BAUN FOUNDATION TRUST vs. CHIEF COMMISSIONER OF INCOME TAX-1 AND ANR.

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WP/1206/2010HC Bombay27 March 2012Author: HON'BLE SHRI JUSTICE DR. D.Y. CHANDRACHUD, HON'BLE SHRI JUSTICE M.S. SANKLECHA4 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the Chief Commissioner had misapplied himself in law. Citing the Supreme Court's decision in Aditanar Education Institute Etc. v. Additional Commissioner of Income-tax, the Court reiterated that the decisive test is whether the object is to make a profit, and an incidental surplus from a lawfully carried-on activity does not disqualify an institution from existing solely for its stipulated purpose. The Court found that the operation of the chemist shop was an activity incidental or ancillary to the dominant object of running a hospital for philanthropic purposes. The Chief Commissioner had accepted that the surplus was utilized for the hospital's purposes. The Court noted that a hospital necessarily requires a facility for dispensing medicines, and a chemist shop is a common and beneficial facility for patients and their relatives. The figures presented did not indicate that the chemist shop's activity had assumed such a dominating importance as to cast doubt on the true nature of the hospital. Therefore, the impugned order was set aside, and the application was to be considered in light of the judgment, with the Chief Commissioner directed to pass a fresh order after providing the Petitioner an opportunity of being heard within two weeks.

What were the facts?

The Petitioner, Baun Foundation Trust, a public charitable trust running Cumballa Hill Hospital, had its application for continuation of exemption under Section 10(23C)(via) rejected by the Chief Commissioner of Income-tax. The rejection was based on the ground that the trust operated a chemist shop within the hospital premises. The Chief Commissioner noted that the surplus from the chemist shop ranged between 3.72% to 5.19% of the total turnover between 2006-07 and 2008-09, and that 27% of the turnover was from the general public. Despite accepting that the surplus was utilized for the hospital's purposes, the Chief Commissioner concluded that the chemist shop's activity was commercial and not exclusive to patients, thus implying the trust did not exist solely for philanthropy. The Petitioner sought continuation of exemption for the period from April 1, 2008, onwards, having previously enjoyed exemption up to Assessment Year 2007-08.

What were the issues?

1. Whether the operation of a chemist shop within the hospital premises, even if ancillary to the primary philanthropic purpose, disqualifies a trust from claiming exemption under Section 10(23C)(via) of the Income-tax Act, 1961, if the surplus generated is utilized for the trust's objects? Assessee's Contentions: The Petitioner argued that the fundamental test is whether the trust's object is to make a profit or if it exists solely for philanthropic purposes. They contended that the dominant nature of the trust's purpose should be considered, and any ancillary or incidental object would not detract from its true character. The Chief Commissioner, it was submitted, had misapplied the law. Revenue's Contentions: The counsel for the Revenue supported the order passed by the Chief Commissioner.

Which sections of the Income-tax Act were involved?

Section 10(22A),Section 10(23C),Section 11

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Cause title — parties, addresses and appearances
PNP 1/4 WP1206-27.3.sxw IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1206 OF 2010 Baun Foundation Trust  ..Petitioner. versus Chief Commissioner of Income­tax­1 and another ..Respondents. ..... Mr. S.C. Tiwari with Ms. Natasha Mangat for the Petitioner. Mr. Suresh Kumar for the Respondents. ......        CORAM :  DR.D.Y.CHANDRACHUD &      M.S. SANKLECHA, JJ.         27 March 2012.

ORAL JUDGMENT (Per DR.D.Y.CHANDRACHUD, J.)  :

1.

The Petitioner is a public charitable trust created under a deed of trust dated 4 February 1964 and is registered under the Bombay Public Trust Act 1950. The trust runs the hospital in the name and style of Cumballa Hill Hospital and Heart   Institution.   The Petitioner has been granted the benefit of exemption under Section 10(22A) or Section 10(23C) (via) or under Section 11, as the case may be, upto Assessment Years 2007­08. By an application dated 31 March 2009 the Petitioner sought continuation of its exemption for the period from 1 April 2008. Particulars  and   information   as  sought   by  the  First  Respondent   were submitted.  On 29 April 2010 the First Respondent rejected the application filed by the Petitioner seeking approval under Section 10(23C)(via) for the period from 2009­10 onwards.

2.

