Taxation

SC denies income tax exemption to local authority

The Supreme Court has held that they are *not eligible for income tax exemption* overruling a Rajasthan High Court order. A top court bench gave its ruling on October 12, 2018 in respect of the Urban Improvement Trust constituted under Rajasthan Urban Improvement Act, 1959. The Supreme Court, while *reviewing the scheme* of Rajasthan Urban Improvement Act and the Rajasthan Municipalities Act, observed that though the *assessee undertakes development in the urban area* included in municipality or municipal board, it is *not constituted in place of the municipality or municipal board* It noted that deletion of authorities listed in erstwhile Section 10(20A) of the Income Tax Act through an amendment in 2002 was a clear indicator that such authorities, which were hitherto enjoying exemption, shall no longer be entitled to enjoy it.

The Income Tax Act exempts income of a local authority under the various heads within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area. The income could include that from house property, capital gains and income from other sources, from a trade or business carried on by it, which arises from supply of a commodity or service other than water or electricity. Local authority for this purpose is defined as panchayat as referred to in Article 243D of the Constitution or municipality as referred to in Article 243P of the Constitution or municipal committee and district board, legally entitled to or entrusted by the government with the control or management of a municipal or local fund or cantonment board. The Income-Tax Act defined ‘local authority’ under Section 10 (20A) and the income earned by such authorities was exempt from tax. However, this *section was deleted* by Finance Act 2002 and the tax *exemption was covered* under Section 10(20). The Finance Act 2002 also amended the definition of ‘local authority’, making it much narrower.

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