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IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA Nos. 337, 338 & 339/Hyd/2011
Assessment Years: 2005-06, 2006-07 & 2007-08
A.P. Pollution Control Board, Dy. Director of Income-tax(E)-
Hyderabad. II, Basheerbagh, Hyderabad.
PAN - AAAJA1610Q
(Appellant) (Respondent)
Assessee by Shri Y. Ratnakar
Revenue by Shri D. Sudhakar Rao
Date of hearing 22-10-2014
Date of pronouncement 19-12-2014
O RDE R
PER SAKTIJIT DEY, J.M.:
These three appeals, all by the same assessee, are directed against separate orders of ld. CIT(A)-IV, Hyderabad for the assessment years 2005-06, 2006-07 and 2007-08.
2. As facts and issues in all these appeals are more or less common, for the sake of brevity, we will refer to the grounds and facts as involvdd in ITA No. 337/Hyd/2011. Assessee has raised the following grounds:
"1. The order of the learned Commissioner of Income tax (Appeals) IV, Hyd. dt. 30-12-2010 for the above assessment year is contrary to law and facts.
2. The appellant contends that its income amounting to Rs.32,77,52,980 for the year is not liable to tax under the provisions of the Income tax Act..2
ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd
3. The appellant contends that the income derived by it is the income of the State and is therefore not liable to tax under Article 289( 1) of the Constitution of India.
4. Without prejudice, it is contended that the activities of the appellant board constitute the functions incidental to the ordinary functions of the State and therefore, its income is immune from tax under Clause (3) to Article 289 of the Constitution of India.
5. The appellant contends that the functions performed by the appellant board fall under Article 48A of the Constitution of India which provides for protection and improvement of environment falling under the directive principles of State Policy in Part IV of the Constitution of India. The appellant therefore, contends that any income derived in the exercise of functions performed by the State or incidental to ordinary functions of the State is not liable to tax under Article 289(1) or under Article 289(3) of the Constitution of India.
6. It is contended that the appellant is an agent of the State performing the State functions falling under Article 48A of the Constitution. Hence, its income is immune from taxation.
7. It is contended that the decision of the Hon'ble Supreme Court in Adityapur Industrial Area Development Authority Vs. Union of India & Others reported in 283 ITR P.97 is inapplicable. The learned Commissioner of Income tax(Appeals) erred in mechanically in applying the said decision, without going into the distinction on the factual aspects of the actual functions exercised by the appellant board and its relationship with the ordinary functions of the State.
8. Without prejudice, it is also contended that the appellant board is entitled to approval uls 10(23C)(iv) of the LT Act and its income is also exempt under the said provisions as the appellant board fulfills all the requisite conditions specified for approval under the said section 10(23C)(iv).
9. It is contended that the calculation of income is not correct. The correct figure of Income should be Rs. 1 9,46,56,4701- against Rs.32,77,52,9801- mentioned in the Assessment order. Likewise the calculation of tax payable including interest at Rs.16,87 ,27 ,233/- is not correct. The correct amount of tax including interest is Rs.IO,22,13,334/-.
10. The appellant contends that the levy of interest u/s 234A/B of the IT Act is not correct and the appellant denies its liability for levy of such interest amounts.
3ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd
11. The appellant craves leave to add, amend or alter any of the aforesaid grounds as the occasion may require.
12. For these and other reasons that may be urged at the time of hearing, it is prayed that the income of Rs. 19,46,56,470.00 be exempt from tax and the appeal be allowed. "
3. In addition, assessee has raised two more additional grounds, which are more or less off-shoots of ground No. 9. As can be seen from the grounds raised, ground Nos. 1, 2 & 11 being general in nature, do not require any specific adjudication. Ground No. 3 to 7 are on the issue of immunity from taxation under Article 289(1) of the Constitution of India, whereas ground No. 8 is against rejection of exemption claimed u/s 10(23C)(iv) of the IT Act. In ground No. 9 along with the additional ground, assessee has contested the determination of income at Rs. 32,77,52,980 as against Rs. 19,46,56,570 and ground No. 10 is in respect of levy of interest u/s 234A and 234B of the Act.
