Gujarat H.C : Legislature is competent to enact suitable amendatory legislation, hence with-drawal of deduction under section 35AC to any donations made to assessee-trust and other institutions after 1-4-2017 could not have been annulled on ground of being harsh

High Court Of Gujarat

Prashanti Medical Services & Research Foundation vs. Union of India

Section 35AC

Akil Kureshi And Biren Vaishnav, JJ.

Special Civil Application No. 7558 Of 2017

September 14, 2017

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged the vires of sub-section (7) of Section 35AC of the Income Tax Act, 1961 (‘the Act’ for short) introduced by the Finance Act 2016 with effect from 01.04.2017. According to the petitioner, such provision is ultra vires of the Constitution.

2. The petition arises in the following background:

2.1 Petitioner is a public charitable trust registered under the Bombay Public Trust Act. The trust was constituted with the object of establishing an institution for rendering medical services to the poor and needy persons irrespective of caste, creed or colour and for undertaking medical research. According to the petitioner, the petitioner set up its first operation at Rajkot providing free medical service to the poor which included operations for by-pass and valve replacement etc. at no costs. The petitioner survives entirely on donations. The petitioner thereafter set up hospitals at Puttaparthy and Bangalore providing similar services.

2.2 The petitioner wanted to set up another hospital at Ahmedabad for which a resolution was adopted on 27.09.2014 for construction of a heart hospital with 250 beds. In order to get maximum donations for the purpose of constructing a new hospital at Ahmedabad, the petitioner applied to the concerned authority being the National Committee for Promotion of Social and Economic Welfare, Department of Revenue, North Block, New Delhi (‘the Committee’ for short) for approval of the project which would qualify the donors to claim exemption under section 35AC of the Act. As per the application, the date of commencement of the project would be 05.05.2014 and the likely date of completion was 23.11.2015 with estimated capital cost of Rs.52 crores and estimated revenue costs of Rs.198 crores. By an order dated 08.12.2015, the Committee had approved the petitioner trust’s project for exemption under section 35AC of the Act by issuing necessary notification dated 07.12.2015.

2.3 Section 35AC of the Act inserted by the Finance Act of 1991 with effect from 01.04.1992 granted exemption to an assessee who incurred any expenditure by way of payment to any public sector company or local authority or an association or an institution approved by the committee for carrying out any eligible project or scheme, a deduction of such amount of expenditure incurred during the relevant year. We would advert to the provisions of this section more minutely later. The case of the petitioner is that with the existing and anticipated donations the petitioner started implementing the project of construction of a hospital. 50% of the capital expenditure was already undertaken and the remaining project would be completed by September 2018. In the meantime, however, sub-section (7) was inserted in section 35AC with effect from 01.04.2017 providing that no deduction under the said section would be allowed in respect of any assessment year commencing on or after 01.04.2018. The petitioner, therefore, contends that the withdrawal of the deduction under section 35AC of the Act to any donations made to the petitioner trust and other institutions after 01.04.2017 would virtually dry off all the donations to the trust leaving the entire project in jeopardy. According to the petitioner, the deduction which was granted way back in the year 1992 could not have been abruptly withdrawn adversely affecting the pipeline projects. The case of the petitioner projected before us, therefore, was that though the legislature would have the competence to withdraw a deduction already granted, the same cannot have adverse effect on pending projects. The provision therefore should be read down as not applicable to the projects which are already approved by the authority under sub-section (1) of Section 35AC of the Act.

3. Mr. Bhargav Karia, learned counsel for the petitioner drew our attention to the Notes on clauses for introduction of the said new provision by the Finance Act 2 of 1991 to highlight that the object was to encourage the projects or schemes for promoting social and economic welfare or upliftment of the public as may be specified by the Central Government on the recommendation of the National Committee for such purpose. He submitted that the petitioner had prepared a project for setting up of a heart hospital at Ahmedabad at considerable capital costs which project was also approved by the Central Government for the purpose of Section 35AC of the Act. Midway through the implementation of the project the deduction came to be withdrawn. Counsel submitted that the petitioner has been providing free medical aid to large number of poor and needy patients at various hospitals already set up by the trust. Sudden withdrawal of the benefit would make the project in question unviable. The benefit is withdrawn by the legislature without citing any reason. The provision is therefore required to be read down.

