# ANDHRA PRADESH STATE ROAD TRANSPORT CORPORATION v. THE INCOME-TAX OFFICER AND ANR

- **Citation:** [1964] 7 S.C.R. 17
- **Court:** Supreme Court of India
- **Decided:** 1961-07-14
- **Bench:** P. B. Gajendragadkar, K. N. Wanchoo, J.C. Shah, N. Rajagopala Ayyangar Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/andhra-pradesh-state-road-transport-corporation-v-the-income-tax-officer-and-anr-3092
- **Pages:** 15

## Headnote

Income-tax-Income of State Road Transport Corporation
whether income of the State-Whether exempt-Constitution of
India, Art. 289-Income-tax Act, 1922 (11 of 1922), s. 22.
The Income-tax Officer (respondent No. 1) served a notice
under s. 22 of the Income-tax Act on the appellant. Upon the
receipt of the notice, the appellant appeared before the Incometax Officer. The appellant pleaded before the Income-tax Officer
that it did not fall under any of the five categories of assessees
under s. 3 of the Income-tax Act. The appellant also raised the
contention that it was a local authority exempt from incometax. All these contentions were rejected by respondent No. 1
with the result that the impugned orders of assessment came
to be passed.
The appellant filed Writ Petitions before the High Court in
which it challenged the impugned orders of assessment passed by
respondent No. 1. In its Writ Petitions, the appellant claimed an
order, writ or other appropriate direction quashing the assessment orders passed by respondent No. 1. The High Court dismiss..
ed these \vrit petitions. The High Court held that the appellant
could not claim the- exemption under Art. 289(1) because it was
not a state-owned Corporation. The High Court grante-d a certificate under Art. 133 of the Constitution and hence the appeal.
Held: (i) Art. 289 of the Constitution cons'sts of three clauses.
The first clause confers exemption from union taxation on the
property and income of a State.
Clause (2) then provides that the income from trade or business carried on bv the Government of a State or on its behalf
which would not have been taxable under cl. (1), can be taxed,
provided a I aw is made by Parliament in that behalf. In other
words cl. (2) is an exception to cl. (1 ).
Clause (3) then empowers Parliament to declare by law
that any trade or business would be taken out of the purview
of cl. (2) and restored to the area covered by cl. (1) by declaring
that the said trade or business is incidental to the ordinarv functions of Government. In other words, cl. (3) is an exception to
the exception prescribed by cl. (2).
(ii) A trading activity carried on by the corporation (ap.J)elIant) is not a trading activity carried on by the State department-
~lly, nor is it a trading activity carried on by a State through
its agents appointe-d in that behalf because according to statute
the Corporation has a personalitv of its own and this personality
i• distinct from that of the State or other shareholders.
·
Ali the relevant provisions of the impugned Act also emphatically bring out the separate personality of the Corporation. Section 30 of the Act also does not suggest that the income of the
1964
March 5
18
SUPREl\IE COURT REPORTS
[1964}
1964
Corporation is the income of the State. All that s. 30 requires is
Andhra Pradesh that a part of that income may be entrusted to the State GovState Road Tra"8porternment for a specific purpose of road development. Therefore,
Oorporation
the income derived by the appellant from its trading activity
Th 1 v.
T
cannot be said to be the income of the State either under cl (1)
o.ffic,;".':J.'An:" or cl. (2) of Art. 289.
The American doctrine of the immunity of State agencies
or instrumentalities from Federal taxation has no application
to the present case.
Akadasi Padhan v. State of Orissa [1963) Supp. 2 S.C.R. 691,
distinguished.
Mark Graves, John J. Merrill and John P. Hennessy v. People
of the State of New York Upon the Relation of James B.O'ke~fe,
83 Law. Ed. 927 and Clallan County v. United States of America,
68 Law Ed. 328, no application.
State of West Bengal v. Union of India [1964) 1 S.C.R. 371,
relied on.
M'Culloch v. Maryland, (1819) 4 Wheat 316, Bank of Toronto
v. Lambe "(1887) 12 A.C. 575 and Webb v. Outrim [1907) A.C. 81,
referred to.
Tamlin v. Hansaford, (1950] K.B. 18, relied on.
(iii) It is hardly necessary fur the Act to make a provision
that tax, if chargeable would be paid. In fact, the Companies
Act which deals with compan

## Text

_Characters 0–39,894 of 42,963. This is a partial read: ask again with offset=39894 for what follows._

7 S.C.R.
SUPREME COURT REPORTS
ANDHRA PRADESH STATE ROAD TRANSPORT
CORPORATION
v.
THE INCOME-TAX OFFICER AND ANR.
17
[P. B. GAJENDRAGADKAR, C. J., K. N. WANCHOO, J.C. SHAH,
N. RAJAGOPALA AYYANGAR ANDS. M. SIKRI JJ.]
Income-tax-Income of State Road Transport Corporation
whether income of the State-Whether exempt-Constitution of
India, Art. 289-Income-tax Act, 1922 (11 of 1922), s. 22.
