthe  share  of the corporation shall be\t guaranteed  by\t the
\nState Government as to the payment of the principal and\t the
\npayment\t of the annual dividend at such minimum rate as\t may
\nbe fixed by the State Government.  Section 26 confers powers
\nof  borrowing on the corporation.  Section 27 constitutes  a
\nfund  of  the  Corporation.  Section  28  provides  for\t the
\npayment\t of interest and dividend.  Section  29(1)  requires
\nthe Corporation to make such provisions for depreciation and
\nfor  reserve  and other funds as the State  Government\tmay,
\nfrom time to time, direct.  Section 29(2) provides that\t the
\nmanagement  of the said funds, the sums to be  carried\tfrom
\ntime  to time to the credit thereof and the  application  of
\nthe  moneys  comprised therein shall be\t determined  by\t the
\nCorporation.   There is a proviso to this sub-section  which
\nprohibits  the\tutilisation of these funds for\tany  purpose
\nother  than  that  for\twhich it  was  created\twithout\t the
\nprevious approval of the State Government.  Section 30 deals
\nwith the disposal of net profits: it says that after  provi-
\nsion is made as required by sections 28 and 29, the Corpora-
\ntion  may utilise such percentage of its net annual  profits
\nas  may be specified in this behalf by the State  Government
\nfor the purposes therein specified, and it adds that out  of
\nthe balance, such amount as may, with the previous  approval
\nof  the\t State\tGovernment and the  Central  Government,  be
\nspecified in this behalf by the Corporation, may be utilised
\nfor  financing the expansion programmes of  the\t Corporation
\nand  the remainder, if any, shall be made over to the  State
\nGovernment for the purpose of road development.\t Section  31
\ngives  power  to the Corporation to spend such\tsums  as  it
\nthinks\tfit  on objects authorised by the Act.\t Section  32
\ndeals with the budget; s. 33 with accounts and audit; and s.
\n34  provides  that  the\t directions  issued  by\t the   State
\nGovernment after consultation with the Corporation shall  be
\nfollowed   by  the  Corporation,  and  it  adds\t that\tsuch
\ndirections   may  include  instructions\t relating   to\t the
\nrecruitment,  conditions  of  service and  training  of\t its
\nemployees, wages to be paid to the employees, reserves to be
\nmaintained  by\tit and disposal of its\tprofits\t or  stocks.
\nUnder Section 38, power is conferred on the State Government
\nto  supersede  the Corporation for reasons specified  by  s.
\n38(1).\tOn supersession, all property vested in the Corpora-
\ntion  vests during the period of supersession, in the  State
\nGovernment;  that is the effect of s. 38(2)(c).\t Section  39
\ndeals  with the liquidation of a Corporation and clause\t (2)
\nof  this  section  provides  that  in  the  event  of\tsuch
\nliquidation,  the assets of the Corporation,  after  meeting
\nthe liabilities, if any, shall be divided among the  Central
\nand the State Government and such other parties, if any,  as
\nmay  have  subscribed to the capital in\t proportion  to\t the
\ncontribution  made by each of them to the total\t capital  of
\nthe  Corporation.  That, in brief, is the position  ,of\t the
\nrelevant provisions of the Act.\n<\/p>\n
29<\/span><\/p>\n
There is no doubt that the bulk of the capital is contribut-
\ned  by\tthe State Government and a small proportion  by\t the
\nCentral\t Government,  and  in that sense,  the\tmajority  of
\nshares, are at present owned by the State Government.  There
\nis also no doubt that the Corporation is a  State-controlled
\ncorporation in the sense that at all material stages and  in
\nall material particulars, the activity of the Corporation is
\ncontrolled  by,\t the  State-, but it  is  clear\t that  other
\ncitizens  may be admitted to the group of shareholders,\t and
\nfrom  that point of view, the Act contemplates\tcontribution
\nof  the capital for the Corporation not only by the  Central
\nand  the State Governments, but also by the  citizens.\t The
\nmain  point which we are examining at this stage is: is\t the
\nincome\tderived by the appellant from its trading  activity,
\nincome of the State under Art. 289(1)?\tIn our opinion,\t the
