These cross-appeals are filed by assessee and Department against order of CIT(A), dt. 16th Aug., 1999. assessee has also filed cross- objection. However, grounds of appeal taken by assessee in its appeal and grounds taken in cross-objection are same i.e. disputing order of learned CIT(A) to hold that income of assessee cannot be claimed to be exempted from taxation under Art. 289 of Constitution of India. In appeal filed by Department, only issue involved is as to whether learned CIT(A) is not justified to delete interest levied under s. 216 of IT Act, 1961, as order passed by AO to levy interest under s. 216 of Act is not speaking order. Firstly we take up appeal and cross-objection filed by assessee. relevant facts are that assessee is company incorporated under Companies Act, 1956 and is corporation of U.P. Government. It is e n g g e d in construction of Government building. Six of shareholders/subscribers to memorandum and articles of association were senior Government officials. entire subscribed/paid-up share capital was paid by State Government. shareholders of assessee corporation are senior officials and they are stated to be benamidars of State Government, who, on their transfer from assessee, automatically transfer shares to new officers. dividends for shares are paid to State Government. chairman, managing director and directors of assessee are completely bound by directions of State Government on question of policy, etc. Therefore, it is only State Government which is acting/working through agency of assessee corporation. It was contended that assessee corporation is State and claimed that its income is exempted from IT Act under Art. 289 of Constitution of India. AO did not accept said contention of assessee that income of assessee was exempted under Art. 289 of Constitution of India and held that assessee corporation being separate legal entity could not be equated with State. Therefore, its income could not be exempted from taxation under Art. 289 of Constitution of India. assessee filed appeal before first appellate authority. learned CIT(A) has also confirmed order of AO that assessee is not Government or State and therefore its income is not exempted from tax as claimed under Art. 289 of Constitution of India. Hence assessee is in further appeal before Tribunal. During course of hearing, learned Authorized Representative of assessee referred to memorandum and articles of association of assessee corporation and submitted that all shareholders/members never held actual title in share and they were merely name lenders. entire share capital is subscribed/paid by State Government. assessee corporation was in actuality sole proprietorship of State Government only and so it was nothing but State itself. He further submitted that as per articles of association of assessee corporation, entire profits of assessee belonged to State. He contended that if corporate veil is lifted, it would be seen that State Government is actual shareholder/owner and others do not possess any title or interest therein. He submitted that it is necessary under IT Act to tax only real and actual owner of income rather than that individual, in whose name income was earned. He submitted that entire income of assessee corporation is that of State and as such assessee is entitled for exemption of IT Act on its income as per Art. 289 of Constitution of India, as assessee corporation is State. He further submitted that State Government is operating through instrumentality or agency of corporation. chairman, managing director and other directors of board of assessee corporation are appointed by State Government and their tenure in office depends completely on whims and fences of those operating in State Government. They are bound by such directions on question of policy as State Government might give in writing to them from time to time. He submitted that State Government is regulator in regard to functioning of assessee corporation. He submitted that assessee corporation has been incorporated to carry out business or its related activities for and on behalf of State Government. He submitted that merely because independent personality has been incorporated under Companies Act to carry out business on behalf of State Government could not mean that it seizes to be State and it can be denied exemption of its income from Art. 289 of Constitution of India. During course of hearing, attention of learned Authorized Representative of assessee was drawn to decision of jurisdictional High Court in case of U.P. Forest Corporation (Writ Petn. No. 4424 of 1987) wherein their Lordships have held that U.P. Forest Corporation could not claim exemption under Art. 289 of Constitution of India as exemption being given to State and not to extended arm of State. It may be stated that U.P. Forest Corporation was constituted under U.P. Forest Corporation Act and in said case it was claimed that its income was exempted from Union Taxation under Art. 289 of Constitution of India. learned Authorized Representative of assessee submitted that U.P. Forest Corporation was incorporated by separate Act and whereas assessee corporation has been incorporated under Companies Act and hence said decision is not applicable to case of assessee. He submitted that income of assessee is exempted under Art. 289 of Constitution of India. On other hand, learned Departmental Representative supported orders of authorities below. He submitted that assessee is company incorporated under Companies Act and as such it is person within meaning of s. 2(13) of IT Act. He submitted that sub-s. (7) of s. 2 defines assessee to be person by whom any tax or any other sum of money is payable under Act. He further submitted that s. 4 creates charges of income-tax in respect of total income of previous year of every person. Thus assessee is person assessable to tax under IT Act. He submitted