The Income-tax Officer (respondent No. 1) served a notice
under s. 22 of the Income-tax Act on the appellant. Upon the
receipt of the notice, the appellant appeared before the Incometax Officer. The appellant pleaded before the Income-tax Officer
that it did not fall under any of the five categories of assessees
under s. 3 of the Income-tax Act. The appellant also raised the
contention that it was a local authority exempt from incometax. All these contentions were rejected by respondent No. 1
with the result that the impugned orders of assessment came
to be passed.
The appellant filed Writ Petitions before the High Court in
which it challenged the impugned orders of assessment passed by
respondent No. 1. In its Writ Petitions, the appellant claimed an
order, writ or other appropriate direction quashing the assessment orders passed by respondent No. 1. The High Court dismiss..
ed these \vrit petitions. The High Court held that the appellant
could not claim the- exemption under Art. 289(1) because it was
not a state-owned Corporation. The High Court grante-d a certificate under Art. 133 of the Constitution and hence the appeal.
Held: (i) Art. 289 of the Constitution cons'sts of three clauses.
The first clause confers exemption from union taxation on the
property and income of a State.
Clause (2) then provides that the income from trade or business carried on bv the Government of a State or on its behalf
which would not have been taxable under cl. (1), can be taxed,
provided a I aw is made by Parliament in that behalf. In other
words cl. (2) is an exception to cl. (1 ).
Clause (3) then empowers Parliament to declare by law
that any trade or business would be taken out of the purview
of cl. (2) and restored to the area covered by cl. (1) by declaring
that the said trade or business is incidental to the ordinarv functions of Government. In other words, cl. (3) is an exception to
the exception prescribed by cl. (2).
(ii) A trading activity carried on by the corporation (ap.J)elIant) is not a trading activity carried on by the State department-
~lly, nor is it a trading activity carried on by a State through
its agents appointe-d in that behalf because according to statute
the Corporation has a personalitv of its own and this personality
i• distinct from that of the State or other shareholders.
·
Ali the relevant provisions of the impugned Act also emphatically bring out the separate personality of the Corporation. Section 30 of the Act also does not suggest that the income of the
1964
March 5
18
SUPREl\IE COURT REPORTS
[1964}
1964
Corporation is the income of the State. All that s. 30 requires is
Andhra Pradesh that a part of that income may be entrusted to the State GovState Road Tra"8porternment for a specific purpose of road development. Therefore,
Oorporation
the income derived by the appellant from its trading activity
Th 1 v.
T
cannot be said to be the income of the State either under cl (1)
o.ffic,;".':J.'An:" or cl. (2) of Art. 289.
The American doctrine of the immunity of State agencies
or instrumentalities from Federal taxation has no application
to the present case.
Akadasi Padhan v. State of Orissa [1963) Supp. 2 S.C.R. 691,
distinguished.
Mark Graves, John J. Merrill and John P. Hennessy v. People
of the State of New York Upon the Relation of James B.O'ke~fe,
83 Law. Ed. 927 and Clallan County v. United States of America,
68 Law Ed. 328, no application.
State of West Bengal v. Union of India [1964) 1 S.C.R. 371,
relied on.
M'Culloch v. Maryland, (1819) 4 Wheat 316, Bank of Toronto
v. Lambe "(1887) 12 A.C. 575 and Webb v. Outrim [1907) A.C. 81,
referred to.
Tamlin v. Hansaford, (1950] K.B. 18, relied on.
(iii) It is hardly necessary fur the Act to make a provision
that tax, if chargeable would be paid. In fact, the Companies
Act which deals with companies does not make such a specific
provision, though no one can seriously suggest that there would
be repugnancy between the provisions of the Companies Act and
· the Income-tax Act. There is no repugnancy between the charging section of the Income-tax Act and ss. 29 and 30 of the Act. All
that ss. 29 and 30 of the impugned Act purport to do is to provide
for the administration of the funds vesting in the Corporation
and their disposal. These provisions are not inconsistent with
the liability to pay tax which is imposed by the Income-tax Act.
C!vrL APPELLATE JURISDICTION: Civil Appeals Nos.475478 of 1963.
Appeal from the order dated July 14, 1961 of the Andhra
Pradesh High Court in Writ Petition Nos. 516 to 519 of 1960.
D. Narsaraju, Advocate-General, Andhra Pradesh, P. R.
Ramchandra Rao and T: V. R. Tatachari, for the appellant (in
all the appeals).
K. N. Rajagopala Sastri, Gopal Singh and R. N. Sachthey,
for the respondents (in all the appeals).
Rajeshwari Prasad and S. P. Varma, for lhtervener No. 1
(in all the appeals).