3.1 In support of his contentions, counsel relied on the following decisions:

(1) Binoy Viswam v. Union of India [2017] 396 ITR 66/249 Taxman 290/82 taxmann.com 211 (SC) in which the Supreme Court in the context of the requirement of quoting of Aadhar number while filing the return of income upholding such a requirement provided under section 139AA of the Act held that such provision cannot be read retrospectively. It was observed that if failure to indicate the Aadhar number renders the Permanent Account Number void ab initio with the deeming provision that the PAN allotted would be invalid as if the person had not applied for allotment of the same, this would have rippling effect of unsettling settled rights of the parties and would have the effect of undoing all the acts done by a person on the basis of such Permanent Account Number.

(2) In case of Avani Exports v. CIT [2012] 348 ITR 391/23 taxmann.com 62/209 Taxman 59 (Mag.) (Guj.), the Division Bench of this court in the context of the amendment in section 80HHC of the Act introduced the aspect of classification based on export turnover of the assessee company above or below Rs.10 crores and while upholding the vires of the statute held that the same cannot operate retrospectively. We may notice that the Supreme Court confirmed the view of the High Court subject to certain clarifications.

(3) In case of Indian Exports Newspapers (Bombay) (P.) Ltd. v. Union of India [1986] 159 ITR 856, the Supreme Court in the context of the challenge to levy of customs duty on import of newsprint at different rates depending on the importer being small, medium and big newspapers depending on the circulation, made certain observations regarding the power of the delegated legislation to frame the law within its sphere.

(4) Reliance was also placed on a decision of Karnataka High Court in case of CIT v. Asea Brown Boveri Ltd. [2009] 316 ITR 450 (Kar.) in which the court found that exemption was granted to one Vidya Sagar Hospital for three consecutive assessment years by the competent authority and that the exemption was not operating from a particular date and the same was effective for the full assessment year. On such basis, the court confirmed the view of the Tribunal that the donation made to the said hospital prior to it being eligible under notification under section 35AC of the Act could also be claimed as deduction by the donor assessee.

4. On the other hand, learned counsel Shri Manish Bhatt for the department opposed the petition contending that the Parliament had the power to grant deduction and also power to withdraw the same. In the present case, there is nothing unconstitutional about the said provision. In economic sphere, the courts recognize a greater degree of latitude to the legislature. There is no promise held out that the deduction shall continue for all times to come. In any case there cannot be an estoppel against the statute. Even reading down the provision as suggested by the petitioner would result into great uncertainty and anarchy since many similar projects and schemes would have a span of number of years.

4.1 Counsel relied on the following judgments:

(I) R.K. Garg v. Union of India [1981] 7 Taxman 53/[1982] 133 ITR 239 in which the Supreme Court observed that every legislation particularly in economic matters is essentially empiric and is based on experimentation. The court must adjudge the constitutionality of such legislation by the generality of its provisions. Laws relating to economic activities should be viewed with greater latitude than other laws. It was also observed that there is always a presumption in favour of the constitutionality of the statute and the burden is upon one who attacks it to show that there has been a clear transgression of the constitutional principles.

(II) Case of Seema Silk & Sarees v. Directorate of Enforcement AIR 2008 SC 2564 was cited to contend that a legislation cannot be struck down on the ground that it is likely to act harshly against some people. For the same purpose reference was also made to the decision in case of Government of Andhra Pradesh v. Smt. P. Laxmi Devi [2008] 4 SCC 720.

5. Learned advocate Shri Parth Bhatt for the Union of India also opposed the petition contending that it is within the competence of the Union legislature to grant as well as withdraw a resolution. He relied on the decision in case of Kasinka Trading v. Union of India [1995] 1 SCC 274 and recent judgment in case of Kothari Industrial Corpn. Ltd. v. Tamil Nadu Electricity Board [2016] 4 SCC 134 where similar principles have been reiterated. Reliance was also placed on the decision in case of Director General of Foreign Trade v. Kanak Exports [2016] 2 SCC 226.

6. Section 35AC of the Act reads as under:

’35AC. (1) Where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, the assessee shall, subject to the provisions of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year:

Provided that a company may, for claiming the deduction under this sub-section, incur expenditure either by way of payment of any sum as aforesaid or directly on the eligible project or scheme.

(2) The deduction under sub-section (1) shall not be allowed unless the assessee furnishes along with his return of income a certificate—

(a) where the payment is to a public sector company or a local authority or an association or institution referred to in sub-section (1), from such public sector company or local authority or, as the case may be, association or institution;

(b) in any other case, from an accountant, as defined in the Explanation below sub-section (2) of section 288, in such form, manner and containing such particulars (including particulars relating to the progress in the work relating to the eligible project or scheme during the previous year) as may be prescribed.

