2024 (6) TMI 79 - HC - Income Tax

Restriction on Set-off of loss relating to Income from house property - Constitutional validity of Section 31 of the Finance Act 2017 which brought about an amendment in the Income Tax Act 1961 by inserting sub-section (3A) to Section 71 - Set off of loss from one head against income from another - case of the petitioner essentially rests on the premise that the amendment in Section 71 allegedly having a retrospective operation is unconstitutional as it substantially affects his alleged untrammelled right to claim deduction as per the erstwhile position of law. HELD THAT - As seen that as on the date of construction of house of the petitioner in April 2014 the amount of interest payable on borrowed capital was eligible for deduction from the head Income from house property . Undisputedly adhering to the rigour of aforenoted provisions the petitioner had assessed his tax liability and filed ITRs for respective FYs i.e. 2014-15 2015-16 and 2016-17. During these FYs the petitioner was duly allowed to set off the actual amount of loss under the head Income from house property against his salary income. A conspectus of the aforementioned provisions would evince that the subsequent amendment in Section 71 of the Act only aims at capping the set off of losses under the head of Income from house property from any other head of income at Rs.2 lakh. Put otherwise with the insertion of sub-section (3A) instead of an indefinite amount which could have been set off as per Section 71 earlier an assessee can now only set off a maximum amount of Rs.2 lakh in the manner mentioned in the said Section qua the Income from house property . As vividly discernible from a plain reading of the amended provision that the said amendment came into effect only from 01.04.2018 i.e. period commencing after the passing of the Act of 2017. The first parameter i.e. regarding the legislative competency of the Parliament has not been challenged by the petitioner. In any case Article 265 of the Constitution stipulates that No tax shall be levied or collected except by authority of law. Sub-section (3A) to Section 71 of the Act was introduced vide the Act of 2017 which was duly passed by the Parliament and therefore there is no legislative incompetence in formulation of such law. In the absence of any such crystallized right the argument of the petitioner that the concerned amendment is violative of Article 14 of the Constitution does not hold any water. Additionally the insertion of sub-section (3A) does not take away the benefits of deduction provided to the petitioner in toto rather it only attempts to circumscribe the indefinite amount of set off to a certain amount. The change introduced by the impugned legislation is a reflection of the larger policy of the Legislature and has an equalizing effect on all the taxpayers claiming any deduction under the abovementioned head. It does not have the effect of creation of any separate class or classification. The class or category in which the petitioner has claimed the deduction is a pre-existing class and the petitioner forms part of the same. What the Legislature has merely done is to alter the criterion as a reasoned policy decision. It cannot be said that by virtue of the said amendment a distinct class has been created without any rational nexus with the objective sought to be achieved through such exercise. The object is well explained by the respondent and the petitioner has not questioned the stated objective as ill founded or otherwise in this proceeding. Thus it is seen that the amendment is applicable to all the category of persons without any apparent or real discriminatory classification. As a sequitur it cannot be said to be against the tenets of equality encapsulated in Article 14 of the Constitution. Notably the petitioner s challenge regarding Article 14 is only based on the test of reasonable classification and intelligible differentia and the same has been turned down by us. There is no challenge on the ground of manifest arbitrariness. We have no hesitation in noting that the impugned legislation does not fall foul of the test of manifest arbitrariness as well. The changes introduced by the legislation is well intended and is based on relevant considerations including abuse of erstwhile provisions and financial health of the economy. The Legislature has been guided by verifiable data and has not proceeded in a whimsical manner. Fundamental right to trade u/A 19 (1) (g) of the Constitution the scope of the said right cannot be extended to protect one s right to profit. The right to carry on any business is certainly subject to regulatory parameters and a challenge against any such regulatory parameter could not be premised on the sole basis that it curtails the profit. There ought to be an infraction of the Constitution for attracting judicial review. A crucial test for determining any violation of Article 19 of the Constitution is the test of proportionality or the doctrine of proportionality. The impugned provision does not create an absolute restriction on the taxpayer s pre-existing right to claim the deduction in question and the capping of Rs.2 lakh is meant to prevent the abuse of the relevant provision. Tool adopted to prevent this abuse is also reasonable and it is not the case of the petitioner that the Legislature had a less restrictive tool to achieve the object. Therefore the impugned law is proportionate with the object sought to be achieved and cannot be faulted for being violative of Article 19. Alteration in the manner of imposing tax in the present case cannot be said to deprive the taxpayer from a benefit rather it tantamounts to a realignment of the existing provisions bearing in mind the broader economic and policy considerations which the Legislature is duly empowered to do. Reliance can be placed upon the decision in the case of Nazeria Motor Service v. State of Andhra Pradesh 1969 (8) TMI 88 - SUPREME COURT held that the assumptions that profits would be diminished or greatly reduced cannot be construed in a sense that there is infringement of the fundamental rights under Part III of the Constitution. Petitioner has also failed to allude to any specific material which could suggest that the amended provision is liable to be struck down on account of any permissible parameters. In any case it has been well-settled that the State must be left with a wide latitude in devising ways and means of fiscal or regulatory measures and the Court should not unless compelled by the statute or by the Constitution transcend into this field or invalidate such law. See Government of Andhra Pradesh v. Smt P. Lakshmidevi 2008 (2) TMI 850 - SUPREME COURT No force in the arguments of the petitioner which are purportedly based upon a self-imposed belief and assumption that the benefits under the old taxation regime shall be continued to be offered till an indefinite period. As a matter of fact neither the earlier provisions nor the amended law expressly or indirectly deal with any such promise by the Legislature and thus there is clearly no applicability of the doctrine of promissory estoppel in the present case. The court dismissed the writ petition finding no merit in the arguments presented by the petitioner. The amendment to Section 71 was held to be constitutional not retrospective and not in violation of Articles 14 and 19(1)(g) of the Constitution.

