# THE INCOME TAX OFFICER v. URBAN IMPROVEMENT TRUST

- **Citation:** [2018] 13 S.C.R. 847
- **Court:** Supreme Court of India
- **Decided:** 2018-10-12
- **Case number:** Civil Appeal No. 10577 of 2018
- **Bench:** A. K. Sikri, Ashok Bhushan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-income-tax-officer-v-urban-improvement-trust-32540
- **Pages:** 21

## Headnote

Income Tax Act, 1961:
Section 10(2) Explanation clause (iii) (as amended by Fiance
Act, 2002) - Whether Urban Improvement Trust (assessee)
constituted under Rajasthan Improvement Act is a local authority
within meaning of clause (iii) of Explanation to s. 10(2) - Plea of
assessee that it is a "Municipal Committee" under clause (iii) of
Explanation to s. 10 (2) - Held: Scheme of the Urban Improvement
Act, under which the assessee was constituted, does not permit
acceptance of the plea that assessee is a "Municipal Committee"
within meaning of clause (iii) of Explanation to s. 10(20) - Rajasthan
Improvement Act, 1959 - ss. 47, 48, 61 to 64 and 105.
Allowing the appeals, the Court
HELD: 1. A perusal of the Scheme of the Rajasthan Urban
Improvement Act, 1959 as well as the Rajasthan Municipalities
Act, 1959 indicate that Urban Improvement Trust undertakes
development in the urban area included in municipality/municipal
board. Urban Improvement Trust is not constituted in place of
the municipality/municipal board rather it undertakes the act of
improvement in urban areas of a municipality/municipal board
under the Rajasthan Urban Improvement Act, 1959. It may also
perform certain limited powers of the municipal board as referred
to in Sections 47 and 48 of Urban Improvement Act but on the
strength of such provision Urban Improvement Trust does not
become a municipality or municipal board. [Para 27][861-A-B]
2. After the insertion of Part IXA in the Constitution by the
Constitution (Seventy-fourth)Amendment Act, 1992 w.e.f.
01.06.1993, Articles 243Q deals with constitution of
Municipalities. Section 10(20) Explanation, Clause (ii) relates to
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[2018] 13 S.C.R. 847
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Municipalities; the assessee has not based its claim on the basis
of Clause (ii) of Explanation rather it has confined its claim to
only Clause (iii). Under Clause (iii) claim of the assessee is that
it is a "Municipal Committee". [Paras 27 and 28][861-C-D]
3. The provisions of Sections 47 and 48 of Rajasthan
Improvement Act, 1959 are to permit certain powers of the
municipal boards to be performed by the Trust which does not
transform the Trust into a Municipal Committee. Sections 61 to
64 are the provisions empowering levy of betterment charges,
which is again in reference to and in context of carrying out
improvement by the Improvement Trust in urban areas. The
Municipal Board, Kota performs its functions, in areas where
Municipal Board still exists. There is no reason to accept that
Urban Improvement Trust is a Municipal Committee within the
meaning of Section 10(20)Explanation Clause (iii). Section 105,
which provides for ultimate dissolution of Trust and transfer of
its assets and liabilities to the Municipal Board, does not in any
manner improve the case of the assessee. When the Trust is
dissolved or at dissolution, properties and funds and dues vested
in or realisable by the Trust shall vest in and be realisable by the
Municipal Board, which is a provision for different purpose and
object. The above provision does not support the plea that
Improvement Trust is a Municipal Committee as referred to in
Clause (iii) of Explanation to Section 10(20) of the I.T. Act. Thus,
the scheme of the Rajasthan Urban Improvement Act, 1959 does
not permit acceptance of the contention of the appellant assessee
that Urban Improvement Trust is a Municipal Committee within
the meaning of Section 10(20) Explanation (iii). [Paras 35, 36 and
37][865-D-H; 866-A-B]
New Okhla Industrial Development Authority v. Chief
Commissioner of Income Tax & Ors. (2018) 8 SCALE
365; Agricultural Produce Market Committee Narela,
Delhi v. Commissioner of Income Tax and Another
(2008) 9 SCC 434 : [2008] 12 SCR 387 - relied on.
Union of India v. R.C. Jain (1981) 2 SCC 308 - referred
to.
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849
Case Law Reference
(2018) 8 SCALE 365
relied on
Para 10
[2008] 12 SCR 387
relied on
Para 29
(1981) 2 SCC 308
referred to
Para 30

## Text

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THE INCOME TAX OFFICER
v.
URBAN IMPROVEMENT TRUST
(Civil Appeal No. 10577 of 2018)
OCTOBER 12, 2018
[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]
Income Tax Act, 1961:
Section 10(2) Explanation clause (iii) (as amended by Fiance
Act, 2002) - Whether Urban Improvement Trust (assessee)
constituted under Rajasthan Improvement Act is a local authority
within meaning of clause (iii) of Explanation to s. 10(2) - Plea of
assessee that it is a "Municipal Committee" under clause (iii) of
Explanation to s. 10 (2) - Held: Scheme of the Urban Improvement
Act, under which the assessee was constituted, does not permit
acceptance of the plea that assessee is a "Municipal Committee"
within meaning of clause (iii) of Explanation to s. 10(20) - Rajasthan
Improvement Act, 1959 - ss. 47, 48, 61 to 64 and 105.
