SHUSHRUSHA CITIZENS CO.OP. HOSPITAL LTD. vs. CHIEF COMMISSIONER OF INCOME TAX, MUMBAI AND ANR.

ORAL JUDGMENT : (PER A.S.OKA,J.) 1 The   submissions   of   the   parties   were   heard   on the  earlier  date.     With  a  view   to  appreciate  the submissions, the controversy which factually arises in this petition will have to be noted.  The order impugned is passed by the first respondent by which the   application   made   by   the   petitioner   for continuation   of   exemption   under   section   10   (23C) (via)   of   the   Income   Tax   Act,1961   (for   short   “the said Act”) has been rejected. According to the case of   the   petitioner,   it   is   a   non­profit   society registered   under   the   Maharashtra   Co­operative Societies Act,1960. The object of the petitioner is of giving needy members of the public better medical facilities   at   free/subsidized   rates,   rendering medical aid etc. It is the case of the petitioner CNR No : HCBM020121732011 Uploaded on - 21/08/2020 that   it   is   running   a   hospital   providing   medical facilities at subsidised rates.  It is the case made out by the petitioner that the   services provided are available to members of the general public. To poor and needy patients, services are being rendered free.  The petitioner has been granted a certificate under   section   12A   of   the   said   Act.     There   is   no dispute  about  the  fact  that  the  certificate  dated 28th December 1988 is still in force and it has not been revoked.  The case made out in the petition is that earlier, the petitioner enjoyed the benefit of section 10 (22A) and in the past, applications made by the petitioner under section 10 (23C) have not been rejected. 2 The   order   impugned   in   this   writ   petition   has been   passed   by   the   first   respondent   on   an application

made

by the petitioner

for grant/continuation   of     exemption   under   section   10 (23C) (vic) of the said Act on 4th  March 2010, for the Assessment Year 2009­10. On the basis of the said application, the office of the first respondent called   upon   the   petitioner   to   furnish   certain information.  Thereafter, a show cause notice dated 18th March 2011 was issued to the petitioner calling upon the petitioner to show as to how it satisfies the condition of existing solely for philanthropic purposes  and   not  for   the  purpose   of  profit.     The petitioner was also called upon to explain as to why the act of inclusion of   non philanthropic objects should not make the petitioner disentitled for the benefit under section 10 (23A) (via). The petitioner Uploaded on - 21/08/2020 filed submissions on 16th March 2011 and 23rd  March 2011. After giving an opportunity of being heard to the petitioner, the impugned order has been passed. It was observed that on an average, only 0.93% of the total receipts for four years have been applied for giving concessional medical treatment. A finding recorded by the first respondent is that it is not the     primary   object   of   the   petitioner   to   exist exclusively   for   philanthropic   purposes.   Another aspect noted in the impugned order was that from the details filed by the petitioner, it appears that the petitioner   has   no   control   whatsoever   on   the   fees charged to the patients referred by the consulting Doctors or the patients of the consultants who get admitted   to   the   rooms   as     charges   are   negotiable between the patients and the consulting Doctors. It was observed that the petitioner has no control over the     fees   charged   by   the   said   Doctors.     In   fact there was no cap prescribed by the petitioner on the amount of fees charged by the Consultants.  Further, it was observed that a percentage fees charged by the   doctors   is   retained   by   the   hospital   as affiliation  charge.     This  is  the   one  of  the  main reasons given by the first respondent. 3 Moreover, it was held that in Bye­law 47(e) of the Bye­laws of the petitioner, there is a provision for payment of honourariam to members for rendering service   and   for   payment   of   special   bonus   to   the persons   who   are   not   members   on   the   basis   of   the support and services rendered.  Further, there is a clause   in   the   Bye­Laws   that   10%   of   the   balance Uploaded on - 21/08/2020 profit   shall   be   distributed   as   a   bonus   to   the employees of the Society.

