Appeals Nos475 478 of 1963
Appeal from the order dated July 14 1961 of the Andhra Pradesh High Court in Writ Petition Nos
516 to 519 of 1960
D Narsaraju Advocate General Andhra Pradesh P R Ramchandra Rao and T V R Tatachari for the appellant in all the appeals
K N Rajagopala Sastri Gopal Singh and R N Sachthey for the respondents in all the appeals
Rajeshwari Prasad and section P Varma for Intervener No 1 in all the appeals
B Seri section C Bose and P K Bose for Intervener No 2 in all the appeals
M C Setalvad section C Bose and P K Bose for Intervener No 3 in all the appeals
19 March 5
The judgement of the Court was delivered by GAJENDRAGADKAR CJ
These four appeals arise from four writ petitions filed by the appellant the Andhra Pradesh State Road Transport Corporation in the High Court of Andhra Pradesh against the Income tax Officer and the Appellate Assistant Commissioner of Income tax Hyderabad respondents 1 and 2 respectively in which it claimed a writ of prohibition restraining them from collecting any tax or taking any proceedings under the Indian Income Tax Act against them
In its writ petitions the appellant further claimed an order writ or other appropriate direction quashing the assessment orders passed by respondent No 1 on the 29th February 1960
for the years 1958 59 and 1959 60
For the first year a tax of Rs 136096386 nP has been imposed for the period 11 1 1958 to the 31 3 1958 and for the latter year a tax of Rs 344443048 nP has been levied for the period 1 4 1958 to 31 3 1959
After hearing the parties the High Court has dismissed the appellant s writ petitions with costs
The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that these four appeals have been brought to this Court
It appears that the appellant was established under the No 64 of 1950 hereinafter called the Act by a notification issued by the Andhra Pradesh Government and it has been functioning with effect from the 11th January 1958
Before the formation of the appellant Corporation the road transport was a depart ment of the Government of Hyderabad and after integration of Hyderabad with Andhra Pradesh it was run by the Government of Andhra Pradesh
During the whole of this period the road transport was treated as exempt from income tax
After the appellant Corporation was however formed the Income tax Department took the view that the income made by the appellant was liable to tax and so a notice under section 22 of the Income Tax Act was served on the appellant on the 29th January 1959
In pursuance of the proceedings which were taken after service of the notice the impugned orders of assessment were passed
Before the Income tax Officer it was urged by the appellant that since the appellant was an independent body carrying on the business of road transport it did not fall Linder any of the five categories of assessees under section 3 of the Income tax Act it was neither an individual nor a Hindu undivided family nor a firm nor a company nor an association of persons and as it was outside the said five categories of assessees no tax could be levied against it
It was further argued that the net income of the appellant ultimately goes to the State of Andhra Pradesh under section 30 of the Act and is such it was immune from Union taxation under 20 article 289 of the Constitution
Yet another contention was raised in support of the plea that the noice issued by respondent No 1 was invalid and that was that the appellant was a local authority exempt from income tax
All these contentions were rejected by respondent No 1 with the result that the impugned orders of assessment came to be passed
It is the validity of these orders that the appellant challenged before the Andhra Pradesh High Court
The High Court has held that the appellant is not a State owned Corporation and that it is not carrying on business on behalf of the Government
It has also observed that the trade or business which the appellant was carrying on was not incidental to the ordinary functions of government and since no declaration had been made to that effect under article 2893 the appellant could not rely on article 2891
The contention that the appellant was a local authority which was urged before the High Court was rejected and the argument that the charging section of the Income tax Act was repugnant with the material provisions of the Act such as sections 28 29 and 30 was also held to be without any substance by the High Court
Thus since none of the arguments urged by the appellant before the High Court was accepted the writ petitions filed by it were dismissed
The main point urged before us by the learned Advocate General of Andhra Pradesh on behalf of the appellant is that the income in respect of which the impugned order of assess ment has been passed by respondent No 1 is exempt from Union taxation under article 2891 of the Constitution and that raises the question about the construction and effect of the provisions of the three clauses of article 289
Let us therefore read the said article 289
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 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 21 The learned Advocate General concedes that the transport activity carried on by the appellant is strictly not inci dental to the ordinary functions of government
