SHUSHRUSHA GITIZENS CO OPERATIVE HOSPITAL LIMITED ,MUMBAI vs. DY. CIT (EXEMPTION) 2(1), MUMBAI

आदेश / ORDER PER MAKARAND VASANT MAHADEOKAR, AM: These two appeals filed by the assessee are directed against the separate orders dated 29.08.2025 passed by the Additional/Joint Commissioner of Income Tax (Appeals), Panaji

2 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited [hereinafter referred to as "CIT(A)"], under section 250 of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] for A.Ys. 2015–16 and 2016–17. Since the issues involved in both the appeals are common and arise out of identical set of facts, the same are heard together and disposed of by this consolidated order for the sake of convenience.

Facts of the Case 2. The assessee, Shushrusha Citizen’s Co-operative Hospital Ltd., is a co-operative society registered under section 9(1) of the Maharashtra Co-operative Societies Act, 1960 and is also registered as a charitable trust under the Income-tax Act, 1961 vide registration under section 12A bearing Registration No. TR- 26748 dated 28.12.1988. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee is engaged in running a hospital and claims exemption under section 11 on the ground of carrying out charitable activities. However, on examination of the trust deed, the Assessing Officer noted that clause (dd) of the objects specifically provides:

“To provide for members and their families medical facilities for prevention, diagnosis and treatment of disease at concessional charges.” 4. Based on the above clause and the trial balance, wherein ―Director’s Concession‖ was debited in case of both the years, the

3 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited Assessing Officer formed a prima facie view that the activities of the assessee are oriented towards benefiting members and related persons, thereby attracting the provisions of section 13(1)(c) read with section 13(3) of the Act. Accordingly, for A.Y. 2015-16, a reference was made to the Addl. CIT (Exemption) under section 144A, who issued directions vide letter dated 05.12.2017. The Addl. CIT directed the Assessing Officer to examine whether a co- operative society is eligible for exemption under sections 11, 12 and 13, when there exists a specific provision under section 80P for co-operative societies; and whether the objects of the assessee, which provide concessional medical facilities to members, result in violation of section 13(1)(c), as the benefits are extended to specified persons. 5. Pursuant to the above, the Assessing Officer issued a show cause notice for A.Y. 2015-16 under section 142(1) dated 11.12.2017 requiring the assessee to explain:  Eligibility of exemption under sections 11, 12 and 13 despite being a co-operative society working for members;  Why the matter should not be referred to the CIT(Exemption) for withdrawal of registration under section 12A; and  Why provisions of section 13(1)(c) should not be invoked and exemption under section 11 be denied. 6. In response, the assessee submitted that:

4 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited  It is a charitable trust registered under section 12A and eligible for exemption under section 11;  Its objects fall within the definition of ―charitable purpose‖ under section 2(15), particularly ―medical relief‖;  The hospital provides medical facilities to the general public and not exclusively to members;  Only approximately 10% of the services are rendered to members, and therefore the predominant activity is for the general public; 7. However, the Assessing Officer rejected the submissions observing as under:  The assessee failed to justify how a co-operative society is eligible for exemption under section 11 when a specific provision under section 80P exists for such entities;  The object clause (dd) clearly envisages provision of concessional medical facilities to members and their families, which directly benefits specified persons;  Trustees being members of the society are covered under section 13(3), and hence any benefit to them attracts section 13(1)(c);  The existence of ―Director’s Concession‖ in the books substantiates that such benefits were actually extended.

5 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited

6 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited 10. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). Before CIT(A), the assessee contended that the assessee is a non-profit entity duly registered under section 12A and is engaged in providing medical and health care services, which squarely fall within the definition of ―charitable purpose‖ as per section 2(15) of the Act. The hospital provides medical facilities to the general public, particularly lower- and middle- income groups, at reasonable and affordable cost without any discrimination of caste, creed or religion. 11. On merits, the assessee submitted that section 11 grants exemption to income applied for charitable purposes and section 13 carves out an exception only where income is applied for the benefit of specified persons. It was contended that the provisions of section 13(1)(c) read with section 13(3) were wrongly invoked in the present case, as there was no diversion of income for the benefit of specified persons. 12. The assessee specifically submitted that medical facilities were provided to trustees/directors only in exceptional circumstances and on the same terms as applicable to the general public and the trustees had duly paid for the services availed and no undue or excessive benefit was derived. It was also contended that there was no disruption in the functioning of the hospital and no preferential treatment was given to any specified person. It was further submitted that no person had made substantial contribution exceeding Rs. 50,000/- so as to fall