The   learned   counsel   for   the   petitioner   has taken us through the material on record.  He invited our attention to the Bye­laws of the petitioner.  He pointed out that exemption certificate granted under section 12­A of the said Act continues to remain in decision of the Apex Court in the case of Queen's 1 [2003]262 ITR 459 (Bombay)

[2010] 322 ITR 246 (Bombay) Uploaded on - 21/08/2020 Educational Society vs. Commissioner of Income Tax3. view   by   ignoring   registration   under   section   12­A. He   also   pointed   out   that   even   assuming   that   the members have better facilities available, any member of public can pay membership fees and get facilities which   are   available   to   the   members   of   the petitioner. 5 The   learned   counsel   for   the   respondent supported the impugned order by submitting that the petitioner is indulging in profiteering.  He invited our attention to the findings recorded by the first respondent and   in particular the finding recorded in paragraph 6.4 of the impugned order. 6 We   have   given   careful   consideration   to   the submissions.  Firstly, it will be necessary to make a  reference  to    relevant    provisions  of  the  said Act.  What is invoked in the present case is section 3 [2015] 372 ITR 699 (SC)

[2017] 393 ITR 57 (delhi) Uploaded on - 21/08/2020 10 (23C)(via).  For the sake of convenience, we are reproducing  relevant   portion  of  section  10  of  the said Act which reads thus:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (1)........................................... (23C) any income received by any person on behalf of— (I)............................................... ..................... (via) any hospital or other institution for the   reception   and   treatment   of   persons suffering

from illness

or mental defectiveness   or   for   the   reception   and treatment of persons during convalescence or of   persons   requiring   medical   attention   or rehabilitation,

existing

solely

for philanthropic purposes and not for purposes of profit, other than those mentioned in sub­ clause   (iiiac)   or   sub­clause   (iiiae)   and which   may   be   approved63   by   the   prescribed authority.” (emphasis added) 7 Firstly,   it   will   be   necessary   for   us   to consider   the   scope   of   clause   (via)   of   section 10(23C).     Clause   (via)   provides   for   exclusion   of income. It is applicable to any hospital or other institutions for reception and treatment of persons suffering from illness   or mental defectiveness or for   reception   and   treatment   of   persons   during Uploaded on - 21/08/2020 convalensce.  To attract the provision, hospitals or institutions must exist solely for the philanthropic purposes   and   not   for   the   purpose   of   profit. Therefore, for the applicability of the provision, both the conditions must exist together.  Hospitals or  institutions must exist solely for philanthropic purpose and not for the purpose of profit.   We may note   here   that   merely   because   a   hospital   or institution is getting profit, that by itself will not   attract   disqualification.   It   will   attract disqualification if a hospital or institution exists for the purpose of gaining profit.  In the light of this   discussion,   firstly   it   will   be   necessary   to advert to the decision of the Apex Court in the case of   Queen's   Educational   Society   (supra).     In   this case, the Apex Court was dealing with clause (iiiad) of section 10 (23C) of the said Act.   This was a case   where   the   application   made   by   the   appellant before the Apex Court  (Queen's Educational Society) for grant of exemption under section 10 (23C) (vi) of the said Act was rejected. As the name indicates, the   appellant   before   the   Apex   Court   was   a Educational Society.  The Apex Court dealt with the definition   of  charitable  purposes.    The  test  laid down by the Apex Court  reads thus: “The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The Uploaded on - 21/08/2020 exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J., when he said in Lok Shikshana Trust case [Lok Shikshana Trust v. CIT, (1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] that: (SCC pp. 274-75, para 41) ‘41. … If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on “charity”.’ The learned Judge also added that the restrictive condition ‘that the purpose should not involve the carrying on of any activity for profit would be satisfied if [Ed.: The matter between asterisks has been emphasised in original.] profit-making is not the real object [Ed.: The matter between asterisks has been emphasised in original.] ’. We wholly endorse these observations.

applied – the purpose of education should not be submerged by a profit­making motive. (3) A distinction must be drawn between the

making of a surplus and an institution being carried on “for profit”.  No inference arises that   merely   because   imparting   education results   in   making   a   profit,   it   becomes   an activity for profit. (4) If after meeting expenditure, a surplus arises incidentally from the activity carried on   by   the   educational   institution,   it   will not be cease to be one existing solely for educational purposes. Uploaded on - 21/08/2020 (5) The   ultimate   test   is   whether   on   an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.” (emphasis added) 9 Thus, the emphasis laid by the Apex Court was on the application of predominent object test.  The distinction has to be drawn between the institutions working   'for   profit'   and   the   institutions (23C) of said Act for the assessment year 2003­2004 and   2002­2003. Various   contentions   were   raised including   the   contention   that   there   is   a   surplus generated by the assessee.  The issue was whether it could be said that the assessee was not running the hospital   for   philanthropic   purpose   but   for   the purpose of profit. The issue was of applicability of section 10(23C) to the assessee. A Division bench of this Court held thus:

“5. As regards the second ground of the free or concessional treatment given by the petitioner to its own employees, it cannot be said that it is not philanthropy at all. Philanthropy is not restricted to give free treatment only to the extremely poor, but it would also be philanthropy to give treatment at a concessional rate to those who though not extremely poor Uploaded on - 21/08/2020 cannot afford to pay the full and normal charges. There was nothing on record to show that the staff members to whom the concessional treatment was provided were the affording lot not deserving any concession. In any event, that aspect has not been considered by respondent No. 1 at all.