B. Sen, S. C. Bose and P. K. Bose, for Intervener No. 2
(in all the appeals).
, M. C. Setalvad, S. C. Bose and P. K. Bose, for Intervener
No. 3 (in all the appeals).
7 S.C.R.
SUPREME COURT REPORTS
19
March 5, 1964. The judgment of the Court was delivered
1964
by--
Andhra Praduh
GAJENDRAGADKAR, C.J .-These four appeals arise from four State Road Tr~nsporl
writ petitions filed by the appellant, the Andhra Pradesh State
Cor~llan
Road Transport Corporation, in the High Court of Andhra The Incom< Tax
.
Pradesh against the Income-tax Officer, and the Appellate
Officer and Anr.
~ Assistant Commissioner of Income-tax, Hyderabad, respon- Gajendragadl«w, c.J.
dents l and 2 respectively, in which it claimed a writ of pro hi-
•
bition restraining them from collecting any tax, or taking any
proceedings under the Indian Income Tax Act against them.
In its writ petitions, the appellant further claimed an order,
writ, or other appropriate direction quashing the assessment
orders passed by respondent No. l on the 29th February, 1960.
for the years 1958-59 and 1959-60. For the .first year, a tax of
Rs. 13,60,963.86 nP. has been imposed for the period 11-1-1958
to the 31-3-1958, and for the latter year, a tax of
P
Rs. 34,44,430.48 nP. has been levied for the period 1-4-1958 to
31-3-1959. After hearing the parties, the High Court has dismissed the appellant's writ petitions with costs. The appellant
then applied for and obtained a certificate from the High Court
and it is with the said certificate that these four appeals have
been brought to this Court.
It appears that the appellant was established under the
Road Transport Corporations Act, 1950 (No. 64 of 1950)
(hereinafter called the Act) by a notification issued by the
Andhra Pradesh Government arid it has been functioning
with effect from the 11th January, 1958. Before the formation
of the appellant Corporation, the road transport was a department of the Government of Hyderabad and after integration
of Hyderabad with Andhra · Pradesh, it was run by the
Government of Andhra Pradesh. During the whole of this
period, the road transport was treated as exempt from incometax. After the appellant Corporation was, however, formed
the Income-tax Department took the view that the income
made by the appellant was liable to tax, and so, a notice under
s. 22 of the Income-Tax Act was served on the appellant on
the 29th January, 1959. In pursuance of the proceedings which
were taken after service of the notice, the impugned orders of
assessment were passed. Before the Income-tax Officer, it was
urged by the appellant that since the appellant was an inde-
~ndent body carrying on the business of road transport, it
did not fall under any of the five categories of assessees under
s. 3 of the T ncome-tax Act; it was neither an individual nor a
Hindu undivided family, nor a firm, nor a company, ~or an
association of persons, and as it was outside the said five categories of assessees, no tax could be levied against it. It was
•
further argued that the net income of the appellant ultimately
goes to the State of Andhra Pradesh under s. 30 of the Act
a.nd as such it was immune from Union taxation unde;
20
SUPREME COURT REPORTS
'[1964}
1964
Art. 289 of the Constitution. Yet, another contention was raised
Andhra Prwleah in support of the plea that the noice issued by respondent No. 1
State Road T~"'P"'' was invalid, and that was that the appellant was a local authoCorporation
rity exempt from income-tax, All these contentions were reT1" 1.,;;,., Tar jected by respondent No. 1, with the result that the impugned
Officer and Anr.
orders of assessment came to be passed. It is the validity of
Gajendraqwlkar, c.J. these orders that the appellant challenged before the Andhra
·
Pradesh High Court.
The High Court has held that the appellant is not a Stateowned Corporation and that it is not carrying on business on
behalf of the Government. It has also observed that the trade
or business which the appellant was carrying on was not incidental to the ordinary functions of government, and since no
declaration had been made to that effect under Art. 289(3), the
appellant could not rely oh Art. 289(1). The contention that
the appellant was a local authority which was urged before
the High Court was rejected, and the argument that the charging section of the Income-tax Act was repugnant with the
matedal provisions of the Act, such as sections 28, 29 and 30,
was also held to be without any substance by the High Court.
Thus, since none of the arguments urged by the appellant before the High Court was accepted, the writ petitions filed by
it were dismissed.
The main point urged before us by the learned AdvocateGeneral of Andhra Pradesh on b~half of the appellant is that
the income in respect of which th~ impugned order of assess·
ment has been passed by respondent No. I. is exempt from
Union taxation under Art. 289(]) of the Constitution, and that
raises the question about the construction and effect df the
provisions of the three clauses of Art. 289. Let us. thirefore.
read the said article:
·
/
"289. (I) The property and income of a State shall
be exempt from Union taxation.