4. Briefly the facts are, assessee earlier known as Andhra Pradesh State Board for Prevention and Control of Water Pollution is a statutory authority created by the Govt. of Andhra Pradesh with effect from 24/01/1976 in exercise of power conferred by section 4(1) of water (prevention and control of pollution) Act, 1974. Subsequently, after enactment of AIR (prevention and control of pollution) Act, 1981 by the Parliament, the name of the Board was changed to AP Pollution Control Board. Till AY 2002-03, assessee claimed exemption u/s 10(20) of the Act, as a local authority. However, after amendment to the definition of local authority u/s 10(20) with effect from 01/04/2003, by Finance Act, 2002, assessee became liable to pay income-tax. Since assessee failed to file any return of income, even after it became liable to pay tax, AO initiated action u/s 147 of the Act by issuing a notice u/s 148 on 31/10/08 calling upon assessee to submit return of income for AYs. 2004-05 to 4 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd 2008-09. In response to the notice issued u/s 148, assessee filed its return of income for impugned AY on 04/12/2008 on the basis of unaudited accounts. Subsequently, assessee filed revised return along with statutory audit reports on 04/06/09. AO observed that revised return can only be filed when the omission was not within the knowledge of assessee. As assessee was well aware that the accounts were not audited by the respective due dates, the revised returns filed are not valid in law, therefore, AO ignored both the original as well as revised returns of income. In course of assessment proceeding, AO while examining the details of receipts and payments of assessee during the year, observed that assessee has applied very meager amount towards the objects for which it is created i.e. prevention and control of pollution and almost no amounts were spent for regulation or for punishing the culprits who violated the norms of pollution control. AO observed that though the assessee claims its activities to be pure charitable nature but in reality assessee has not undertaken any such activity. AO observed that during the year assessee has shown receipts of Rs. 33,23,75,784 together with opening balance of Rs. 25,38,05,153, thus, the total funds available at the hands of assessee for the year under consideration was about Rs. 58 crores, out of which, the amounts applied for various environmental schemes and their percentage to the available funds were found to be as under:
Sl.No. Particulars Actual for Percentage
2004-05 of available
funds
1 Hazardous waste 0 0
management
2. Air Quality surveys and 3,99,17 0.067
display/reports
0
3. Automobile pollution 0 0
control
4. Noise survey in cities & 0 0
industrial estate
5. Water quality survey, 2,60,803 0.043
monitoring & reporting
5
ITA Nos. 337, 33 8, 339/Hyd /2011
A.P. Pollution Co ntrol Boa rd
6. Bio-medical waste 1,12,13 0.019
management
0
7. Clean & Green 0 0
programme
8. Environmental 14,84,5 0.247
awareness programmes
54
9. Environmental Research 3,25,00 0.054
Programmes
0
10. Implementation of solid 0 0
waste management
11. Implementation of plastic 0 0
waste management
12. Mobile Exhibition 9,09,46 0.152
9
13. NAAQM & SAAQM 64,108 0.011
14. Laboratory maintenance 57,17,0 0.953
(glassware, chemicals
17
etc.)
15. Seminars & Conferences 5,46,17 0.091
8
16. World environment day 11,42,1 0.190
01
17. Training programme 1,98,54 0.033
0
18. Exhibition expenses 58,444 0.009
19. Environmental zoning - 10,00,000 0.167
GIS
Grand Total 1,22,17,514 2.036
PAYMENTS - CENTRAL SCHEMES
Sl. Particulars Actual for Percentage
2004-05 of available
No.
funds
1 Geo-reference of industries 69,99,266 1.67
under world bank - IPP
2. Hyderabad waste management 0 0
project TSDF II (for
incinerator)
6
ITA Nos. 337, 33 8, 339/Hyd /2011
A.P. Pollution Co ntrol Boa rd
3. Clean process technology 17,51,938 0.29
schemes - water cess funds
4. Financial assistance to the 0 0
municipalities for
establishment of STPs/Solid
Waste Management - water
cess funds
5. Ecocity TUDA 3,18,300 0.053
6. Common Effluent treatment 0 0
plant
7. Real Time Qir Quality 0 0
Monitoring Stations
8. Financial assistance 5,10,819 0.085
workshop/roadshow
9. National air quality monitoring 31,463 0.005
10. Model facilities MSW - 0 0
Suryapet Municipality
Grand Total 96,11,786 2,103
REVENUE EXPENDITURE
Sl.No. Particulars Actual for 2004- Percentage
05 of available
funds
1 Salary and 3,60,75,365 6.00
allowances
2 to Other expenditure 5,41,59,535 9.00
48
Total 9,02,34,900 15.00
5. On analyzing the data as appearing in the tables, AO observed that the amount spent towards salaries is three times more than the amounts used for the schemes formulated by the board. It was also noted by AO that the total revenue expenditure is 15% of the available funds and the total amounts applied for various schemes is only 2%. According to the AO, establishment expenditure is approximately 8 times the amounts applied for various schemes. On examining the balance sheet as on 31/03/05, he noticed that the total FDs amounted to Rs. 42.4 crores. Thus, about 70.67% of the available funds was simply lying in the banks as FDs, instead of being 7 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd utilized in regulatory and enforcement activities for which assessee was created. AO was of the view that the activities pertaining to the schemes formulated by assessee as well as central govt. are not exactly in tune with the statutory functions of the assessee board as contained in section 17 of Water (prevention and control of pollution) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, which are mainly advisory and inspection related functions. AO after taking into account certain provisions of the concerned Acts, noted that though the assessee board is vested with various powers to prevent and control pollution of water and environment but in a number of instances, the board is found to have failed in enforcing/preventing the violations. In this regard, AO also referred to few instances of violation committed by certain institutions/ establishments. AO also referred to the report submitted by C&AG wherein various lapses/inactions of the board in enforcing the provisions of Act were pointed out. Though, assessee claimed that the provisions of AP Charitable and Hindu Religious Endowments Act, 1987 is not applicable, as the Board cannot be termed as a public charitable institution or endowment, but, AO rejected such submissions of assessee. Finally, AO having noticed the fact that the assessee is neither registered u/s 12AA of the Act, nor approved u/s 10(23C)(iv), held that it is not eligible for availing exemption either u/s 11 or u/s 10(23C(iv). Accordingly, AO treated the surplus of Rs. 33,77,52,980 as income of assessee for the impugned AY. Being aggrieved of the assessment order so passed, assessee preferred appeal before ld. CIT(A).
