Assessment of Local Authority under Assessment of Other Entities :

(1) General meaning: The expression “local authority” has been defined not by the Income-tax Act, 1961 but by section 2(31) of the General Clauses Act. A local authority is a person under section 2(31) of the Income-tax Act, 1961, and thus, constitutes a separate unit of assessment. It is chargeable to tax on its total income in respect of the previous year, computed in accordance with and under the basic provisions of the Act, which apply to other taxable entities and for all purposes of the Act, this entity is included in the term ‘person‘. All municipal corporations, or councils, committees, panchayat boards, port trusts, district boards and other authorities legally entitled to or entrusted by the Central or State Government with the control and/or management of a municipal or local fund are covered by the expression ‘local authority‘.

(2) Exemptions: Under section 10(20), the income of a local authority which is chargeable to tax under the heads ‘Income from house property,‘ ‘Capital gains‘ and ‘Income from other sources‘ accruing or arising to it anywhere in or outside India and income from a trade or business carried on by it which accrues or arises to it from the supply of a commodity or service with its own jurisdiction or from the supply of water or electricity within or outside its own jurisdictional area are totally exempt from tax. In other words, a local authority is taxable only in respect of the income arising to it from any business carried on by it provided that such income arises from the supply of any commodity or service, not being water or electricity outside its jurisdictional area, i.e., territorial limits.

A local authority is said to be resident at the place where the control and management of its affairs are situated and its residential status is governed by section 6(4). A local authority in India is always resident in India, except where the control and management of its affairs is exercised wholly from outside India.

(3) Tax rate: After total income, i.e., the income of a local authority chargeable to tax has been determined, the whole of it would attract tax at the rate applicable i.e., the one prescribed by the relevant Finance Act. There is no minimum amount exempt from tax in the case of a local authority: for income tax purposes, local authority is chargeable to tax on the whole of its income at 30%. Surcharge@12% is applicable where total income exceeds Rs.1 crore. Education cess@2% and Secondary and higher education cess@1% have to be added to the income-tax and surcharge.