Supreme Court Upholds Tax Benefit Scheme for Disabled Dependents: Ravi Agrawal vs. Union of India (2019)

Introduction

Date of the Judgment: 03 January 2019

Citation: (2019) INSC 1

Judges: A.K. Sikri, J., Ashok Bhushan, J., S. Abdul Nazeer, J.

Can a tax benefit scheme for disabled dependents, which only provides benefits after the death of the parent/guardian, be considered fair? The Supreme Court of India recently addressed this question in a Public Interest Litigation concerning the Jeevan Aadhar policy offered by the Life Insurance Corporation of India (LIC). This policy, designed to provide financial security for disabled dependents, has been challenged for its restriction on benefit payouts until after the death of the policyholder. The bench comprised Justices A.K. Sikri, Ashok Bhushan, and S. Abdul Nazeer, with the judgment authored by Justice A.K. Sikri.

Case Background

Ravi Agrawal, a differently-abled person, filed a Public Interest Litigation (PIL) under Article 32 of the Constitution of India. He raised concerns about the Jeevan Aadhar Policy (Table 114) offered by the Life Insurance Corporation of India (LIC). This policy was designed for the benefit of handicapped children, with parents taking the policy for the livelihood of their children. The petitioner argued that the policy’s terms, which delay benefits until the death of the policyholder, were unfair to the disabled dependents.

The petitioner’s grievance stemmed from a circular issued by the Income Tax Department, which stated that no benefits could be paid to the disabled dependent until the proposer/life assured (parent/guardian) dies. This meant that even if the entire premium for the policy was paid, the disabled dependent would not receive any financial assistance until the death of the parent/guardian. The petitioner argued that this restriction violated the fundamental right to equality under Article 14 of the Constitution, as other life insurance policies provide annuity benefits during the lifetime of the policyholder.

The petitioner had previously approached the Insurance Regulatory and Development Authority of India (IRDA) and the Court of the Chief Commissioner for Persons with Disabilities, but did not receive a satisfactory resolution. The Chief Commissioner advised the Central Board of Direct Taxes (CBDT) to re-examine the matter, but no action was taken. This led the petitioner to file the writ petition seeking amendments to Section 80DD of the Income Tax Act and the Jeevan Aadhar Policy to allow for payments to disabled dependents during the lifetime of their parents/guardians.

Timeline

Legal Framework

The core of this case revolves around Section 80DD of the Income Tax Act, 1961. This section provides tax deductions for expenses incurred on the medical treatment, training, and rehabilitation of a dependent with a disability. It also allows for deductions on payments made under a scheme by the Life Insurance Corporation (LIC) or any other insurer for the maintenance of a disabled dependent.

The relevant sub-sections of Section 80DD of the Income Tax Act, 1961 are as follows:

“80DD. Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability.— (1) Where an assessee, being an individual or a Hindu undivided family, who is a resident in India, has, during the previous year,— (a) incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability; or (b) paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or any other insurer or the Administrator or the specified company subject to the conditions specified in sub-section (2) and approved by the Board in this behalf for the maintenance of a dependant, being a person with disability, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of a sum of seventy-five thousand rupees from his gross total income in respect of the previous year: Provided that where such dependant is a person with severe disability, the provisions of this sub-section shall have effect as if for the words “seventy-five thousand rupees”, the words “one hundred and twenty-five thousand rupees” had been substituted.”

“(2) The deduction under clause (b) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely:— (a) the scheme referred to in clause (b) of sub-section (1) provides for payment of annuity or lump sum amount for the benefit of a dependant, being a person with disability, in the event of the death of the individual or the member of the Hindu undivided family in whose name subscription to the scheme has been made; (b) the assessee nominates either the dependant, being a person with disability, or any other person or a trust to receive the payment on his behalf, for the benefit of the dependant, being a person with disability.”

“(3) If the dependant, being a person with disability, predeceases the individual or the member of the Hindu undivided family referred to in sub-section (2), an amount equal to the amount paid or deposited under clause (b) of sub-section (1) shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee and shall accordingly be chargeable to tax as the income of that previous year.”