6. Before the first appellate authority, assessee apart from challenging the disallowance of exemption claimed u/s 10(23C) also raised additional ground claiming immunity from taxation under article 289 of the Constitution of India. As far as the issue raised in additional ground is concerned, ld. CIT(A) called for a report from AO on the issue. Ld. CIT(A) after considering the submissions of 8 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd assessee in the context of the facts and materials on record, found that AO has basically assessed the income at the hands of assessee for the following reasons:
"i) that the appellant board does not have registration under sec. 12A for the year,
ii) That the appellant board does not have requisite approval u/s 10(23)(vi) for the year,
iii) That it had huge surplus and the unspent funds were kept in FDs, showing that its income was not being utilized towards the avowed charitable objects,
iv) That the board is not registered u/s 43(1) of the AP Charitable and Hindu Religious Institutions and Endowments Act, 1987."
Ld. CIT(A) did not approve the view of AO that only because assessee has not spent substantial part of its income for the objects of prevention and control of pollution and has earned surplus in the respective AYs, the character of the assessee is non-charitable. He also observed that the expenditure incurred towards salaries of the staff cannot be considered to be towards purposes beyond the aims and objects of the board. Ld. CIT(A) observed that considering the nature of functions to be performed by board which is of regulatory, advisory and technical in nature, it has to be performed with the help of officers and staff having requisite technical and scientific qualification. Therefore, payment of salary cannot be a disqualifying factor as far as claim of exemption is concerned. Ld. CIT(A) also observed that the observations made by C & AG being in the nature of guidance could not have been considered as basis for denying exemption either u/s 11 or u/s 10(23C)(vi) of the Act. However, ld. CIT(A) noted that assessee is neither registered u/s 12AA nor approved under section 10(23C)(vi). Therefore, assessee's claim of exemption either u/s 11 or u/s 10(23C) cannot be entertained. As far as assessee's claim of immunity from taxation under article 289(1) of the Constitution of India, ld. CIT(A) observed that assessee was no more a local authority for the purpose of income-tax act, after amendment to section 10(20) w.e.f. 01/04/2003. At the same time, 9 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd assessee is not a part of the state itself. Ld. CIT(A) observed that assessee is a distinct legal entity. Hence, income of assessee cannot be said to be the income of the state so as to prevent such income from union taxation. Ld. CIT(A) observed that the income generated by assessee does not go to the coffers of the state directly and even does not remain as income of the state. Though, assessee's funds might have been spent as per the directions of the state govt. but the same remain as the fund of assessee board and not of the state govt. Ld. CIT(A) analyzing the provisions of article 289(1) of the Constitution of India observed that what is exempt from union taxation is the income of the state and not the income of any authority under the state. Ld. CIT(A) observed, if the government exercises its power to dissolve the board, then the properties, funds, debts, etc. of the board devolve thereafter upon the state govt. Till the time of such dissolution all of those belong to assessee itself and not to the state. Ld. CIT(A) referring to the decision of Hon'ble Supreme Court in case of Adityapur Industrial Area Development Authority Vs. Union of India and others, 283 ITR 97, held that even if assessee board has been constituted by the state govt. with a view to fulfill the state obligation under article 48A of the Constitution of India, that fact alone is not sufficient to conclude that income of assessee is the income of state itself, so as to exempt it from union taxation as per article 289 of the Constitution of India. Ld. CIT(A) was of the view that the activities carried on by assessee cannot even be said to be as business or trade or any operation of that nature on behalf of the state govt. Even otherwise also, if the operations of the assessee were to be treated to be in the nature of trade or business as the parliament has not made any specific provision regarding taxation of income derived there from, the income earned by assessee will not be immune from taxation. Ld. CIT(A) opined that assessee being an independent legal personality distinct from the state and till such time the income earned by assessee goes to its own funds and not to the state coffers, the income earned by assessee will not be free from taxation 10 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd under article 289 of the Constitution of India. Accordingly, he rejected assessee's claim of exemption under article 289.
