The Constitution and List I in the seventh schedule says that tax on income is imposed by the Union government. The Constitution concedes exempt to state governments from charging income tax, also, state’s property and income is exempted from union taxation.

The exemption provided is for government as well as non-government activities of a state. But, state-owned companies or corporations claimed that their trade or business is carried on behalf of the state government and in reality, it is the state government which carries on business through them. The surplus generated by such activities belongs to the state government. Hence, they are entitled to be treated as state.

In the case of Andhra Pradesh State Road Transport Corporation, the apex court had adjudged that the income derived by the corporation 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, even though it is constituted by a notification issued by the Andhra Pradesh Government.

The apex court further added that the trading activities and the profits/loss arising therefrom belong to the corporation, even if it is requisite to surrender its surplus to the state. The income generated could be considered as income of the state, if trade and business is carried on departmentally, or through exclusively appointed agents.

There are few other examples of such cases like: the Allahabad High Court ruled that the Corporation cannot claim exemption under Article 289, in case of UP Forest Corporation. Similarly, Adityapur Industrial Area Development Authority (constituted under the Bihar Industrial Areas Development Authority Act, 1974) sought relief under Article 289, but denied by the Apex court saying recourse to Article 289 is not available to such entities.