Specifically, Section 80DD(2)(a) of the Income Tax Act, 1961 stipulates that the scheme must provide for payment of annuity or lump sum amount to the disabled dependant only upon the death of the individual or member of the Hindu Undivided Family (HUF) in whose name the subscription to the scheme has been made. This provision is the basis for the LIC’s Jeevan Aadhar policy, which restricts benefit payouts until the death of the policyholder.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the Jeevan Aadhar policy, by restricting benefit payouts until the death of the parent/guardian, denies the benefit of the insurance to handicapped persons during the lifetime of their parents/guardians. This is in contrast to other life insurance policies that provide annuity benefits during the lifetime of the policyholder.
• The petitioner contended that this restriction violates the fundamental right to equality under Article 14 of the Constitution, as it treats disabled dependents differently from other beneficiaries of life insurance policies.
• The petitioner highlighted that even after the entire premium for the policy is paid, the disabled dependent does not receive any benefit until the death of the parent/guardian. The policy does not have a maturity claim, meaning the funds remain with LIC until the policyholder’s death.
• The petitioner sought amendments to Section 80DD of the Income Tax Act, 1961 and the Jeevan Aadhar policy to allow for payments to disabled dependents during the lifetime of their parents/guardians, particularly after the parent/guardian reaches a certain age (55/58 years).
• The petitioner emphasized that the primary objective of the policy should be to benefit the disabled person, and that the annuity should be given as early as possible in their lifetime.

Respondent’s Arguments (Union of India):

• The Union of India argued that Section 80DD of the Income Tax Act, 1961 was specifically designed to provide for the maintenance of disabled dependents after the death of their primary caregivers (parents/guardians).
• The respondent stated that the provision was introduced to address the anxiety of parents/guardians about the financial security of their disabled dependents after their death.
• The Union of India submitted that the Jeevan Aadhar scheme was designed keeping in mind the tax benefits under Section 80DD of the Income Tax Act, 1961, and that the scheme’s design was aligned with the legislative intent of this provision.
• The respondent argued that the restriction on benefit payouts until the death of the parent/guardian is a valid classification for providing a specific regime for persons with disabilities, and that this classification has a rational nexus with the objective of the scheme.
• The Union of India cited several judgments to support the argument that the classification based on disability is a reasonable classification and does not violate Article 14 of the Constitution.

Respondent’s Arguments (LIC):

• LIC argued that the clause in the Jeevan Aadhar policy, which restricts benefit payouts until the death of the policyholder, is in accordance with the prescribed norms approved by the Central Board of Direct Taxes (CBDT).
• LIC supported the reasons given by the Union of India behind the circular that restricts benefit payouts until the death of the policyholder.

Submissions Table

Issues Framed by the Supreme Court

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

1. Whether the condition in the Jeevan Aadhar policy and Section 80DD of the Income Tax Act, 1961, which restricts the payment of annuity or lump sum amount to a person with disability until the death of the parent/guardian, is discriminatory and violates Article 14 of the Constitution.

Treatment of the Issue by the Court

Authorities

Cases Cited by the Court:

• State of U.P. and Another v. Kamla Palace, (2000) 1 SCC 557: The Supreme Court cited this case to emphasize that Article 14 of the Constitution does not prohibit reasonable classification for specific ends. It highlighted that the classification must not be arbitrary but based on real and substantial distinctions. The court also noted that laws relating to economic activities and taxation enjoy greater latitude.
• S.K. Dutta, Income Tax Officer v. Lawrence Singh Ingty, (1968) 2 SCR 165: This Constitution Bench judgment was cited to reiterate that taxation laws must also pass the test of Article 14. The court observed that the State has a wide discretion in selecting persons or objects to tax, and a statute is not open to attack merely because it taxes some and not others. It is only when the law operates unequally within its range of selection that it becomes violative of Article 14.
• State of A.P. and Others v. Nallamilli Rami Reddi and Others, (2001) 7 SCC 708: The Court relied on this judgment to explain that Article 14 prohibits “class legislation” and not “classification for the purpose of legislation.” It was emphasized that the classification must be founded on intelligible differentia with a rational connection to the object sought to be achieved. The Court also noted that Article 14 does not insist on a scientifically perfect or logically complete classification.