7 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited within the ambit of section 13(3)(b), and the hospital merely collects membership fees. 13. On facts, the assessee emphasised that the alleged benefit to specified persons was negligible when compared with the overall scale of charitable activities, as under:  For A.Y. 2015–16, concession extended to a director/trustee was only Rs. 1,56,692/-.  For A.Y. 2016–17, total hospital income was Rs. 4,87,38,394/- and concession provided to director members was only Rs. 5,29,177/- out of services amounting to Rs. 12,17,175/- rendered to such members. 14. It was contended that such amounts are insignificant and cannot lead to denial of exemption under section 11 in entirety. The assessee further submitted that:  Only about 10% (approx.) of the services were rendered to members, whereas the substantial portion of services was provided to the general public at large.  The hospital is engaged in various charitable activities such as providing concessional treatment, organizing health check-up camps and awareness camps, and implementing schemes like Rajiv Gandhi Jeevandayee Arogya Yojana.

8 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited  The assessee also provided assistance to economically weaker sections through schemes such as ―Indigent Patient Fund‖ and extended benefits to BPL patients and other needy sections of society. 15. It was therefore contended that the dominant purpose of the assessee is charitable and the activities are genuine and carried out in accordance with its objects. 16. Without prejudice, the assessee submitted that even assuming there is any violation of section 13, the exemption under section 11 cannot be denied in entirety and at the most, denial can be restricted only to the extent of income applied for the benefit of specified persons. In support of the said contention, reliance was placed on some judicial precedents. Further, with regard to the issue of withdrawal of registration under section 12AA, it was submitted that as per section 12AA(4), registration can be cancelled only if activities are not genuine or not carried out in accordance with the objects, which is not the case for the assessee. 17. On the issue of set-off of brought forward losses (raised for A.Y. 2016–17), the assessee submitted that the Assessing Officer erred in not granting set-off of carried forward business losses. It was contended that the AO had considered only loss of A.Y. 2008–09 and ignored other brought forward losses. The assessee furnished working of such losses and requested that the same be

9 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited allowed to be set off and income be recomputed accordingly, even if exemption under section 11 is denied. 18. The CIT(A), after considering the assessment records and submissions of the assessee, upheld the action of the Assessing Officer in denying exemption under section 11 and in disallowing the claim of set-off of losses. 19. The CIT(A) recorded that although the assessee is registered under section 12A and claims to be engaged in charitable activity of running a hospital, the benefit of exemption under section 11 is not automatic and is subject to fulfillment of statutory conditions, including application of income for charitable purposes and compliance with provisions of section 13. The CIT(A) also recorded that the assessee failed to produce books of accounts along with supporting bills and vouchers either during the assessment proceedings or during the appellate proceedings. The CIT(A) observed that no documentary evidence was furnished to establish actual application of income for charitable purposes. In absence of such primary evidence, the claim of exemption could not be verified. 20. The CIT(A) held that under section 11(1)(a), exemption is allowable only to the extent income is applied for charitable purposes and that maintenance of proper books of account and supporting evidences is mandatory. It was emphasized that the burden lies on the assessee to prove such application of income

10 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited through documentary evidence and failure to discharge this burden justifies denial of exemption. 21. The CIT(A) further upheld the invocation of provisions of section 13 by the Assessing Officer. It was observed that the Assessing Officer had pointed out that benefits were extended to specified persons and the assessee failed to rebut these findings with cogent evidence. In absence of proper verification and supporting records, the CIT(A) concluded that violation of section 13 could not be ruled out. 22. With regard to the issue of set-off of brought forward losses (A.Y. 2016–17), the CIT(A) recorded that the assessee failed to furnish documentary evidence to establish that such losses were determined in earlier years in accordance with law. It was observed that no evidence was produced to demonstrate filing of return under section 139(3), assessment of such losses, or their eligibility for carry forward. The CIT(A) held that as per section 72, carry forward and set-off of losses is permissible only where such losses are determined in pursuance of a return filed under section 139(3). In absence of such proof, the claim cannot be allowed. The CIT(A) further observed that since exemption under section 11 itself was denied and the assessee failed to substantiate the claim of brought forward losses, the Assessing Officer was justified in disallowing the set-off. 23. Aggrieved by the orders of CIT(A), the assessee is in appeal raising following grounds of appeal:

11 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited

In ITA No. 6785/MUM/2025 for A.Y. 2015–16 The Additional/ Joint Commissioner of Income-tax (Appeals) – Panaji (hereinafter referred to as the Addl CIT(A)) erred in upholding the action of the Deputy Commissioner of Income-tax (Exemptions) 2(1), Mumbai (hereinafter referred to as the Assessing Officer) in not allowing exemption under section 11 of the Act and treating the income of the appellant-trust as business income. The appellants contend that on the facts and in the circumstances of the case and in law, the Addl CIT(A) ought not to have upheld the action of the Assessing Officer in as much as he has not correctly appreciated the facts of the case in its entirety and hence, the action of the Assessing Officer in not allowing exemption under section 11 needs to be reversed. The appellants further contend that the Addl CIT(A) ought to have allowed the exemption under section 11 of the Act in as much as the Assessing Officer or the Addl CIT(A) have not brought anything on record to refute the fact that the appellant-trust is carrying out charitable activities for public at large which is in line with its objects. The appellants further contend that the action of the Assessing Officer is perverse as the same is devoid of any evidence on record. In ITA No. 21/MUM/2026 for A.Y. 2016–17 1. The Additional/ Joint Commissioner of Income-tax (Appeals) – Panaji (hereinafter referred to as the Addl CIT(A)) erred in upholding the action of the Assistant Commissioner of Income-tax Exem Circle 2, Mumbai (hereinafter referred to as the Assessing Officer) in not allowing exemption under section 11 of the Act and treating the income of the appellant-trust as business income. The appellants contend that on the facts and in the circumstances of the case and in law, the Addl CIT(A) ought not to have upheld the action of the Assessing Officer in as much as he has not correctly appreciated the facts of the case in its entirety and hence, the action of the Assessing Officer in not allowing exemption under section 11 needs to be reversed. The appellants further contend that the Addl CIT(A) ought to have allowed the exemption under section 11 of the Act in as much as the Assessing Officer or the Addl CIT(A) have not brought anything on

12 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited record to refute the fact that the appellant-trust is carrying out charitable activities for public at large which is in line with its objects. The appellants further contend that the action of the Assessing Officer is perverse as the same is devoid of any evidence on record. 2. The Addl CIT(A) erred in upholding the action of the Assessing Officer in not allowing set-off of brought forward business loss of Rs. 25,25,822 against business income. The appellants contend that on the facts and in the circumstances of the case and in law, the Addl CIT(A) ought to have allowed the set-off of brought forward business loss against the business income inasmuch as he has not correctly appreciated the facts of the case in its entirety; the same is as per the provisions of section 72 of the Act and hence, the action of the CIT(A) in not allowing the said set-off needs to be reversed. 24. The learned Authorised Representative (AR) of the assessee, reiterating the submissions advanced before the CIT(A), assailed the action of the Assessing Officer in denying exemption under section 11 by invoking the provisions of section 13(1)(c).

13 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited invoking section 13(1)(c) without appreciating the scale and nature of operations of the assessee. 26. Drawing attention to the factual details, the learned AR submitted that in A.Y. 2016–17, which has been taken as the lead year, the total medical services provided during the year amounted to Rs. 48,73,80,394/-. Out of this, services rendered to directors aggregated to Rs. 12,17,175/-, and the concessional portion thereof was only Rs. 5,29,177/-. It was thus contended that the alleged benefit to specified persons constitutes merely about 0.25% of the total services rendered by the assessee. Similar factual position prevails in A.Y. 2015–16 as well. 27. The learned AR submitted that such a minuscule and incidental benefit cannot be construed as violation of section 13(1)(c) so as to deny exemption under section 11 in entirety. It was argued that the dominant and primary object of the assessee continues to be charitable in nature and the activities are overwhelmingly directed towards providing medical relief to the general public. The AR further submitted that the concessional treatment extended to directors is not in the nature of diversion of income or application of funds for non-charitable purposes, but is merely part of normal hospital policy and as per the objects. 28. The learned AR further contended that even assuming, without admitting, that there is some violation of section 13(1)(c), the consequence cannot be denial of exemption on the entire