7. As far as assessee's claim of exemption u/s 10(23C(vi) is concerned, ld. CIT(A) noted that the Chief Commissioner of Income- tax vide order dated 10/12/2009 has rejected assessee's claim of approval u/s 10(23C)(vi). However, considering the fact that assessee has filed writ application challenging the order of CCIT, which is still pending in the jurisdictional High Court, he directed the AO to ascertain present status and decide the issue in accordance with the directions of Hon'ble High Court while deciding the writ application. Being aggrieved of the aforesaid order of the ld. CIT(A), assessee is before us.
8. The ld. AR in his written submission submitted before us under Article 39(e) of the Constitution of India, State is to secure the health and strength of workers men and women and ensure that they are not abused. He submitted, under Article 48A the state shall endeavour to protect and improve the environment and to safeguard the forest and wild life of the country.
8.1 In addition to the above, ld. AR submitted that the following are essentially state functions.
a) Prevention and control of water pollution and maintaining or restoring the wholesomeness of water.
b) Prevention, control and abatement of air pollution and giving effect to decisions taken and United Nations Conference and Human Environment, Preservation of natural resources of the earth which includes quality of air and control of air pollution.
8.2 Thus, he submitted that the appellant board is constituted to discharge the above functions. It was submitted that the above 11 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd functions are not those which non-state or private bodies can take up. The State cannot allow the above functions to be discharged by any private entity. These functions can only be discharged by the State or any one appointed by it on its behalf to discharge the above state functions.
8.3 It was submitted that the above state functions should be distinguished from any commercial activity which a state can take up on its own or even a private body can also take up. Therefore whether the function discharged is a pure state function or not, or is a commercial activity, depends upon the function that is sought to be discharged.
8.4 Referring to the effect of Article 289 of the Constitution of India, ld. AR submitted as under:
i) Levy of tax on the state income is governed by Article 289 of the Constitution of India. An analysis of the above article reveals the following position.
ii) All income derived by the state is exempt. The income could be from an activity which is totally non-commercial purely to be discharged by the state or a commercial activity which a state can carry on just as any private entity can discharge;.
iii) On several occasions, a state takes up a commercial activity just as any private entity can also take up. There is no bar under the Statute from State taking up any commercial activity. If a State takes up a commercial activity and derives any income, the income so derived is immune from union taxation under article 289( 1 ) of the Constitution of India.
iv) At the same time it is open to the union to impose any tax in respect of any profit derived in any such trade or business, if 12 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd the Parliament by law so provides. Even in the case of any such income derived from trade or business run by the state, if the Parliament by law declares that it is incidental to an ordinary function of the Government, it will not be liable for taxation. The effect of Article 289 of the Constitution of India can be summarized as under:
a) all income of the state be it from a commercial or a non-
commercial or a welfare activity of a State is exempt from union taxation;
b) in respect of any income derived from trade or business carried on by the state, the Parliament may by law, impose any tax;
c) If the Parliament declares that any trade or business carried on by the state to be incidental to the ordinary functions of the Government, then also tax cannot be imposed from such activity of trade;
8.5. It is submitted that the taxability of any income derived by the state depends upon the following factors:
a) is it a pure state function;
b) is it a commercial activity taken up by the state;
c) is it a pure state function entrusted to a statutory body
under its control (not being a commercial activity); and
d) is it a function entrusted to a statutory body under its control and which can also be taken up by any non-state entity (or private entity);
It is submitted that the legal position of taxability changes with reference to the category into which the function discharged by the State falls.
8.6 In this context, ld. AR referred to the functions discharged by the appellant board, which are as under:
13ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd
a) The appellant board does not carry on any business.
b) The appellant board does not indulge in any commercial activity. It is only a regulatory body.
c) The functions discharged by the appellant board can only be discharged by the state and by no one else.
d) The persons ultimately accountable for the appellant board's functioning is the state itself, though for the purpose of formality the Board is run by the Members appointed by the Government.
e) The appellant board is vested with powers which only a state can discharge and not any private entity or a private organization.
f) The functions to be discharged by the Board are set out in the Water (Prevention and Control of Pollution) Act, 1974 and The Air (Prevention and Control of Pollution) Act, 1981.
g) It is not as if anyone can discharge these functions. The state is not acting as a complimentary body to any non-state or private entity or organization discharging similar functions.
8.7. Ld. AR objecting to reliance placed by CIT(A) on the decision of Adityapur Industrial Area Development Authority (supra), submitted that there is a distinction between the appellant body and the case relied on by the Commissioner of Income tax(Appeals).
