ITO, EXEMPTIONS WARD- 2(2), NEW DELHI vs. SONDHI CHARITABLE HOSPITAL SOCIETY, NEW DELHI

This appeal is preferred by the Revenue against order dated 01.06.2017 passed by the Learned Commissioner of Income Tax (Appeals)-40, Delhi {CIT(A)} for Assessment Year 2012-13.

During the year under consideration, the assessee had receipts from diagnostic tests, sale of medicines, room rent, donations and miscellaneous income etc. The return of income for the year under consideration was filed declaring total income at ‘Nil’ after claiming benefit of exemption by application of income in terms of section11 of the Act. After processing, the assessee’s case was selected for scrutiny, and subsequently, the assessment was completed at an income of Rs. 2,95,93,570/- as per the following computation:

Computation of Income: Gross receipts as per income & expenditure account: Rs 5,96,69,866 Application of Income: Expenses as per I & E Statement : Rs. 6,17,20,168/- Less: Depreciation : Rs. 21,41,474/- Rs. 5,95,78,694/- Less: Disallowed 50% expenses as discussed above. : Rs. 2,97,89,347/- Add depreciation on assets purchased during the year: Rs. 3,00,949/- Total Application of Income Rs. 3,00,90,296/- Rs. 2,95,79,570/- Add: Amount as per Section 69 Deemed Income Rs. 14,000/- Deemed income Rs. 2,95,93,570/- 2.1 It has been noted by the Assessing officer in the assessment order that the assessee did not produce the books of account when required to do so and, therefore, 50% of the expenses claimed were to be disallowed.

It has also been noted by the Assessing officer that the activity beingcarried out by the assessee was not charitable in nature but was aimed at earning more profits and, therefore, the benefit of sections 11 and 12 of the Act for the purpose of providing exemption in respect to the surpluses earned by the assessee was to be taxable at the maximum marginal rate.

2.2 Aggrieved, the assessee carried the matter before the Ld. CIT(A) who allowed the assessee’s appeal by directing the Assessing officer to allow exemption u/s 11 & 12 of the Act with all consequential benefits.

With respect to the disallowance of 50% of expenditure for the reason that no books of account were produced, this addition was deleted after allowing the assessee to file additional evidences and after duly considering the remand report submitted by the Assessing officer in this regard.

2.3 Now, the Department has approached this Tribunal and has challenged the relief given by the Ld. CIT(A) by raising the following grounds of appeal:-

1. On the basis of facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the assessee is not eligible for exemption u/s 11 of the I. T. Act, 1961.

2.On the basis of facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the intent of the assessee is not of providing charitable service but was to earn more profit by making patient as IPD instead of OPD. This activity goes on to book better profitability which is contrary to the principle of an organization which is not meant for profit.

3. On the basis of facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring the fact that the assessee is not entitled to produce evidences/documents in form of bills/vouchers of the aforesaid expenses as per clause (b) of rule 46A(1) as assessee was accorded sufficient opportunities to file documentary evidences during assessment proceedings.

3.0 At the outset, the Ld. Sr. DR submitted that the assessee was not providing any charitable services but was striving to earn more profits by converting outdoor patients to indoor patients so that the patients can be billed for higher amounts. It was submitted that as per the two appointment letters for doctors, as has been observed by the Assessing officer, the doctors are given incentives if they get a patient admitted in the hospital and, therefore, apparently, the aim of the assessee Society was to earn more and more profits ratherthan providing medical help / relief at an affordable price to the needy. It was submitted that the Assessing officer had rightly disallowed the benefit of exemptions u/s 11 and 12 of the Act.

3.1 With respect to deletion of disallowance out of expenses, it was submitted that the Ld. CIT(A) had allowed additional evidences to be filed without enquiring into the reason for the failure of the assessee to have filed the documents during the assessment proceedings.

4.0 Per contra, the Ld. Authorised Representative (AR) submitted that all the preceding and subsequent assessments had been completed u/s 143(3) of the Act and that the assessee’sclaim for exemption had been allowed in such assessments. It was emphasized by the Ld. AR that there was no change in facts and circumstances from year to year and, therefore, there was no justifiable reason for the Assessing officer to depart from the precedent of earlier years. It was also submitted that the Ld. CIT(A) had allowed the assessee’s appeal after duly considering the factual matrix of the case and after duly noting that the assessee had been enjoying the benefit of exemption u/s 11 & 12 of the Act uninterruptedly.

4.1 With respect to the admission of additional evidences, it was submitted that the Ld. CIT(A) had admitted the same only after obtaining remand report from the Assessing officer.

