Against the order dated 13.6.2008 passed by the Income Tax Appellate Tribunal, Patna Bench, Patna in ITA No.575/Pat/2007.

********** Bihar Agricultural Produce Marketing Board, having its office in Pant Bhawan on Bailey Road, P.O. G.P.O., P.S. S.K. Puri in the town and district of Patna, through Dr. B. Rajinder, Administrator.

THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE AHSANUDDIN AMANULLAH ********* S.K. Katriar, J. This appeal under section 260A of the Income Tax Act 1961 (hereinafter referred to as „the Act‟), is directed against the order dated 13.6.20008, passed by the Income Tax Appellate Tribunal, Patna Bench, Patna in ITA No.575/Pat/2007, whereby the appeal preferred by the assessee has been dismissed, and the order passed by the learned Commissioner of Appeals has been upheld. The learned Commissioner had, in its turn, upheld the order of the learned Assessing Officer. It is with respect to the Assessment Year 2004-05.

2. A brief statement of facts essential for the disposal of this appeal may be indicated. The appellant assessee had submitted its returns for the period in question on 1.11.2004. It was a statutory body created in terms of the Bihar Agricultural Produce Markets Act 1960 (hereinafter referred to as the „local Act‟). It is an institution for charitable purposes within the meaning of section 2(14) of the Act. The local Act was repealed by the Bihar Agricultural Produce Market (Repeal) Act 2006 (Bihar Act 23 of 2006), with effect from 12.9.2006. The learned assessing officer passed order of assessment on 19.12.2006 (Annexure-

1), whereby the assessee was assessed to tax. Its claim for exemption beyond 15% of its receipts under the provisions of section 12 of the Act was rejected under the provisions of section 11 of the Act. Aggrieved by the order, the assessee preferred appeal which was dismissed by order dated 5.7.2007, passed by the learned Commissioner of Income Tax (Appeals), Patna, and the order of assessment was upheld. The assessee challenged the same by preferring appeal before the Tribunal which has been rejected by the impugned order. Hence this appeal at the instance of the assessee.

3. While assailing the validity of the proceedings, learned counsel for the appellant submits that the Act was repealed with effect from 1.9.2006, and the assessment order was passed on 19.12.2006. The same will be deemed to have been passed against a dead person because no steps were taken for substitution in terms of the Repeal Act. He relies on the provisions of section 159, 171, and 189 of the Act. He submits in the same vein that the appellant Board is not covered by sub-section (31) of section 2 of the Act which defines „Person‟. He relies on the judgment of the Supreme Court in Commissioner of Income Tax, Bombay City I vs. Amarchand N. Shroff, (1963) 48 ITR 59 (at page 66 LHC)=AIR 1963 SC 1448, paragraph 7. He next submits that the Board‟s fund collected under the provisions of section 33-C of the local Act is statutory contribution for specific purpose, and the assessee was not free to use it in any manner it liked. It could be used only for the specified purpose. He submits in the same vein that, supposing for the sake of argument that the substitution in terms of Repeal Act was complete, yet it was not liable to taxation. He relies on the judgment dated 1.4.2011, passed by a Division Bench of this Court to which one of us (S.K. Katriar, J.) was a party in Misc. Appeal No.425 of 2010 (Bihar State Text Book Publishing Corporation vs. The Commissioner of Income Tax-I, Patna & another), since reported in 2011(4) PLJR 398. He next submits that, in view of the scheme, the aims and objects of the local Act, the Board‟s fund cannot be treated to be „income‟ within the meaning of sub-section (24) of section 2 of the Act. He next submits that the assessee is an organisation for charitable purposes and, therefore, it is entitled to the benefit of exemption in terms of section 11(2) (a), and the cognate provisions of the Act. The learned authorities under the Act have erred in disallowing the claim of exemption in terms of section 11(2) (a) of the Act to the extent of 85%. He submits that the information in terms of section 139, read with section 17, read with Form 10, should have been allowed to be filed. He relies on a Division Bench judgment of the Gujarat High Court in Commissioner of Income-Tax vs. Mayur Foundantion, (2005) 274 ITR 562. The expression „in the manner‟ occurring in section 11(2) (a) of the Act excludes the compulsion element of time. He relies on the judgment of the Supreme Court in Sales Tax Officer, Ponkunnam and another vs. K.I. Abraham, AIR 1967 S.C. 1823 (paragraph 6). He further submits that the Revenue should not take advantage of ignorance of the assessee. He relies on the judgment of a Division Bench of the Allahabad High Court in Commissioner of Income-Tax vs. Lucknow Public Educational Society, (2009) 318 ITR 223 (All).

3.1) Learned counsel for the appellant has advanced elaborate submissions in reply to the contentions of the learned senior Standing Counsel.