(2! Nothing in clause (I) shall prevent the Union
from imposing, or authorising the imposition of, any
tax to such extent. if any. as Parliament may by law
provide in respect of a trade or business of any kind
·carried on by. or on behalf of, the Government of a
State, or any operations connected therewith, or any
property used or occupied or any income accruing or
arising in connection therewith.
·
(3) Nothing in clause (2) shall apply to any trade
1111
or business, or to any class of trade or business, which
Parliament may by law declare to be incidental to the
ordinary functions of government."
7 S.C.R.
SUPREME COURT REPORTS
21
The learned Advocate-General concedes that the trans1964
port activity carried on by the appellant is strictly not inciAndhra Pradesh
dental to the ordinary functions of government. It is true that State Road T~118pQt1
in a modern democratic Welfare State, Government has to
c ... poration
undertake several economic 'activities some of which are trade The 1:;,,., T""
activities, while others are commercial activities, because the
Officer and Anr.
pursuit of the welfare policies inevitably .req.uires that Gove~n- Gajendragadkar, c.J.
ment should help the process of economic IIllprovement of its
citizens. However desirable these socio-economic activities may
be and however legitimate may be the attempt of the State
. Government to undertake them, there is no denying the fact
that the ordinary functions of the Government to which clause
(3) of Art. 289 refers must be distin$uished from these socioeconomic activities. The Advocate-General, however, urges
that though the trade activities of the appellant may thus be
distinguishable from the ordinary functions of government,
they are nevertheless included in Art. 289(1) and income derived by the appellant from the said activities falls within the
protection of Art. 289(1).
This argument proceeds on the assumption that clause (2) •
of Art. 289 is an exception or proviso to clause (!) and as such,
whatever is included in clause (2) must be deemed to have been
included also in clause (I); otherwise, the proviso cannot be
logically explained. It is because the trading or commercia:I
activities of the government of a State to which the said clause
refers were originally included in clause (l) that it became
necessary to provide by clause (2) that the said trading or commercial activities carried op by the Government of a State
would not claim the benefit of exemption prescribed by clause
(1). That is how the Advocate-General seekS to include trading
or business activities mentioned in cl. (2) in cl. (I) itself. Loglcally, no exception can be taken to this approach.
The next stage in the argument urged by the AdvocateGeneral is that clause (2) is wide enough to include the trading
activities carried on by the appellant and as a result of the
width of its scope, the appellant's activities can be treated as
the commercial activities carried on by the Government of
Andhra Pradesh itself. It will be noticed that clause (2) refers
to a trade or business of any kind carried on by or on behalf
of. the Government of a State. The argument is that the first
part of the clause refers to the trade or business carried on by
the Government and that means, carried on by the Government
either departmentally or by agents appointed by the Government in that behalf. Whether the department carried on the
business or an agent specifically and exclusively appointed for
that purpose carries it on, it is the business carried on by the
State. The latter part of the clause refers to trade or business
carried on on behalf of the Government of a State and it is
_,l
22
SUPREME COURT REPORTS
[1964]
1964
suggested that this part of the clause is intended to take in
Andhra p,..d.,, trade or business carried on by a Corporation like the appel8tate RoadTmnaport !ant which is either State-owned. or State-controlled. The
0•·ix:~twn
appellant Corporation, says the Advocate-General, is unTke Income Tax doubtedly State-controlled and he would suggest that it iS
•
Officer and Anr. also owned by the State of Andhra Pradesh. Therefore, the
Gajendragaa!Jar o.J. commercial activity carried on by the appellant must be deem-
'
ed to be an activity carried on on behalf of the State of Andhra
Pradesh, and it is with this postulate that the argument reverts to clause (!)·of Art. 289 and urges that the income received by the appellant in respect of commercial activities carried on by it on behalf of the Government of Andhra Pradesh
is exempt from Union taxation.
In support of this argument, the Advocate-General has
relied on a recent decision of this Court in Akadasi Padhan
v. State of Orissa & Others.(') In that case, this Court had
occasion to consider the scope and effect of the provisions contained in Art. 19(6). It will be recalled that Art. 19(6) authorises the State, inter alia, to make any Jaw relating to the carrying on by the State or by a Corporation owned or controlled
by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise. One of the points which fell to be considered in the
Akadasi Pad/tan case was the effect of the words "a Ja:w
relating to the carrying on by the State of any trade or business." Dealing with this question, this Court held that though
normally, the trade specified in the clause would be carried
on by the State departmentally or with the assistance of public servants appointed in that behalf, there may be cases of
some trades or business in which it would be open to the State
to employ the services of agents, provided the agents work on
behalf of the State and not for themselves. Relying upon this
decision, the Advocate-General argues that when clause (2)
of Art. 289 refers to trade or business carried on by the Government of a State, it includes trade or business carried on by the
Government either departmentally or with the assistance of
agents appointed in that behalf, and so, he argues that these
two categories of carrying on business. h~ving been includ~
in the first part, what the second part 1s mtended to cover 1s
trade or business carried on by the Government of a State
through the instrumentality of a corporation like the appellan~,
and so, the trade or business cart1ed on by the appellant IS
trade or business carried on on behalf of the Government of
Andhra Pradesh within the meaning of Art. 289(2) and that
makes the income earned out of the said trade or businesa
income of the State under Art. 289(1).