Allowing the appeals, the Court
HELD: 1. A perusal of the Scheme of the Rajasthan Urban
Improvement Act, 1959 as well as the Rajasthan Municipalities
Act, 1959 indicate that Urban Improvement Trust undertakes
development in the urban area included in municipality/municipal
board. Urban Improvement Trust is not constituted in place of
the municipality/municipal board rather it undertakes the act of
improvement in urban areas of a municipality/municipal board
under the Rajasthan Urban Improvement Act, 1959. It may also
perform certain limited powers of the municipal board as referred
to in Sections 47 and 48 of Urban Improvement Act but on the
strength of such provision Urban Improvement Trust does not
become a municipality or municipal board. [Para 27][861-A-B]
2. After the insertion of Part IXA in the Constitution by the
Constitution (Seventy-fourth)Amendment Act, 1992 w.e.f.
01.06.1993, Articles 243Q deals with constitution of
Municipalities. Section 10(20) Explanation, Clause (ii) relates to
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[2018] 13 S.C.R. 847
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Municipalities; the assessee has not based its claim on the basis
of Clause (ii) of Explanation rather it has confined its claim to
only Clause (iii). Under Clause (iii) claim of the assessee is that
it is a "Municipal Committee". [Paras 27 and 28][861-C-D]
3. The provisions of Sections 47 and 48 of Rajasthan
Improvement Act, 1959 are to permit certain powers of the
municipal boards to be performed by the Trust which does not
transform the Trust into a Municipal Committee. Sections 61 to
64 are the provisions empowering levy of betterment charges,
which is again in reference to and in context of carrying out
improvement by the Improvement Trust in urban areas. The
Municipal Board, Kota performs its functions, in areas where
Municipal Board still exists. There is no reason to accept that
Urban Improvement Trust is a Municipal Committee within the
meaning of Section 10(20)Explanation Clause (iii). Section 105,
which provides for ultimate dissolution of Trust and transfer of
its assets and liabilities to the Municipal Board, does not in any
manner improve the case of the assessee. When the Trust is
dissolved or at dissolution, properties and funds and dues vested
in or realisable by the Trust shall vest in and be realisable by the
Municipal Board, which is a provision for different purpose and
object. The above provision does not support the plea that
Improvement Trust is a Municipal Committee as referred to in
Clause (iii) of Explanation to Section 10(20) of the I.T. Act. Thus,
the scheme of the Rajasthan Urban Improvement Act, 1959 does
not permit acceptance of the contention of the appellant assessee
that Urban Improvement Trust is a Municipal Committee within
the meaning of Section 10(20) Explanation (iii). [Paras 35, 36 and
37][865-D-H; 866-A-B]
New Okhla Industrial Development Authority v. Chief
Commissioner of Income Tax & Ors. (2018) 8 SCALE
365; Agricultural Produce Market Committee Narela,
Delhi v. Commissioner of Income Tax and Another
(2008) 9 SCC 434 : [2008] 12 SCR 387 - relied on.
Union of India v. R.C. Jain (1981) 2 SCC 308 - referred
to.
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849
Case Law Reference
(2018) 8 SCALE 365
relied on
Para 10
[2008] 12 SCR 387
relied on
Para 29
(1981) 2 SCC 308
referred to
Para 30
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 10577
of 2018.
From the Judgment and Order dated 23.10.2017 of the High Court
of Judicature for Rajasthan Bench at Jaipur in D.B. Income Tax Appeal
No. 287 of 2016
With
Civil Appeal Nos. 10578, 10579, 10580, 10581, 10584, 10582,
10586, 10585, 10583 of 2018.
Vikramjit Banerjee, ASG, K. Radhakrishnan, Sr. Adv., Rupesh
Kumar, Arijit Prasad, Mrs. Anil Katiyar, Advs. for the Appellant.
Sanjay Jhanwar, Rajat Sharma, Tarun Gupta, Advs. for the
Respondent.
The Judgment of the Court was delivered by
ASHOK BHUSHAN, J. 1. Leave granted.
2. These appeals have been filed by the Revenue challenging the
Division Bench judgments of Rajasthan High Court dated 25.07.2017 as
well as subsequent judgment dated 23.10.2017 following earlier judgment.
The High Court vide its above judgments has dismissed all the income
tax appeals of the Revenue and allowed that of assesse - Urban
Improvement Trust. The Division Bench accepted the claim of the
assessee that it is local authority within the meaning of Clause (iii) of
Explanation to Section 10(20) of the Income Tax Act, 1961 and hence it
is entitled for exemption under Section 10(20) of the Act. The Revenue
have been contending that Urban Improvement Trust, the assessee is
not a local authority within the meaning of Explanation to Section 10(20),
hence it is not entitled for exemption.
