BREACH CANDY HOSPITAL TRUST vs. THE CHIEF COMMISSIONER OF INCOME TAX AND 2 ORS.
What did the High Court hold?
The High Court held that the matter required reconsideration by the Chief Commissioner. The Court found that the Chief Commissioner erred in rejecting the applications without giving the petitioner an opportunity to demonstrate that there was no net surplus when considering its activities over a period of time. Regarding the surplus of receipts over expenses, the Court noted the petitioner's submission of a cumulative loss over several years, which was not considered by the respondent. The Court also found that the respondent had not adequately considered whether concessional treatment to staff members constituted philanthropy and whether the staff were deserving of such concessions. The write-off of Rs. 76,80,723 was deemed irrelevant to the determination of the petitioner's sole philanthropic purpose, as it related to statutory obligations for provident fund contributions. Concerning the income from USA visa medical check-ups, the Court acknowledged a surplus in some years but suggested that cross-subsidization within a single unit for overall medical treatment is not uncommon, and without material showing a general profit, it could not be concluded that the petitioner did not exist solely for philanthropic purposes. The Court also noted that the petitioner's Memorandum and Articles of Association, prohibiting dividend distribution, were not considered. The impugned order was set aside, and the matter was remanded back to the Chief Commissioner for fresh consideration.
What were the facts?
The petitioner, Breach Candy Hospital Trust, a company and public trust, challenged an order dated March 31, 2009, by the Chief Commissioner of Income Tax, Mumbai. This order rejected the petitioner's applications for approval under Section 10(23C)(via) of the Income Tax Act, 1961, for Assessment Years (AY) 2002-03 to 2008-09 and onwards. The petitioner had previously enjoyed tax exemptions. The rejection was based on several grounds, including a perceived profit motive due to surpluses of receipts over expenses, concessional treatment to staff, a write-off of Rs. 76,80,723 due to a stockbroker's failure, and income from conducting medical check-ups for USA visa applicants. The petitioner argued that the Chief Commissioner erred in rejecting their applications without considering the cumulative financial position and without providing an opportunity to explain certain aspects.
What were the issues?
1. Whether the Chief Commissioner of Income Tax was justified in rejecting the petitioner's applications for approval under Section 10(23C)(via) of the Income Tax Act, 1961, for AY 2002-03 to 2008-09 and onwards, based on the grounds of perceived profit motive, concessional treatment to staff, a write-off of investment, and income from visa medical check-ups. Assessee's contentions: - The petitioner argued that the Chief Commissioner could not have taken a contrary view to previous approvals without new material, relying on the principle that past approvals should be considered. (However, the Tribunal rejected this argument based on the principle that res judicata does not apply to different assessment years). - Regarding the surplus of receipts over expenses, the petitioner contended that cumulatively, for AY 1990-91 to 2008-09, there was a loss of Rs. 22.30 lakhs, and this was not considered by the respondent, nor was an opportunity given to explain this cumulative position. - The petitioner argued that concessional treatment to staff members could be considered philanthropy and that the respondent did not consider whether the staff members were deserving of concession. - The petitioner submitted that the write-off of Rs. 76,80,723 was a statutory obligation for provident fund contributions and was irrelevant to determining philanthropic purpose. - The petitioner argued that income from visa medical check-ups could be cross-subsidized for overall philanthropic activities and that there was no general profit motive. - The petitioner pointed out that its Memorandum and Articles of Association prohibit dividend distribution, a fact not considered by the respondent. Revenue's contentions: - The revenue, through the Chief Commissioner's order, contended that the petitioner did not exist solely for philanthropic purposes due to surpluses, profit from visa check-ups, and other factors, justifying the rejection of approval.
Which sections of the Income-tax Act were involved?
Section 10(23C)(via),Section 10(22A)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
ORAL JUDGMENT: (Per D.G.Karnik,J)
By this petition, the petitioner challenges the order dated 31st March 2009 passed by the Chief Commissioner of Income Tax, Mumbai (Respondent no.1) rejecting the petitioner’s request for grant of approval under section 10(23C)(via) of the Income Tax Act, 1961 (for short “the Act”) for the Assessment Year 200203 to A.Y. 200809 and onwards.