8.8. It was submitted, in Adityapur Industrial Area Dev. Authority, a body corporate was constituted under the Bihar Industrial Area Dev. Authority Act, 1974 to provide for planned development of industrial area for promotion of industries and connected matters. This is essentially a commercial activity. This activity can also be undertaken by any non-state or private organization, providing planned development of industrial area and to promote industries. This is a subject which is not exclusively a state function. It is one thing to 14 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd state, that a state can carry on the activity, but altogether different to state except the state no one can else carry on the activity. This is also not an activity mandated to be done only by the state under the Constitution of India or by statute. The Development Authority is not Cl regulatory body. The Development authority is merely acting as a complimentary body to the activity of promotion of industries which is also undertaken by private players. Therefore, the judgment of the Hon 'ble Supreme Court should be understood in the light of the nature of activity that is sought to be discharged by the Development authority constituted under the Bihar State Act which is a commercial activity, though by itself the authority may not be carrying on any trade.
8.9. Ld. AR submitted, it may be true that the Adityapur Industrial Area Development Authority in carrying out its functions may not be carrying on any trade or business. Yet the fact remains even a private entity can take up similar activity. This is not the case in the A.P.Pollution Control Board.
8.10. Referring to the decision of the Hon'ble Supreme Court in A.P. State Road Transport Corpn.Ltd. Vs. ITO (52 ITR 524). Here again carrying on transport business is not the prerogative of the State alone. It was submitted, in Adityapur Industrial Area Dev. Authority as well as the A.P.State Road Transport Corpn. Ltd. the activity carried on is an activity which even a private or non state entity can carry on and unlike the present case does not fall within the exclusive domain of the state activity.
8.11 Ld. AR submitted, a ratio of a decision cannot be applied without looking into the factual aspect. In this context, he relied upon the decision of the Hon'ble Supreme Court in Commissioner of Central Excise, Bangalore V.Srikumar Agencies (2009) 1 SCC 469 (SC) and a number of other decisions as referred to in the written 15 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd submission.
8.12. It was submitted that assessee is only an agent appointed exclusively for carrying out the state function or the state obligation mandated by the Constitution of India as well as by the statute. If the veil of the assessee board is lifted, it would be seen that the state is the person running and controlling the board. It is state which performs the obligation through an agent appointed exclusively for the purpose. To substantiate the aforesaid contention, ld. AR referred to various provisions of the Water (prevention and control of pollution) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, 8.13. Ld. AR submitted, the fact that assessee board shall have its own funds, does not make any difference if it is acting as an exclusive agent of the state for performing a state function or a state obligation which falls wholly in the realm of state domain. This distinction may be relevant in all cases where the functions performed by the state can also be performed by a non state agent as the functions do not fall exclusively within the state domain. This distinction is vital and makes all the difference in determining whether the income derived by the appellant board can be said to be a state income falling within the provisions of Article 289( 1) of the Constitution of India.
9. The ld. DR on the other hand strongly supporting the finding of the ld. CIT(A) on the issue submitted that assessee being a distinct legal entity separate from the state govt., the income derived by assessee cannot be considered to be the income of state govt. thereby making it immune from taxation under article 289(1) of the Constitution of India. Ld. DR submitted that neither the funds of assessee are the funds of the state govt. or the fees received by it is the income of the state. He submitted that as the income derived by assessee goes to enhance its own funds and not to the state govt. the income generated will not be the income of the state govt. To 16 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd substantiate such contention, ld. DR brought to our notice the provisions contained under Chapter VI of water (Prevention and control of pollution) Act, 1974. Thus, in sum and substance, ld. DR submitted that as assessee is a distinct legal entity separate from the state govt. and income of assessee also goes to its own kitty not to the state, it cannot be said that the income earned by assessee being the income of state govt. is exempt from taxation under article 289(1) of the Constitution of India. In support of such contention, ld. DR relied upon the following decisions:
1. AP State Road Transport Corporation Vs. CIT, 52 ITR 524 (SC)
2. Adityapur Industrial Development Authority, 283 ITR 97
3. AP Housing Board Vs. DCIT, ITA No. 717/H/12 and others, dt. 31/05/13
10. In rejoinder, ld. AR submitted that the principle decided by the ITAT, Hyderabad Bench in case of AP Housing Board (supra) will not apply to the facts of assessee's case because the act performed by the present assessee can only be performed by the state alone and not by anyone else. It was submitted that AP Housing Board is a commercial organization as it is engaged in the activity of purchase and sale of land, construction of houses and sale of the same. It receives money for the services rendered like any other business undertaking. It was submitted, the activity carried on by Housing Board can also be carried on by any other person and the nature of activity is also not something which only a state can alone take up and no one else. Further, the activity is carried on by a separate entity created and controlled by the state but not by the state itself. Ld. AR explaining the exact nature of activities carried on by the board and the fee received submitted that the activities carried on by assessee can only be carried on by the state or its agent and not by anyone else. It was submitted, the nature of receipt also will show that the functions performed by the board are only state functions and 17 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd no private player is entitled to charge such fee from industries. The board does not render any services to the persons paying such fee. Therefore, the character and nature of receipts of the board indicate that it is working only as an agent or an extended arm of the state and not like any corporation established for carrying out the activities which even a non-state actor or any private institution can carryout. It was submitted that the board does not owe any obligation to any person or institution or industry for receiving any money. The beneficiaries of the activities of the board are public at large or the citizens of the state. It was submitted that the activity undertaken by the board is a welfare activity which a welfare state undertakes in discharge of its duties towards its objects. The board does not carry out any business or commercial activity. Thus, it was submitted that as the activity carried on by the board is of such a nature which the state alone can carry on the income generated/derived from such activity has to be treated as income of the state govt.
