Section 10(20) of the Income Tax Act, 1961 provides exemption from income tax for the income of a local authority.
A local authority is defined as any person or body of persons constituted by or under any law enacted by Parliament or by a State Legislature for the purpose of local government, or for the purpose of performing any of the functions of a municipality or district board or cantonment board.
Under Section 10(20), the income of a local authority is exempt from income tax if it is derived from:
- The supply of water or electricity
- The supply of any other service
- The construction, maintenance, or repair of any road, bridge, or building
- The supply of any article or thing
- The carrying out of any other work
- The collection of tolls
It is important to note that the exemption under Section 10(20) applies only to the income derived from the specified activities. Any income earned by a local authority from other sources will be subject to income tax.
The term “local authority” is defined in Section 2(24) of the Income Tax Act to mean:
- A panchayat as referred to in clause (d) of article 243 of the Constitution;
- A municipality as referred to in clause (e) of article 243P of the Constitution;
- A municipal committee and district board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;
- A cantonment board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924).
Conditions for exemption:
- The income must be received by a local authority.
- The income must be from one of the following sources:
- House property
- Capital gains
- Other sources
- Trade or business carried on by the local authority, which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area.
- the income of a local authority must be utilized for the purposes specified in the law under which it is constituted. Any income that is not utilized for these purposes may not be eligible for the exemption under Section 10(20).
- It is important for local authorities to maintain proper records and documentation to substantiate their claim for exemption under Section 10(20). They should keep track of the income earned from the specified activities and ensure that it is utilized for the designated purposes.
Example of Local Authority:
Examples of local authorities that are eligible for exemption under Section 10(20) include:
- Municipal corporations
- Nagar palikas
- Gram panchayats
- District boards
- Cantonment boards
- Development authorities
- Port trusts
Examples of Incomes:
Examples of income that is exempt from income tax under Section 10(20) include:
- Rent income from properties owned by the local authority
- Interest income on deposits made by the local authority
- Royalty income from the exploitation of natural resources
- Income from the sale of goods and services by the local authority
- Income from property taxes
- Income from water and sewerage charges
- Income from license fees
- Income from fines and penalties
- Income from grants and subsidies received from the Central Government or State Government
In conclusion, Section 10(20) of the Income Tax Act provides an exemption for the income of local authorities derived from specified activities. This exemption helps local authorities fulfill their responsibilities without the burden of income tax. However, it is crucial for local authorities to comply with the conditions and requirements specified under Section 10(20) in order to avail the exemption.