[Explanation.—The deduction, to which the assessee is entitled in respect of any sum paid to a public sector company or a local authority or to an association or institution for carrying out the eligible project or scheme referred to in this section applies, shall not be denied merely on the ground that subsequent to the payment of such sum by the assessee,—

(a) the approval granted to such association or institution has been withdrawn; or

(b) the notification notifying the eligible project or scheme carried out by the public sector company or local authority or association or institution has been withdrawn.]

(3) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.

[(4) Where an association or institution is approved by the National Committee under sub-section (1), and subsequently—

(i) that Committee is satisfied that the project or the scheme is not being carried on in accordance with all or any of the conditions subject to which approval was granted; or

(ii) such association or institution, to which approval has been granted, has not furnished to the National Committee, after the end of each financial year, a report in such form and setting forth such particulars and within such time as may be prescribed,

the National Committee may, at any time, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned association or institution, withdraw the approval:

Provided that a copy of the order withdrawing the approval shall be forwarded by the National Committee to the Assessing Officer having jurisdiction over the concerned association or institution.

(5) Where any project or scheme has been notified as an eligible project or scheme under clause (b) of the Explanation, and subsequently—

(i) the National Committee is satisfied that the project or the scheme is not being carried on in accordance with all or any of the conditions subject to which such project or scheme was notified; or

(ii) a report in respect of such eligible project or scheme has not been furnished after the end of each financial year, in such form and setting forth such particulars and within such time as may be prescribed,

such notification may be withdrawn in the same manner in which it was issued:

Provided that a reasonable opportunity of showing cause against the proposed withdrawal shall be given by the National Committee to the concerned association, institution, public sector company or local authority, as the case may be:

Provided further that a copy of the notification by which the notification of the eligible project or scheme is withdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association, institution, public sector company or local authority, as the case may be, carrying on such eligible project or scheme.]

[(6) Notwithstanding anything contained in any other provision of this Act, where—

(i) the approval of the National Committee, granted to an association or institution, is withdrawn under sub-section (4) or the notification in respect of eligible project or scheme is withdrawn in the case of a public sector company or local authority or an association or institution under sub-section (5); or

(ii) a company has claimed deduction under the proviso to sub-section (1) in respect of any expenditure incurred directly on the eligible project or scheme and the approval for such project or scheme is withdrawn by the National Committee under sub-section (5),

the total amount of the payment received by the public sector company or the local authority or the association or the institution, as the case may be, in respect of which such company or authority or association or institution has furnished a certificate referred to in clause (a) of sub-section (2) or the deduction claimed by a company under the proviso to sub-section (1) shall be deemed to be the income of such company or authority or association or institution, as the case may be, for the previous year in which such approval or notification is withdrawn and tax shall be charged on such income at the maximum marginal rate in force for that year.]

Explanation.—For the purposes of this section,—

(a) “National Committee” means the Committee constituted by the Central Government, from amongst persons of eminence in public life, in accordance with the rules made under this Act;

(b) “eligible project or scheme” means such project or scheme for promoting the social and economic welfare of, or the uplift of, the public as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee.] ‘

7. Section 35AC was inserted in the Act with effect from 01.04.1992. From the Notes on Clauses in the said provision, it can be gathered that deduction was sought to be made available in relation to the expenditure incurred for eligible projects or schemes. Such project or scheme would be for promoting social and economic welfare and upliftment of the public as specified by the Central Government. Brief analysis of the section would be necessary. Sub-section (1) of Section 35AC provides that where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, the assessee would get a deduction of the amount of such expenditure incurred during the previous year. As per the proviso to sub-section (1) such expenditure either could be by way of a payment of any sum or directly incurred on the eligible project or scheme. Sub-section (3) of section
35AC ensures that there will be no double deduction of the said expenditure. Under sub-section (4) of section 35AC under certain circumstances the approval granted to an association or institution by the National Committee could be withdrawn. Likewise, under sub-section (5) of section 35AC the notification making a project or scheme could be withdrawn under certain circumstances. Sub-section (6) of section 35AC however provides that the deduction available on the expenditure incurred by the assessee would not be disturbed even if the approval granted to the association or institution was subsequently withdrawn under sub-section (4) or the notification approving the project or scheme under sub-section (5) is withdrawn and instead the income would be taxed at the hands of the company, authority association or the institution as the case may be. Clause (b) of the Explanation to Section 35AC defines eligible project or scheme as to mean such project or scheme for promoting the social and economic welfare or the uplift of the public as the Central Government may by its notification in the Official Gazette specify on the recommendations of the National Committee.