The petitioner is a company incorporated and registered under the Companies Act, 1913 whose main object is creating and maintaining an hospital for philanthropic purposes. The petitioner is also registered as a public trust under the Bombay Public Trust Act 1950. The petitioner was granted exemption u/s.10(22A) of the Act for the years 197071 to 199596. In the year 199697, an issue was raised by the tax authorities whether the petitioner could be considered as carrying on its activities solely for philanthropic purpose and by an order dated 26th March 1991, the petitioner was assessed to income tax holding that petitioner did not exist solely for philanthropic purpose. However, by an order dated 22nd January 2002, the Commissioner (Appeals) allowed the appeals of the petitioner for the years 199798 and 199899 holding that the petitioner existed solely for philanthropic purposes. Thereafter, Central Board of Direct Taxes by its order dated 10th April 2003 also granted approval to the petitioner under section 10(23C) of the Act for the years 19992000 to 200102. Thus, till Uploaded on - 21/08/2020 the year 20012002, the petitioner was continuously enjoying exemption from payment of Income tax as an institution existing solely for philanthropic purpose. On 12th February 2002, Director General of Income Tax (Exemptions) however issued a show cause notice to the petitioner why its application for renewal of the exemption be not rejected. By a reply dated 15th March 2002, the petitioner replied to the show cause notice. On 26th December 2002 and 4th October 2005, the petitioner made applications to the Chief Commissioner of Income Tax for the A.Y.20022003 to 20042005 and A.Y. 200506 to 200708 respectively seeking renewal of the approval u/s. 10(23C) (via) of the Income Tax Act. On 31st March 2008, the petitioner filed an application to the Chief Commissioner for renewal of the approval u/s.10(23C) VI a of the A.Y. 200809 to 20102011. By an order dated 31st March 2009, the respondent no.1 rejected all the aforesaid applications u/s.10(23C)(via)for the A.Y.20022003 to 20102011. That order is impugned in this petition.
Learned counsel for the petitioner submitted that the petitioner was previously granted approval by the Central Board of Direct Taxes for the years 19902000 to 20012002 and even earlier, the petitioner was granted exemption holding that it exists solely for the philanthropic purpose. He
therefore submitted that the respondent no.1 could not have taken a contrary view and in the absence of any new material could not have taken a different view in the matter in rejecting the applications. We are unable to Uploaded on - 21/08/2020 agree. It is settled principle of law that the principle of res judicata does not apply in matters pertaining to tax for different Assessment Years as the cause of action for each Assessment Year is distinct. If any authority is needed for this proposition, it is found in C.K. Gangadharan Vs. Commissioner of Income Tax 2008 2008TIOL140SC as also Devidayal between 2.58% to 22.08% of the total receipts. The respondent no.1 also noticed that the assets of the petitioner had increased during this period and therefore, he deduced that the petitioner had used the excess of receipts over expenses for creating the assets and thereby strengthening its capacity to earn more. Therefore he inferred that the petitioner did not exist solely for philanthropic purpose but there existed some profit motive. Secondly, respondent no.1 examined and compared the money spent by the petitioner Uploaded on - 21/08/2020 for concessional treatment to the patients with the amounts received from them for such concessional treatment. On such examination the respondent no.1 concluded that part of the money received from the patients was need for free or concessional treatment to the staff members of the hospital run by the petitioner. He held that concessional treatment provided to the staff members could not be regarded as philanthropic purpose. Thirdly, the respondent no.1 took exception to the write off of the amount of Rs. 76,80,723/. The petitioner had made certain payments to a stock broker for purchasing Trust Securities for the employees provident fund trust. The broker delivered part of the securities but failed to deliver the securities worth Rs.76,80,723/ for which the amount was paid. The broker company came under a cloud as it was controlled by Ketan Parekh who is being prosecuted for alleged malpractices on the stock exchange. The amount paid to the broker became irrecoverable and was written off by the petitioner. This fact was also held against the petitioner. Lastly, the Commissioner noted that in addition to the medical treatment, the petitioner was also engaged in conducting medical checkups of the people applying for visa to USA and they paid fees for such checkups. The expenses incurred for medial checkups between the year 19992000 to 2072008 were less than the examination fees earned and there was a surplus ranging between 3.9 lakhs to 7.4 lakhs except for two years when there was a loss of Rs.4 lakhs and Rs.5 lakhs respectively. The respondent no.1 therefore concluded that the petitioner was earning income out of the Uploaded on - 21/08/2020 medical check ups of USA visa applicants and this earning an income which cannot be regarded as philanthropic purpose. For these reasons, the respondent no.1 held that the petitioner did not satisfy the condition that it existed solely for the philanthropic purpose and rejected the applications.