It is true that in a modern democratic Welfare State Government has to undertake several economic activities some of which are trade activities while others are commercial activities because the pursuit of the welfare policies inevitably requires that Government should help the process of economic improvement of its citizens
However desirable these socioeconomic activities may be and however legitimate may be the attempt of the State Government to undertake them there is no denying the fact that the ordinary functions of the Government to which clause 3 of article 289 refers must be distinguished from these socioeconomic activities
The Advocate General however urges that though the trade activities of the appellant may thus be distinguishable from the ordinary functions of Government they are nevertheless included in article 2891 and income derived by the appellant from the said activities falls within the protection of article 2891
This argument proceeds on the assumption that clause 2 of article 289 is an exception or proviso to clause 1 and as such whatever is included in clause 2 must be deemed to have been included also in clause 1 otherwise the proviso cannot be logically explained
It is because the trading or commercial activities of the government of a State to which the said clause refers were originally included in clause 1 that it became necessary to provide by clause 2 that the said trading or commercial activities carried on by the Government of a State would not claim the benefit of exemption prescribed by clause 1
That is how the Advocate General seeks to include trading or business activities mentioned in cl
2 in cl
1 itself
Logi cally no exception can be taken to this approach
The next stage in the argument urged by the Advocate General is that clause 2 is wide enough to include the trading activities carried on by the appellant and as a result of the width of its scope the appellant s activities can be treated as the commercial activities carried on by the Government of Andhra Pradesh itself
It will be noticed that clause 2 refers to a trade or business of any kind carried on by or on behalf of the Government of a State
The argument is that the first part of the clause refers to the trade or business carried on by the Government and that means carried on by the Government either departmentally or by agents appointed by the Government in that behalf
Whether the department carried on the business or an agent specifically and exclusively appointed for that purpose carries it on it is the business carried on by the State
The latter part of the clause refers to trade or business carried on on behalf of the Government of a State and it is 22 suggested that this part of the clause is intended to take in trade or business carried on by a Corporation like the appellant which is either State owned or State controlle
The appellant Corporation says the Advocate General Is undoubtedly State controlled and he would suggest that it is also owned by the State of Andhra Pradesh
Therefore the commercial activity carried on by the appellant must be deemed to be an activity carried on on behalf of the State of Andhra Pradesh and it is with this postulate that the argument reverts to clause 1 of article 289 and urges that the income received by the appellant in respect of commercial activities carried on by it on behalf of the Government of Andhra Pradesh is exempt from Union taxation
In support of this argument the Advocate General has relied
on a recent decision of this Court in Akadasi Padhan vs State of Orissa  Others1 In that case this Court had occasion to consider the scope and effect of the provisions contained in article 196
It will be recalled that article 196 authorrises the State inter ilia to make any law relating to the carrying on by the State or by a Corporation owned or controlled by the State of any trade business industry or service whether to the exclusion complete or partial of citizens or otherwise
One of the points which fell to be considered in the Akadasi Padhan case was the effect of the words a law relating to the carrying on by the State of any trade or business
 Dealing with this question this Court held that though normally the trade specified in the clause would be carried on by the State departmentally or with the assistance of public servants appointed in that behalf there may be cases of some trades or business in which it would be open to the State to employ the services of agents provided the agents work on behalf of the State and not for themselves
Relying upon this decision the Advocate General argues that when clause 2 of article 289 refers to trade or business carried on by tile Government of a State it includes trade or business carried on by the Government either departmentally or with the assistance of agents appointed in that behalf and so be argues that these two categories of carrying on business having been included in the first part what the second part is intended to cover is trade or business carried on by the Government of a State through the instrumentality of a corporation like the appellant and so
the trade or business carried on by the appellant is trade or business carried on on behalf of the Government of Andhra Pradesh within the meaning of article 2892 and that makes the income earned out of the said trade or business income of the State under article 2891
1 1963 Supp 2 SCR 691