that income-tax is self-contained Act and immunity granted under Constitution of India from Union Taxation is only to State property and it does not extend to corporation owned or controlled by State. They are routine subjected to levy of income-tax. He submitted that assessee corporation is corporation to carry on business activities as per its object clause of memorandum of association and being separate legal entity, provisions of IT Act to tax income are applicable. He submitted that it is irrelevant that who are shareholders and how income is distributed. He submitted that there is no specific provision under which assessee s income is exempted from taxation under IT Act and thus income of assessee is liable to be taxed as per provisions of IT Act. In support of his submission, he also placed reliance on decision of apex Court in case of Andhra Pradesh State Road Transport Corporation vs. ITO (1964) 52 ITR 524 (SC). We have considered orders of authorities below and submissions of learned representatives of parties. We have also gone through cases cited by learned representatives of parties in support of their submissions. We have also carefully considered Art. 289 of Constitution of India as also Art. 12 of Constitution of India. We have also perused memorandum and articles of association of assessee corporation. There is no dispute to fact that assessee corporation has been incorporated under Companies Act, 1956 and all shareholders and subscribers to memorandum of association are senior Government officials of U.P. State Government. We also agree with learned Authorized Representative of assessee that initial subscribed and paid-up capital of assessee corporation and also subsequent enhancement till assessment year under consideration was paid by State Government only. We also agree with learned Authorized Representative of assessee that chairman, managing director and board of directors of assessee corporation are appointed/constituted by State Government. However, it is relevant to state that provisions of Companies Act, 1956 are applicable in regard to their appointment and as such State Government has to comply with provisions of Companies Act. We also agree with learned Authorized Representative of assessee that board of directors and managing director/chairman of assessee corporation are to carry out directions on question of policy as may be given from time to time by State Government. We also agree with learned Authorized Representative of assessee that entire dividend as may be distributed by assessee corporation goes to coffer of State Government. Be that as it may, there is no dispute to fact that activities of assessee corporation have to be carried out by assessee corporation in its own name. profit and loss would be profit and loss of assessee corporation. assessee corporation is Government company as per s. 617 of Companies Act, 1956, has personality of its own and this personality is undisputedly distinguished from that of State Government or its shareholders. Hence income derived by assessee is income of assessee corporation which is separate and independent legal entity apart from Government. assessee corporation can sue or be sued in its own name. We are or considered view that above submission of learned Authorized Representative of assessee only establishes existence of deep pervasive State control. It may utmost offer indication that assessee is State agency or instrumentality of Government but it cannot be equated with State. We consider it relevant to reproduce Art. 289 of Constitution of India which reads as under: "Art. 289 (1) property and income of State shall be exempt from Union taxation. (2) Nothing in cl. (1) prevent Union from imposing, or authorizing imposition of, any tax to such extent, if any, as Parliament may by law provide in respect of trade or business of any kind carried on by, or on behalf of, Government of State, or any operation connected therewith, or any property used or occupied for purposes of such trade or business, or any income accruing or arising in connection therewith. (3) Nothing in cl. (2) shall apply to any trade or business, or to any class of trade or business, which Parliament may by law declare to be incidental to ordinary functions of Government." On perusal of said Art. 289 of Constitution of India, it reveals that concept of immunity from taxation has been provided in respect of property and income of State but sub-art. (2) authorizes Parliament to impose tax in respect of trade or business carried on by or on behalf of State Government. Further, cl. (3) of said Art. 289 of Constitution of India empowers Parliament to declare by law that any of trade or business would be taken out of purview of cl. (2) and be restored to area covered by cl. (1) by declaring that trade or business is incidental to ordinary function of Government. In other words, cl. (3) of Art. 289 is exemption to exemption prescribed by cl. (2) of Art. 289. Thus, Art. 289(3) contemplates that trade or business may be incidental to ordinary function of Government and when State engages in any such trade or business, income or profit therefrom is exempted from taxation. By that, it means that if Parliament by law declares any such trade or business to be incidental to ordinary functions of Government, it shall not be liable to be taxed by Union. Therefore, unless trade or business is incidental to ordinary functions of Government or has been declared to be so by Parliament, income of that trade or business will not escape tax. Hon ble Allahabad High Court while considering in case of U.P. Forest Corporation (supra) has held that U.P. Forest Corporation constituted by U.P. Forest Corporation Act for better preservation and development of foreign and better exploitation of forest produced within State could not be equated with State. Further, U.P. Forest Corporation though