As regards the first ground held against the petitioner viz, there being some surplus, learned counsel for the petitioner invited our attention to the statement given in ground no. A(viii) at page 23 of the petition, which discloses that though there was some surplus for a few years cumulatively for the years 199091 to 200809 there was a cumulative loss (expenditure exceeding the income) of 22.30 lakhs. These averments are not denied by the respondent. Thus, cumulatively there was no surplus as observed by the respondent no.
In the notice of hearing dated 12th March 2009 also there was no mention that there was surplus for a certain number of years and no explanation was sought from the petitioner on that count though explanation was sought regarding write off of Rs.76,80,723/ as also regarding the fees received for medical examination from USA visa applicants. Had the notice been given to the petitioner that their applications were sought to be rejected on the ground that there was surplus of income over expenditure for some years, the petitioner could have explained that there was a cumulative loss for nearly two decades. Petitioner therefore, had no opportunity of explaining the true position nor does it appear that the respondent no.1 was aware of this position. Uploaded on - 21/08/2020
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 the philanthropy at all. Philanthropy is not restricted to give the 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 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 the respondent no.1 at all.
As regards the third ground mentioned in the order, it was the duty of the petitioner to pay not only the salary to the staff but to make contributions to the Provident Fund. It is a statutory obligation under the Employees Provident Funds Act. On account of unfortunate event of the broker to whom money was paid for investments for the employees provident fund, the employees could not suffer. The petitioner and its Directors/Trustees could have been prosecuted and sued for non payment of the Provident Fund contributions which was their statutory duty. In our view, this was wholly irrelevant for considering whether the petitioner was or was not established solely for philanthropic purpose. Uploaded on - 21/08/2020
As regards the last ground regarding the fees received for medical examination of applications for USA visa, undoubtedly there has been a surplus for seven out of nine years while there was a loss in the remaining two years. But it may be difficult to appropriate every receipt for every activity and medical treatment provided by the petitioner. There may be some surplus in some areas and deficit in other areas. Cross subsidization is not unknown. Even in state function, cross subsidies are provided for. The hospital under the petitioner is one unit run at one place and it is not the case of the respondent there there are multiple units and one unit is subsidizing the other. In the same unit, payment is collected for different services rendered which may result in some cross subsidy. Ultimately, the entire receipts are used for treatment of the patients and medical care. In the absence of any material to show that generally there was a profit, it cannot be said that the petitioner does not exist solely for the philanthropic purpose but exists for the purpose of profit
Our attention was also invited to the Memorandum of Association and Articles of Association of the petitioner which show objects of the petitioner to be to establish and maintain Hospital for Philanthropic purpose and prohibit declaration of any dividend to the members. This aspect has also not been considered by the respondent no.1. 10. In our view, the matter requires reconsideration in the light of what Uploaded on - 21/08/2020 is stated above and in particular, the respondent no.1 should have given an opportunity to the petitioner to show that there was no net surplus taking into consideration its activities over a period of time. It may also be noted that the respondent no.1 has rejected the application for renewal for the Assessment Year 20082009 onwards. Though this may imply that the application was rejected for the years 200809 to 201011, according to the petitioner, it amounts to a rejection forever and this could not have been done. In any event, the respondent no.1 needs to clarify that the rejection is not forever but only for the periods 200809 to 201011. 11. For these reasons, the impugned order is set aside and the matter is remanded back to the respondent no.1 by considering it afresh in the light of what is stated above. (D.G. KARNIK,J) (FERDINO I. REBELLO, J) Uploaded on - 21/08/2020 Powered by TCPDF (www.tcpdf.org)
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