Section 10(20A) has been omitted and we are outside the new s.10(20) Explanation. Can we still say our income is the State's income and immune under Article 289?
No. The Supreme Court held that where a development authority is constituted under a State Act with its own funds, its own assets and its own liabilities, the income is the authority's own income and not the income of the State, so Article 289(1) does not help. The withdrawal of s.10(20A) by the Finance Act 2002 and the narrowing of s.10(20) by the Explanation from 1 April 2003 were deliberate, and a benefit expressly taken away cannot be recovered through the Constitution.
Decided by the Supreme Court (B.P. Singh J and S.H. Kapadia J) on 2006-05-03, reported as Civil Appeal No. 6382 of 2003 (Supreme Court of India). It bears on section 10(20), section 10(20A) of the Income Tax Act 1961, in Capital Gains Exemptions, How Tax Law Is Read and TDS Defaults matters.
Every statutory authority that lost s.10(20A) on 1 April 2003 reached for Article 289(1) sooner or later, and this is the decision that closes that door. It matters most for the reflex that a body created by a State statute, whose members the Government appoints, is somehow the State for tax purposes — the Court looked instead at the funding section of the constituting Act and asked whose money it is. The corollary is practical: the fight over these authorities has moved entirely into s.11 read with s.2(15), which is where ACIT v. Ahmedabad Urban Development Authority (SC, 2022) now governs, and into s.10(46) notification. It is also the reason a TDS demand on an authority's bank interest is hard to resist at the deduction stage.
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The appellant was an authority constituted under the Bihar Industrial Areas Development Authority Act 1974. It challenged an income-tax notice requiring banks to deduct tax at source from interest on its fixed deposits. Its exemption had rested on s.10(20A), which the Finance Act 2002 omitted with effect from 1 April 2003, and the same Finance Act inserted the Explanation into s.10(20) which enumerates the bodies that qualify as local authorities and does not cover the appellant. The authority contended that it was an instrumentality of the State and that its income was the income of the State, immune from Union taxation under Article 289(1) of the Constitution.
The appeal was dismissed without any order as to costs. The benefit conferred by s.10(20A) had been expressly taken away and the Explanation to s.10(20) does not cover the appellant; having regard to the constituting Act, and particularly s.17 of it, the income of the authority is its own income, it manages its own funds and has its own assets and liabilities, so it is futile to contend that its income is the income of the State Government merely because it was constituted under a State enactment.
The Court took the test for Article 289(1) immunity and applied it to the constituting statute rather than to the authority's public character. Section 17 of the 1974 Act showed a fund belonging to the authority, from which its own liabilities are met, and the authority holds its own assets. That being so, the income never becomes the income of the State, and the fact that the authority owes its existence to a State enactment and a Government notification does not change the ownership of the income. On the statutory side, the Court held that the exemption previously available had been expressly withdrawn and that the enumeration in the Explanation to s.10(20) does not extend to the appellant, so there was no merit in the submission that exemption survived.
Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly Section 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.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that where a development authority is constituted under a State Act with its own funds, its own assets and its own liabilities, the income is the authority's own income and not the income of the State, so Article 289(1) does not help. The withdrawal of s.10(20A) by the Finance Act 2002 and the narrowing of s.10(20) by the Explanation from 1 April 2003 were deliberate, and a benefit expressly taken away cannot be recovered through the Constitution. This was decided by the Supreme Court (B.P. Singh J and S.H. Kapadia J) and bears on section 10(20), section 10(20A) of the Income Tax Act 1961. It is reported as Civil Appeal No. 6382 of 2003 (Supreme Court of India). Every statutory authority that lost s.10(20A) on 1 April 2003 reached for Article 289(1) sooner or later, and this is the decision that closes that door. It matters most for the reflex that a body created by a State statute, whose members the Government appoints, is somehow the State for tax purposes — the Court looked instead at the funding section of the constituting Act and asked whose money it is. The corollary is practical: the fight over these authorities has moved entirely into s.11 read with s.2(15), which is where ACIT v. Ahmedabad Urban Development Authority (SC, 2022) now governs, and into s.10(46) notification. It is also the reason a TDS demand on an authority's bank interest is hard to resist at the deduction stage. If it applies to you, the first step is this: Identify the funding and fund-vesting section of your constituting Act, because that is what the Court examined — here s.17 of the Bihar Industrial Areas Development Authority Act 1974 — and be ready for the finding that the fund is the authority's own.
