Supreme Court Upholds Prospective Application of Section 35AC(7) of the Income Tax Act in Charitable Trust Case (25 July 2019)

Date of the Judgment: 25 July 2019

Citation: 2019 INSC 738

Judges: Abhay Manohar Sapre, J., Indu Malhotra, J.

Can a change in tax law retroactively affect charitable projects that have already been approved? The Supreme Court of India addressed this question in a case concerning a charitable hospital whose tax benefits were impacted by a new provision in the Income Tax Act. The court examined whether the newly inserted sub-section (7) of Section 35AC of the Income Tax Act, 1961, could retrospectively deny tax deductions for donations to projects that had already been approved. The bench comprised Justices Abhay Manohar Sapre and Indu Malhotra, with Justice Sapre authoring the judgment.

Case Background

The appellant, Prashanti Medical Services & Research Foundation, a charitable trust registered under the Bombay Public Trust Act, 1950, established a heart hospital in Ahmedabad. The hospital project commenced on 05 May 2014. On 27 September 2014, the appellant applied to the National Committee for Promotion of Social and Economic Welfare for approval under Section 35AC of the Income Tax Act, 1961. This approval would allow donors to claim deductions on their income tax for contributions made to the hospital project.

The Committee approved 28 projects, including the appellant’s, as “eligible projects” under Section 35AC, as per a notification dated 07 December 2015. The appellant’s project was approved for an estimated cost of Rs. 250 crores for three financial years, starting from 2015-16. The appellant received donations from various assessees during the financial years 2015-2016, 2016-2017, and 2017-2018.

However, the benefit of claiming deductions was discontinued from the assessment year 2018-2019 onwards due to the insertion of sub-section (7) in Section 35AC of the Income Tax Act, 1961, by the Finance Act, 2016, effective from 01 April 2017.

Timeline:

Course of Proceedings

The appellant challenged the constitutional validity of sub-section (7) of Section 35AC of the Income Tax Act, 1961, in the High Court of Gujarat at Ahmedabad. The appellant argued that the provision should not apply to projects approved before its enactment, i.e., before 01 April 2017. The High Court dismissed the appellant’s petition, upholding the prospective nature of the amendment. The appellant then appealed to the Supreme Court of India.

Legal Framework

The core of this case revolves around Section 35AC of the Income Tax Act, 1961, which allows deductions for expenditures made towards eligible projects. Sub-section (7) of Section 35AC, inserted by the Finance Act, 2016, with effect from 01 April 2017, states:

“(7) No deduction under this section shall be allowed in respect of any assessment year commencing on or after the 1st day of April, 2018.”

This provision effectively discontinued the deduction benefit from the assessment year 2018-2019. The appellant argued that this should not affect projects approved before this date, while the Revenue contended that the provision applies to all projects uniformly from the specified date.

Arguments

The appellant argued that since their hospital project was approved for three financial years, the insertion of sub-section (7) of Section 35AC of the Income Tax Act, 1961, should not withdraw the benefit for the third year (2017-2018). They contended that the amendment was essentially prospective and should not apply to projects approved before 01 April 2017. The appellant also argued that the Revenue could not apply sub-section (7) retrospectively to withdraw benefits already approved.

The Revenue argued that the insertion of sub-section (7) was indeed prospective and applied to all projects uniformly, irrespective of prior approvals. They stated that the provision clearly disallows deductions from the assessment year 2018-2019 onwards. The Revenue also contended that the appellant, not being an assessee under Section 35AC of the Income Tax Act, 1961, lacked the locus to raise this issue. They further argued that the appellant had no vested right to claim tax concessions and no right to invoke promissory estoppel against legislative power.

The following table summarizes the submissions of both parties:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

✓ Whether sub-section (7) of Section 35AC of the Income Tax Act, 1961, which disallows deductions from the assessment year 2018-2019, applies to projects that were approved before its enactment.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The following authorities were considered by the court:

Judgment

The Supreme Court upheld the decision of the High Court, ruling that sub-section (7) of Section 35AC of the Income Tax Act, 1961, is prospective in nature and applies uniformly to all projects from the assessment year 2018-2019 onwards. The court rejected the appellant’s argument that the amendment should not affect projects approved before its enactment.

The following table shows how each submission made by the parties was treated by the Court:

The following table shows how each authority was viewed by the Court:

The Court emphasized that the provision is clearly prospective, as it disallows deductions for assessment years commencing on or after 01 April 2018. The court also noted that the appellant, not being an assessee under Section 35AC of the Income Tax Act, 1961, did not have the locus to challenge the provision. Furthermore, the court held that neither the appellant nor the assessees had any vested right to claim tax concessions or any right to invoke promissory estoppel against legislative power.

The court stated, “We are of the view that sub-section (7) is prospective in its operation and, therefore, all the assessees were rightly allowed to claim deduction of the amount paid by them to eligible projects from their total income during two financial years, namely, 2015-2016 and 2016-2017.”

The court further added, “a plea of promissory estoppel is not available to an assessee against the exercise of legislative power and nor any vested right accrues to an assessee in the matter of grant of any tax concession to him.”

The court also noted, “In a taxing statute, a plea based on equity or/and hardship is not legally sustainable. The constitutional validity of any provision and especially taxing provision cannot be struck down on such reasoning.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear language of sub-section (7) of Section 35AC of the Income Tax Act, 1961, which explicitly states that no deduction would be allowed for assessment years commencing on or after April 1, 2018. The Court emphasized the prospective nature of the provision and the absence of any vested right for assessees to claim tax concessions. The court also highlighted that principles of equity and hardship do not override the express provisions of a taxing statute. The court also considered the fact that the appellant was not an assessee under the provision and therefore had no locus to challenge the provision.

The following table shows the ratio of fact:law percentage that influenced the court to decide:

Logical Reasoning

Key Takeaways

• ✓ Sub-section (7) of Section 35AC of the Income Tax Act, 1961, is prospective and applies uniformly to all projects from the assessment year 2018-2019 onwards.
• ✓ Taxpayers cannot claim promissory estoppel against legislative changes in tax laws.
• ✓ There is no vested right to claim tax concessions.
• ✓ Equity and hardship arguments do not override the express provisions of a taxing statute.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that sub-section (7) of Section 35AC of the Income Tax Act, 1961, is prospective in nature and applies uniformly to all projects from the assessment year 2018-2019 onwards. This judgment clarifies that legislative changes in tax laws are generally prospective and do not create retrospective obligations. It also reinforces the principle that taxpayers cannot claim promissory estoppel against legislative changes and that there is no vested right to claim tax concessions. This ruling reaffirms the established position of law regarding the prospective nature of tax amendments.

Conclusion

The Supreme Court dismissed the appeal, upholding the prospective application of sub-section (7) of Section 35AC of the Income Tax Act, 1961. The court clarified that the amendment applies to all projects uniformly from the assessment year 2018-2019 onwards, and that no vested rights or promissory estoppel claims can be made against such legislative changes. This decision reinforces the principle that tax laws are generally prospective and that equity and hardship arguments cannot override the express provisions of a taxing statute.