4. The learned Senior Standing Counsel has supported the impugned order. Relying on the provisions of the Repeal Act, he submits that the successor body contemplated under the Repeal Act is the State Government itself whose senior functionary has always remained the Managing Director of the Board. The assessee has contested the matter at all stages and, therefore, the quondam Board was throughout effectively represented by the Board‟s Managing Director, a senior member of the Indian Administrative service. He further relies on the provisions of section 170 of the Act. He next submits that the information as to non- utilisation of 85% of the receipts has to be given in Form 10 within the time prescribed by the Explanation -2 to section 139(1) (b) of the Act. He relies on the judgment of the Supreme Court in Commissioner of Income-Tax vs. Nagpur Hotel Owners' Association, (2001)247 ITR 201 (at page 204), and further states that the judgment in the case of Commissioner of Income Tax vs. Mayur Foundation (supra) stood on a different footing.

5. We have perused the materials on record and considered the submissions of the learned counsel for the parties. The first contention advanced on behalf of the appellant is that the order of assessment was passed after the Board had become extinct. It appears to us that the local Act remained on the statute book from 1960 to 31.8.2006. The same was repealed by the Repeal Act, with which the entire duties and functions of the Board came to an end. However, Section 3 of the Repeal Act took into account the affairs of the Board conducted while the local Act was in force, and also the issues arising out of the same in future after repeal of the Act.

5.1) It is evident on a perusal of the proviso to section 3(i) of the Act that any pending proceeding shall continue and shall be taken care of by the Administrator and Special Officer contemplated by section 4(ii) of the Act, till it reaches its finality. Section 4(i) of the Act provides that all liability including statutory and non-statutory, secured or unsecured, shall be the liability of the State Government. It is thus evident that the local Act was repealed, yet adequate provisions have been made in the Repeal Act to look after the litigations or such other proceedings against, or initiated by, the Board. The Repeal Act further provides that all rights, liabilities, and properties under the Act shall vest in the State Government.

6. It is relevant to reproduce hereinbelow section 33-A of the local Act:

"33-A. Establishment of Board. - (1) For the purposes of exercising superintendence and control over Market Committees, and for exercising such other powers and performing such functions as are conferred or entrusted under this Act, the State Government shall, by notification in the official Gazette, establish a Board called the Bihar Agricultural marketing Board. (2) The Chairman of the Board shall be the person nominated by the State Government. The number of the members of the Board shall not exceed fifteen. These members shall be appointed by the State Government. (3) The members of the board shall be appointed by the State Government by notification in the official Gazette, from amongst the following categories of persons, namely:

(a) an officer of Finance Department of the State Government ;

(b) two officers of the Agriculture Department of the State Government;

(c) an officer of the Revenue Department of the Government;

(d) Chief Engineer of the Rural Engineering organisation of the State Government, ex-officio;

(e) The Chief Town Planner of the State Government, ex-officio;

(f) an officer of the Ministry of Agriculture of the Government of India to be nominated by that ministry;

(g) Managing Director of the State Bank of India or his nominee;

(h) five members to be nominated from amongst the members of the Market Committee;

(4) The Managing Director of the Board shall function as the Chief Executive Officer of the Board who shall be an officer of the State Government not below the rank of a Collector.

(5) The membership of persons, other than the official members shall be at the pleasure of the Government.

6.1) It is evident from a perusal of Section 33A of the Act that its Chairman shall be the person nominated by the State Government. Traditionally the State Government has always nominated a senior member of the Indian Administrative Service as the Managing Director. It is evident under section 33-A(4) of the local Act that the Managing Director of the Board shall function as the Chief Executive Officer of the Board who shall be an officer of the State Government not below the rank of a Collector. It is further relevant to state that section 33-A of the Act provides that the Board comprises of nominees of the Bihar Government and some other ex-officio nominees.

7. As stated hereinabove that, after repeal of the local Act, the Administrator and Special Officer shall be officers of the State Government. In other words, the official control of the affairs of the Board prior to repeal of the Act and thereafter has in substance been that of the State Government. To this has to be added the position that the Board and/or the Administrator vigorously contested the proceedings before the three learned authorities under the Act and before us also. Furthermore, it is with respect to a period prior to the date of repeal of the local Act. We are, therefore, in no doubt that the quondam Board has always been effectively represented and, therefore, the proceedings cannot abate on account of formal non-substitution of the nominee of the State Government. We, therefore, do not agree with the first submission advanced on behalf of the learned counsel for the appellant

8. We shall now deal with the second contention advanced by learned counsel for the appellant. He has submitted that the receipts of the Board are not taxable. This necessitates a close examination of the schemes, aims and the objects of the Act. The aims and objects of the Act are as follows:

"(1) Creation of market area and markets with a view to ensuring fair trade transactions in agricultural and allied commodities.

(2) Appointment of Market Committees fully representative of growers, traders, local authorities and Government to supervise the working of regulated markets.

(3) Regulation of market charges and prohibition of realization of excess charges.

(4) Regulation of Market practices.

(5) Licensing of market functionaries. (6) Arrangement for conciliation of disputes regarding quality, weighment, deductions etc. (7) Sale by open auction.

(8) Arrangement for the display of reliable and up to date market information in the market yard. (9) Improving generally the conditions of agricultural marketing."

The preamble of the Act reads as follows:

"An Act to provide for the better regulation of buying and selling of Agricultural Produce and the Establishment of Markets for Agricultural Produce in the State of Bihar and for matters connected therewith".

9. Section 27 of the Act empowers the market committees to levy and collect market fee from the licensees which can be used for the purposes mentioned in Section 30 of the Act. The Act contemplated and constituted a network of market committees at the local level to achieve the aims and objects of the Act enumerated above under the over all guidance, supervision, control, and regulation of the Board. Section 2(bb) of the local Act defines „Board‟ to mean the Bihar Agricultural Marketing Board established under Section 33A of the Act. Chapter IV-A of the Act is headed „Marketing Board‟. Section 33-A is headed „Establishment of Board‟, and provides for its composition and appointment. In view of the provisions of section 33A of the Act, the Marketing Board is a body corporate having perpetual succession and common seal, and can sue and be sued in its own name. Section 33-C of the Act, which is headed „Board‟s Fund‟, is of utmost importance in the present context, and is reproduced hereinbelow:

"33.C. Board‟s Fund.- (1) Every Market Committee shall, out of its fund, pay to the Board as contribution, such percentage of its income derived from licence fee and market fees as may be prescribed to meet expenses of the establishment of the Board and also those incurred in the interest of the Market Committee.

of the Act, we are of the view that the Board is a statutory body, having legal personality of its own, and has been assigned statutory duty of regulation of buying and selling of agricultural produce and establishment of markets for agricultural produce in the State of Bihar. It appears to us that it is not in the least engaged in any commercial activity, and no part of its activity is inspired by any profit motive. The Board‟s duties are entirely statutory verging on sovereign and regal functions.

10. We must also notice the judgment of a Division of this Court in Bihar State Text Book Publishing Corporation vs. The Commissioner of Income Tax (supra), on which learned counsel for the appellant has placed heavy reliance. That was a case where the appellant assessee is a public-sector undertaking of the Government of Bihar, and incorporated under the provisions of Section 617 of the Companies Act.

It is charged with the duty of publication and distribution of text-books in schools particularly for children of the poor and down-trodden sections of the society. In view of the policy decision of the State Government, it was extending cash subsidy to the assessee for printing and sale of text- books at low rates to children of the deprived sections of the society in an effort to fulfill the constitutional mandate of spread of education. The assessee claimed exemption from payment of taxes on the amount of subsidy received and receivable from the State Government which was concurrently rejected by the three authorities under the Act. The assessee, therefore, preferred appeal in this Court under Section 260A of the Act which was allowed. It is relevant to state that the learned Tribunal had, in that case relied on the judgment of the Supreme Court in Sahney Steel &Press Works Ltd. v. C.I.T. [(1997) 228 ITR 253]. On a close perusal of the judgment of the Supreme Court and various other relevant authorities, this Court concluded that the subsidy received by the Corporation from the Bihar Government was entitled to the benefit of exemption from taxation. The relevant portions of the judgment are reproduced hereinbelow:

10. We must consider the judgment of the Supreme Court in Sahney Steel & Press Works Ltd. (supra), on which the learned appellate authority as well as the learned Tribunal have placed full reliance. We are of the view that the judgment is inapplicable to the facts and circumstances of the present case, inasmuch as it did not deal with `charitable purpose' within the meaning of section 2(15), nor the `benefits of exemption available to educational institutions from the State Government', within the meaning of section 10(23C), of the Act. Sahney Steel & Press Works Ltd. was really concerned with industrial subsidy from the Government which is fundamentally different and distinct from educational institutions to which has to be added Chapter-IV of the Constitution of India which lays down the governmental duty to promote education amongst all, particularly the downtrodden sections, of this country. In view of the facts and circumstances of the case, the Supreme Court held that the amount paid to the assessee in that case was in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. The Supreme Court held that, having regard to the scheme of the notification, there was no doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably.

11. We wish to notice some of the judgments discussed in Sahney Steel & Press Works Ltd. (supra), to the extent relevant in the present context. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Ostime v Pontypridd and Rhondda Joint Water Board [(1946) 14 ITR (Suppl) 45, 47; (1946) 28 TC 261 (HL)], that the nature of subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts and are, therefore, taxable. The identity of the source is of great importance. In other words, it must come from public funds. Equally important is that the subsidy from public funds are meant to carry on the undertaker's trade and business which are trading receipts, that is, are to be brought into account in arriving at the balance of profits orgains.

