The Gujarat High Court upheld the vires of the sub-section (7) of Section 35AC of the Income Tax Act. The benefit of deduction under section 35AC of the Income Tax Act no more available, in respect to the payments made to association or institution approved by the National Committee for carrying-out any eligible project or scheme.
Section 35AC of the Income Tax Act, 1961, provides for a deduction in computing the business income of an assessee, of the amount paid by him to a PSU or a local authority or to an association or institution approved by the National Committee for carrying-out any eligible project or scheme.
The petitioner, Prashanti Medical Services and Research Foundation has challenged the vires of sub-section (7) of Section 35AC of the Income Tax Act, 1961 introduced by the Finance Act 2016 with effect from 01.04.2017.
The Petitioner is a public charitable trust constituted with the object of establishing an institution for rendering medical services to the poor and needy persons.
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 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.
Section 35AC of the Act inserted by the Finance Act of 1991 with effect from 01.04.1992 granted exemption to an assesse.
The petitioner contended 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.
The petitioner also submitted, the deduction which was granted way back in the year 1992 could not have been abruptly withdrawn adversely affecting the pipeline projects.
The division bench comprising of Justice Akil Kureshi and Justice Biren Vaishnav observed that, “In plain terms, thus, this provision discontinued the deduction available under section 35AC from the assessment year commencing on or after 01.04.2018. 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”.
While dismissing the petition, the division bench also observed that, the provision applies prospectively and the Union legislature was competent to introduce such amendment.
Read the full text of the Judgment below.