11. We have considered the elaborate submissions made from both sides and perused the orders of the departmental authorities as well as other materials on record. We have also carefully applied our mind to the decisions relied upon by the parties before us. At the outset, we need to observe that though the assessee board was created with effect from 24/01/1976 as Andhra Pradesh State Board for the Prevention and Control of Water Pollution and subsequently rechristened as Andhra Pradesh Pollution Control Board after enactment of the AIR (prevention and control of pollution) Act, 1981, but, the assessee board never claimed immunity from payment of income-tax under article 289 of the Constitution of India. Only after assessee lost the claim of exemption u/s 10(20) of the Act, by virtue of amendment to the definition of the expression local authority w.e.f. 01/04/2003 and it failed in its attempt, either in getting approval u/s 10(23C)(vi) or being registered u/s 12AA of the Act for the impugned AY, as a last resort it staked its claim of immunity from payment of 18 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd income-tax under article 289 of the Constitution of India, that too at the stage of proceeding before the first appellate authority. It is a fact on record that during the assessment proceeding also for the impugned AY, assessee never claimed that its income is exempt from taxation by virtue of article 289(1) of the Constitution of India. Be that as it may, the issue before us is whether the income of the assessee board can be said to be the income of the state govt. so as to get immunity from taxation under article 289(1) of the Constitution of India. In this regard, it is the submission of assessee that as the activities carried on by assessee is of such a nature which the state alone can carry on and no other person or organization can carry on such activity, the income derived by assessee while carrying out such activity has to be treated as the income of the state. In this context, ld. AR has taken us through various provisions of the Water (prevention and pollution control) Act, 1974 and AIR (prevention and control of pollution) Act, 1981, to submit that the activity carried on by assessee board under the said provisions is only as an agent or extended arm of the state. Hence, the income of the board has to be treated as income of the state govt. Before deciding the validity of the aforesaid claim of assessee, it is necessary to look into the provision contained under article 289(1) of the Constitution of India, which is extracted hereunder for the sake of convenience:
"Exemption of property and income of a State from Union taxation (1) The property and income of a State shall be exempt from Union taxation (2) Nothing in clause ( 1 ) 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 for the purposes of such trade or business, or any income accruing or arising in connection therewith (3) Nothing in clause ( 2 ) shall apply to any trade 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."19
ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd
12. On careful analysis of Article 289, extracted above, it is to be observed, the said article is divided into three parts. Clause (1) of Article 289 says that the property and income of State shall be exempt from union taxation. Article 289(2) however provides that nothing in clause(1) shall prevent the union from imposing and authorizing 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 or State, or any operation connected therewith, or any property used or occupied for the purpose of such trade or business, or any income accruing or arising in connection therewith. Article 289(3) provides that nothing in clause(2) shall apply to any trade or business or to any class of trade or business, which parliament may by law to be incidental to the ordinary functions of government. Thus, a plain reading of the aforesaid clauses of Article 289 makes it clear that they are independent of each other and speaks of three different situations.