(') [1963] Supp. 2 S.C.R 691.
7 S.C.R.
SUPREl\IE COURT REPORTS
23
In substance, this argument is really based on the Ameri1961
can doctrine of the immunity of State agencies <ir instru- Andh;;;Pradesh
mentalities from Federal taxation. When this doctrine was ac-StateRoadTransporl.
cepted by American decisions, it was normally confined to
Gorporatfon
such State agencies as were concerned with functiol)s which
The In;~me Ta,
were essentially governmental in character. But, says the AdvoOfficer and Ant.
cate-General, since Art. 289(2) takes in trade activities carriedaajendraaadkar,G.J,
on by a corporation like the appellant, the question as to
whether the trade is a function which is essentially governmental in character is irrelevant. In support of his contention,
the Advocate-General has relied upon two American decisions;
first of these is the decision in the case of Mark Graves. John
J. Merrill and John P. Hennessy v. People of the State of
New York Upon the Relation of James B. O'keefe('). In tha.t
case Stone J. who spoke for the Supreme Court of America,
has observed that when the national government lawfully acts
• through a corporation which it owns and controls, those activities are governmental functions entitled to whatever tax
immunity attaches to those functions when carried on by the
government itself through its departments. In other words, this
observation shows that the Court was inclined to take the view
that for the purpose of claiming exemption from taxation, it
did not make a material difference whether the operation was
carried on by the State departmentally or with the assistance
of a corporation.
In Clallan County v. United States of America, (') it was
held by the Supreme Court of America that a State cannot tax
the property of a corporation or.ganised by the Federal government to produce material for war purposes, the property of
which is conveyed to it by, or bought with the money of, the
United States, and used solely for the purposes of its creation.
Holmes J. who delivered the opinion of the Court emphasised
the fact that in the case before the Court not only the agent
was created, but all the agent's property was acquired and
used for the sole purpose of producing a weapon for the war.
"This is not like the case of a corporation," added the learned
Judge. "having its own purposes as well as those of the United·
Sta.tes, and interested in profit on its own account. The incorporation and formal erection of a new personality was only for
the convenience of the United States, to carry out its ends and
so,. it is unnecessary to consider wh.ether the fact that the
Urnted States °'.vned all the st~ck and furnished all the property
to the corporation, taken by itself, would be enough to bring
the cas~ within the policy of the rule that exempts property of
the Urnted States."
·
(') 83 Law. Ed. 927.
(') 68 Law. Ed. 328, 331.
/
\
24
SUPREME COURT REPORTS
[1964]
1961
Both these decisions would not_ assist us in determining
Alldhra Pradesh the question as to whether the income received by the appell-
-State Road Transpon ant is the income·of the State of Andhra Pradesh within the
Carpo;atian
meaning of Art. 289(1), because the decision of the problem
The 1,.,,,,;., Ta• raised before us by the appellant must be reached not on :!ny
OfficerandAnr;·--academic considerations of the claims for exemption from
aajendragadkar, c.J. taxation which the State instrumentalities can put forward,
but on the construction of Art. 289 itself. Art. 289(1)
exempts from ·Union taxation the property and income
of a State, and the Advocate-General can succeed only
if he is able to establish that the income derived by the appellant in respect of which the impugned assessment order has been
passed is the income of the State of Andhra Pradesh. Therefore, the American doctrine on which -strong reliance was
placed by the Advocate-General would be of.no assistance to
his case. If the trading activity carried on by the appellant is
sought to be brought into Art. 289(1) solely as a result of the
construction of Art. 289(2), the test on which the validity of
the Advocate-General's argument must necessarily be judged,
is whether or not the requirement of Art. 289(1) is satisfied
and that requirement clearly is that the income like the property for which exemption from Union taxation is claimed
must be the income or property of a State.
Besides, there is another reason why the AdvocateGeneral cannot derive any assistance from the American doctrine of the exemption from taxation in regard to State instrumentalities.· The said- doctrine has been categorically rejected
by this Comt .in State of West Bengal v. Union of India(')
Speaking for the majority of the Court, Sinha C. J. observed
that ''it was futile to attempt the resuscitation of the now exploded doctrine of the immunity of instrumentalities which
originating from the observations of Marshall, C. J., in
M' Cu/loch v. Maryland,(') has been decisively rejected by
the Privy Council as inapplicable to the interpretation of the
respective powers of the States and the Centre under the
Canadian and Australian Constitutions (vide Bank ofTormzto
v. Lambe,(') and Webb v. Outrim(') and has practically
been given up even in the United States." Thus, it.is necessary
to revert to the construction of Art. 289 _in deciding whether
the appellant is right in claiming immunity from Union tax- _
-ation.
