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The Supreme Court has held that the New Okhla Industrial Development Authority (NOIDA) is not a local authority for the purpose of availing tax exemptions under Section 10 of the Income Tax Act (IT Act), 1961, after the enactment of the Finance Act of 2002.
NOIDA had approached the Supreme Court against IT assessment notices issued to them in 2003, after the Allahabad High Court dismissed their case in 2011.
The Bench of Justices AK Sikri and Ashok Bhushan however upheld the High Court’s decision and clarified that the Revenue Department is not barred from taxing NOIDA after the amendments brought in by the Finance Act of 2002.
Senior Advocate Balbir Singh appeared for NOIDA, whereas Senior Advocate K Radhakrishnan argued for the Revenue Department.
NOIDA was created in 1976 vide the UP Industrial Area Development Act for the purpose of developing areas under its jurisdiction into an industrial and urban township.
Accordingly, it is also endowed with necessary administrative functions over the area, including the levy of tax. In 2001, the Governor had also issued a notification under Article 243Q (1) of the Constitution, specifying NOIDA to be an “industrial township”.
This being the case, NOIDA claimed that it has assumed the character of a local authority and was therefore eligible for tax exemption as provided for under Section 10 of the IT Act. Section 10(20) lays down that income arising from a local authority is excludible for the purpose of filing income tax.
Prior to 2003, Section 10(20) did not define the term local authority in exhaustive terms. Further, the definition of local authority in Section 3(31) of the General Clauses Act was broad enough to cover NOIDA within its purview.
Moreover, Section 10 (20A) allowed tax exemptions for authorities dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages. NOIDA fell within this definition.
Accordingly, NOIDA was able to claim tax exemption up till 2003. A 2002 Allahabad High Court judgement had also endorsed this view while dismissing IT notices issued by the Revenue Department in 1998.
However, this 2002 verdict only found that NOIDA cannot be taxed in view of Section 10(20A). It did not go into the question of whether NOIDA is a local authority under Section 10(20).
Changes brought in by the Finance Act, 2002
The Finance Act of 2002 brought in two crucial amendments to Section 10 of the IT Act, whereby it restricted the scope of “local authority” for the purpose of claiming income tax exemption.
First, it introduced an Explanation to Section 10 (20) of the IT Act, which defined four categories of “local authorities” eligible to claim income tax exemption. After this amendment, an entity would qualify as a local authority, only if it fell under one of the following categories, i.e.
Secondly, it deleted Section 10(20A) of the Income Tax Act.
This in turn prompted the Revenue Department to issue tax assessment notices under Section 142 of the IT Act to NOIDA in 2003. These notices formed the subject matter of challenge before the Court.
Supreme Court judgment
The question before the Supreme Court was whether NOIDA is a local authority within the meaning of Section 10(20) as amended by Finance Act, 2002 w.e.f. 01.04.2003?
The Court has answered this question in the negative, on a strict interpretation of the amended Section 10(20) of the IT Act.
As noted above, after the 2002 Finance Act, the tax exemption under Section 10(20) was restricted to the Panchayats and Municipalities as referred to in Articles 243P(d) and 243P(e) of the Constitution.
On its part, NOIDA contended that it was still eligible to be exempt from taxation as a local authority, under Article 243 (e), therefore falling under sub clause (ii) of the newly added explanation to Section 10(20). The Court however disagreed, holding that,
“It is true that various municipal functions are also being performed by the Authority as per Act, 1976 but the mere facts that certain municipal functions were also performed by the authority it cannot acquire the essential features of the Municipality which are contemplated by Part IXA of the Constitution.”
This was based on the observation that NOIDA is not an institution of self-government, as per the definition of a Municipality under Article 243P.
Referring to the Governor’s notification made under the proviso to Section 243Q(1), the Court noted that the proviso only lays down that industrial establishment may be notified by the Governor where a municipality cannot be constituted. This does not mean that the industrial establishment (in this case, the industrial township) is akin to a municipality. As stated in the judgment,
“Thus, proviso does not contemplate constitution of an industrial establishment as a Municipality rather clarifies an exception where Municipality under clause 22 (1) of Article 243Q may not be constituted in an urban area…The words ‘industrial township’ have been used in contradiction of a Nagar Panchayat, a Municipal Council and a Municipal Corporation.
…exemption from constituting Municipality does not lead to mean that the industrial establishment which is providing municipal services to an industrial township is same as Municipality as defined in Article 243P(e)…
…Thus, notification under proviso to Article 243Q(1) is not akin to constitution of Municipality. We, thus, are clear in our mind that industrial township as specified under notification dated 24.12.2001 is not akin to Municipality as contemplated under Article 243Q.”
In light of this finding and given that Section 10(20A) of the IT Act has been deleted, the Court ultimately concluded that NOIDA is a taxable entity after the Finance Act, 2002. Consequently, the appeals filed by NOIDA were dismissed.
Read the judgment: