Need Tally
for Clients?

Contact Us! Here

  Tally Auditor

License (Renewal)
  Tally Gold

License Renewal

  Tally Silver

License Renewal
  Tally Silver

New Licence
  Tally Gold

New Licence
 
Tally On Cloud Tally on Cloud: Ready for the Daily Backup Requirement
Keep your Tally books accessible from anywhere while supporting your Rule 46(8) obligations. With daily backups configured on servers physically located in India, Tally on Cloud helps you maintain the backup arrangement required for electronic books of account under the Income-tax Rules, 2026. Move your Tally to the cloud with confidence.
Open DEMAT Account with in 24 Hrs and start investing now!
« Top Headlines »
Open DEMAT Account in 24 hrs
 Filing Belated ITR for AY 2026-27? Know Which Losses You Can Carry Forward and Which You May Lose
 CBDT Extends Tax Audit Report Deadline to October 21, ITR Filing Last Date to November 21 for AY 2026-27
 CBDT Extends AY 2026-27 ITR Filing Deadline for Tax-Audit Cases: New Dates and Key Compliance Details
 Foreign Assets Missing From Your ITR? Income Tax Department Opens One-Time Disclosure Window
 Tax Audit Deadline September 30: Why AIS, TDS and GST Figures May Not Match Your ITR and What Taxpayers Should Do
 Tax audit deadline September 30: Common mistakes taxpayers should avoid
 Your ITR says ‘verified’, but the refund hasn’t arrived? 5 reasons why your money could be stuck
 Missed the ITR Deadline but TDS Refund Is Due? Here’s How You Can Still Claim Your Money
 ITAT Cuts ?4.85 Lakh Penalty After ?14.02 Lakh Interest Income Was Missed in ITR
 ITR filed under old regime, tax calculated under new regime; Delhi ITAT gives taxpayer relief
 ITAT Delhi Quashes Tax Notice on AMU PG Student’s ?18.34 Lakh Stipend, Declares It Tax-Free Under Section 10(16)

Taxing state-owned corporations
April, 06th 2007

Tax on income is levied by the Union government as per the Constitution and List I in the seventh schedule. The state governments are exempt from the levy of income tax. Under the Constitution, property and income of a state shall be exempt from union taxation.

The immunity provided is for both government and non-government activities of a state. However, can a state-owned company or corporation established by a special enactment by state governments claim itself to be state and avail of the exemption?

In a few cases, such entities have claimed that they carry on trade or business on behalf of the state government and it is indeed the state government which is carrying on business through them. The surplus that such activities generate belongs to the state government and, one way or the other, ultimately finds its way to the coffers of the state government. They are, thus, entitled to be treated as state. The existence of an independent identity should not be used as a tool to deny them this benefit.

The apex court, in the case of Andhra Pradesh State Road Transport Corporation, had held that the income derived by Andhra Pradesh State Road Transport Corporation (constituted by a notification issued by the Andhra Pradesh Government) from its activities could not be said to be income of state of Andhra Pradesh, as the corporation had a separate personality of its own.

The trading activities and the profits and loss arising therefrom are that of the corporation. Even if it is required to hand over its surplus to the state, it does not become state within meaning of Article 289. The apex court had further observed that only when trade and business is carried on departmentally, or through exclusively appointed agents, could the income generated form such activities be considered as income of the state.

Similarly, in case of UP Forest Corporation (incorporated by a separate Act), the Allahabad High Court has held that the Corporation cannot claim exemption under Article 289, as exemption is given to a state and not an extended arm of the state.
 
The apex court was again confronted with this issue in the case of Adityapur Industrial Area Development Authority. Adityapur Industrial Area Development Authority was a body corporate, constituted under the Bihar Industrial Areas Development Authority Act, 1974, to provide for planned development of industrial area and promotion of industries. It had perpetual succession, a common seal, power to acquire, hold and dispose off properties, to contract, to sue or be sued and maintained its own fund. When specific exemption to such authorities under the Income-tax Act, 1961, was withdrawn, it sought relief under Article 289.

The apex court denied recourse to Article 289 as due to its enacting statue, it has a legal personality distinct from the state; its income is its own. The apex court further observed that the fact that authority in this case may not be strictly transacting trade and business or upon dissolution its assets, funds and liabilities would devolve upon the state government would make no difference.

The issue was raised again recently in the case of UP Rajkiya Nirman Nigam. In this case, the assessee was a company incorporated under the Companies Act, 1956, engaged in construction of government buildings.

The entire share capital was contributed by UP government, shareholders were senior government officials, dividend would go to the state government and the management was completely bound by the directions of the state on policy issues. In this background, the assessee claimed benefit under Article 289.

The Lucknow Tribunal has observed that as the assessee is a government company, as per section 617 of the Companies Act, 1956, it has a personality of its own and this personality is undisputedly distinguished from that of the state government or its shareholders. Activities of the assessee are carried in its own name, income derived is the income of the assessee and when it is assessed to tax, the assessee pays tax of its own liability and not on behalf of or as the agent or its shareholders.

Thus, the assessee cannot not claim immunity from taxation under Article 289. The existence of deep pervasive state control may give an indication it is an extended limb of the government, a state agency or an instrumentality of the state government but it cannot be equated with the state.

Accordingly, based on the above, it may be said that recourse to Article 289 is not available to such entities. As these entities fall within the definition of person under the act, they can claim exemption from taxation only if there is a special provision to that effect in the act itself.

RAVI PRAKASH & RICHA SAWHNEY
(The authors are with PricewaterhouseCoopers)

Home | About Us | Terms and Conditions | Contact Us
Copyright 2026 CAinINDIA All Right Reserved.
Designed and Developed by Ritz Consulting