5.0 We have heard the rival submissions and have also perused the material on record. We have also gone through the impugned order and we deem it fit to reproduce the detailed findings as recorded by the Ld. CIT(A) as under:-

“4.1 Grounds of appeal

Nos. 1, 2 and 3 challenge the denial of exemption under sections 11 and 12 by invoking the proviso to section 2. (15). Since these grounds of appeal are interlinked, these are being adjudicated together. 4.1.1 The Assessing Officer, in the assessment order, has referred to a clause in para No. 13 of some sample appointment letters for appointing doctors which states that an incentive of Rs. 200/- only will be given in case of conversion of each OPD case into an IPD case. Two such letters have been relied upon by the Assessing Officer. As per the Assessing Officer, these documents clearly, manifestly and unambiguously prove that the intent of the assessee is not of providing charitable services but to earn more profit by making the patient an indoor patient instead of an outdoor patient. It has also been held that the doctors are incentivised for an act to convince the patient to get admitted in the hospital to earn more and more profits instead of providing medical help/relief at an affordable price. It has also been held that the main objective of providing the benefit of exemption under section 11 is to extend medical help to needy and poor people who are not capable to take medical assistance is at least possible price and should not be deprived from medical help relying on the particular clause 13 of the appointment letter which has been held to show clear motive to incentivise only those doctors who convert outpatients to inpatients. After discussing the provisions of section 2. (15) as also the meanings of the words trade, business and commerce, the Assessing Officer held that that the assessee has receipts arising out of activity in the nature of business commerce and activity falls under the limb advancement of any other object of general public utility and both the provisos to section 2(15) were held to be applicable. 4.1.2 The appellant on the other hand has submitted that the appellant is carrying on the same activities ever since its establishment. It has further been submitted that it is not running the hospital for a profit motive. It has further been submitted that the fact that all 10 assessment years for which the assessments were framed under section 143 (3), the income of the assessee has always been assessed at nil and the nature of receipts and expenditure is the same as was an earlier years and there is no departure from the same. 4.1.3 I have considered the assessment order and also the submissions of the appellant. I have also perused the assessment record which was requisitioned from the assessing officer. From the various details available on the record it is seen that the assessee is engaged in running of a hospital which is also apparent from the assessment orders of the last few years and also for assessment year 2014-15 which have been submitted during the course of the appellate proceedings. It is also seen from the assessment order that the Assessing Officer has himself mentioned that the assessee is deriving receipts from patients (for diagnostic test, medicines and other tests, room rent etc.). The Assessing Officer has invoked the proviso to section 2 (15) by holding that the assessee falls under the category of advancement of any other object of general public utility since the assessee is deriving receipts from activities which are in thenature of business as an incentive was to be paid to them for converting out patients to inpatients. 4.1.4 The fact that the assessee is running a hospital is not in dispute. The Assessing Officer has himself mentioned that the assessee is deriving receipts from patients for diagnostic tests, medicines and other tests room rent, etc. which clearly shows that it is providing medical relief and falls in the third limb of the definition of charitable purpose. Even if it is considered that giving an incentive to the doctor for converting an outpatient when inpatient is a commercial activity, nothing has been brought on record to show how many suci i cases were found. It the case of Breach Candy Hospital Trust vs. CCITT [(2010) 228 CTR 381 (Bom)], it has been held that the fact of making profit in 7 out of 9 assessment years was in itself not a conclusive contention for treating the trust is non-charitable and a commercial entity. 4.1.5 Since it is clear that the assessee falls in the category of providing medical relief, the next issue is whether the proviso to section 2 (15) can be invoked by holding that the assessee falls in the category of advancement of any of the general public utility. In the case of Hamdard Laboratories India vs. Director General of Income Tax (Exemption)[(2013) 35 taxmann.com 314 (Delhi)], the Hon'ble Delhi High Court have held as under:

"The first proviso to sub-section 2(15) was amended by Finance (No. 2) Act, 2009 with retrospective effect from 1-4-2009. The said proviso is applicable in cases -where an assessee claims that it is carrying on charitable purpose covered by the residuary clause i.e., 'advancement of any other object of public utility'. The proviso is not applicable in case an assessee or institution claims that it is carrying on charitable purpose like relief to poor, education, medical relief etc., i.e. purposes which have been specifically enumerated and stated in the earlier part of section 2(15). [Para 10]

There was no specific finding or statement in the impugned order that the charitable activities or purposes in the case of the petitioner fall under the residuary head and not under the enumerated heads mentioned in section 2(15). The impugned order in this regard is completely silent. On the said aspect, the petitioner has filed number of orders passed by Commissioner (Appeals) relating to assessment years 1965-66 onwards upto assessment year 1994-95 and orders of the Tribunal from 1966-67 upto 1976-77 in which findings have been recorded that the petitioner was undertaking charitable activities covered under the clauses; relief to poor, education and medical relief. It is, therefore, clear that the impugned order has applied the first proviso to section 2(15) without elucidating the scope and ambit of the said proviso and whether it would be applicable. The revenue has proceeded on assumption that charitable purpose undertaken by the petitioner is covered by the residuary clause, without recording any such specific finding. [Para 12]"