Summary

Issues Involved:

1. Constitutional validity of Section 31 of the Finance Act, 2017.
2. Retrospective application of Section 31 of the Finance Act, 2017.
3. Violation of Articles 14 and 19 (1) (g) of the Constitution of India.

Summary:

1. Constitutional Validity of Section 31 of the Finance Act, 2017:
The petitioner challenged the constitutional validity of Section 31 of the Finance Act, 2017, which inserted sub-section (3A) to Section 71 of the Income Tax Act, 1961, restricting the set-off of loss under the head "Income from house property" to Rs. 2 lakh against income under other heads. The petitioner argued that this amendment was ultra vires the Constitution of India. The Court held that the amendment was within the legislative competence of the Parliament and did not violate any constitutional provisions. The Court noted that the amendment was a policy decision aimed at preventing abuse of tax provisions and was based on relevant considerations, including the financial health of the economy.

2. Retrospective Application of Section 31 of the Finance Act, 2017:
The petitioner contended that the amendment was retrospective in nature and imposed a heavy tax liability on him. The Court referred to the Supreme Court's definition of retrospectivity and concluded that the amendment was not retrospective as it applied prospectively from Assessment Year (AY) 2018-19 onwards. The Court emphasized that the amendment did not disturb any vested rights of the petitioner and was not arbitrary or unconstitutional.

3. Violation of Articles 14 and 19 (1) (g) of the Constitution of India:
The petitioner argued that the amendment created an unreasonable restriction on his existing statutory rights and was violative of Articles 14 and 19 (1) (g) of the Constitution. The Court held that the amendment did not create any discriminatory classification and was applicable to all taxpayers equally. The Court further stated that the amendment was a reasonable regulatory measure and did not infringe upon the petitioner's fundamental rights. The Court applied the test of proportionality and found that the amendment was proportionate to the objective sought to be achieved.

Conclusion:
The Court dismissed the writ petition, holding that the amendment to Section 71 of the Income Tax Act, 1961, was constitutionally valid, applied prospectively, and did not violate Articles 14 and 19 (1) (g) of the Constitution. The petitioner's arguments were found to be without merit, and the pending applications were also disposed of.