could be extended arm of State Government, but not State Government itself. few lines from said judgment is of benefit and same are reproduced as under: "Coming to other questions, namely, if petitioner was entitled to claim exemption under s. 11(1) of IT Act or Art. 289 of Constitution, they appear to be fully covered by two decisions of Hon ble Supreme Court in case of Andhra Pradesh Road Transport Corporation case, one reported in CIT vs. A.P. Road Transport Corporation AIR 1986 SC 1054 and Andhra Pradesh Road Transport Corporation vs. CIT AIR 1964 SC 1486 decision in 1964 SC is authority for preposition that corporation with separate personality even if it is required to handover surplus to State does not become State within meaning o f Art. 289 of Constitution. vehement argument of learned counsel for petition that concept of Public Service Corporation having undergone change and they being extended are of State as held in Sukhdeo Singh vs. Bhagat Ram Sardar Singh AIR 1975 SC 1331 and Ramana vs. J.A. Authority of India AIR 1979 SC 1620 or they being bodies where Government operated behind corporate veil, as held in Central Land Water Transport Corporation Ltd. vs. Brajanath AIR 1986 SC 1571, petitioner was nothing but State entitled to exemption appears to devoid of any substance. exemption being to State and not to extend arm of State petitioner cannot claim any benefit. Moreover, aspect being fully covered by 1964 SC (supra) decision, petitioner cannot be permitted to raise it." It is relevant to state that apex Court in case of Andhra Pradesh State Road Transport Corpn. (supra) has also considered similar issue as to State Road Transport Corpn. (supra) has also considered similar issue as to whether State Road Transport Corporation constituted by Road Transport Corporation by notification issued by Andhra Pradesh Government could claim immunity from liability to income-tax on its income derived from its trading activities under Art. 289 of Constitution of India on ground that its trade activities were carried on by or on behalf of Government of State. It was held by Their Lordships of apex Court that income derived by corporation from its activities could not be said to be income of Andhra Pradesh State under Art. 289 of Constitution, as State Corporation had separate personality of its own, trading activities are trading activities of corporation and profits and loss arising therefrom are profit and loss of corporation. We are of considered view that above cited decision of Hon ble Allahabad High Court in case of U.P. Forest Corporation (supra) and decision of apex Court in case of Andhra Pradesh State Road Transport Corpn. (supra) surely apply to case of assessee before us. corporation when it is assessed to tax, it pays tax of its own liability and not on behalf of agent or its shareholders. Therefore, assessee corporation could not claim immunity from taxation under Art. 289 of Constitution of India, as it is not State within scope of Art. 289 of Constitution of India. It is only extended limb of Government on account of deep and pervasive control of its functioning and it is not State to be covered within scope of Art. 289 of Constitution. Hence, we uphold order of learned CIT(A) that assessee corporation is not State Government under Art. 289 of Constitution and it cannot claim exemption/immunity from taxation of its income. Therefore, grounds of appeal taken by assessee in its appeal as well as cross-objections are rejected. Now we take up grounds of appeal taken by Department. During course of hearing, learned Departmental Representative submitted that assessee was liable to pay interest under s. 216 of IT Act, 1961. He submitted that learned CIT(A) was not justified to delete interest leviable under s. 216 of Act which is mandatory in nature merely because there is no speaking order of AO. He submitted that issue could be set aside to enable AO to fulfil such requirement. He submitted that order of learned CIT(A) be reversed and matter be restored to AO to pass speaking order, for levy of interest under s. 216 of Act. On other hand, learned Authorized Representative of assessee supported order of learned CIT(A) and placed reliance on decision of Hon ble Gujarat High Court in case of CIT vs. Nagri Mills Ltd. (1986) 57 CTR (Guj) 304: (1987) 166 ITR 292 (Guj) and also Board Circular F. No. 400/58/78-ITCC, dt. 29th Feb., 1980. He submitted that their Lordships of Hon ble Gujarat High Court have confirmed order of Tribunal to delete interest levied under s. 216 of Act when AO levied interest without giving finding. We have considered order of learned CIT(A) and submissions of learned representatives of parties. We have also gone through said CBDT circular (supra) and also decision of Hon ble Gujarat High Court in case of Nagri Mills Ltd. (supra). We do agree with learned Authorized Representative of assessee that CBDT has stated that order under s. 216 of Act being appealable should be speaking order before charging interest under s. 216 of Act. We further observed that Hon ble Gujarat High Court has also held that if AO has passed order under s. 216 of Act without giving finding, question of levy of interest would not arise and therefore no interest was chargeable under s. 216 of Act when AO failed to record finding that there had been under-estimation of advance tax by assessee. We observed that AO not given any reason or finding for levy of interest under s. 216 of Act. Therefore, issue involved is squarely covered by decision of Hon ble Gujarat High Court in case of Nagri Mills Ltd. (supra). Respectfully following said order of Hon ble Gujarat High Court, we uphold order of learned CIT(A) and reject ground taken by Department. In result, appeals of assessee as well Department and also cross-objection of assessee are dismissed. *** U.P. RAJKIYA NIRMAN NIGAM LTD. v. JOINT COMMISSIONER OF INCOME TAX