23 In substance this argument is really based on the American doctrine of the immunity of State agencies or instru mentalities from Federal taxation
When this doctrine was accepted by American decisions it was normally confined to such State agencies as were concerned with functions which were essentially governmental in character
But says the Advocate General since article 2892 takes in trade activities carried on by a corporation like the appellant the question as to whether the trade is a function which is essentially governmental in character is irrelevant
In support of his contention the Advocate General has relied upon two American decisions first of these is the decision in the case of Mark Graves
John J Merrill and John P Hennessy vs People of the State of New York Upon the Relation of James B O keefe1
In that case Stone J who spoke for the Supreme Court of America
has observed that when the national government lawfully acts through a corporation which it owns and controls those activities are governmental functions entitled to whatever tax immunity attaches to those functions when carried on by the government itself through its departments
In other words this observation shows that the Court was inclined to take the view that for the purpose of claiming exemption from taxation it did not make a material difference whether the operation was carried on by the State departmentally or with the assistance of a corporation
In Clallan County vs United States of America 2 it was held by the Supreme Court of America that a State cannot tax the property of a corporation organised by the Federal government to produce material for war purposes the property of which is conveyed to it by or bought with the money of the United States and used solely for the purposes of its creation
Holmes J who delivered the opinion of the Court emphasised the fact that in the case before the Court not only the agent was created but all the agent s property was acquired and used for the sole purpose of producing a weapon for the war
This is not like the case of a corporation added the learned Judge having its own purposes as well as those of the United States and interested in profit on its own account
The incorporation and formal erection of a new personality was only for the convenience of the United States to carry out its ends and so it is unnecessary to consider whether the fact that the United States owned all the stock and furnished all the property to the corporation taken by itself would be enough to bring the case within the policy of the rule that exempts property of the United States    331
24 Both these decisions would not assist us in determining the question as to whether the income received by the appellant is the income of the State of Andhra Pradesh within the meaning of article 2891 because the decision of the problem raised before us by the appellant must be reached not on any academic considerations of the claims for exemption from taxation which the State instrumentalities can put forward but on the construction of article 289 itself
article 2891 exempts from Union taxation the property and income of a State and the Advocate General can succeed only if he is able to establish that the income derived by the appellant in respect of which the impugned assessment order has been passed is the income of the State of Andhra Pradesh
There fore the American doctrine on which strong reliance was placed by the Advocate General would be of no assistance to his case
If the trading activity carried on by the appellant is sought to be brought into article 2891 solely as a result of the construction of article 2992 the test on which the validity of the Advocate General s argument must necessarily be judged is whether or not the requirement of article 2891 is satisfied and that requirement clearly is that the income like the property for which exemption from Union taxation is claimed must be the income or property of a State
Besides there is another reason why the Advocate General cannot derive any assistance from the American doctrine of the exemption from taxation in regard to State instru mentalities
The said doctrine has been categorically rejected by this Court in State of West Bengal vs Union of India1 Speaking for the majority of the Court Sinha C J observed that it was futile to attempt the resuscitation of the now exploded doctrine of the immunity of instrumentalities which originating from the observations of Marshall C J in M  Culloch vs Maryland2 has been decisively rejected by the Privy Council as inapplicable to the interpretation of the respective powers of the States and the Centre under the Canadian and Australian Constitutions vide Bank of Toronto vs Lambel3 and Webb vs Outrim4 and has practically been given up even in the United States Thus it is necessary to revert to the construction of article 289 in deciding whether the appellant is right in claiming immunity from Union taxation
We have already seen that article 289 consists of three clauses the first clause confers exemption from Union tax ation on the property and income of a State
In Special Reference No 1 of 1962
In re
Sea Customs Act 1878 Section 1 1964 1 SCR 371 407
3 2  at p 436
4 25 2021 a Special Bench of this Court by a majority as e that the immunity granted to the States in respect of Union taxation under article 2891 does not extend to duties of customs including export duties or duties of excise