14 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited income of the assessee. In this regard, reliance was placed on the judgement of Hon’ble Karnataka High Court in the case of CIT vs. Fr. Mullers Charitable Institutions(44 taxmann.com 275). The learned AR also submitted that the above view has been affirmed by the Hon’ble Supreme Court in CIT vs. Fr. Mullers Charitable Institutions (51 taxmann.com 378), wherein the Special Leave Petition filed by the Revenue was dismissed. The AR also submitted that the Hon’ble Bombay High Court in DIT (Exemption) vs. Sheth Mafatlal Gagalbhai Foundation Trust (114 taxman 19) held that only the non-exempt income portion would fall in the net of tax… and not the entire income. 29. Placing reliance on the above judicial principles, the AR submitted that even in cases of violation of section 13, the denial of exemption is to be restricted only to the extent of income which is directly relatable to such violation and not the entire income of the trust. 30. The learned AR further pointed out that during the course of assessment proceedings, the Assessing Officer had issued a show cause notice to the assessee as to why the matter should not be referred to the CIT(Exemption) for cancellation of registration granted under section 12A of the Act. It was submitted that despite such proposal, no action has been taken by the competent authority and the registration granted under section 12A continues to remain valid and in force. The AR contended that so long as the registration has not been withdrawn by the

15 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited CIT(E), the Assessing Officer is not justified in denying exemption under section 11 on presumptive grounds of alleged violation. 31. The learned Departmental Representative (DR), on the other hand, strongly relied upon the orders of the Assessing Officer and the CIT(A). 32. We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record. The issue arising for our consideration is whether the assessee is entitled to exemption under section 11 of the Act or whether the same is liable to be denied in entirety on account of alleged violation of section 13(1)(c). 33. At the outset, it is necessary to examine the scheme of taxation governing charitable institutions under the Act. Sections 11 and 12 provide for exemption of income derived from property held under trust for charitable purposes, subject to fulfillment of prescribed conditions. One of the primary conditions under section 11(1)(a) is that at least 85% of the income must be applied for charitable purposes during the year. Further, the exemption is subject to the restrictions contained in section 13, which inter alia provides that no part of the income or property of the trust should be used or applied for the benefit of specified persons. 34. Thus, the statutory framework makes a clear distinction between (i) eligibility for exemption based on charitable application of income, and (ii) withdrawal or denial of exemption

16 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited in cases of specified violations. The denial of exemption is not automatic but must be based on cogent material demonstrating that income has been applied in a manner prohibited under section 13. 35. In the present case, there is no dispute that the assessee is duly registered under section 12A and is engaged in the activity of providing medical relief, which falls within the ambit of charitable purpose under section 2(15). The primary objection of the Assessing Officer is that concessional medical facilities were extended to directors, thereby attracting section 13(1)(c). 36. On perusal of the facts, it is observed that the total medical services rendered by the assessee in A.Y. 2016–17 amounted to Rs. 48,73,80,394/-, whereas the concessional portion extended to directors was only Rs. 5,29,177/- out of services of Rs. 12,17,175/- rendered to them. The proportion of such concession works out to approximately 0.25% of the total services provided. Similar factual position exists in A.Y. 2015–16. 37. In our considered view, such a negligible and incidental benefit cannot be construed as diversion of income or application of funds so as to defeat the charitable character of the institution. The dominant purpose of the assessee continues to be charitable, and the activities are overwhelmingly directed towards providing medical relief to the general public.