3. For deciding this batch of appeals, it shall be sufficient to notice
the facts of Civil Appeal arising out of S.L.P. (C) No. 18067 of 2018 -
The Income Tax Officer Vs. M/s. Urban Improvement Trust, Kota.
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
TRUST
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4. Section 10(20) has been amended by Finance Act, 2002 w.e.f.
01.04.2003. A Notice under Section 142(1) of the Income Tax Act, 1961
(hereinafter referred to as "I.T. Act") was issued dated 01.08.2005
requiring the assessee to file a return for the assessment year 20032004. A reply was submitted on behalf of the assessee that Urban
Improvement Trust - the assessee is a municipality within the meaning
of Article 243P of the Constitution of India, hence it is not required to file
an income tax return. Assessing Officer passed an assessment order
dated 28.03.2006 rejecting the contention of the assessee that its income
is exempted under Section 10(20). An appeal was filed by the assessee
before the Commissioner (Appeals). Commissioner (Appeals) passed
an order on 10.02.2010 holding that assessee is a local authority within
the meaning of Section 10(20) of the I.T. Act. The Revenue filed an
appeal before the Income Tax Appellate Tribunal (hereinafter referred
to as "ITAT") challenging the appellate order. The ITAT accepted the
Revenue's claim that assessee is not covered within the definition of
Clause (iii) of Explanation to Section 10(20). The Appellate Tribunal in
Paragraph 2.6 allowed the appeal and restored back the matter to the
Commissioner of Income Tax (Appeals). Para 2.6 of the Order of the
ITAT is as follows:-
"2.6 Considering our decision in the case of Rajasthan Housing
Board, we feel that the Ld. CIT (A) was not justified in holding
that income of UTI is exempt u/s 10(20) of the Act. The Ld.
CIT(A) has not decided other issues raised before him by the
assessee because the Ld. CIT(A) was of the opinion that income
of the assessee was exempt u/s 10(20) of the Act. Since we are
vacating the order of the Ld. CIT(A) on the issue of liability of
exemption u/s 10(20) of the Act, therefore, other issues are required
to be considered afresh by the Ld. CIT (A). Accordingly, the
appeals are restored back on the file of the Ld. CIT(A)."
5. Both the assessee and Revenue aggrieved by the order of ITAT
had filed appeals before the High Court under Section 260A of the I.T.
Act. The High Court decided all the appeals vide its judgment dated
25.07.2017. High Court held the assessee to be local authority within the
meaning of Section 10(20) Explanation. After answering the above issue
in favour of the assessee, the High court held that other issues have
become academic. Consequently, the appeals filed by the Revenue were
dismissed and that of the assessee were allowed.
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6. Another set of appeals have been filed by the Revenue
questioning the subsequent judgment of the High Court dated 23.10.2017
deciding Income Tax Appeal No. 287 of 2016 and other appeals. The
above appeals were filed by the assessee against the judgment of the
ITAT dated 08.06.2017 wherein ITAT had set aside the order of the
Assessing Officer and had directed the Assessing Officer to provide
reasons for issuing Notice under Section 148 to the assessee in respect
of assessment years 2005-2006 to 2009-2010. Assessee thereafter was
allowed to file objection before the Assessing Officer and Assessing
Officer was directed to pass a speaking order. Operative portion of the
judgment of ITAT contained in Para 7 is to the following effect:-
"7. Since we have set aside the order passed in respect of the
assessment year 2005-06 to 2009-10 as the Assessing Officer
has not provided the reasons u/s 148 of the Act, therefore, the
appeals of the revenue arising out of the order passed by the Ld
CIT(A) in respect of the assessment year 2005-06 to 2009-10
are also set aside with the direction to the Assessing Officer to
pass fresh order after providing the reasons to the assessee and
after deciding the objections if any in terms of the judgment in the
case of GKN DRIVESHAFTS (INDIA) LTD. VS. INCOMETAX OFFICER AND OTHERS [2003] 259 ITR 19(SC). In light
of above, all the appeals of the assessee as well as revenue are
set aside to the file of the Assessing officer for the statistical
purposes."
7. Aggrieved by the order of the ITAT, the appeals were filed by
the assessee. Assessee's contention before the High Court was that
assessee being covered by definition of local authority within the meaning
of Section 10(20) Explanation of I.T. Act, its income was exempt. The
Division Bench of the High Court relied and quoted its earlier Division
Bench Judgment dated 25.07.2017 mentioned above and allowed the
appeals filed by the assessees.
8. Revenue aggrieved by the aforesaid two judgments have come
up in these appeals. By both the judgments of the High Court, large
number of income tax appeals were decided giving rise to different appeals
under consideration in this batch of appeals.
9. We have heard Mr. Vikramjit Banerjee, learned Additional
Solicitor General of India, Shri K. Radhakrishnan, learned senior counsel
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
TRUST [ASHOK BHUSHAN, J.]
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for the appellants. Shri Sanjay Jhanwar and other learned counsel have
been heard for the respondent.