In that case the question which directly arose for decisions was to determine the scope and effect of the nature of taxation from which exemption could be claimed by the property and income of a State under article 2891
With that aspect of the matter however we are not concerned in the present appeals
The scheme of article 289 appears to be that ordinarily the income derived by a State both from governmental and non governmental or commercial activities shall be immune from income tax levied by the Union provided of course the in come in question can be said to be the income of the State
This general proposition flows from clause 1
Clause 2 then provides an exception and authorises the Union to impose a tax in respect of the income derived by the Government of a State from trade or business carried on by it or on its behalf that is to say the income from trade or business carried on by the Government of a State or on its behalf which would not have been taxable under clause 1 can be taxed provided a law is made by Parliament in that behalf
If clause 1 had stood by itself it may not have been easy to include within its purview income derived by a State from commercial activities but since clause 2 in terms empowers Parliament to make a law levying a tax on commercial activities carried on by or on behalf of a State the conclusion is inescapable that these activities were deemed to have been included in cl1 and that alone can be the justification for the words in which cl
2 has been adopted by the Constitution
It is plain that cl
2 proceeds on the basis that but for its provision the trading activity which is covered by it would have claimed exemption from Union taxation under cl
That is the result of reading clauses 1 and 2 together
Clause 3 then empowers Parliament to declare by law that any trade or business would be taken out of the purview of cl
2 and restored to the area covered by cl
1 by declaring that the said trade or business is incidental to the ordinary functions of government
In other words cl
3 is an exception to the exception prescribed by cl
Whatever trade or business is declared to be incidental to the ordinary functions of government would cease to be governed by cl
2 and would then be exempt from Union taxation
That broadly stated appears to be the result of the scheme adopted by the three clauses of article 289
1 26 Reading the three clauses together one consideration emerges beyond all doubt and that is that the property as well as the income in respect of which exemption is claimed under cl
1 must be the property and income of the State and so the same question faces us again is the income derived by the appellant from its transport activities the income of the State If a trade or business is carried on by the State departmentally and income is derived from it there would be no difficulty in holding that the said income is the income of the State
If a trade or business is carried on by a State through its agents appointed exclusively for that purpose and the agents carry it on entirely on behalf of the State and not on their own account there would be no difficulty in holding that the income made from such trade or business is the income of the State
But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by issuing a notification under the relevant provisions of the Act
The corporation though statutory has a personality of its own and this personality is distinct from that of the State or other shareholders
It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned
The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately and so prima facie the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation
It may that the statute under which the notification has been issued constituting the appellant corporation may provide expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the State
The doctrine of the separate entity or personality of the corporation is always subject to the exceptions which statutes may create and if there is a statutory provision which clearly indicates that despite the concept of the separate personality of the corporation the trade carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the said trade likewise belongs to them that would be another matter
It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation and so we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh
In this connection we may usefully refer to the observa tions made by Lord Denning in Tamlin vs Hansaford 1
In 27 the eye of the law said Lord Denning the corporation is its own master and is answerable as fully as any other person or corporation
It is not the Crown and has none of the immunities or privileges of the Crown
Its servants are not civil servants and its property is not Crown property
It is as much bound by Acts of Parliament as any other subject of the King
It is of course a public authority and its purposes Po doubt are public purposes but it is not a government department nor do its powers fall within the province of government These observations tend to show that a trading activity carried on by the corporation is not a trading activity carried on by the State departmentally nor is it a trading activity carried on by a State through its agents appointed in that behalf