13. On a perusal of The Water (prevention and control of Pollution) Act, 1974, it is to be noticed that section 4 of the said Act empowers the state govt. to constitute a state pollution control board through a notification published in the official gazette for exercising such powers and functions as may be assigned to the board under the Act. Similarly, section 4 of The AIR (prevention and control of pollution) Act, 1981, provides that state pollution control boards constituted under section 4 of the water (prevention and control of pollution) Act, 1974 shall be deemed to be the state board for the prevention and control of air pollution. Further, other provisions of both the aforesaid Acts does not leave any room for doubt that the state govt. exercises control over the functioning of the board, but at the same time, section 37 of The Water(prevention and control of pollution) Act, 1974 makes it clear that the board shall have its own fund constituted by the sums paid by the state govt. and all other receipts by way gifts, 20 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd grants, donations, benefactions, fee or other wise shall be carried to the fund of the board and all payments by the board shall be made there from. It further provides that the board may expend such sums as it thinks fit for performing its functions under the Act and such sums shall be treated as expenditure payable out of the fund of the board. Section 37A also empowers the board to borrow money from any source by way of loans or issue of bonds debentures or such other instruments as it may deem fit for the performance of any of its functions under the Act, but, of course with the consent of the or the authority given by the Central or State govt. Section 38 provides that the board for each financial year shall prepare its own budget showing estimated receipt and expenditure for the next FY and copy of the said budget shall be forwarded to the Central/State Govt. From the aforesaid provisions, it becomes abundantly clear that the income generated by the board which goes to constitute its own fund does not go to the consolidated fund of the state and is distinct and separate from the fund of the state govt. Section 62 of The Water (prevention and control of pollution) Act, 1974 empowers the state govt. to supersede the state pollution control board, if it is of the opinion that the state board has persistently made defaults in the performance of the functions imposed on it by or under the Act or circumstances exist which render it necessary in the public interest to do so. Only upon supersession of the state board the state govt. takes over all the powers and functions and duties performed by the state board and also property owned or controlled by the board shall vest in the state govt. Therefore, from the aforesaid provision, it becomes clear that until supersession of the state board, not only it retains its distinct and independent identity but also the funds and property of the board also remains in its possession.
14. Therefore, examining the aforesaid facts vis-à-vis the provisions contained under Article 289 of the Constitution of India, it is evident that the powers/functions exercised by the board cannot be 21 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd considered to be in the nature of trade or business. Therefore, clause (2) and (3) of Article 289 may not be applicable to the facts of assessee's case. The only provision under which assessee can possibly claim immunity from taxation is clause (1) of Article 289. On a plain reading of the said clause, it is clear that only property or income of state is exempt from union taxation. The expression 'income of a state' as incorporated under Article 289(1) has to be interpreted to mean, the income of the state govt. itself and not the income of some authority other than the state, such as statutory authority or board which is a independent/separate juristic entity, even though it may be owned or controlled by the state govt. As we have stated earlier, provisions of both the water (prevention and control of pollution) Act, 1974 and Air (prevention and control of pollution) Act, 1981, make it clear that the funds of the board are its own funds and does not belong to the state govt. Only in case of supersession of the board, the property of the board vests with the state govt. Therefore, until such supersession the fund of the board is distinct from the fund of state govt. Considered in the aforesaid perspective, the income/receipts of the Board cannot be considered to be the income/receipts of the state govt. It also cannot be disputed that assessee is an independent/separate juristic entity distinct from the state govt., though, the state may be exercising control over the board. Further, the facts and materials on record also make it clear that the income/receipts of the board remain as its own funds and not transferred to the coffers of the state govt. In the aforesaid facts and circumstances when the income/receipts of the board remain with the board itself and not transferred to the state govt. such income/receipt has to be considered as income/receipt of the board and not of the state govt. Therefore, such income/receipt cannot be immune from taxation under article 289(1) of the Constitution of India.
15. The Hon'ble Supreme Court in case of Adityapur Industrial (supra) while examining provisions under Bihar Industrial Area 22 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd Development Authority, 1974 which are akin to section 37 and 62 of The Water (prevention and control of pollution) Act, 1974 observed as under:
"Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly s. 17 thereof, we have no manner of doubt that the income of the appellant/Authority constituted under the said Act is its own income and that the appellant/Authority manages its own funds. It has its own assets and liabilities. It can sue or be sued in its own name. Even though, it does not carry on any trade or business within the contemplation of cl. (2) of Art. 289, it still is an Authority constituted under an Act of the legislature of the State having a distinct legal personality, being a body corporate, as distinct from the State. Sec. 17 of the Act further clarifies that only upon its dissolution its assets, funds and liabilities devolve upon the State Government. Necessarily therefore, before its dissolution, its assets, funds and liabilities are its own. It is, therefore, futile to contend that the income of the appellant/Authority is the income of State Government, even though the Authority is constituted under an Act enacted by the State legislature by issuance of a notification by the Government thereunder."