The   learned   counsel   appearing   for   the petitioner   relied   upon   a   decision   of   Kerala   High Court in the case of Commissioner of Income Tax v/s. Pulikkal Medical Foundation (P.) Ltd.5  The Division Bench of Kerala High Court dealt with the earlier provision of section 10 (22A) of the Act which is similar to the provision with which we are dealing with.  Clause (22A) of  Section 10 provided that any income of a hospital or other institution for the reception   and   treatment   of   persons   suffering   from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons

requiring

medical

attention

or rehabilitation,   existing   solely   for   philanthropic purposes and not for the purposes of profit, is not 5       (1994) 210 ITR 299 Uploaded on - 21/08/2020 to be included in the total income. In the context of   the   said   provision,   the   Division   Bench   of   the Kerala   High   Court   considered   the   meaning   of   the words “philanthropic purposes”. Paragraph 16 of the said decision reads thus:­ “16. Now,  we   may  advert   to   the   meaning  of   the   words "philanthropic   purposes".   Black's   Law   Dictionary,   sixth edition­­"charitable" : "The word 'charitable', in a legal sense includes every gift for a general public use, to be applied consistent with existing laws, for benefit of an indefinite number of   persons,   and   designed   to   benefit   them   from   an educational,   religious,   moral,   physical   or   social standpoint. This term is synonymous with 'beneficent', 'benevolent', and 'eleemosynary'." Ramanatha Aiyar's Law Lexicon, 1987 edition, explains the meaning of the word 'philanthropic' as follows : ". . . an act cannot be said to be philanthropic unless it indicates goodwill to mankind at large. Still, it seems to me   that   'philanthropic'   is   wide   enough   to   comprise purposes not technically charitable. (Stroud 1479)". This  meaning  is  taken  from  the judgment  of  Dyitling  J. Macduff, In re 1896, 2 Ch 451. Shorter   Oxford   English   Dictionary,   3rd   edition, "philanthropic" : "Characterized by philanthropy ; benevolent, humane." Law Lexicon Cum Digest, Vol. III, by N.M. Mulchandani, "Philanthropic purpose" ; "It is not always necessary that a 'philanthropic use' must be such as may be beneficial to the humanity at large but it could be limited to the welfare or benefit of fellow human beings belonging to a well defined class or community, who are joined together by common bonds of religion, race, social, or economic unity. After all, the purpose which is beneficial to a section of the public, is in the larger context beneficial to the human society, Uploaded on - 21/08/2020 but an act solely for the benefit of a few individuals or group of persons would not fall within the purview of charitable or philanthropic use." Chambers' Dictionary: "Philanthropy ­ love of mankind esp. as shown in services to general welfare. 'Philanthropic' ­ doing good to others, benevolent." Thus, on an understanding of the meaning of the words "philanthropic purposes", it is clear that the establishment and running of a hospital by the assessee is a philanthropic purpose. However, the main question is whether the hospital exists solely for philanthropic purposes and not for purposes of profit.” (underline supplied) 13 Thereafter,   in   paragraph   18,   the   Division Bench referred to a decision of Delhi High Court by quoting the same with the approval what is held by the   Division   Bench   is   that   merely   because   the assessee is running a hospital on commercial lines, it will not be disentitled to the exemption under Section   10(22A).   It   was   held   that   the   dominant purpose  is  a  philanthropic  one   and  merely  because the Managing Director or  the Director getting some advantages  while  running the institution, it will not   be   a   ground   to   hold   that   the   purpose   of   the institution is not philanthropic.  It was held that the   benefits   which   are   extended   to   the   Managing Director or the Director would be merely incidental to carrying out of the main or primary purpose and so,   such   benefits   would   not   militate   against   the philanthropic of character of the institution. Even on the aspect of earning profit, it was held that the philanthropic purpose does not cease to exist so Uploaded on - 21/08/2020 long   as   profit   is   being   redeployed   in   the   same institution   or   any   other   similar   institution. Ultimately, in paragraph 28 it was held thus:­ “28. Thus our main conclusions are as follows : In case a hospital exists solely for philanthropic purposes, even if incidentally profit is earned, the hospital is entitled to the benefit under Section 10(22A) of the Act. In order to achieve the main philanthropic objects, the hospital may do some   profit   earning   business   provided   such   profit   is appropriated towards the expansion and development of the hospital   or   to   start   another   