10. Learned counsel for the appellant in support of the appeal
contends that the Division Bench of the High Court committed error in
coming to the conclusion that Urban Improvement Trust - the assessee
is a local authority within the meaning of Explanation to Section 10(20)
of the I.T. Act. It is submitted that Urban Improvement Trust might
have been earlier getting benefit of wide definition of local authority
prior to amendment by Finance Act, 2002 but after amendments in Section
10(20) by Finance Act, 2002, Urban Improvement Trust is no longer
included in the definition of local authority. Learned counsel for the
appellant further submits that assessee, i.e. Urban Improvement Trust is
not covered by any of clauses, i.e. clauses (i) to (iv) of Explanation to
Section 10(20) of the I.T. Act. Learned counsel for the appellant further
relies on recent judgment of this Court in New Okhla Industrial
Development Authority Vs. Chief Commissioner of Income Tax
& Ors. (2018) 8 SCALE 365, by which judgment, this Court had
occasion to interpret Section 10(20) Explanation and the constitutional
provisions of Articles 243P and 243Q of the Constitution.
11. Learned counsel for the assessee refuting the submission of
appellant contends that Urban Improvement Trust is fully covered by
the definition of local authority as contained in Explanation to Section
10(20) as amended by Finance Act, 2002. It is submitted that the Urban
Improvement Trust is constituted under the Rajasthan Urban
Improvement Act, 1959 and the assessee is performing various municipal
functions, hence it is also entitled for the benefit, which is extended to
the municipalities. Learned counsel for the respondent submits that the
assessee, i.e. Urban Improvement Trust is covered within the definition
of local authority as given in sub-clause(iii) of Explanation, i.e. "Municipal
Committee". It is submitted that assessee performs the municipal
functions, collects charges, has control over the municipal funds and
after dissolution of the trust, the entire fund is reverted back to the
Municipal Board, which provision clearly indicate that it is a Municipal
Committee and covered by definition of local authority under Section
10(20). Learned counsel submits that the judgment of this Court in New
Okhla Industrial Development Authority Vs. Chief Commissioner
of Income Tax & Ors.(supra) is distinguishable since in the said
judgment, this Court had occasion to consider the provisions of Uttar
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Pradesh Industrial Area Development Act, 1976, which was entirely
different legislation from one, which is under consideration in the present
case, i.e. The Rajasthan Urban Improvement Act, 1959.
12. We have considered the submissions of the learned counsel
for the parties and have perused the records.
13. The only issue, which has been raised by the learned counsel
for the parties in this batch of appeals is as to "whether the Urban
Improvement Trust constituted under the Rajasthan Urban Improvement
Act, 1959 is a local authority within the meaning of Explanation to Section
10(20) of the I.T. Act, 1961"?
14. By Finance Act, 2002, Section 10(20) of the I.T. Act was
amended by inserting an Explanation w.e.f. 01.04.2003. Section 10(20)
as amended by Finance Act, 2002 is as follows:-
"10(20) the income of a local authority which is chargeable under
the head "Income from house property", "Capital gains" or
"Income from other sources" or from a trade or business carried
on by it which accrues or arises from the supply of a commodity
or service (not being water or electricity) within its own
jurisdictional area or from the supply of water or electricity within
or outside its own jurisdictional area.
Explanation.-For the purposes of this clause, the expression
"local authority" means-
(i) Panchayat as referred to in clause (d) of article 243 of the
Constitution; or
(ii) Municipality as referred to in clause (e) of article 243P of the
Constitution; or
(iii) Municipal Committee and District Board, legally entitled to,
or entrusted by the Government with, the control or management
of a Municipal or local fund; or
(iv) Cantonment Board as defined in section 3 of the Cantonments
Act, 1924 (2 of 1924);"
15. By Finance Act, 2002, provisions of Section 10(20A) was
also deleted. Section 10(20A) as it existed prior to Finance Act, 2002
was as follows:-
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
TRUST [ASHOK BHUSHAN, J.]
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"10(20A) any income of an authority constituted in India by or
under any law enacted either for the purpose of dealing with and
satisfying the need for housing accommodation or for the purpose
of planning, development or improvement of cities, towns and
villages or for both;"
16. At this juncture, it is relevant to notice the Explanatory Notes
on Finance Act, 2002. Explanatory Notes was on both the sections -
Section 10(20) as well as Section 10(20A). Paragraphs 12.2 to 12.4 and
13.1 to 13.4 of the Explanatory Notes, which are relevant for the present
purpose are as follows:-
"12.2 Through Finance Act, 2002, this exemption has been
restricted to the Panchayats and Municipalities as referred to in
Articles 243(d) and 243(p)(e) of the Constitution of India
respectively. Municipal Committees and District Boards, legally
entitled to or entrusted by the Government with the control or
management of a Municipal or a local fund and Cantonment Boards
as defined under section 3 of the Cantonments Act, 1924.
