Supreme Court allows tax exemption undertaking for Section 35AC projects

The Supreme Court of India addressed the challenge against the validity of Section 35AC(7) of the Income Tax Act, 1961. The Court allowed the petitioner to provide an undertaking to cover the tax exemption amount in case of an unfavorable outcome. Donors contributing to the petitioner's projects under Section 35AC may claim exemptions, but they would be liable for tax and interest if the petition fails. This decision aimed to mitigate the impact of the amendment on donations for specified projects while safeguarding the Revenue's interests. The Court emphasized that this ruling should not set a precedent.

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Issues: Validity of Section 35AC(7) of the Income Tax Act, 1961

The judgment by the Supreme Court of India pertains to the challenge against the validity of Section 35AC(7) of the Income Tax Act, 1961, inserted with effect from 1st April, 2017. The petitioner, represented by learned senior counsel Mr. Arvind Datar, argued that the amendment has deterred donors from contributing the necessary funds for the construction of specified projects. Consequently, there is a risk of insufficient funds for the petitioner in the Financial Year 2017-18. Mr. Datar proposed that the petitioner be allowed to provide an undertaking to cover the tax exemption amount if the petition is unsuccessful. The Court acknowledged the concern and accepted the undertaking as a measure to protect the Revenue's interests.

The Court directed that donors willing to contribute to the petitioner's projects under Section 35AC of the Income Tax Act may claim exemptions. However, in the event of an unfavorable outcome for the petitioner, they would be responsible for paying the tax amount and applicable interest claimed by the donors, as per the undertaking provided by Mr. Datar. It was explicitly stated that this order should not be considered a precedent, emphasizing the specific circumstances and arrangements of this case.

In conclusion, the judgment addresses the uncertainty created by the amendment to Section 35AC(7) of the Income Tax Act, highlighting the potential impact on donations for specified projects. By allowing the petitioner to offer an undertaking and ensuring accountability for tax exemptions, the Court aimed to balance the interests of both the petitioner and the Revenue.

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