institution   with   the   same philanthropic objectives. The real test to be applied is what is the dominant or primary purpose of the institution. If the primary   purpose   is   philanthropic,   the   inclusion   of   some objects for earning profits for the implementation of the primary object would not alter the character of that primary object. In other words, this will not be a ground for holding that   the  hospital   is  not  existing  solely  for  philanthropic purposes. All cumulative factors will have to be taken into consideration   in   order   to   decide   whether   the   institution exists for philanthropic purposes and not for purposes of profit. Neither the fortuitous factor of having a large surplus in any particular year, nor the fact of diverting some income to objects which are not philanthropic in itself would be decisive of the matter.” (underline supplied) 14 The   main   judgment   was   delivered   by   John Mathew,J.   and   there   is   a   concurring   judgment   by Narayana Kurup,J.  In paragraph 34 of his judgment, Kurup,J.   observed   that   though   the   expression philanthropy       is of a popular usage, its legal connotation is not properly understood.  In the said decision,   the   learned   Judge   also   considered   the question   whether   it   is   synonymous   with   the   word “charity”   or   is   it   something   different   from “charity”?   The learned Judge proceeded to observe Uploaded on - 21/08/2020 that   the   said   Act   refers   to   charity   as   well   as philanthropy   and,   therefore,   a   different   meanings will have to be assigned to the word philanthropy. 15 In the impugned order, the first respondent appears to have been impressed by what is provided in the Bye­laws of the petitioner.  Bye­laws provide for payment of honoraria to the persons who are not members.  The activity undertaken by the petitioner is   of   running   a   hospital.   The   object   of   the petitioner   is   to   provide   the   citizens   better facilities for medical help at a reasonable charge by   providing   a   decent   hospital,   dispensaries   and other   up­to­date   scientific   medical   and   surgical amenities.  Another object is to provide members and their   families   medical   facilities   for   prevention, diagnosis and treatment of disease at concessional charges.     One   more   important   object   is   to   render medical aid to the needy and poor free of charge or at subsidised charges.  If the object is to set up a decent   hospital   for   providing     medical   facilities and   medical   help   at   a   reasonable   charge   and   for providing medical facilities to needy and poor free of charge or at subsidised rates, it is necessary for   the   petitioner   to   engage   a   trained   staff   and medical practitioners.  For achieving the aforesaid objects,   the   professional   or   other   persons   who render services have to be paid honourariam.   Bye­ Law   46   provides   that   no   part   of   the   funds,   of society shall be paid by way of bonus or dividend or otherwise distributed to the   members. Though the petitioner society is registered under the said Act Uploaded on - 21/08/2020 of   1960,   none   of   the   members   are   entitled   to dividend   or   distribution   of   profit   in   any   form. This   is   one   factor   which   ought   to   have   been considered  in favour of the petitioner. The first respondent   was   impressed   by   the   petitioner   pays bonus   to   its   staff   members.   Apart   from   the contention of the petitioner that the bonus will be a   part   of   wages   or   salary,   the   staff   and   other members   as   well   as   medical   practitioners   are   not expected to work with the petitioner on charitable basis if a decent hospital is to be maintained and good facilities are to be provided to the patients. There   is   nothing   wrong,   if   bonus   is   paid   to   the members of the staff.   This aspect has been dealt with   to   some   extent   in   the   case   of   Breach   Candy Hospital   Trust   (supra).   The   Division   Bench considered   this   aspect   in   the   context   of contribution being made by the Breach Candy Hospital Trust to the provident fund of the members of the staff. 16 Relying   upon   the   decision   of   Uttarakhand High   Court   in   the   case   of  CIT   v/s.   Queens   Educational Society,    the first respondent observed the fact that the   petitioner   is   having   surplus   during   last   2­3 years as factor against the petitioner.  Apart from the fact that  the correctness of the view taken by the said High Court is not accepted by this Court in the   case   of  Vanita   Vishram   Trust   v/s.   Chief Uploaded on - 21/08/2020 Commissioner of Income Tax and another6, considering the   nature   of   the   activity   undertaken   by   the petitioner society, unless, some surplus is created, it will be difficult for the petitioner to maintain the   medical   facilities   and   to   update   the   medical facilities.     