The appellant was an authority constituted under the Bihar Industrial Areas Development Authority Act 1974. It challenged an income-tax notice requiring banks to deduct tax at source from interest on its fixed deposits. Its exemption had rested on s.10(20A), which the Finance Act 2002 omitted with effect from 1 April 2003, and the same Finance Act inserted the Explanation into s.10(20) which enumerates the bodies that qualify as local authorities and does not cover the appellant. The authority contended that it was an instrumentality of the State and that its income was the income of the State, immune from Union taxation under Article 289(1) of the Constitution. The matter was decided on 2006-05-03 by the Supreme Court (B.P. Singh J and S.H. Kapadia J). On those facts the Supreme Court held as follows. The appeal was dismissed without any order as to costs. The benefit conferred by s.10(20A) had been expressly taken away and the Explanation to s.10(20) does not cover the appellant; having regard to the constituting Act, and particularly s.17 of it, the income of the authority is its own income, it manages its own funds and has its own assets and liabilities, so it is futile to contend that its income is the income of the State Government merely because it was constituted under a State enactment.
The Court took the test for Article 289(1) immunity and applied it to the constituting statute rather than to the authority's public character. Section 17 of the 1974 Act showed a fund belonging to the authority, from which its own liabilities are met, and the authority holds its own assets. That being so, the income never becomes the income of the State, and the fact that the authority owes its existence to a State enactment and a Government notification does not change the ownership of the income. On the statutory side, the Court held that the exemption previously available had been expressly withdrawn and that the enumeration in the Explanation to s.10(20) does not extend to the appellant, so there was no merit in the submission that exemption survived. In the words reproduced by the source cited on this page: "Having regard to the provisions of the Bihar Industrial Areas Development Authority Act, 1974, particularly Section 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 was decided by the Supreme Court on 2006-05-03 and is reported as Civil Appeal No. 6382 of 2003 (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(20), section 10(20A), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed without any order as to costs. The benefit conferred by s.10(20A) had been expressly taken away and the Explanation to s.10(20) does not cover the appellant; having regard to the constituting Act, and particularly s.17 of it, the income of the authority is its own income, it manages its own funds and has its own assets and liabilities, so it is futile to contend that its income is the income of the State Government merely because it was constituted under a State enactment. It arises in Capital Gains Exemptions, How Tax Law Is Read and TDS Defaults matters, on section 10(20), section 10(20A) of the Income Tax Act 1961, and was decided by B.P. Singh J and S.H. Kapadia J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Do not run Article 289(1) as a standalone ground for a statutory authority with its own fund; run it only where the income genuinely vests in the State's consolidated fund. Treat 1 April 2003 as the cut-off: s.10(20A) was omitted and the s.10(20) Explanation inserted by the same Finance Act 2002 from that date, so exemption for AY 2002-03 and earlier is on a different footing entirely. Redirect the claim to s.11 with s.12A/12AB registration and argue s.2(15) on the AUDA lines, or apply for a s.10(46) notification of specified income. If banks are being told to deduct tax on the authority's deposits, deal with it under s.197 rather than by asserting constitutional immunity.
Still good law. Consistent with, and two years earlier than, Agricultural Produce Market Committee, Narela v. CIT (SC, 21 August 2008) on the effect of the Finance Act 2002 changes to s.10(20) and s.10(20A). No decision doubting it was located. A systematic later-treatment check was not completed; note in particular that what a development authority can now claim under s.11 read with s.2(15) is governed by ACIT v. Ahmedabad Urban Development Authority (SC, 19 October 2022), which is a different question from the one decided here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The passages I quote were confirmed by a second retrieval. One caution for a later pass: the phrase 'managing its own funds' also appears in the record of counsel's submission, distinct from the Court's own sentence quoted here, so a search on that phrase alone will land in the argument and not the holding. No ITR citation appeared in the text read. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed without any order as to costs. The benefit conferred by s.10(20A) had been expressly taken away and the Explanation to s.10(20) does not cover the appellant; having regard to the constituting Act, and particularly s.17 of it, the income of the authority is its own income, it manages its own funds and has its own assets and liabilities, so it is futile to contend that its income is the income of the State Government merely because it was constituted under a State enactment.
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