1. The appellant is in appeal against the orders passed by the CIT(A) vide orders dt. 21st April, 1993, 17th Dec., 1986, 17th Dec., 1986 and 27th April, 1995. The appellant has taken following grounds in appeals: "1. That the assessment finalised by the learned AO under Section 143(3) and later on confirmed by the learned CIT(A) is grossly against the correct provisions of law and is, therefore, not based on facts of the case.
2. That treating the appellant-Board as a company and not as a local authority entitled for exemption from tax under Section 10(20) of the IT Act, 1961, is completely against the provisions of both IT Act, 1961 as well as the J&K State Sheep & Sheep Products Development Board Act of 1979, as passed and enacted by the legislature of the State of Jammu & Kashmir whereunder in Section 3(2) the appellant-Board has been constituted as a local authority only.
3. That ignoring the claim of the appellant to be treated as local authority entitled for full exemption from payment of income-tax as per Section 10, Sub-section 20 of the IT Act, is clearly going against the provisions of the J&K State Sheep & Sheep Products Development Board Act of 1979, which power is not vested in any authority other than the State legislature only.
4. That treating the appellant as a company and not as local authority is based on incorrect and illegal surmises only to unjustifiably bring the appellant-Board within the purviews of the IT Act, 1961.
4A. That even the different case rulings cited before the learned CIT(A) in this regards have not found favour and the claim of the appellant has been fully disregarded, leaving the matter to be decided by the Hon'ble Bench of this Tribunal.
5. That even the fact that the appellant-Board was constituted under a special Act of the State legislature and not as a company under the Companies Act, which is a prerequisite to term any institution as a company, has been disregarded.
6. That the submissions that the activities carried but by the appellant-Board are purely those of public functions as per Section 2(15) of the IT Act, 1961, fully covered under the definition of charitable activities and would not be carried out by any business house, and in fact were being carried out by the State Government itself before the constitution of the appellant-Board, and should, therefore, be treated as State Government, have had no effect either on the learned AO or the learned CIT(A).
7. That in view of the submissions made above, it is prayed that the status of the appellant-Board is restored as "local authority" and not as a company. Further to the above, it is submitted, That the disallowance by the learned AO of an amount of Rs. 11,086 paid to 4 employees of the Board as ex gratia payments and its upholding by the learned CIT(A) is not justified keeping in view the circumstances and facts of the case.
to whom the ex gratia payments have been made are permanent employees of the appellant-Board, remain quite frequently on tour for the Board's official purposes and the payments of the nature of salaries, allowances and other similar benefits have to be paid in cash as are paid to other employees from time-to-time as a normal routine office practice and is well within the routine business expediency norms covered under Rule 6DD, and should, therefore, be allowed as routine expenses.
-That the payment, of Rs. 2,700 paid as rent for two months @ Rs. 900 per month are also well covered under normal business expediency norms as these payment were due to be made to the landlord @ Rs. 900 per month on monthly basis which have been paid in cash as a routine practice and are, therefore, covered under Rule 6DD also.
-That when the genuineness of the expenditures as disallowed under Section 40A(3) is not in doubt and has been allowed under Section 36 as routine business expenditures, the disallowance under Section 40A(3) merely due to their having been paid in cash, is not justified and should, therefore, be allowed: -That the interest charged under Section 217 is not leviable in the case of the appellant keeping in view the facts of the case, especially when the appellant has all along fully co-operated in the proceedings of the assessment which fact is also borne from the assessment orders itself.
-That in view of the above submissions, it is prayed that the assessment made by the learned AO by treating the status of the appellant as a company be set aside and the correct status of 'local authority' eligible for exemption under Section 10(20) be granted.
-That a detailed paper book shall be filed at the time of hearing of the appeal.
-That the appellant craves to further reserve the right to amend, delete, alter, add or change any of the submissions at the time of hearing and before the final disposal of the appeal.
3. The basic issue to be resolved is whether or not the appellant is entitled for exemption from tax under Section 10(20) of the IT Act, 1961.