17 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited 38. It is also relevant to note that the objects of the assessee, as approved by the competent authority at the time of granting registration under section 12A, specifically contemplate provision of medical facilities, including concessional treatment. Therefore, the act of extending concession, even to members or directors, cannot be viewed in isolation so as to constitute a per se violation of section 13(1)(c), unless it is shown that such benefit is excessive or unreasonable.

18 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited

maximum marginal rate of tax on the entire income of the Trust? The Bombay High Court held that in case of contravention of Section 13(1)(d), maximum marginal rate of tax under Section 164(2), proviso is applicable only to that part of income of the Trust which has forfeited exemption and not the entire income. Relevant paragraph reads as under: "Sec. 164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of an AOP. Therefore, a proviso was inserted by the Finance Act, 1984 w.e.f 1st April1985, under which in cases where the whole or any part of the relevant income is not exempt under s. 11or s.12 because of the contravention of s.13(1)(d),the tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non-exempt income portion would fall in the net of tax as if it was the income of an AOP. The phrase 'relevant income or part of the relevant income' in the proviso is required to be read in contradistinction to the phrase 'whole income 'under s. 161(1A). This is only by way of comparison. Under s. 161(1A), which begins with a non-obstante clause, it is provided that where any income in respect of which a person is liable as are presentative assessee consists of profits of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the legislature has clearly indicated its mind in the proviso to s. 164(2) when it categorically refers to forfeiture of exemption for breach of s.13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has for forfeited exemption. It does not refer to the entire income being subjected to maximum, marginal rate of tax. This interpretation is also supported by Circular No.387, dt. 6th July, 1984. Vide the said Circular, it has ' been laid down in para 28.6 that where a trust contravenes s.13(1)(d), the maximum marginal rate of Income-tax will apply only to that part of the income which has forfeited exemption wider the said provision and not to the entire income. There is a vital difference between

19 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited

eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, there is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the divided income from shares held in contravention of s.13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act." A similar view has been taken by the Delhi High Court in a judgment reported in Agrim Charan Foundation(Supra). Reading of the proviso to Section 142 is very clear that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case. 12. We are in respectful agreement with the views expressed by the Bombay High Court as well as Delhi High Court for violating Section 11(5) of the Act and the entire income of the respondent-Trust cannot be assessed for the tax. 41. The above view has been affirmed by the Hon’ble Supreme Court, wherein the Special Leave Petition filed by the Revenue was dismissed.

20 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited 43. Applying the above principles to the facts of the present case, we find that: i. The assessee is engaged in genuine charitable activity of providing medical relief; ii. The requirement of application of income under section 11 stands satisfied; iii. The alleged benefit to specified persons is incidental and negligible in proportion; iv. The objects of the trust themselves envisage provision of concessional medical facilities; and v. There is no material to demonstrate that income has been diverted for private benefit in a manner contemplated under section 13(1)(c). 44. In such circumstances, the action of the Assessing Officer in denying exemption under section 11 in entirety is not sustainable in law. At best, even if any violation is presumed, the consequences would be limited only to the extent of such benefit and cannot result in wholesale denial of exemption. 45. Accordingly, in our considered view, the assessee is entitled to exemption under section 11 and the addition made by the Assessing Officer and sustained by the CIT(A) is liable to be deleted. 46. In view of the foregoing findings and judicial principles discussed hereinabove, the grounds relating to denial of

21 ITA No. 21/Mum/2026 & ITA No. 6785/Mum/2025 Shushrusha Gitizens Co Operative Hospital Limited exemption under section 11 are allowed. The Assessing Officer is directed to grant exemption under section 11, as the alleged violation of section 13(1)(c) is not established in substance and, in any case, cannot result in denial of exemption in entirety.

Order pronounced in the open court on 02.04.2026.

Sd/- Sd/- (PAWAN SINGH) (MAKARAND VASANT MAHADEOKAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated 02/04/2026 Dhananjay, Sr.PS आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : अपीलाथी / The Appellant 1. प्रत्यथी / The Respondent. 2. 3. संबंधधत आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT धिभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, मुम्बई / DR, ITAT, Mumbai 5. 6. गार्ड फाईल / Guard file. आदेशानुसार/ BY ORDER, सत्याधपत प्रधत //True Copy// 1. उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai