Delhi HC Upholds Constitutional Validity Of Section 71(3A) Income Tax Act; Dismisses Petition Challenging Rs. 2 Lakh Cap On House Property Income Set-Off

The Delhi High Court dismissed a writ petition challenging the constitutional validity of Section 31 of the Finance Act, 2017. This section amended the Income Tax Act, 1961 (ITA) by adding sub-section (3A) to Section 71. The petition was filed by a government employee who claimed to have constructed a house in 2014, incurring an expenditure of Rs. 1.35 crore.

A Division Bench consisting of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav ruled, “… the 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. … Further, the 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.”

The Bench further stated that the legislation does not violate the test of manifest arbitrariness. The changes introduced are well-intended, based on relevant considerations, including preventing abuse of previous provisions and ensuring the financial health of the economy. The Legislature, guided by verifiable data, did not act in a whimsical manner.

In this case, the petitioner financed the construction of his house through a housing loan, partially raised from IDBI Bank amounting to Rs. 85 lakhs and the rest from his father, amounting to Rs. 50 lakhs. The annual rent for this property in the Financial Year (FY) 2016-17 was computed to be Rs. 1,20,000/-. Since the house was constructed using borrowed capital, under Section 24 of the Income Tax Act (ITA), the interest payable on such capital was eligible for deduction from the head “Income from house property.” The income chargeable under this head was to be computed after deducting the interest payable on the borrowed capital, and this deduction was also eligible for set off as per Section 71 of the ITA.

Accordingly, after availing the deduction and setting it off against his salary income, the petitioner filed his Income Tax Returns (ITR) for FY 2014-15 to 2016-17. However, by virtue of the Finance Act, 2017, the threshold limit for set off of loss under the head “Income from house property” against any other head of income was restricted to Rs. 2 lakhs for a particular Assessment Year (AY) with effect from April 1, 2018, i.e., for AY 2018-19 and subsequent AYs.

The petitioner contended that this amendment to the 2017 Act is against the tenets of the Constitution and is illegal, as it was introduced with retrospective application, imposing a heavy tax liability on him. He argued that the amendment curtailed his pre-existing right to set off the loss exceeding Rs. 2 lakhs, which was limited by the 2017 Act.

The High Court, after hearing both sides, noted, “The element of disturbance of a vested right lies at the core of any challenge on the basis of restrospectivity. In the instant case, neither the old provisions, as they existed, nor the amended provisions endeavour to create or disturb any indefeasible right in favour of the petitioner so as to allow him to claim any legitimate expectation to set off the amount in the manner canvassed before us.”

The Court further stated that without such a crystallized right, the petitioner's argument that the amendment violates Article 14 of the Constitution is untenable.

“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 Court observed.

Furthermore, the Court asserted that the amendment applies to all categories of individuals without any apparent or real discriminatory classification. Consequently, it cannot be said to violate the principles of equality enshrined 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. … With respect to the challenge raised in light of the infraction of fundamental right to trade under Article 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”, the Court noted.

The Court remarked that the contested provision does not impose an absolute restriction on the taxpayer's pre-existing right to claim the deduction in question. The Rs. 2 lakh cap is intended to prevent the abuse of the relevant provision.

“… there is clearly no applicability of the doctrine of promissory estoppel in the present case. … In the case at hand, it is palpably observed that the ―Notes on Clauses‖, appended to Section 31 of the Act of 2017, clearly stipulate that the amendment shall be applicable from AY 2018-19”, the Court concluded.

Accordingly, the High Court dismissed the writ petition.

Case Title: Sanjeev Goyal v. Union of India

Citation: 2024 LiveLaw (Del) 674

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