Income Of Mussoorie Dehradun Development Authority Not The Income Of The State Government, Not Exempt Under Article 289(1): Uttarakhand High Court

The Bench, consisting of Acting Chief Justice S.K. Mishra and Justice Alok Kumar Verma, observed that it was only on the dissolution of the Mussoorie Dehradun Development Authority, which was constituted under the U.P. Urban, Planning & Development Act, 1973, that its assets and funds were to devolve upon the State Government. Thus, the Court held that the levies collected by the Mussoorie Dehradun Development Authority were taxable in its hand and they were not governed by the doctrine of diversion of income due to an overriding title.

The appellant/ assessee Mussoorie Dehradun Development Authority filed its income tax return declaring nil income. The income tax return of the assessee was selected for scrutiny assessment. The Assessing Officer (AO) found that the assessee was maintaining an "Infrastructure Fund" in its books of accounts, to which certain receipts were credited and out of which certain infrastructure related expenses were incurred. The AO allowed the said infrastructure expenses incurred by the assessee and sought to tax the balance amount appearing in the "Infrastructure Fund" in the assessee's books of accounts. The assessee submitted before the AO that the State Government has an overriding title on the receipts appearing in the said "Infrastructure Fund" and, therefore, they did not form a part of the assessee's total income. The AO rejected the submissions of the assessee and passed an order making certain additions to the assessee's income. Against this order, the assessee filed an appeal before the CIT(A). The CIT(A) held that there was no overriding title of the State Government over the "Infrastructure Fund" account maintained by the assessee, and thus the amounts in the said account should be included in the income of the assessee. The CIT(A) ruled that since the assessee is a body corporate, hence he did not enjoy the status of a State Government which is exempt from taxation. Against the order of the CIT(A), the assessee filed an appeal before the ITAT. The ITAT dismissed the appeal and upheld the order passed by the CIT(A). The assessee filed an appeal before the Uttarakhand High Court against the order of the ITAT.

The assessee Mussoorie Dehradun Development Authority submitted that it is constituted under the U.P. Urban, Planning & Development Act, 1973. The assessee added that under the orders of the Government of Uttar Pradesh, vide G.O. dated 15.01.1998, which was adopted by the State of Uttarakhand, certain levies were to be collected by the assessee in a separate account. The assessee averred that the said levies collected by it were to be spent by the State Government through a Committee constituted by the State for the purpose of residential infrastructure. Thus, the assessee contended that the levies collected by it in the "Infrastructure Fund" account were governed by the doctrine of diversion of income due to an overriding title, and hence the said levies were excluded from the income of the assessee.

Section 58 (1) of the U.P. Urban, Planning & Development Act, 1973 provides that where the State Government is satisfied that the Development Authority established under the Act has substantially achieved its purpose so as to render its continued existence unnecessary, the State Government may by notification in the Gazette, dissolve the said Development Authority with effect from the date as specified therein.

Section 58(2) provides that from the date the said Development Authority is dissolved, all properties, funds and dues which are vested in or realisable by the said Development Authority shall vest in, or be realisable by, the State Government.

The High Court observed that as per Article 289(1) of the Constitution of India, the income and property of a State is exempt from Union taxation. Also, Article 289(2) of the Constitution provides that nothing in Article 289 (1) shall prevent the Union of India from imposing, or authorising the imposition of, any tax which the Parliament may by law provide in respect of a trade or business carried on by, or on behalf of, the State Government, or in respect of any connected operations, or property used or occupied for the purposes of such trade or business, or any income accruing or arising in connection with such trade or business.

The High Court noted that a similar issue had arisen before the Supreme Court in the case of Adityapur Industrial Area Development Authority versus Union of India (2006), regarding the interpretation of Article 289 of the Constitution of India as well as Section 17 of the Bihar Industrial Area Development Authority Act, 1974. The High Court observed that the Supreme Court had held that in view of the provisions of Article 289(2), even the income of the State within the meaning of Article 289(1) may be taxed by a law made by the Parliament, if such income is derived from a trade or business carried on by or on behalf of the State Government or from any connected operations.

The High Court noted that the Supreme Court had ruled that the income of the Development Authority constituted under the Bihar Industrial Area Development Authority Act was its own income and not the income of the State. The Supreme Court had observed that the said Authority managed its own funds, had its own assets and liabilities and could sue or be sued in its own name. The Supreme Court had held that even though the said Authority did not carry any trade or business within the meaning of Article 289(2), it was still an Authority constituted under an Act of the State Legislature which had a distinct legal personality. The Supreme Court had ruled that being a body corporate, the said Authority was distinct from the State. The Supreme Court had added that as per the provisions of Section 17 of the Bihar Industrial Area Development Authority Act, it was only when the said Authority had dissolved that its assets, funds and liabilities were to devolve upon the State Government. Thus, the Supreme Court had held that the income of the said Authority was not the income of the State Government.

The High Court ruled that the provisions of Section 58 of the U.P. Urban, Planning & Development Act, 1973 and Section 17 of the Bihar Industrial Area Development Authority Act, 1974 are pari materia in substance.

Thus, the Court held that the assessee Mussoorie Dehradun Development Authority, constituted under the U.P. Urban, Planning & Development Act, 1973, is a separate legal entity, having its own legal identity separate from the State. The Court added that the assessee Development Authority is a corporate body, having its own assets and liabilities. The Court ruled that it is only when the State Government passes an order dissolving the said Development Authority under Section 58 of the U.P. Urban, Planning & Development Act that the income, assets and liabilities of the assessee would vest with the State Government, and not otherwise.

Thus, the Court ruled that any fees collected by the assessee Development Authority for infrastructure development would be the income of the assessee and the expenses incurred by the assessee for infrastructure development would be deductible from the said income. Thus, the Court added that the balance would be taxable in the hands of the assessee.

The Court, therefore, dismissed the appeal of the assessee.

Case Title: Mussoorie Dehradun Development Authority versus Additional Commissioner of Income Tax & Anr.

Citation : 2022 LiveLaw (Utt) 20

Dated: 20.05.2020 (Uttarakhand High Court)

Counsel for the Appellant: Mr. Vinay Garg and Mr. Rahul Consul

Counsel for the Respondent: Mr. Hari Mohan Bhatia

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