\nanswer\tto this question must be in the negative.  Far\tfrom
\nmaking\tany  provision which would make the  income  of\t the
\nCorporation  the  income  of the  State,  all  the  relevant
\nprovisions  emphatically bring out the separate\t personality
\nof the corporation and proceed on the basis that the trading
\nactivity  is run by the corporation and the profit and\tloss
\nthat would be made as a result of the trading activity would
\nbe  the\t profit and loss of the corporation.   There  is  no
\nprovision  in the Act which has attempted to lift  the\tveil
\nfrom  the  face of the corporation and\tthereby\t enable\t the
\nshareholders  to  claim\t that despite  the  form  which\t the
\nOrganisation  has taken, it is the shareholders who run\t the
\ntrade  and who can claim the income coming from it as  their
\nown.  Section 28 which provides for the payment of  interest
\nclearly\t brings out the duality between the  Corporation  on
\nthe  one hand, and the State and Central Governments on\t the
\nother.\tTake, for instance, the case of supersession of\t the
\ncorporation   authorised   by  s.  38.\t  Section   38(2)(c)
\nemphatically  brings out the fact that the  property  really
\nvests  in the Corporation, because it provides\tthat  during
\nthe  period  of\t supersession, it shall vest  in  the  State
\nGovernment.   Similarly,  s.  39(2)  which  deals  with\t the
\ndistribution  of assests in case of liquidation, brings\t out
\nthe  same  feature.   It has been urged\t before\t us  by\t the
\nAdvocate-General   that\t s.  50\t contemplates\tthat   after
\nprovision  is  made as required by sections 28\tand  29\t and
\nfunds  are utilised as prescribed by s. 30, the balance\t has
\nto be given to the State Government for the purpose of\troad
\ndevelopment,  and that, it is suggested, indicates that\t the
\nincome\tbelongs to the State Government.  This\targument  is
\nclearly not well-founded.  When we are deciding the question
\nas  to whether the income derived by the Corporation is\t the
\nincome of the State, the provision made by s. 30 for  making
\nover to the State Government the balance that may remain  as
\nindicated  therein,  is\t of no assistance.   The  income  is
\nundoubtedly  the income of the Corporation.  All that s.  30
\nrequires  is that a part of that income may be entrusted  to
\nthe
\n30<\/span>
\nState Government for a specific purpose of road\t developmen-
\nnt  is not suggested or shown that when such income is\tmade
\nover to the State, it becomes a part of the general  revenue
\nof  the\t State.\t  It is income which is\t impressed  with  an
\nobligation and which can be utilised by the State Government
\nonly  for the specific purpose for which it is entrusted  to
\nit.  Therefore, we are satisfied that the income derived  by
\nthe appellant from its trading activity cannot be said to be
\nthe  income of the State under Art. 289(1), and if  that  is
\nso,  the  fact that the trading activity carried on  by\t the
\nappellant  may\tbe covered by Art. 289(2), does\t not  really
\nassist\tthe  appellant’s case.\tEven if a  trading  activity
\nfalls under cl. (2) of Art. 289, it can sustain a claim\t for
\nexemption  from Union taxation only if it is shown that\t the
\nincome derived from the said trading activity is the  income
\nof  the\t State.\t  That is how ultimately, the  crux  of\t the
\nproblem\t is to determine whether the income in\tquestion  is
\nthe  income  of\t the  State, and on  this  vital  test,\t the
\nappellant fails.\n<\/p>\n
There  is one more point which was faintly argued before  us
\nby the learned Advocate-General.  He frankly told us that he
\ndid  not  propose  to  challenge  the  correctness  of\t the
\nconclusion recorded by the High Court that the appellant  is
\nnot  a local authority; but he was not prepared to  give  up
\nhis contention that there is repugnancy between the charging
\nsection of the Income-tax Act and sections 29 and 30 of\t the
\nAct.   He suggested that in view of the repugnancy on  which
\nhe  relied,  the  Act which is Act No.\t64  of\t1950  should
\nprevail\t over  the Income Tax Act which is an  enactment  of
\n1922.  None of the assumptions made by the learned Advocate-
\nGeneral\t in  support of this plea can be said to  be  valid.