That takes us to the provisions of the Act which will assist us in determining the question as to whether the income in question can legitimately be held to be the income of the State of Andhra Pradesh
The Act was passed to provide for the incorporation and regulation of Road Transport Corpora tions
Section 3 authorises the State Government to issue a notification in the Official Gazette establishing a Road Transport Corporation for the whole or any part of the State under such name as may be specified in the notification after taking into account considerations specified by clauses a b and c
Section 4 then provides that every corporation shall be a body corporate by the name notified under section 3 having perpetual succession and a common seal and shall sue or be sued by the said name
Section 5 deals with the constitution of Road Transport Corporation sub section 3 provides for the representation both of the Central Government and of the State Government in the Corporation in such proportion as may be agreed to by both the Governments and of nomination by each Government of its own representatives therein it also contemplates that if capital is raised by the issue of shares to other parties provision has to be made for the representation of such shareholders
Section 17 authorises the appointment of Advisory Councils
Section 18 prescribes the general duty of the corporation
Section 231 provides for the capital of the corporation under this sub section the capital contributed by the Central Government and the State Government is in the proportion of I  3
Sub section 3 authorises the division of the capital of the corporation into such number of shares as the State Government may determine  and it provides that the number of shares which shall be subscribed by the State Government the Central Government and other parties shall also be determined by the State Government in consultation with the Central Government
This provision contemplates the possibility of other shareholders joining the State Government and the Central Government
Section 24 permits additional capital of the corporation to be raised
Section 25 requires that 28 the share of the corporation shall be guaranteed by the State Government as to the payment of the principal and the payment of the annual dividend at such minimum rate as may be fixed by the State Government
Section 26 confers powers of borrowing on the corporation
Section 27 constitutes a fund of the Corporation
Section 28 provides for the payment of interest and dividend
Section 291 requires the Corporation to make such provisions for depreciation and for reserve and other funds as the State Government may from time to time direct
Section 292 provides that the management of the said funds the sums to be carried from time to time to the credit thereof and the application of the moneys comprised therein shall be determined by the Corporation
There is a proviso to this sub section which prohibits the utilisation of these funds for any purpose other than that for which it was created without the previous approval of the State Government
Section 30 deals with the disposal of net profits it says that after provi sion is made as required by sections 28 and 29 the Corpora tion may utilise such percentage of its net annual profits as may be specified in this behalf by the State Government for the purposes therein specified and it adds that out of the balance such amount as may with the previous approval of the State Government and the Central Government be specified in this behalf by the Corporation may be utilised for financing the expansion programmes of the Corporation and the remainder if any shall be made over to the State Government for the purpose of road development
Section 31 gives power to the Corporation to spend such sums as it thinks fit on objects authorised by the Act
Section 32 deals with the budget section 33 with accounts and audit and section 34 provides that the directions issued by the State Government after consultation with the Corporation shall be followed by the Corporation and it adds that such directions may include instructions relating to the recruitment conditions of service and training of its employees wages to be paid to the employees reserves to be maintained by it and disposal of its profits or stocks
Under Section 38 power is conferred on the State Government to supersede the Corporation for reasons specified by section 381
On supersession all property vested in the Corpora tion vests during the period of supersession in the State Government that is the effect of section 382c
Section 39 deals with the liquidation of a Corporation and clause 2 of this section provides that in the event of such liquidation the assets of the Corporation after meeting the liabilities if any shall be divided among the Central and the State Government and such other parties if any as may have subscribed to the capital in proportion to the contribution made by each of them to the total capital of the Corporation
That in brief is the position of the relevant provisions of the Act
29 There is no doubt that the bulk of the capital is contribut ed by the State Government and a small proportion by the Central Government and in that sense the majority of shares are at present owned by the State Government