-
We have already seen that Art. 289 consists of three
·clauses, the first clause confers exemption from Union taxation on the property and income of a State. In Special Refer-
:ence No. 1 cf 1962. In re. Sea Customs Act (1878), Section
(') [1964] 1 S.C.R. 371, 407.
_ (') (1887) 12 A.C. 575.
(') (1819) 4 Wheat, 316 at p. 436. (') [1907]c A.C. 81
•
7 S.C.R.
SOPRBl\IE COURT REPORTS
25
20(2),(') a Special Bench of this Court by a majority has held
1964
that the immunity granted to the States. in respect of Union
Andhra Pra,resh
taxation, under Art. 289(1) does not extend to duties of cus-Statc Road Tranaporl
tom> including export duties or duties of excise. In that case,
Oorpomtion
the question which directly arme for decision, was to determine
1'he 1.,;~" Tax
the scope and effect of the nature of taxation from which exOfficer and Anr.
emption could be claimed by the property and income of a Gajendr(l!Jadko.r, o.J.
State under Art. 289(]). With that aspect of the matter, however, we are not concerned in the present appeals.
The scheme of Art. 289 appears to be that ordinarily, the
income derived by a State both from governmental and nongovernmental or commerc:al activities shall be immune from
income-tax levied by the Union, provided, of course, the income in question can be said to be the income of the State.
This general proposition flows from clause (1).
'
Clause (2) then provides an exception and authorises the
Union to impose a tax in respect of the income derived by the
Government of a State from trade or business carried on by it,
or on its behalf; that is to say, the income from trade or business carried on by the Government of a State or on its behalf
which would not have been taxable under clause (!), can be
taxed, provided a law is made by Parliament in that behalf.
If clause (I) had stood by itself, it may not have been easy to
•.
'include within its purview income derived by a State from
commercial activities, but since clause (2), in terms, empowers
Parliament to make a law levying a tax ort commercial
activities carried on by or on behalf of a State, the conclusion
is inescapable that these activities were deemed to have been
included in cl.(!) and that alone can be the justification for
the words in which cl. (2) has been adopted by the Constitution.
It is plain that cl. (2) proceeds on the basis that but for its
provision, the trading activity which is covered by it would
have claimed exemption from Union taxation under cl. (!).
That is the result of reading clauses (1) and (2) together.
Clause (3) then empowers Parliament to declare by law
that any trade Qlr business would be taken out of the
purview of cl. (2) and restored to the area covered by cl. (1)
by declaring that the said trade or business is incidental to the
ordinary functions of government. In 'other words, cl. (3) is an
exception to the exception prescribed by cl. (2). Whatever trade
or business is declared to be incidental to the-ordinary functions of government, would cease to be governed by cl. (2) and
--"
would then be exempt from Union taxation. That, broadly
~ted, appears to be the result of the scheme adopted by the·
three clauses of Art. 289.
(') [1964] 3 C.S.R. 787.
26
SUPREME COURT REPORTS
[1964)
J964
Reading the three clauses together, one consideration
Andh Pad h emerges beyond all doubt and that is that the property as well
.state R::a Tran~pvrt as the income in respect of which exemption is claimed under
Corporation
cl. (!), must be the property and income of the State, and so,
The In;~'"' Tax the same question faces us again: is the income derived by
O.fficer an4 Anr.
the appellant from its transport activities the income of the
,-; . n4~ 0 J State? If a trade or business is carried on by the State departaJ•
r, · ·mentally and income is derived from it, there would be no
difficulty in holding that the said income is the income of the
State. If a trade or business is carried on by a State through
its agents appointed exclusively for that purpose, and the
agents carry it on entirely on behalf of the State and not on
their own account, there would be no difficulty in holding that
the income made from such trade or business is the income of
the State. But difficulties arise when we are dealing with trade
or business carried on by a corporation established by a State
by issuing a notification under the relevant provisions of the
Act. The corporation, though statutory, has a personality of
its own and this personality is distinct from that of the State
or other shareholders. It cannot be said that a shareholder
owns the property of the corporation or carries on the business
with which the corporation is concerned. The doctrine that a
corporation has a separate legal entity of its own is so firmly
rooted in our notions derived from common law that it -is
hardly necessary to deal with it elaborately; and so, primiz
facic, the income derived by the appellant from its trading
activity cannot be claimed by the State which is one of the
shareholders of the corporation.