4.1.6 In the case of the appellant also, the only reason why the appellant has been consideredto be in the residuary category is that in two appointment letters, the Assessing Officer foundthat an incentive of Rs. 200/- was to be given to the doctors in case an outpatient was convertedinto an inpatient. It is also pertinent that as was the case in Hamdard Laboratories referred to above. In the instant case also, for all the just assessment years and also an assessment year 2014-15, the appellant has been granted exemption on account of medical relief and nowhere have the activities being considered to fall in the category of advancement of any other general public utility,

4.1.7 Even the CBDT, in circular No. 11/2008 19.12.2008 have clarified that the proviso to section 2 (15) will not apply in cases of education, relief of poor, medical relief, etc. The relevant portion of the circular is reproduced below:

"Section 2(15) of the Income Tax Act, 1961 ('Act') defines "charitable purpose" to include the following:-

(i) Relief of the poor (ii)Education (Hi) Medical relief and (iv) the advancement of any other object of general public utility. An entity with a charitable object of the above nature was eligible for exemption from tax under section 11 or alternatively under section 10(23C) of the Act. However, it was seen that a number of entities who were engaged in commercial activities were also claiming exemption on the ground that such activities were for the advancement of objects of general public utility in terms of the fourth limb of the definition of 'charitable purpose'. Therefore, section 2(15) was amended vide Finance Act, 2008 by adding a proviso which states that the 'advancement of any other object of general public utility' shall not be a charitable purpose if it involves the carrying on of -

(a) any activity in the nature of trade, commerce or business; or (b) any activity of rendering any service in relation to any trade, commerce or business; for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention of the income from such activity. 2. The following implications arise from this amendment -

2.1 The. newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical relief Consequently, where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carn/ing on of commercial activities."

2.2. 'Relief of the poor' encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that (i) the business should be incidental to the attainment of the objectives of the entity,and (ii)separate books of account should be maintained in respect of such business. Similarly, entities whose object is 'education' or 'medical relief would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

4.1.8 In view of the discussion above and also relying on the judgement of the Hon'ble Delhi High Court in the case of Hamdard Laboratories India vs.Director General of Income Tax (Exemption) (supra) and circular No. 11/2008 of the CBDT dated 19.12.2008, it is held that the assessee is engaged and activities carried on providing medical relief and accordingly the proviso to section 2 (15) will not apply to the assessee. The Assessing Officer is directed to allow exemption under sections 11 and 12 with all consequential benefits. Grounds of appeal nos. 1, 2 and 3 are allowed.”

5.1 A perusal of the above extract from the order of the Ld. CIT(A) would show that the Ld. CIT(A) hasgiven a thoughtful consideration to the issue in dispute before him. He has mentioned that it was not in dispute that the assessee wasrunning a hospital. Thereafter, the Ld. CIT(A) has stated that even if some kind of incentive was being provided to doctors for converting an outdoor patient into an indoor patient, nothing has been brought on record to demonstrate as to how many such cases were found. The Ld. CIT(A) has relied on the judgement of the Hon'ble Bombay High Court in the case of Breach Candy Hospital Trust Vs.CCIT reported in [2010] 228 ITR 381 (Bom) to underline the fact that the fact of profit making was itself was not a conclusive proof of the trust having non-charitable activities. Thereafter, the Ld. CIT(A) has relied upon the order of the Hon'ble Delhi High Court in the case of Hamdard Laboratories India Vs. DGIT (Exemptions) reportedin [2013] 35 taxmann.com 314 (Delhi) for holding that without recording any specific findings, the Assessing officer cannot invoke the proviso to section 2(15) of the Act for holding that the assessee fell under the category of advancement of general public utility. The Ld. CIT(A) has also referred to CBDT Circular No. 11/2008 dated 18.12.2008, wherein, it has been clarified that proviso to section 2(15) will not be applicable in caseofeducation, relief of the poor and medical relief etc. Further, in the course of arguments before us, the Ld. Sr. DR could not point out any perversity in the said observations of the Ld. CIT(A). Accordingly, on the facts of the case, being guided by the earlier assessment years as well as succeeding assessment years as well as the settled judicial precedent, we find no reason to interfere with the findings of the Ld. CIT(A) on the issue of allowing the benefit of exemption to the assessee Trust u/s 11 and 12 of the Act. Accordingly, ground Nos. 1 & 2 are dismissed.

5.2 With respect to the Department’s contention that the Ld. CIT(A) did not have the power to admit additional documents in the form of bills / vouchers of the expenditure in terms of Rule 46A of the Income Tax Rules, we find that the Ld. CIT(A) has duly called for a remand report from the Assessing officer before proceeding to admit these additional evidences and, therefore, it cannot be said that the interest of the Department was not safe guarded. Accordingly, ground No.3 also does not have any feet to stand on and is accordingly dismissed.

6.0 In the final result, the appeal of the Department stands dismissed.

Order pronounced on 07.02.2022.