12.3 The exemption under clause (20) of section 10 would,
therefore, not be available to Agricultural Marketing Societies and
Agricultural Marketing Boards, etc., despite the fact that they
may be deemed to be treated as local authorities under any other
Central or State Legislation. Exemption under this clause would
not be available to port trusts also.
12.4 This amendment will take effect from 1st April, 2003 and
will, accordingly, apply in relation to the assessment year 2003
2004 and subsequent assessment years.
13.1 Under the existing provisions contained in clause (20A) of
section 10, income of the Housing Boards or other statutory
authorities set up for the purpose of dealing with or satisfying the
need for housing accommodations or for the purpose of planning,
development or improvement of cities, towns and villages is exempt
from payment of income tax.
13.2 Through Finance Act, 2002 clause (20A) of section 10 has
been deleted so as to withdraw exemption available to the
abovementioned bodies. The income of Housing Boards of the
States and of Development Authorities would, therefore, also
become taxable.
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13.3 Under section 80G, donation made to housing authorities,
etc. referred to in clause (20A) of section 10 is eligible for 50%
deduction from total income in the hands of the donors. Since
clause (20A) of section 10 has been deleted, donation to the housing
authorities etc. would not be eligible for deduction in the hands of
the donors and this may result in drying up of donations. To continue
the incentive to donation made to housing authorities etc., section
80G has been amended so as to provide that 50% of the sum paid
by an assessee to an authority constituted in India by or under any
law enacted either for the purpose of dealing with and satisfying
the need for housing accommodation or for the purpose of planning,
development or improvement of cities, towns and villages, or for
both, shall be deducted from the total income of such assessee.
13.4 These amendments will take effect from lst April, 2003 and
will, accordingly, apply in relation to the assessment year 2003
2004 and subsequent assessment years."
17. Section 10(20A), which existed prior to amendments made by
Finance Act, 2002 exempted any income of an authority constituted in
India by or under any law enacted either for the purpose of dealing with
and satisfying the need for housing accommodation or for the purpose
of planning, development or improvement of cities, towns and villages or
for both. The Rajasthan Urban Improvement Act, 1959 was enacted for
the improvement of Urban Areas in Rajasthan. The Act contains following
preamble:-
"An act for the improvement of Urban Areas in Rajasthan.
WHEREAS it is expedient to make provision for the improvement
and expansion of urban areas in the State of Rajasthan."
18. Section 10(20A) specifically granted exemption to income of
an authority constituted in India by or under any law and the Rajasthan
Urban Improvement Act, 1959 was, thus, clearly covered by Section
10(20A) as was availing exemption under Section 10(20A) prior to
Finance Act, 2002. What is the consequence of deletion of Section
10(20A) and further insertion of Explanation under Section 10(20)
providing for an exhaustive definition of the word "local authority", which
was not defined under the I.T. Act prior to Finance Act, 2002? For
definition of local authority, the provisions of General Clauses Act, 1897
- Section 3(31) were looked into and applied. The definition of local
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
TRUST [ASHOK BHUSHAN, J.]
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authority given under Section 3(31) of the General Clauses Act was as
follows:-
""local authority" shall mean a municipal committee, district board,
body or port Commissioners or other authority legally entitled to,
or entrusted by the Government with, the control or management
of a municipal or local fund;"
19. The Explanation added to Section 10(20) now defines the
definition of local authority in four clauses. Clause (i) relates to Panchayat
as referred to in clause (d) of article 243 of the Constitution. Clause (ii)
relates to Municipality as referred to in clause (e) of article 243P of the
Constitution. Clause(iv) relates to Cantonment Board as defined in section
3 of the Cantonments Act, 1924 (2 of 1924). Learned counsel for the
assessee claim that the assessee is covered under Clause (iii) of
Explanation to Section 10(20), which is to the following effect:-
"(iii) Municipal Committee and District Board,legally entitled to,
or entrusted by the Government with, the control or management
of a Municipal or local fund; or"
20. We, thus, have to confine our discussions to above Clause (iii)
under which the assessee- Urban Improvement Trust claims to be
covered. Before we advert to above Clause (iii), it is relevant to notice
certain provisions of the Rajasthan Urban Improvement Act, 1959 to
find out the nature of the Urban Improvement Trust constituted under
the said Act. The Rajasthan Urban Improvement Act, 1959 defines
"improvement" in Section 2(vi) in following manner:-
"2(vi) "improvement" with its grammatical variations means the
carrying out of building, engineering, mining or other operations
in, on, over or under land or the making of any material change in
any building or land [or making provision for any amenity in, on,
over or under any building or land] and includes re-improvement;"
21. Section 2(x) defines "urban area" as follows:-
"2(x) "urban area" means the urban area notified under Section
3 or, as the case may be, under Section 8;"
22. Section 2(2) of the Rajasthan Urban Improvement Act, 1959
provides as follows:-
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"2(2) All words and expressions not defined in this Act have,
wherever used therein, the same meanings as are assigned to
them by the Municipal law for the time being in force:"
23. Section 9 provides for "Constitution of Trust", which is as follows:-
"Section 9. Constitution of Trusts.-(1) The Trust shall consist
of-
(a) Chairman,
(b) two members of the Municipal Board, if any, having authority
in the urban area, [XXX].