·
It may that the statute under which the notification has
been issued constituting the appellant corporation may provide
expressly or by necessary implication that the income derived
by the corporation from its trading activity would be the income of the State. The doctrine of the separate entity or personality of the corporation is always subject to the exceptions
which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of tire
separate personality of the corporation, the trade carried on
by it belongs to the shareholders who brought the corporation
into existel1ce and the income, received from the said trade
likewise belongs to them, that' would be another matter. It
would then be possible to hold that as a result of the specific
statutory provisions the income received from the trade carried
on by the corporation belongs to the shareholders who have
constituted the said corporation, and so, we must look to the
Act to determine whether the income in the present case can
be said to be the income of the State of Andhra Pradesh.
In this connection, we may usefully refer to the observations made by Lord Denning in Tamlin v. Hansaford: tl. "In
(') [1950] K.B. 18.
7 S.C.R.
SUPREME COURT REPORTS
27
the eye of the law," said Lord Denning. "the corporation is its
l9G4
own master and is answerable as fully as any other person or
Andhra Pr.,desh
corporation. It is not the Crown and has none of the immunities Slate Road T".'nsport
.. ,
f h c
It
t
t . ·1
a t
Corpora/wn
or pnv1 eges o t e rown.
s servan s are no c1v1 serv n s,
v.
and its property is not Crown property. It is as much bound
7'hc Income Tax
by Acts of Parliament as any other subject of tbe King. It is,
Offic" and Anr.
of course, a public authority and its purposes, no doubt, are Gajcndragadkar, c.J.
public purposes, but it is not a government department nor do
its powers fall within the province of government." These
observations tend to show that a trading activity carried on by
the corporation is not a trading activity carried on by the State
departmentally, nor is it a trading activity carried on by a
State through its agents appointed in that behalf.
That takes us to the provisions of the ~ct which will assist
us in determining the question as to whether the income in
question can legitimately be held to be the income of the
State of Andhra Pradesh. The Act was passed to provide for
the incorporation and regulation of Road Transport Corporations. Section 3 authorises the State Government to issue a
notification in the Official Gazette establishing a Road Transport Corporation for the whole or any part of the State under
such name as may be specified in the notification, after taking
into account considerations specified by clauses (a), (b) and.
(c). Section 4 then provides that every corporation shall be a
body corporate by the name notified under s. 3 having perpetual succession and a common seal, and shall sue or be sued
by the said name. Section 5 deals with the constitution of
Road Transpo~t Corporation; sub-section (3) provides for the
representation both of the Central Government and of the
State Government in the Corporation in such proportion as
may be agreed to by both the Governments and of nomination
by each Government of its own representatives therein; it also
contemplates that if capital is raised by the issue of shares to
other parties, provision has to be made for the representation
of such shareholders. Section 17 authorises the appointment of
Advisory Councils. Section 18 prescribes the general duty of
the corporation. Section 23(1) provides for the capital of the
corporation; under this sub-section, the capital contributed by
the Central Government and the State Government is in the
proportion of 1 : 3. Sub-section (3) authorises the division of
the capital of the corporation into such number of shares as
the State Government may determine; and it provides that the
number of shares which shall be subscribed by the State Government, the Central Government and other parties shall also
be determined by the State Government in consultation with
the ~~~tral Government. This provision contemplates the
poss1b1hty of other shareholders joining the State Government
and_ the Central Government. Section 24 permits additional
capital of the corporation to be raised. Section 25 requires that
28
SUPREME COURT REPORTS
[1964)
1964
the shares of the corporation shall be guaranteed by the State
Andh'a bade&h Government as to the payment of the' principal and the payS1ate Rowl Trm.,port ment of the annual dividend at such minimum rate as mav be
CorpDralion
..,
•
J
v.
fixed by the State Government. Section 26 confers powers of
The I=m• Tax borrowing on the corporation. Section 27 constitutes a fund
Office,· and Anr. of the Corporation. Section 28 provides for the payment of
Oajendragadkar, O.J. interest and dividend. Section 29(1) requires the Corporation
to make such provisions for depreciation and for reserve and
other funds as the State Government may, from time to time,
direct. Section 29(2) provides that the management of the said
funds, the sums to be carried from time to time to the credit
thereof and the applica~on of the moneys comprised therein
shall be dete1mined by the Corporation. There is a proviso to
this sub-section which prohibits the utilisation of these funds
for any purpose other than that for which it was created without the previous approval of the State Government. Section 30
deals with the disposal of net profits: it says that after provision is made as required by sections 28 and 29, the Corporation may utilise such percentage of its net annual profits as
may be specified in this behalf by the State Government for
the purposes therein specified, and it adds that out of the
balance, such amount as may, with the previous approval of
the State Government and the Central Government, be specified in this behalf by the Corporation, may be utilised for financing the expansilln programmes of the Corporation and the
remainder, if any, shall be made over to the State Government for the purpose of road development. Section 31 gives
power to the Corporation to spend such sums as it thinks fit
on objects authorised by the Act. Section 32 deals with the
budget; s. 33 with accounts and audit; and s. 34 provides that
the directions issued by the State Government after consultation with the Corporation shall be followed by the Corporation, and it adds that such directions may include instructions
relating to the recruitment, conditions of service and training
of its employees, wages to be paid to the employees, reserves
to be maintained by it itnd disposal of its profits or stocks.