Legal Provisions Considered by the Court:

• Section 80DD of the Income Tax Act, 1961: The court examined this provision in detail, highlighting that it provides tax deductions for expenses related to disabled dependents and for payments made under schemes for their maintenance. The court noted that the provision stipulates that the annuity or lump sum amount is to be released only after the death of the person assured.
• Article 14 of the Constitution of India: The court considered the petitioner’s argument that the restriction on benefit payouts under the Jeevan Aadhar policy violates the right to equality under Article 14. The court, however, held that the provision is based on reasonable classification and does not violate Article 14.

Authority Table

Judgment

Treatment of Submissions by the Court

How Authorities Were Viewed by the Court

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legislative intent behind Section 80DD of the Income Tax Act, 1961, which is to secure the future of persons with disabilities after the death of their parents/guardians. The Court emphasized that the provision was designed to address the anxiety of parents/guardians about the financial security of their disabled dependents after their death. The Court also relied on the principle that the State has wide discretion in selecting objects to tax and that Article 14 does not prohibit reasonable classification for specific ends. The Court’s reasoning was also influenced by the fact that the Jeevan Aadhar policy is in conformity with the conditions stipulated in Section 80DD(2)(b) of the Income Tax Act, 1961.

Sentiment Analysis of Reasons

Fact:Law Ratio

Logical Reasoning

The Court considered the argument that there could be harsh cases where handicapped persons may need the payment on annuity or lumpsum basis even during the lifetime of their parents/guardians. However, it stated that it is for the Legislature to take care of these aspects and to provide suitable provisions by making necessary amendments in Section 80DD of the Act.

The Court did not find any violation of Article 14 of the Constitution, noting that the classification is reasonable and has a specific objective. The Court also noted that the legislative mandate is to release the amount only after the death of the person assured.

The Court made the following observations:

• “The purpose is to secure the future of the persons suffering from disability, namely, after the death of the parent/guardian. The presumption is that during his/her lifetime, the parent/guardian would take care of his/her handicapped child.”
• “The Legislature has provided the condition that amount/annuity under the policy is to be released only after the death of the person assured. This is the legislative mandate.”
• “Here, we find that the respondents have been able to successfully demonstrate that the main provision is based on reasonable classification, which as a valid rational behind it and there is a specific objective sought to be achieved thereby.”

The Court did not find any grounds to direct the amendment of Section 80DD of the Income Tax Act, 1961 or the Jeevan Aadhar policy. However, the court urged the Union of India to relook into the provision and explore the possibility of making suitable amendments.

Key Takeaways

• The Supreme Court upheld the validity of the Jeevan Aadhar policy and Section 80DD of the Income Tax Act, 1961, which restrict benefit payouts to disabled dependents until the death of their parents/guardians.
• The Court found that this restriction is based on reasonable classification and does not violate Article 14 of the Constitution.
• The Court acknowledged the potential hardships faced by disabled dependents who may need financial assistance during the lifetime of their parents/guardians.
• The Court urged the Union of India to re-examine the provision and explore the possibility of making suitable amendments to address these hardships.
• The judgment reinforces the legislative intent behind Section 80DD, which is to secure the future of disabled persons after the death of their primary caregivers.

Directions

The Supreme Court did not issue any specific directions but urged the Union of India to have a relook into the provision by taking into consideration all the aspects, including those highlighted by the Court in this judgment, and explore the possibility of making suitable amendments.

Development of Law

The ratio decidendi of this case is that the restriction on payment of annuity or lump sum amount to a person with disability under the Jeevan Aadhar policy until the death of the parent/guardian, as provided under Section 80DD of the Income Tax Act, 1961, is a valid classification and does not violate Article 14 of the Constitution. The Court upheld the legislative intent behind the provision, which is to secure the future of disabled persons after the death of their primary caregivers. There is no change in the previous position of law, as the court reiterated the principles of reasonable classification and the state’s discretion in taxation matters.

Conclusion

The Supreme Court dismissed the writ petition filed by Ravi Agrawal, upholding the validity of the Jeevan Aadhar policy and Section 80DD of the Income Tax Act, 1961. The Court found that the restriction on benefit payouts until the death of the parent/guardian is a reasonable classification and does not violate Article 14 of the Constitution. However, the Court urged the Union of India to re-examine the provision and explore the possibility of making suitable amendments to address potential hardships faced by disabled dependents. The judgment reinforces the legislative intent behind Section 80DD, which is to secure the future of disabled persons after the death of their primary caregivers.