The sole ground on which the Chief Commissioner of Income Tax has denied his approval is that the Petitioner conducts a chemist shop in the premises of the hospital.  The Chief Commissioner has computed the net surplus from the chemist shop as a percentage of the income and came to the conclusion that it varied between 15% for 2007­08 to 18% for 2008­09. Moreover, it has been CNR No : HCBM020128722010 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:53

PNP 2/4 WP1206-27.3.sxw observed that 73% of the total turnover is from inpatients, while 27% is from the general public which would include purchases made by the patients coming to the Out Patients' Department (OPD).  The percentage of surplus from the chemist shop to the total turnover is stated to range between 3.72% to 5.19% between 2006­07  and   2008­09. Having   so   observed,   the  Chief  Commissioner  in his impugned order has accepted the position that the surplus which is earned from the chemist shop is utilized for the purposes of the hospital.   Despite this, the Chief Commissioner has held that the nature of a chemist shop is not exclusive to the patients coming to the hospital and is commercial or akin to trading activity. Hence, it has been concluded that the trust does not exist solely for the purposes of philanthropy.  As a result, the application has been rejected.

3.

Counsel   appearing   on   behalf   of   the   Petitioner   submits   that   the fundamental test which is required to be adopted is whether the object of the trust is to  make   a  profit  or  contrariwise  whether the trust  exists solely for philanthropic   purposes.   Learned counsel submitted that it is the dominant nature of the purpose for which the trust exists that has to be borne in mind and if that is found to be philanthropic, any other object merely ancillary or incidental to the primary or dominant purpose would not detract from the true nature or character of the trust.  Consequently, it was urged that the Chief Commissioner has misapplied himself in law.  On the other hand counsel appearing on behalf of the Revenue has supported the order passed by the Chief Commissioner.

4.

In  Aditanar Education Institute Etc. v. Additional Commissioner of Income Tax1, the Supreme Court has observed, while construing the provisions of Section 10(22) that the decisive or acid test is whether on an overall view of the matter the object is to make a profit.  If after meeting the expenditure any surplus results incidentally from the activity lawfully carried on by the institution, it will not cease to be one existing solely for the statutorily stipulated purpose so long as the object is not to make a profit.  Again, it is a well settled position in law that the   dominant   nature   of   the   purpose   for   which   the   trust   exists   has   to   be 1 (1997) 224 ITR 310(SC) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:53

PNP 3/4 WP1206-27.3.sxw considered.     The Chief Commissioner has not doubted the genuineness of the trust or the fact that it is conducting a hospital.  Even if the figures which are taken into account by the Chief Commissioner are to be had regard to, it is evident that the activity of a chemist shop is an activity which is incidental or ancillary to the dominant object and purpose which is to run a hospital.   The Chief Commissioner has accepted that the surplus which is earned from the operation of a chemist shop is utilized for the purposes of the hospital.  A hospital must of necessity have a section or department where medicines can be dispensed and it is not uncommon for a medical hospital which exists even for philanthropic purposes to have a chemist shop where pharmaceutical products are sold.  This is a facility which is intended to be used predominantly by patients and their relatives.   Though the members of the general public are not prohibited from using the facility, the crucial question to ask or the test to answer is whether the establishment of a chemist shop is incidental or ancillary to the dominant object and purpose which is to set up and conduct a hospital for philanthropic purposes. As a matter of fact, Section 10(23C) permits the accumulation of income upto a certain  stipulated   amount   over  a   stipulated   period.     In   our  view,   the  Chief Commissioner of Income Tax has clearly misapplied   himself in law by having regard to a clearly ancillary   or incidental activity and elevating it to the status of the dominant purpose for which the hospital has been established.  Running the chemist shop in the present case is not the dominant object or purpose of the trust.   Nor would the figures as disclosed indicate that the nature of the activity has assumed such a dominating or overwhelming importance so as to cast doubt on the true nature and character of the hospital which is conducted by the Petitioner.  The Chief Commissioner has acted contrary to the judgments of the Supreme Court which hold the field consequent upon which the impugned order would have to be set aside.

5.

We accordingly quash and set aside the impugned order of the Chief Commissioner dated 29 April 2010 and direct that the application filed by the Petitioner under the provisions of Section 10(23C)(via) shall be considered in the light of the observations contained in the earlier part of this judgment.  We clarify Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:53

PNP 4/4 WP1206-27.3.sxw that it would not be open to the Chief Commissioner upon remand to reject the application on the grounds for rejection in the impugned order which has been quashed and set aside.   The Chief Commissioner shall pass a fresh order after furnishing to the Petitioner an opportunity of being heard and this exercise shall be   completed   within   a   period   of   two   weeks   from   the   date   on   which   an authenticated copy of this order is produced by the Petitioner.   Rule is made absolute in these terms. There shall be no order as to costs. (Dr. D.Y. Chandrachud, J.) (M.S. Sanklecha, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:53 Powered by TCPDF (www.tcpdf.org)

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