Under Section 38, power is conferred on the State Government to supersede the Corporation for reasons specified by
s. 38(1). On supersession, all property vested in the Corporation vests during the period of supersession, in the State Government; that is the effect of s. 38(2)(c). Section 39 deals with
the liquidation of a Corporation and clause (2) of this section
provides that in the event of such liquidation, the assets of the
Corporation, after meeting the liabilities, if any, shall be divided among the Central and the State Government and such
other parties, if any, as may have subscribed to the capital in
proportion to the contribution made by each of them to the
total capital of the Corporation. That, in brief, is the position
-of the relevant provisions of the Act.
/
7 S.C.R.
SUPREME COURT REPORTS
29
There is no doubt that the bulk of the capital is contribut1964
ed by the State Government and a small proportion by the
Andhra Prad"h
Central Government, and in that sense, the majority of sharesH1ateRoadTr~n.•p0rt
.are at present owned by the State Government. There is also
Corpo~~w•
no doubt that the Corporation is a State-controlled corporaThr Income Tax
tion in the sense that at all material stages and in all material
Officer and Anr.
particulars, the activity of the Corporation is controlled by a,,jrndrogadkar,G.J.
the State; but it is c:ear that other citizens may be admitted to
the group of shareholders, and from that point of view, the
Act contemplates contribution of the capital for the Corporation not only by the Central and the State Governments, but
.also by the citizens. The main point which we are examining
at this stage is: is the income derived by the appellant from its
trading activity, income of the State under Art. 289(1)? In our
opinion, the answer to this question must be in the negative.
Far from making any provision which would make the income
of the Corporation the income of the State, all the relevant
provisions emphatically bring out the separate personality of
the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and lo~s that would
be made as a result of the trading activity would be the profit
and loss of the corporation. There is no provision in the Act
which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that· despite the form which the organisation has taken, it is the shareholders who run the trade and who can claim the income
coming from it as their own. Section 28 which provides for
the payment of interest clearly brings out the duality between
the Corporation on the one· hand, and the State and Central
Governments on the other. Take, for instance, the case of
supersession of the corporation authorised by s. 38. Section
38(2)(c) emphatically brings out the fact that the property
really vests in the Corporation, because it provides that during
the period of supersession, it shall vest in the State Government. Similarly, s. 39(2) which deals with the distribution of
·assests in case of liquidation, brings out t!le same feature. Jt
has been urged before us by the Advocate-General that s. 50 ·
contemplates that after provision is made as required by sections 28 and 29 and funds are utilised as prescribed by s. 30,
the balance has to. be given to the State Government for the
purpose of road development, and that, it is suggested, indicates that the income belongs to the State Government. This
argument is clearly not well-founded. When w~ are deciding
the question as to whether the income derived by the Corporation is the income of the State, the provision made by s. 30 for
making over to the State Governm~nt the balance that may
remain as indicated therein, is of no assistance. The. income
is undoubtedly the income of the Corporation. All that s. 30
requires is that a part of that income may be entrusted to the
30
SUPREME COURT REPORTS
[1964)
19~
4
State Government for a specific purpose of road development.
Andhra Prad"'' It is not suggested or shown that .when such income is made
Stale Road T~an<pvrt over to the State, it becomes a part of the general revenue of
Oor~~a1wn
the State. It is income which is impressed with an obligation
Tiie lnwm< Tax and which can be utilised by the State Government only for
Officer and Anr.
the specific purpose for which it is entrusted to it. Therefore.
11aj<ndr"1J!J<lkar, o.J. we are satisfied that the income derived by the appellant from
its trading activity cannot be said to be the income-'Of the
State under Art. 289(1), and if that is so, the fact that the trading activity carried on by the appellant may be covered by Art.
289(2), does not really assist the appellant's case. Even if a
trading activity falls under cl. (2) of Art. 289, it can sustain a
claim for exemption from Union taxation only if it is shown
that the income derived from the said trading activity is the
income of the State. That is how ultimately, the crux of the
problem is to determine whether the income in question is the
income of the State, and on this vital test, the appellant fails.
There is one more point which was faintly argued before
us by the learned Advocate-General. He frankly told us that he
did not propose to challenge the correctness of the conclusion
recorded by the High Court that the appellant is not a local
authority; but he was not prepare.d to give up his contention
that there is repugnancy between the charging section of the
Income-tax Act and sections 29 and 30 of the Act. He suggested that in view of the repugnancy on which he relied, the Act
which is Act No. 64 of 1950 should prevail over the Income
Tax Act which is an enactment of 1922.