Malik, C.J. - (1.) This is a reference under Section 66 (1), Income-tax Act, and the two questions that have been referred to us are as follows : "(1) Whether on the facts of the ease the arrangement for supply of water to Agra Cantonment constituted any trade or business on the part of the Agra Municipality ? (2) Whether the Agra Cantonment was not within the jurisdictional area of the Agra Municipality ?"
(2.) The Cantonment area of Agra is surrounded on all sides by land within the municipal limits of Agra. From 1894 the Municipal Board used to provide water for the Cantonment including the Fort. This continued upto 1906 and in that year the Cantonment Board became a share-holder in the Municipal Water Supply Works by paying a lump sum amount representing the Cantonment Board's share on the capital costs. After 1906 water was supplied from the Water Works Agra both to the Cantonment area as well as to the Municipal area. In the year 1932, however, there was a fresh agreement the terms of which are important. According to this the complete ownership of the Water Works was vested in the Municipal Board and the Agra Cantonment agreed to buy water in bulk at three places: (1) H. L. Reservior at Rakabganj, (2) Reservoir in Fort and (3) 2" main to old Ordinance Quarters at Chipitola. This agreement was for a period of five years and provided for a minimum and maximum supply of water at a particular rate. The Municipal Board bad nothing to do with the distribution of the water supply to the residents within the Cantonment. It was only concerned with the bulk supply and was entitled to deal only with the Garrison Engineer, Agra Division, or such other officer as the Cantonment Board might nominate for the purpose. The agreement also provided that ''the Cantonment Board shall, at its own cost and expense, provide and maintain, to the satisfaction of the Municipal Board, all distribution, pumping and plant beyond the taking over points mentioned above and shall be responsible for the maintenance and upkeep of the same." In accordance with this agreement water was supplied in bulk by the Municipal Board to the Cantonment at the reservoir in Rakabganj, at the reservoir in Fort and at the 2" main to old Ordinance Quarters at Chipitola. The Income-tax Officer considered the income derived by the Board by sale of the water to the Cantonment Board as income, profits and gains which was taxable under the Income-tax Act.
(3.) On behalf of the Board, however, reliance is placed on Section 4 (3) (iii) which is as follows : "4 (3) Any income, profits or gains falling within , the following classes shall not be included in the total income of the person receiving them : * * * * (iii) The income of local authorities (except income from a trade or business carried on by the authority so far as that income is not income arising from the supply of a commodity or service within its own jurisdictional area.)" Mr. Banerji, on behalf of the Municipal Board of Agra, has contended that it was not income from trade or business and was not taxable at all; and, secondly, that, even if it was income from trade or business, it was income arising from the supply of commodity or service within the jurisdictional area of the Municipal Board.;