\nThough the original Income-tax Act was passed in 1922, as is
\nwell-known, every year a fresh Finance Act is passed and  it
\nis by virtue of such successive Finance Acts that income-tax
\nis assessed from year to year, and so, the argument that the
\nAct on which the appellant relies is later in point of\ttime
\nmust  fail.  Besides, there is really no repugnancy at\tall.
\nBasing himself on the provisions of sections 29 and 30,\t the
\nAdvocate-General  contends  that these two  provisions\tshow
\nthat the Act did not contemplate the payment of\t income-tax.
\nThis  argument\tis  entirely  misconceived.   It  is  hardly
\nnecessary  for\tthe  Act to make a provision  that  tax,  if
\nchargeable, would be paid.  In fact, the Companies Act which
\ndeals\twith  companies\t does  not  make  such\ta   specific
\nprovision,  though no one can seriously suggest\t that  there
\nwould be repugnancy between the provisions of the  Companies
\nAct  and  the Income Tax Act.  All that sections 29  and  30
\npurport\t to do is to provide for the administration  of\t the
\nfunds vesting in the Corporation and their disposal.  It  is
\nclearly far-fetched, if not fantastic, to suggest that these
\nprovisions  are inconsistent with the liability to  pay\t tax
\nwhich  is  imposed  by the Income Tax  Act.   The  Advocate-
\nGeneral, no doubt, attempted to derive some support
\n31<\/span>
\nto  his\t argument  by relying on section  43  of  the  State
\nFinancial  Corporations Act 1951), as well as s. 43  of\t the
\nDamodar alley Corporation Act, 1948 (No. 14 of 1948).\tSec-
\ntion 43 which occurs in both the said Acts provides that the
\nCorporation  shall  be\tliable to pay any  taxes  on  income
\nlevied\tby the Central Government in the same manner and  to
\nthe  same extent as a company.\tIt is urged that  where\t the
\nlegislature  wanted  to\t provide for the  liability  of\t the
\nCorporation to pay the taxes on income levied by the Central
\nGovernment,  it has made specific provisions in that  behalf
\nand  since  no such provision has been made in the  Act,  it
\nfollows that the legislature intended that no tax should  be
\nlevied\ton the income earned by the Corporation\t established
\nunder  the Act.\t We do not think there is any  substance  in
\nthe  argument.\t The  whole  object  which  section  43\t  is
\npresumably  intended to achieve is to provide that  the\t tax
\nshould\tbe  levied on the basis that the  Corporation  is  a
\ncompany and nothing more.  If no such provision was made  in
\nthe  Act,  that\t has  no bearing on  the  liability  of\t the
\nCorporation to pay the tax on its income.  Therefore, we are
\nsatisfied  that\t the High Court was right in  rejecting\t the
\nargument that by virtue of the repugnancy between the mater-
\nial  provisions of the Act and the charging section  of\t the
\nIncome Tax Act, it should be held that the appellant was not
\nliable to pay tax on its income.\n<\/p>\n
The  result  is,  the appeals fail and\tare  dismissed\twith
\ncosts.\tOne hearing fee.\n<\/p>\n
Appeals dismissed.\n<\/p>\n
32<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Andhra Pradesh State Road … vs The Income-Tax Officer And Anr on 5 March, 1964 Equivalent citations: 1964 AIR 1486, 1964 SCR (7) 17 Author: P Gajendragadkar Bench: Gajendragadkar, P.B. (Cj), Wanchoo, K.N., Shah, J.C., Ayyangar, N. Rajagopala, Sikri, S.M. PETITIONER: ANDHRA PRADESH STATE ROAD TRANSPORTCORPORATION Vs. RESPONDENT: THE INCOME-TAX OFFICER […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-51423","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nAndhra Pradesh State Road ... vs The Income-Tax Officer And Anr on 5 March, 1964 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/andhra-pradesh-state-road-vs-the-income-tax-officer-and-anr-on-5-march-1964\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Andhra Pradesh State Road ... vs The Income-Tax Officer And Anr on 5 March, 1964 - 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