Section 3. (i) The Governor ma y, after making such inquiry as he may de em fit, and

having regard to the population of any urban area, the density of population
therein, the reven ue generated for the local administrati on of such area, the
percentage of employment in non- agricultural activities in such area, the
economic impor tance of such area, and such other factors as may be
prescribed, by notification, declare his intention to specify such area to be a
larger urban area, or smaller urban area, or a transitional area'.

Provided that no such declaration shall be made unless the population :-
a) in the case of a larger urban area is 75 thousands or more,
b) in the case of a smaller urban area, is twenty five thousand or more but
is less than 75 thousand, and
c) in the case of a transitional area, is less than twenty-five thousand :
Provided further that the non-agricultural population in all cases shall
be eighty five per cent or more.
Explanation :- "revenue generated for the local administration ' shall
not include –
a) taxes, if any, distributed to the Municipa lity by the State
Government,
b) loans and grants from the State Government, and
c) loans and grants from the Central Government or any institution
or other source.
(2) The Governor shall, by notification, declare an area specified as-
i. a larger urban area to be a city,
ii. a smaller area to be a town, and
iii. a transitional area to be a Nagar Panchayat.

(3) Notwithstanding an ything contained in sub -section (l), the Governor
may, by notification, determine separate conditio ns to constitute any hill ar ea,
pilgrim centre, tourist centre of mandi town as a municipal area.