4. The learned Departmental Representative relied on the orders passed by the authorities below. The appellant is engaged in the business of procurement and sale of wool and also runs a slaughter house. The AO did not accept the claim regarding status as local body, following the order passed by the learned CIT(A) in the asst. yr. 1984-85 vide appeal No. 272/85-86/A-Ward/Sgr. The matter was adjudicated upon before the learned CIT(A) and the appellant pleaded before the learned CIT(A) that the decision of the Hon'ble Andhra Pradesh High Court in the case of Buddha Veerai Naidu v. State of Andhra Pradesh (1983) 143 ITR 1021 (AP) should be applied and the appellant should be granted entitlement of exemption under Section 10(20) of the IT Act. The learned CIT(A) did not agree with the submission of the appellant and denied the appellant right to claim deduction under Section 10(20) of the IT Act.
5. The learned Departmental Representative relied on the orders passed by the authorities below. The learned Departmental Representative pleaded that the appellant has filed return in the status of company and, therefore, it cannot be treated as local authority. The learned Departmental Representative pleaded that correct and logical status of the assessee is a company. The learned counsel relied on the decision of the Hon'ble Supreme Court in the case of decided by R.S. Pathak, O.Chinnappa Reddy & Baharul Islam, JJ, in Civil Appeal No. 3351 of 1979, dt. 17th Feb., 1981. [See Union of India v. R.C. Jain AIR 1981 SC 951-Ed.] 6. The learned counsel pleaded that on similar facts and issue, the Hon'ble Supreme Court has declared Delhi Development Authority as a local authority.
7. We have heard arguments from both the sides. Section 10(20) deals with exemption of 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 within its own jurisdictional area or from supply of water or electricity within or outside the jurisdictional area. We are here to interpret the meaning of local authority. The first discussion on the issue is made by the Hon'ble Calcutta High Court in the case of Calcutta State Transport Corporation v. CIT (1977) 108 JTR 922 (Cal). The Hon'ble Calcutta High Court was dealing with State Road Transport Corporation.
"Section 3(31) of General Clauses Act (Central) deals with the definition of local authority. The definition of local authority includes any other authority legally entitled to, or entrusted by the Government with, the control or management of a local fund." Essential ingredients are that such 'authority' or 'body' must have legal existence by Act of governance, Act of legislature or Act of Parliament. There must be a fund which must be at the command of the authority or a body and such body must be governed by internal rules and regulations. The local body acts as an independent institution and supporting to the authority who is cause of its creation. The authority which creates such an institution will put certain limitations and will create jurisdiction for such body. The word 'authority' as defined in Webster's Dictionary means a person or a body exercises power or having legal right to command and be obeyed. The main purpose of making an institution of local authority is to allow the State to create an authority within a State which will function independently for a localise object. In the case of Calcutta State Transport Corporation (supra), the Hon'ble Calcutta High Court has held that State Transport Corporation as a local authority.
8. The issue also came up before the Hon'ble Andhra Pradesh High Court in the cases of CIT v. Agricultural Market Committee (1983) 143 ITR 1020 (AP) and Budha Veen Naidu v. State of Andhra Pradesh (supra). The Hon'ble Andhra Pradesh High Court has held that agricultural market committee is a local authority. The primary conditions embedded by the local authority are that it should become a juridical person by creation of legislative authority. It should have independent existence, governed by independent rules and regulations, statute and there should be a proper fund and purpose created by the authority. In the case of R.S. Pathak, O. Chinnappa Reddy & Baharul Islam, JJ (supra), the Hon'ble Supreme Court has given following observations: "An authority, in order to be a local authority, must be of like nature and character as a Municipal Committee, District Board or Body, Port Commissioners, possessing, therefore, many, if not all, of the distinctive attributes and characteristics of a Municipal Committee, District Board, or Body of Port Commissioners, but possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with the control and management of a municipal or local fund. The authorities must have separate legal existence as corporate bodies. They must not be mere Government agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the areas. Next, they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy effecting the area administered by them. The autonomy may not be. complete and the degree of the dependence may vary considerably but -an appreciable measure of autonomy there must be. Next, they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies. Broadly, they may be entrusted with the performance of civic duties and functions which would otherwise be Government duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges or fees. This may be in addition to money provided by Government or obtained by borrowing or otherwise. What is essential is that control or management of the fund must vest in the authority. Case law discussed.
