2017 (9) TMI 1237 - HC - Income Tax

Expenditure on eligible projects or schemes - withdrawal of the deduction u/s 35AC - principle of promissory estoppel - Vires of sub-section (7) of Section 35AC as introduced by the Finance Act 2016 with effect from 01.04.2017 challenged - Held that - Section 35AC recognizes the deduction in case of expenditure by an assessee by way of payment to the approved institutions carrying out eligible project or the scheme or payment made directly on such eligible project or scheme. As per Explanation clause (b), eligible project or scheme would be a project or scheme for promoting the social and economic welfare or the uplift of public as the Central Government may notify. The deduction was therefore not confined to the healthcare service which the petitioner is dispensing and would cover range of projects and schemes for promoting social and economic welfare or the uplift of the public as may be notified. In plain terms, sub-section (7) of section 35AC provided for a terminal point for granting such benefit. After 01.04.2017 the legislature desired to withdraw such deduction. Any expenditure after such date would no longer be an eligible deduction. The provision applies prospectively. The Union legislature was competent to introduce such amendment. We do not find merits in the petition.

Issues Involved:
1. Constitutionality of sub-section (7) of Section 35AC of the Income Tax Act, 1961.
2. Impact of the withdrawal of deduction under Section 35AC on ongoing projects.
3. Legislative competence and judicial review in economic matters.

Detailed Analysis:

1. Constitutionality of sub-section (7) of Section 35AC of the Income Tax Act, 1961:

The petitioner challenged the vires of sub-section (7) of Section 35AC, introduced by the Finance Act 2016, effective from 01.04.2017, as being ultra vires of the Constitution. The petitioner argued that the abrupt withdrawal of the deduction adversely affected pipeline projects, contending that while the legislature has the competence to withdraw a deduction, it should not impact pending projects. The petitioner sought to have the provision read down to exclude projects already approved under sub-section (1) of Section 35AC.

2. Impact of the withdrawal of deduction under Section 35AC on ongoing projects:

The petitioner, a public charitable trust, had commenced several medical projects, including a heart hospital in Ahmedabad, relying on donations incentivized by the deduction under Section 35AC. The withdrawal of this deduction, effective for assessment years commencing on or after 01.04.2018, was argued to jeopardize ongoing projects by drying up donations. The petitioner cited several judicial precedents to support the argument that sudden legislative changes should not adversely affect existing rights and expectations.

3. Legislative competence and judicial review in economic matters:

The respondent contended that the Parliament had the power to grant and withdraw deductions and that there was nothing unconstitutional about the provision. It was argued that in economic matters, the courts recognize a greater degree of latitude to the legislature. The respondent cited multiple judgments to support the principle that economic legislation should be viewed with greater latitude and that the courts should presume the constitutionality of such statutes unless there is a clear transgression of constitutional principles.

Judgment Analysis:

The court analyzed Section 35AC, which allowed deductions for expenditures on eligible projects or schemes for promoting social and economic welfare, as specified by the Central Government. The provision was introduced to incentivize donations and direct expenditures on such projects. Sub-section (7), however, withdrew this deduction for expenditures incurred after 01.04.2017.

The court held that the Parliament was competent to withdraw the deduction and that such a withdrawal, though it may affect ongoing projects, was prospective and within legislative competence. The court emphasized that economic legislation is often empiric and based on experimentation, thus warranting a greater degree of latitude. The court cited the constitutional bench judgment in R.K. Garg, which underscored the presumption of constitutionality and the need for judicial restraint in economic matters.

The court dismissed the petition, ruling that the withdrawal of the deduction under Section 35AC was constitutionally valid and within the legislative competence of the Parliament. The petitioner's argument that the provision should be read down to exclude ongoing projects was rejected.

Conclusion:

The petition challenging the constitutionality of sub-section (7) of Section 35AC was dismissed. The court upheld the legislative competence of the Parliament to withdraw the deduction and emphasized the need for judicial restraint in economic legislation. The withdrawal of the deduction, though it may impact ongoing projects, was deemed constitutionally valid and prospective in nature.

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