11.1) The judgment of the House of Lords in Seaham Harbour Dock Co. v Crook [(1931) 16 TC 333 (HL)], may be noticed. The Harbour Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropriated by Parliament. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. In other words, the House of Lords observed that if a subsidy from public funds given for a particular purpose and objective to take care of the problem of unemployment, in that case financial assistance will not be treated to be operational or trade receipt and, therefore, exempt from taxation. Such a subsidy does not form part of trade activities of the company and, therefore, the House of Lords reached that conclusion. It had nothing to do with the trade of the company. Another test to determine this is whether or not such a subsidy is meant to achieve a certain objective, or the beneficiary is free to spend it for any item of its trade or business as was the case in Sahney Steel & Press Works Ltd. In other words, if the recipient is bound to use the subsidy from public funds for a particular purpose, as was the case in Seaham Harbour Dock Company, or Lincolnshire Sugar Co. Ltd. v. Smart [(1937) 20 TC 643 (HL)], it would not be operational or trade receipts, and would therefore not be taxed.

11.2) We would next like to notice the facts and circumstances of Lincolnshire Sugar Co. Ltd. (supra). In that case, it was found that the Company carried on the business of manufacturing sugar from home- grown beet. The company was paid various sums under the British Sugar Industry (Assistance) Act 1931, out of monies provided by Parliament. The question was whether these monies were to be taken into account as trade receipts or not. The object of the grant was that in the year 1931, in view of the heavy fall in prices of sugar, sugar industries were in difficulty. The government decided to give financial assistance to certain industries in respect of sugar manufactured by them from home-grown beet during the relevant period. Lord Macmillan held that:

"What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business."

He further observed that:

I think that they were supplementary trade receipts bestowed upon the company by the Government and proper to be taken into computation in arriving at the balance of the company's profits and gains for the year in which they were received.

Applying these principles in the case of Sahney Steel & Press Works Ltd., the Supreme Court observed that the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee, Sahney Steel, could not use this money for distribution as dividend to its share-holders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock's case (supra).

11.3) The judgment in the Canadian case in St. John Dry Dock and Ship Building Co. Ltd. v. Minister of National Revenue, 4 DLR 1, may also be referred. It was a case where the Canadian Government had given aid to the company to encourage construction of dry dock which was "an aid to the construction of dry dock", and was, therefore, treated to be not an operational subsidy. It was, therefore, exempt from taxation because it was meant for a particular objective of general public utility.

12. The ratio of the judgments discussed above is that the grant coming from the Government will qualify for exemption from taxation if the same was granted for a particular purpose of public utility or public importance, or to alleviate a situation affecting the general public, and cannot be used for any other purpose. The subsidy from the Government would be taxable if it can be used for any purpose the assessee likes including its trade and business, would then be in the nature of trade receipts and taxable. In other words, the basic question to be determined is whether a subsidy from payment from public funds is in the nature of capital or revenue. In the case of the former, it is not taxable, and is taxable in case of the latter.

11. Applying the ratio of the judgment to the present situation, it appears to us that the Board‟s fund was meant for specific purposes, namely, to meet the expenses for establishment of the Board, and those incurred in the interest of the Market committee. The aims and objects of the Market committee, and the purpose for which the committee itself could use the funds, are laid down in section 30 of the local Act. In such a situation, it is a statutory, compulsory contribution by the market committee to the Board‟s fund, meant for specified statutory purposes, which cannot be used for any purpose that the Board desires, and surely cannot be used for commercial activities, or trade and business. It does not permit any profit motive. It is apparent from the aims and objects of the Act that the functions of the Board are entirely statutory, specified, and to alleviate the situation affecting plight of agriculturists in the State of Bihar. In such a situation, it is not a revenue receipt and, therefore, cannot be taxed.

12. We must also notice the definition of „income‟, occurring in sub-section (24) of Section 2 of the Act. It is quite clear in our minds that the Board‟s fund received under section 33-C of the local Act is not an income for profits and gains, is not dividend , is not voluntary contribution, nor is it covered by any one of the remaining clauses of sub- section (24) of section 2 of the Act. We, therefore, conclude that the Board‟s fund received and collected under the provisions of section 33C of the Act is not income within the meaning of sub-section (24) of section 2 of the Act, and is beyond the purview of the Act.

13. In view of the foregoing discussion, we do not consider it necessary to discuss the remaining questions advanced by learned counsel for the parties.

14. In the result, we allow this appeal, and the order dated 13.6.2008, passed by the learned Income Tax Appellate Tribunal, Patna Bench, in ITA No.575/Pat/2007, is hereby set aside. In the circumstances of the case, there shall be no order as to costs.