[(bb) X X X]
[(c) such number of other persons, as may be determined by the
State Government for each Trust, of whom one shall be a person
belonging to Scheduled Tribe or Scheduled Caste, if no person of
such caste or tribe is represented in the Trust by virtue of Clause
(a) or Clause (b)]
[x X x]
(2) The Chairman and the persons referred to in Clause (c) of
Sub-section (1) [x x x] shall be appointed by the State Government
by notification.
(3) The members of the Municipal Board referred in Clause (b)
of Sub-section (1) shall be elected by the said Board.
(4) If the said Board does not, by such date as may be fixed by
the State Government, elect two of its members to be Trustees,
the State Government shall appoint two members of the said Board
to be Trustees and every person so appointed shall be deemed to
be a Trustee as if he had been duly elected by the Municipal
Board.
(5) If the said Board shall have been superseded or dissolved in
accordance with the provision of the Municipal law for the time
being in force, it shall be represented on the Trust by persons
appointed or elected, as the case may be, by the officer or authority
appointed under the said law to discharge the functions and exercise
the powers of the Board during the period of its supersession or
dissolution.
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
TRUST [ASHOK BHUSHAN, J.]
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(6) Of the person referred to in Clause (c) of Sub-section (1) at
least one shall be a person in the service of the State Government.
(7) The names of all persons appointed or elected to the Trust
shall be notified by the State Government in the Official Gazette."
24. Under Section 47, certain powers under the Municipal laws
may be vested in the Trust. Section 48 provides for Transfer of duties
etc. of Municipal Board to Trust. Sections 47 and 48 are as follows:-
"Section 47. Powers under the Municipal laws vested in
the Trust.-(1) Such provisions of the Municipal law for the
time being in force in any part of the State as may be prescribed
in the case of each Trust, shall so far as may be consistent with
the tenor of this Act, apply to [the urban area for which the Trust
is established under this Act and] all references in the said
provisions to the Municipal Board, Council or Corporation shall
be construed as references to the Trust which, in respect of any
[such urban area] may alone exercise and perform all or any of
the powers and functions which under any of the said provisions
might have been exercised and performed by the Municipal Board,
Council or Corporation or by the Chairman or President or by any
officer thereof:
Provided that the Trust may delegate to the Chairman or to any
officer of the Trust all or any of the powers conferred under this
section.
[(2) to (5) Omitted by Rajasthan Act No. 26 of 1976.]
Section 48, Transfer of duties etc. of Municipal Board to
Trust.-The State Government may by notification in the Official
Gazette transfer to the Trust any of the duties, powers, functions
and responsibilities of the Municipal Board and thereupon the Trust
shall carry out, exercise, perform and discharge such duties, powers,
functions and responsibilities."
25. Section 61 provides for the Improvement Fund. Section 62
empowers the Trust to levy betterment charges. Section 63 provides for
assessment of betterment charge and Section 64 provides for settlement
of betterment charge by arbitrators. One more section on which reliance
has been placed by the learned counsel for the appellant is Section 105,
which is to the following effect:-
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"Section 105. Ultimate dissolution of Trust and Transfer of
its assets and liabilities to the Municipal Board.-(1) When
all schemes sanctioned under this Act have been executed or
have been so far executed as to render the continued existence
of the Trust, in the opinion of the State Government, unnecessary,
the State Government may by notification declare that the Trust
shall be dissolved from such date as may be specified in this behalf
in such notification and the Trust shall be deemed to be dissolved
accordingly.
(2) From the said date-
(a) all properties, funds and dues which are vested in or realisable
by the Trust shall vest in and be realisable by the Municipal Board;
(b) all liabilities which are enforceable against the Trust shall be
enforceable against the Municipal Board;
(c) for the purpose of completing the execution of any scheme
sanctioned under this Act, Which has not been fully executed by
the Trust, and, of realising properties, funds and dues referred to
in Clause (a) the functions of the Trust under this Act shall be
discharged by the Municipal Board as if it were the Trust under
this Act, and
(d) the Municipal Board shall keep separate accounts of all moneys
respectively received and expended by it under this Act, until all
loans raised hereunder have, been repaid and until all other liabilities
referred to in clause (b) have been duly met."
26. It is relevant to notice that in the same year in which the
Rajasthan Urban Improvement Act, 1959 was passed, another enactment
namely, the Rajasthan Municipalities Act, 1959 was enacted. Learned
counsel for the respondent has referred to notification dated 09.07.1970
by which the State Government has established Urban Improvement
Trust, Kota. Notification dated 09.07.1970 is as follows;-
"TOWN PLANNING DEPARTMENT
NOTIFICATION
Jaipur, July 9, 1970
 No. 5 (3) TP/70- In exercise of the powers conferred by
Section 8 read with Section 9 and 13 of the Rajasthan Urban
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
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Improvement Act, I959 (Act No. 35 of 1959) of the State
Government here by orders :
1. that for the purpose of carrying out improvement of the
Urban Area included in the Municipal limits of Kota Town,
a board of trustee called the improvement Trust, Kota shall
be established.