16. The Hon'ble Supreme Court after analyzing the provisions contained under article 289 as a whole and taking note of the principles laid down by the Hon'ble Supreme Court in case of AP State Road Transport Corpn. Vs. ITO (52 ITR 524) observed as under:
"Considerable reliance was placed on the principles laid down in the aforesaid decision by learned counsel appearing for the Union of India. He submitted that having regard to the provisions of the Act under which the appellant/Authority is established, the same conclusion may be reached. In particular, emphasizing the fact that as in Andhra Pradesh State Road Transport Corporation case (supra), so in the instant case as well, s. 17 of the Act provides that upon dissolution of the appellant/Authority, the properties, funds and dues realizable by the Authority along with its liabilities shall devolve upon the State Government. Impliedly, therefore, such properties, funds and dues vest in the Authority till its dissolution, and only thereafter it vests in the State Government. He also referred to various other provisions of the Act and submitted that there was nothing in the Act which attempted to lift the veil from the face of the corporation. Even though the Authority was created under an Act of the legislature, it was still an Authority which had a distinct personality of its own, having perpetual succession and a common seal, with powers to acquire, hold and dispose of property, and to contract, and could sue and be sued in its own name. Shri Venugopal, on the other hand, tried to distinguish the judgment on the ground that the Andhra 23 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd Pradesh Road Transport Corporation is being run on business lines, and a corporation that runs on business lines is distinguishable and different from a corporation which is not run on those lines. Even if such a distinction is drawn, that will not have the effect of making the income of the corporation the income of the State Government having regard to the other features noticed above."
The Hon'ble Supreme Court finally held that exemption can be claimed under Article 289(1) of the Constitution of India only if the income can be said to be the income of the state govt.
17. Considered in the light of the ratio laid down by the Hon'ble Supreme Court as aforesaid and facts involved in the present appeal, under no circumstances it can be held that the income/receipts of the assessee is that of the state govt.. This is because, not only assessee is a distinct and separate legal/juristic entity but funds of the assessee also belong to assessee. Though, the learned AR has tried to impress upon us that the principles laid down in case of Adityapur Industria. (supra) will not be applicable to assessee, but, we are unable to agree with the same. In our view, the principles laid down by the Hon'ble Supreme Court squarely applies to the facts of the case of assessee. While dealing with identical issue in case of AP Housing Board (supra), a coordinate bench of this Tribunal has held that Housing Board being a separate juristic entity, income derived by it cannot be considered to be the income of the state under article 289 of the Constitution of India.
18. The entire issue can also be looked into from another angle. As can be seen till AY 2002-03, assessee had been claiming exemption u/s 10(20) by treating itself to be a local authority. Moreover, assessee has also applied for registration u/s 12AA of the Act as a charitable institution and has also been granted such registration in pursuance to the directions of the ITAT. Furthermore, it is a fact on record that assessee has also applied for approval u/s 10(23C)(iv) of the IT Act, and approval has also been granted to assessee from AY 24 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd 2009-10 onwards. From the aforesaid facts, it becomes clear that assessee by its own actions considers itself to be a separate legal entity distinct from the state govt. That being the case, the income/receipts of the board has to be treated as its own income and not of the state govt. In the aforesaid facts and circumstances, we agree with the ld. CIT(A) that assessee cannot get immunity from taxation under article 289 of the Constitution of India.
19. As far as the next issue relating to claim of exemption u/s 10(23C)(iv) of the Act is concerned, considering the fact that assessee's writ application is pending before the Hon'ble Jurisdictional High Court, we uphold the directions of the ld. CIT(A).
20. Now coming to the issue raised in ground No. 9 read with additional grounds, ld. AR has submitted before us that the actual receipts as per the revised return is Rs. 19,46,56,470 as against Rs. 32,77,52,980 considered by AO. After considering the submissions of assessee vis-à-vis the facts and materials on record, we direct the AO to verify this aspect and adopt the correct figure after affording a reasonable opportunity of being heard to assessee in the matter.
21. As far as levy of interest u/s 234A and 234B is concerned, such interests being automatic and mandatory, we do not find any reason to interfere with the same.
22. In the result, assessee's appeal is partly allowed for statistical purposes.
23. As the grounds, facts and circumstances relating to claim of exemption under Article 289(1) of Constitution of india or u/s 10(23C) of the Act are materially identical in ITA Nos. 338 & 339/Hyd/2011 for AYs. 2006-08 and 2007-08 respectively to that of ITA No. 25 ITA Nos. 337, 33 8, 339/Hyd /2011 A.P. Pollution Co ntrol Boa rd 337/Hyd/2011 (supra), following the decision therein, we uphold the orders of ld. CIT(A).
24. To sum up, all three appeal of assessee in ITA No. 337/Hyd/2011 is partly allowed for statistical purposes and in ITA Nos. 338 & 339/Hyd/2011 are dismissed.
Pronounced in the open court on 19/12/2014.
Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 19 th December, 2014
kv
Copy to:-
1) A.P. Pollution Control Board, Pariayavaran Bhavan, A3, Indl. Estate, Sanatnagar, Hyderabad
2) DDIT(E)-II, Basheerbagh, Hyderabad - 500 004
3) CIT(A)-IV, Hyderabad
4) DIT(E), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.