It   is   not   the   case   of   the   first respondent that the surplus which is generated was diverted to any non­charitable activity. As observed earlier,   the   test   will   be   for   what   purpose   the surplus   or   the   profits   earned   are   being   applied. Therefore,   the   said   ground   taken   by   the   first respondent has no relevance at all in the facts of the case.  It is true that there are various objects enumerated under clause (3) of the Bye­Laws of the petitioner.     One   of   the   objects   is   to   establish, manage, continue, administer, maintain  and conduct hospital   which   is   named   in   sub­clause   (c).     The other object in sub­clause(d) is to purchase, take on lease or in exchange, hire or otherwise acquire any   other   property   and   in   particular   medical, surgical and all other allied plants, vehicles, etc. One   clause   provides   for   sale,   lease,   mortgage   or disposal of the property. These two clauses are not the objects of  the  petitioner.    The same  are  the powers of the petitioner.  The relevant issue which was   to   be   decided   was;   whether   the   petitioner   is existing solely for philanthropic purposes and not for the purposes of profit.  Clause (3) of the Bye­ Laws   enable   the   society   to   do   several   things. Merely because clause (3) enables the society to do several   things,   it   will   not   militate   against   the 6       327 ITR 121 Uploaded on - 21/08/2020 existing status of the petitioner.  We have already made a reference to a decision of the Division Bench of this Court in a case of Deccan Gymkhana wherein the   Division   Bench   was   considering   the   question whether   the   assesee   Club   was   a   charitable institution.   In   paragraphs   10   and   11   of   the   said decision, the Division Bench held thus:­ “10. As stated above, we are confining our judgment to the facts of this case, Section 2(15), as it stood at the relevant time, defines the words “charitable purpose” to include relief of the poor, education, medical  relief and advancement of any   other   object   of   general   public   utility,   not   involving carrying   on   of   any   activity   for   profit.     In   the   case   of Thiagarajar Charities v. Addl. CIT (1997) 225 ITR   1010 (SC), it has been held that the correct test to be applied was whether   the   predominant   object   of   the   activity   was   to subserve the charitable purpose or to earn profit.   Where profit­making was the predominant object of the activity, the purpose would cease to be charitable purpose.  But, where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose the character of charitable purpose merely because some profit arises from the activity.  In that judgment, it has been further laid down that there is a difference between the objects of the trust and the power of the trustees. In that matter, the Supreme Court had to construe two clauses in the constitution of the trust.  In that matter, under clause 1(g) the words were as follows:­ “To   engage   in   and   assist   and   promote   rural reconstruction work, cottage industry and all other matters Uploaded on - 21/08/2020 incidental thereto. The other clause in the trust deed was clause 7(a) which reads as follows:­ “7(e) To invest in any business undertaking of whatever nature.” It was held by the Supreme Court that the above clause 1(g) was an object clause, whereas clause 7(e), referred to above, indicated the power of the trustees to invest in business. That, the predominant object was in clause 1(g).   In the circumstances, it was held by the Supreme Court, applying the above test, that clause 1(g) came within the ambit of the words   “relief   of   the   poor,   education   and   medical   relief” under Section 2(15) of the IT Act, and not to earn profit and in the circumstances, the fourth limb of Section 2(15) stood   excluded.     According   to   us,   the   judgment   of   the Supreme Court squarely applies to the facts of our case.

is remitted

for fresh consideration   to   the   first   respondent confined to the aspects/findings referred in paragraphs 17 to 22 above; (ii) It will be open for the petitioner to produce

records/additional

materials/ additional   documents   before   the   first respondent within a period of one month from the date of judgment and order be uploaded; (iii)   After   considering   the   additional material and after giving an opportunity of being   heard   to   the   petitioner,   the   first respondent shall  pass a fresh order within a period   of   4   months   from   the   date   on   which this order is uploaded; (iv) All contentions of the parties on merits are kept open to the above extent; (v) Rule is made absolute on above terms. (vi) All   concerned   to   act   upon   an authenticated copy of the judgment. (A.K.MENON,J.) (A.S.OKA,J.) Uploaded on - 21/08/2020 Powered by TCPDF (www.tcpdf.org)