2. That the said trust shall consist of:-
 a. A Chairman.
 b. Two members/Nominees of the Municipal Council,
Kota.
 c. Chief Town Planner or his nominee.
 d. 4 other persons.
 In exercise of the powers conferred by sub-section(2) of
Section 9 of the said Act, the State Government further appoints
the following persons as the Chairman and other Member of the
said Trust for a period of three years with effect from 10.7.1970
or earlier till he is required to hold the office under Section 11 and
12 of the said Act:
1. Shri Nathu Lal Jain, Advocate Chairman
2. Chief Town Planner or his Nominee Member
3. Sushri Nagendra Bala, Ex. M.L.A. Member
4. Collector, Kota Member
3. The term of the office of the said Trustees shall commence
with effect from 10.7.70.
 The Municipal Council, Kota is called upon to appoint the
two persons to be trustees of the said Trust in pursuance of subsection(5) of Section 9 of the said Act within the period of one
month from the date of issue of this Notification.
By Order of the Governor,
R.K. Saxena,
Secretary to the Government"
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27. A perusal of the Scheme of the Rajasthan Urban Improvement
Act, 1959 as well as the Rajasthan Municipalities Act, 1959 indicate that
Urban Improvement Trust undertakes development in the urban area
included in municipality/municipal board. Urban Improvement Trust is
not constituted in place of the municipality/municipal board rather it
undertakes the act of improvement in urban areas of a municipality/
municipal board under the Rajasthan Urban Improvement Act, 1959. It
may also perform certain limited power of the municipal board as referred
to in Sections 47 and 48 but on the strength of such provision Urban
Improvement Trust does not become a municipality or municipal board.
After the insertion of Part IXA in the Constitution by the Constitution
(Seventy-fourth) Amendment Act, 1992 w.e.f. 01.06.1993, Articles 243Q
deals with constitution of Municipalities. Section 10(20) Explanation,
Clause (ii) relates to Municipalities.
28. Learned counsel for the assessee has not based its claim on
the basis of Clause (ii) of Explanation rather it has confined its claim to
only Clause (iii). Under Clause (iii) claim of the assessee is that it is a
"Municipal Committee". We, thus, have to answer as to whether it is a
Municipal Committee within the meaning of Explanation to Section 10(20)
or not?
29. The word "Municipal Committee" as occurring in Section
10(20) Explanation came for consideration before this Court in
Agricultural Produce Market Committee Narela, Delhi Vs.
Commissioner of Income Tax and Another, (2008) 9 SCC 434. In
the above case, this Court had examined the Explanation to Section
10(20) as amended by Finance Act, 2002 and the definition of local
authority contained therein. After noticing the definition of local authority
as contained in Section 10(20) Explanation w.e.f. 01.04.2003 as well as
Section 3(31) of the General Clauses Act, 1897. Following was stated in
Para 30 and 31:-
"30. At the outset, it may be noted that prior to the Finance Act,
2002, the said 1961 Act did not contain the definition of the word
"local authority". That word came to be defined for the first time
by the Finance Act, 2002 vide the said Explanation/definition clause.
31. Certain glaring features can be deciphered from the above
comparative chart. Under Section 3(31) of the General Clauses
Act, 1897, "local authority" was defined to mean "a Municipal
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
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Committee, District Board, Body of Port Commissioners or other
authority legally entitled to ... the control or management of a
municipal or local fund". The words "other authority" in Section
3(31) of the 1897 Act have been omitted by Parliament in the
Explanation/definition clause inserted in Section 10(20) of the 1961
Act vide the Finance Act, 2002. Therefore, in our view, it would
not be correct to say that the entire definition of the word "local
authority" is bodily lifted from Section 3(31) of the 1897 Act and
incorporated, by Parliament, in the said Explanation to Section
10(20) of the 1961 Act. This deliberate omission is important."
30. In the above case, earlier judgment of this Court in Union of
India Vs. R.C. Jain, (1981) 2 SCC 308 was considered where this
Court had laid down and applied the functional test as to whether a body
is local authority or not? This Court laid down that functional test as
evolved in R.C. Jain's case (supra) is no more applicable after
amendment of Section 10(20) of I.T. Act by Finance Act, 2002. Following
was laid down in paragraph 35:-
"35. One more aspect needs to be mentioned. In R.C. Jain, (1981)
2 SCC 308 the test of "like nature" was adopted as the words
"other authority" came after the words "Municipal Committee,
District Board, Body of Port Commissioners". Therefore, the words
"other authority" in Section 3(31) took colour from the earlier
words, namely, "Municipal Committee, District Board or Body of
Port Commissioners". This is how the functional test is evolved in
R.C. Jain. However, as stated earlier, Parliament in its legislative
wisdom has omitted the words "other authority" from the said
Explanation to Section 10(20) of the 1961 Act. The said
Explanation to Section 10(20) provides a definition to the word
"local authority". It is an exhaustive definition. It is not an inclusive
definition. The words "other authority" do not find place in the
said Explanation. Even, according to the appellant(s), AMC(s) is
neither a Municipal Committee nor a District Board nor a Municipal
Committee nor a panchayat. Therefore, in our view functional
test and the test of incorporation as laid down in R.C. Jain is no
more applicable to the Explanation to Section 10(20) of the 1961
Act. Therefore, in our view the judgment of this Court in R.C.