There is also no doubt that the Corporation is a State controlled corporation in the sense that at all material stages and in all material particulars the activity of the Corporation is controlled by the State  but it is clear that other citizens may be admitted to the group of shareholders and from that point of view the Act contemplates contribution of the capital for the Corporation not only by the Central and the State Governments but also by the citizens
The main point which we are examining at this stage is is the income derived by the appellant from its trading activity income of the State under article 2891 In our opinion the answer to this question must be in the negative
Far from making any provision which would make the income of the Corporation the income of the State all the relevant provisions emphatically bring out the separate personality of the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and loss that would be made as a result of the trading activity would be the profit and loss of the corporation
There is no provision in the Act which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that despite the form which the Organisation has taken it is the shareholders who run the trade and who can claim the income coming from it as their own
Section 28 which provides for the payment of interest clearly brings out the duality between the Corporation on the one hand and the State and Central Governments on the other
Take for instance the case of supersession of the corporation authorised by section 38
Section 382c emphatically brings out the fact that the property really vests in the Corporation because it provides that during the period of supersession it shall vest in the State Government
Similarly section 392 which deals with the distribution of assests in case of liquidation brings out the same feature
It has been urged before us by the Advocate General that section 50 contemplates that after provision is made as required by sections 28 and 29 and funds are utilised as prescribed by section 30 the balance has to be given to the State Government for the purpose of road development and that it is suggested indicates that the income belongs to the State Government
This argument is clearly not well founded
When we are deciding the question as to whether the income derived by the Corporation is the income of the State the provision made by section 30 for making over to the State Government the balance that may remain as indicated therein is of no assistance
The income is undoubtedly the income of the Corporation
All that section 30 requires is that a part of that income may be entrusted to the 30 State Government for a specific purpose of road developmen nt is not suggested or shown that when such income is made over to the State it becomes a part of the general revenue of the State
It is income which is impressed with an obligation and which can be utilised by the State Government only for the specific purpose for which it is entrusted to it
Therefore we are satisfied that the income derived by the appellant from its trading activity cannot be said to be the income of the State under article 2891 and if that is so the fact that the trading activity carried on by the appellant may be covered by article 2892 does not really assist the appellant s case
Even if a trading activity falls under cl
2 of article 289 it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State
That is how ultimately the crux of the problem is to determine whether the income in question is the income of the State and on this vital test the appellant fails
There is one more point which was faintly argued before us by the learned Advocate General
He frankly told us that he did not propose to challenge the correctness of the conclusion recorded by the High Court that the appellant is not a local authority but he was not prepared to give up his contention that there is repugnancy between the charging section of the Income tax Act and sections 29 and 30 of the Act
He suggested that in view of the repugnancy on which he relied the Act which is Act No 64 of 1950 should prevail over the Income Tax Act which is an enactment of 1922
None of the assumptions made by the learned Advocate General in support of this plea can be said to be valid
Though the original Income tax Act was passed in 1922 as is well known every year a fresh Finance Act is passed and it is by virtue of such successive Finance Acts that income tax is assessed from year to year and so the argument that the Act on which the appellant relies is later in point of time must fail
Besides there is really no repugnancy at all
Basing himself on the provisions of sections 29 and 30 the Advocate General contends that these two provisions show that the Act did not contemplate the payment of income tax
This argument is entirely misconceived
It is hardly necessary for the Act to make a provision that tax if chargeable would be paid
In fact the Companies Act which deals with companies does not make such a specific provision though no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income Tax Act
All that sections 29 and 30 purport to do is to provide for the administration of the funds vesting in the Corporation and their disposal
It is clearly far fetched if not fantastic to suggest that these provisions are inconsistent with the liability to pay tax which is imposed by the Income Tax Act