2. Let us, therefore, concentrate and confine our attention and enquiry to the definition of 'local authority' in Section 3(31) of the General Clauses Act. A proper and careful scrutiny of the language of Section 3(31) suggests that an authority, in order to be a local authority, must be of like nature and character as a Municipal Committee, District Board or Body of Port Commissioners, possessing, therefor, many, if not all, of the distinctive attributes and characteristics of a Municipal Committee, District Board, or Body of Port Commissioners, but possessing one essential feature, namely, that it is legally entitled to or entrusted by the Government with, the control and management of a municipal or local fund. What are the distinctive attributes and characteristics, all or many of which a Municipal Committee, District Board or Body of Port Commissioners shares with any other legal authority First, the authorities must have separate legal existence as corporate bodies. They must not be mere Governmental agencies but must be legally independent entities. Next, they must function in a defined area and must ordinarily, wholly or partly, directly or indirectly, be elected by the inhabitants of the area. Next, they must enjoy a certain degree of autonomy, with freedom to decide for themselves questions of policy affecting the area administered by them. The autonomy may not be completed and the degree of dependence may vary considerably but an appreciable measure of autonomy there must be.
Next they must be entrusted by statute with such Governmental functions and duties as are usually entrusted to municipal bodies, such as those connected with providing amenities to the inhabitants of the locality, like health and education services, water and severage, town planning and development, roads, markets transportation, social welfare services, etc., etc. Broadly we may say that they may be entrusted with the performance of civic duties and functions which would otherwise be Governmental duties and functions. Finally, they must have the power to raise funds for the furtherance of their activities and the fulfilment of their projects by levying taxes, rates, charges or fees. This may be in addition to money provided by Government or obtained by borrowing or otherwise.
What is essential is that control or management of the fund must vest in the authority." 9. Coming to the relevant facts of the case, the learned counsel has brought on record the Jamrnu & Kashmir State Sheep & Sheep Products Development Board Act of 1979 with Amendment Bill, 1983. The preamble reads as follows: "An Act to provide for the establishment of a Sheep and Sheep Products Development Board for procurement of raw wool, its grading and sale and for development of sheep and wool industry within the State and for matters connected therewith." (1) This Act may be called the Jammu & Kashmir Sheep and Sheep Products Development Board Act, 1979.
(3) It shall come into force on such date as the Government may, by notification in the Government Gazette, appoint in this behalf.
(a) "Board" means the Jammu & Kashmir State Sheep & Sheep Products Development Board, established under this Act.
(b) "Chief Executive Officer" means the chief executive officer of the Sheep & Sheep Products Development Board appointed under Sub-section (1) of Section 8.
10. Keeping in view the definition of the local authority and decision given by the Hon'ble Supreme Court and the fact that such authority is created by an Act of Parliament and Board has been created by the legislative assembly and the purpose of such Board has been defined by legislature in Clause II that Board for all purposes shall be local authority.
11. If the Act of legislature has declared Board as a local authority, it is not open to the tax authorities to give it a different definition and interpretation. The only remedy of interpreting Clause n of Chapter II of the Act lies either with the Hon'ble J&K High Court or with the Hon'ble Supreme Court of India. We are, therefore, of the opinion that the Jammu & Kashmir State Sheep & Sheep Products Development Board, Jammu, is entitled for exemption under Section 10(20) of the IT Act.
Since the income is exempt, we are of the opinion that there is no need to adjudicate other grounds which relate to the taxability of income.
The appeals of the appellant on this issue are accordingly allowed.