Jain followed by judgments of various High Courts on the status
and character of AMC(s) is no more applicable to the provisions
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of Section 10(20) after the insertion of the Explanation/definition
clause to that sub-section vide the Finance Act, 2002."
31. This Court further noticed the expression "Municipal
Committee" in Clause (iii) of Section 10(20). This Court held that the
words "Municipal Committee and District Board" in Explanation were
used out of abundant caution. In 1897, when the General Clauses Act
was enacted there existed in India Municipal Committees and District
Boards, which were discharging the municipal functions in different parts
of the country. The expression "Municipal Committee and District Board"
were included by amendments incorporated by Finance Act, 2002 to
take into its fold those Municipal Committees and District Board which
are still discharging municipal functions where no other municipalities or
boards to discharge municipal functions have been constituted. In
paragraph Nos. 36 and 37 following has been laid down:-
"36**. The question still remains as to why Parliament has used
the words "Municipal Committee" and "District Board" in Item
(iii) of the said Explanation. In our view, Parliament has defined
"local authority" to mean-a panchayat as referred to in clause
(d) of Article 243 of the Constitution of India and municipality as
referred to in clause (e) of Article 243-P of the Constitution of
India. However, there is no reference to Article 243 after the
words "Municipal Committee" and "District Board". In our view,
the Municipal Committee and District Board in the said Explanation
are used out of abundant caution.
37. In 1897, when the General Clauses Act was enacted there
existed in India Municipal Committees and District Boards. They
continued even thereafter. In some remote place it is possible that
there exists a Municipal Committee or a District Board. Therefore,
in our view, apart from a panchayat and municipality, Parliament
in its wisdom decided to give exemption to Municipal Committee
and District Board. Earlier there were District Board Acts in
various States. Most of the States had repealed those Acts.
However, it is quite possible that in some remote place District
Board may still exist. Therefore, Parliament decided to give
exemption to such Municipal Committees and District Boards.
Therefore, in our view, advisedly Parliament has retained exemption
for Municipal Committee and District Board apart from panchayat
and municipality."
THE INCOME TAX OFFICER v. URBAN IMPROVEMENT
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32. This Court further noticed the constitutional provision of Part
IX-A and noticed that any law relating to municipalities in force in a
State immediately before the commencement of the Constitution
(Seventy-fourth Amendment) Act, 1992, even if inconsistent with the
provisions of Part IX-A, shall continue to be in force until amended or
repealed by a competent legislature. In Para 39, following has been laid
down:-
"39. Similarly, under Part IX-A there is Article 243-ZF which
refers to the "Municipalities". This article, inter alia, states that
notwithstanding anything in Part IX-A, any provision of any law
relating to municipalities in force in a State immediately before
the commencement of the Constitution (Seventy-fourth
Amendment) Act, 1992, which is inconsistent with the provisions
of Part IX-A, shall continue to be in force until amended or repealed
by a competent legislature. In our view, Article 243-N and Article
243-ZF indicate that there could be enactments which still retain
the entities like Municipal Committees and District Boards and if
they exist, Parliament intends to give exemption to their income
under Section 10(20) of the 1961 Act."
33. In above case, this Court, thus, has held that the expression
"Municipal Committee and District Board" occurring in Clause (iii) of
Explanation referred to those bodies, which are discharging municipal
functions and power in any part of country and so far has not been
substituted by any other Body by any Act of Legislature. The word
"Municipal Committee" occurring in Clause (iii) Explanation, thus, has a
definite purpose and object. Purpose and object was to cover those bodies,
which are discharging municipal functions but are not covered by the
definition of municipalities as was required to be constituted by Article
243Q of the Constitution of India. Urban Improvement Trust constituted
under the Rajasthan Urban Improvement Act, 1959, thus, cannot be
held to be covered by the definition of Municipal Committee as contained
in Clause (iii) of Explanation to Section 10(20) of the I.T. Act. Further,
as noticed above, prior to deletion of Section 10(20A), Section 10(20A)
was a provision which exempted the income of authority constituted in
India by or under any law enacted for the purpose of planning,
development or improvement of cities, towns and villages or for both.
There cannot be any dispute that Urban Improvement Trust, i.e. the
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assessee was fully covered by the definition of authorities as contained
in Section 10(20A) prior to its deletion. When there is a specific deletion
of Section 10(20A), the said deletion was for an object and purpose.
The Explanatory Notes in Paragraph Nos.