The Advocate General no doubt attempted to derive some support 31 to his argument by relying on section 43 of the  as well as section 43 of the Damodar alley Corporation Act 1948 No 14 of 1948
Sec tion 43 which occurs in both the said Acts provides that the Corporation shall be liable to pay any taxes on income levied by the Central Government in the same manner and to the same extent as a company
It is urged that where the legislature wanted to provide for the liability of the Corporation to pay the taxes on income levied by the Central Government it has made specific provisions in that behalf and since no such provision has been made in the Act it follows that the legislature intended that no tax should be levied on the income earned by the Corporation established under the Act
We do not think there is any substance in the argument
The whole object which section 43 is presumably intended to achieve is to provide that the tax should be levied on the basis that the Corporation is a company and nothing more
If no such provision was made in the Act that has no bearing on the liability of the Corporation to pay the tax on its income
Therefore we are satisfied that the High Court was right in rejecting the argument that by virtue of the repugnancy between the mater ial provisions of the Act and the charging section of the Income Tax Act it should be held that the appellant was not liable to pay tax on its income
The result is the appeals fail and are dismissed with costs
One hearing fee
Appeals dismissed


Summary:
The Income tax Officer respondent No1 served a notice under section 22 of the Income tax Act on the appellant
Upon the receipt of the notice the appellant appeared before the Income tax Officer
The appellant pleaded before the Income tax Officer that it did not fall under any of the five categories of assessees under section 3 of the Income tax Act
The appellant also raised the contention that it was a local authority exempt from income tax
All these contentions were rejected by respondent No 1 with the result that the impugned orders of assessment came to be passed
The appellant filed Writ Petitions before the High Court in which it challenged the impugned orders of assessment passed by respondent No 1
In its Writ Petitions the appellant claimed an order writ or other appropriate direction quashing the assessment orders passed by respondent No 1
The High Court dismissed these writ petitions
The High Court held that the appellant could not claim the exemption under article 2891 because it was not a state owned Corporation
The High Court granted a certificate under article 133 of the Constitution and hence the appeal
Held i article 289 of the Constitution consists of three clauses
The first clause confers exemption from union taxation on the property and income of a State
Clause 2 then provides that the income from trade or busi ness carried on by the Government of a State or on its behalf which would not have been taxable under cl
1 can be taxed provided a law is made by Parliament in that behalf
In other words cl
2 is an exception to cl
Clause 3 then empowers Parliament to declare by law that any trade or business would be taken out of the purview of cl
2 and restored to the area covered by cl
1 by declaring that the said trade or business is incidental to the ordinary functions of Government
In other words cl
3 is an exception to the exception prescribed by cl
ii A trading activity carried on by the corporation appellant is not a trading activity carried on by the State departmentally nor is it a trading activity carried on by a State through its agents appointed in that behalf because according to statute the Corporation has a personality of its own and this personality is distinct from that of the State or other shareholders
All the relevant provisions of the impugned Act also emphatically bring out the separate personality of the Corporation
Section 30 of the Act also does not suggest that the income of the 18 Corporation is the income of the State
All that section 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development
Therefore the income derived by the appellant from its trading activity cannot be said to be the income of the State either under cl
1 or cl
2 of article 289
The American doctrine of the immunity of State agencies or instrumentalities from Federal taxation has no application to the present case
Akadasi Padhan vs State of Orissa 1963 Supp 2 SCR 691 distinguished
Mark Graves John J Merrill and John P Hennessy vs People of the State of New York Upon the Relation of James BO keefe  and Clallan County vs United States of America   no application
State of West Bengal vs Union of India 1964 1 SCR 371 relied on
M Culloch vs Maryland   Bank of Toronto vs Lambe and Webb vs Outrim 1907 AC 81 referred to
Tamlin vs Hansaford  relied on
iiiIt is hardly necessary for the Act to make a provision that taxif chargeable would be paid
In fact the Companies Act which deals with companies does not make such a specific provision though no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income tax Act
There is no repugnancy between the charging section of the Income tax Act and sections 29 and 30 of the Act
All that sections 29 and 30 of the impugned Act purport to do is to provide for the administration of the funds vesting in the Corporation and their disposal
These provisions are not inconsistent with the liability to pay tax which is imposed by the Income tax Act