8. This was broadly the scheme of deduction under section 35AC of the Act. Sub-section (7) which was inserted with effect from 01.04.2017 withdrew the exemption by providing that no deduction under this section shall be allowed in respect of any assessment year commencing on or after the 1st day of April, 2018.

9. In plain terms, thus, this provision discontinued the deduction available under section 35AC from the assessment year commencing on or after 01.04.2018. In other words, any expenditure incurred after 01.04.2017 would no longer be eligible for deduction under the said section. The fact that the parliament had the competence to enact the said provision has nowhere been disputed before us. It is not even the stand of the petitioner that the parliament which granted the deduction could not have withdrawn it. In plain terms, a deduction is in the nature of waiver to a limited extent from payment of tax. In absence of such a deduction, the assessee incurring such expenditure would have to account for the full amount to tax. In order to encourage donations for or direct expenditure in certain approved projects or schemes meant for promoting social and economic welfare or the uplift of the public, the said provision was introduced by the legislature. If at a later point of time, the Union legislature in its wisdom was of the opinion that such benefit should no longer be granted, it is always open for the parliament to withdraw the deduction by framing necessary legislation. This provision in the strict sense of the term is to have prospective effect. It may have effect on projects and schemes which are in pipeline and in that sense may affect the pending or existing projects. Nevertheless, the withdrawal of the deduction is from a prospective date. In that view of the matter, it is possible that some of the institutions, projects or schemes may be adversely affected and the legislation may act somewhat harshly. However, this cannot be a ground for annulling the statutory provision.

10. The courts always recognize a greater degree of latitude while examining the laws concerning economic matters. Even otherwise the wisdom of the parliament for framing a law would not be subject matter of judicial review. The Constitution of India while undoubtedly authorizes the constitutional courts to test the validity of a legislation including one framed by the Union or the State legislature, the courts have however recognized that the law framed by the Parliament or State legislature can be declared unconstitutional only on the grounds that the same is opposed to the fundamental rights contained in part III of the Constitution or is opposed to any other provision in the Constitution. Particularly when it comes to the laws pertaining to the economic matters, the courts recognize greater degree of latitude in the legislature. These principles have been highlighted in the constitutional bench judgement of the Supreme Court in case of R.K. Garg (supra) in which it was observed as under:

‘7. Now while considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule is that there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation.

8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. ….

The court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry that exact wisdom and nice adoption of remedy are not always possible and that judgment is largely a prophecy based on meagre and uninterpreted experience. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There, may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.’

11. In case of Kasinka Trading Corpn. (supra), the Union Government had granted exemption under a notification dated 15.03.1979 on customs duty on import of resin which is a raw material used for manufacturing of PVC. The notification provided that the same shall be in force upto and inclusive of 31.03.1981. However, before expiry of the said time mentioned in the notification, the Government issued another notification on 16.10.1980 withdrawing the exemption and providing that in public interest it was necessary that the import of resin could invite duty at the rate of 4% ad valorem. This was done with a view to equalising the sale prices of indigenous and imported materials. The notification was challenged by the importers interalia on the ground that it breached the principle of promissory estoppel. Rejecting the challenge, the Supreme Court observed that the doctrine of promissory estoppel is part of the administrative law and is applicable against the Government also to prevent fraud and injustice and such doctrine must yield when the equity so demands if it can be shown having regard to the facts and circumstances of the case that it would be inequitable to hold the public authority to its promise, assurance or representation. It was observed that an exemption notification does not make the items which are subject to levy of customs duty as not leviable. It only suspends the levy and collection of customs duty wholly or partly as the case may be. Under section 25 of the Customs Act, if the Government had the power to grant exemption it also had the power to withdraw the same.

12. In case of Kothari Industrial Corpn. (supra), the court held that the Government had the power to determine what should be the policy for grant or refusal of concessional power to different units. In case of Kanak Exports (supra), the court observed that an incentive scheme promulgated by the Government is in the nature of concession or incentive which is a privilege of the Government and it is for the Government to take such a decision as to grant or not.

13. As noted, 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.

14. Petition is, therefore, dismissed. Rule is discharged.

[Citation : 399 ITR 450]