Case: Andhra Pradesh State Road Transport Corporation Vs. Income Tax Officer, B-I B-ward, Hyderabad and Ors

2. It appears that the appellant was established underthe Road Transport Corporations Act, 1950 (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 department of the Government of Hyderabad and after integration of Hyderabad with the 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 S. 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 under any of the five categories of assessees under S. 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 S. 30 of the Act, and as such it was immune from Union taxation under Art. 289 of the Constitution. Yet, another contention was raised in support of the plea that the notice 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.3. 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 Art. 289(3), the appellant could not rely on Art.289 (1). 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.

Reasoning: 7. The next stage in the argument urged by the Advocate-General is that cl. (2) is wide enough to include the trading activities carried on by the appellant and as a result of width of its scope the appellants activities can be treated as the commercial activities carried on by the Government of Andhra Pradesh itself. It will be noticed that cl. (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 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 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 controlled. 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 Art. 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 Unionclaimed 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? It 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 incomes 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 theour 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 had and the State and Central Government on the other. Take, for instance the case of supersession of the Corporation authorised by S. 38. Section 38 (2) (c) 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 S. 39(2) which deals with the distribution of assets in case of liquidation, brings out the sameargument 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 S. 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 S. 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development. It 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 Art. 289(1), and if that is so, the facts that the trading activity carried on by the appellant may be covered by Art. 289(2), does not really assist the appellants case. Even if a trading activity falls under cl. (2) of Art. 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 theof 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 Ss. 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, thought no one can seriously suggest that there would be repugnancy between the provisions of the Companies Act and the Income-tax Act. All that Ss. 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 to his argument by relying on S. 43 ofthe State Financial Corporations Act, 1951 (No. 63 of 1951) as well as S. 43 ofthe Damodar Valley Corporation Act, 1948 (No 14 of 1948). Section 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, if 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 S. 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 material 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.