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Facts
The Revenue appealed against the CIT(A)'s order, challenging the allowance of benefits under Section 11/12 and the deletion of additions. The assessee, running an Eye Hospital, declared 'nil' income and was registered as a charitable institution under Section 12A(a). The AO observed a surplus of 31.29% and treated it as income from commercial activities, making an addition of Rs.6,01,88,516/-.
Held
The Tribunal held that the assessee's activities fell under medical relief, which is a charitable purpose under Section 2(15). The AO erred in not considering the capital expenditure and the application of funds towards charitable objects. The Tribunal found that more than 85% of the income was applied for charitable activities, complying with Section 11 of the Act.
Key Issues
Whether the assessee's activities constitute charitable purposes under Section 2(15), and whether the surplus generated disqualifies it from exemptions under Section 11/12.
Sections Cited
11, 12, 143(2), 142(1), 12A(a), 2(15), 270A, 164(3), 234, 13(3), 253
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Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
�नधा�रण वष� / Assessment Year: 2017-18 Palampur Rotary Eye Foundation, Vs The ACIT (Exemptions), Maranda, Palampur (HP). Circle – 2, Chandigarh. �थायी लेखा सं/.PAN NO: AAATT1365M अपीलाथ�/Appellant ��यथ�/Respondent Assessee by : Shri Tej Mohan Singh, Advocate Revenue by : Smt. Kusum Bansal, CIT DR Date of Hearing : 28.04.2025 Date of Pronouncement : 30.04.2025 HYBRID HEARING O R D E R PER RAJ PAL YADAV, VP
The Revenue is in appeal against the order of the ld.
Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 22.02.2024 passed for assessment year 2017-18.
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 2
The grievance of the Revenue is that ld. CIT(A) has erred in allowing the benefit of Section 11/12 of the Income Tax Act to the assessee. It has further pleaded that CIT(A) has erred in deleting the addition of Rs.6,01,88,516/-.
The brief facts of the case are that the assessee Society, at the relevant time was running Eye Hospital at various locations of Himachal Pradesh and its neighbouring States. It has filed its return of income on 14.08.2017 declaring ‘nil’ income. The case of the assessee was selected for scrutiny assessment and notices under Section 143(2) and 142(1) were issued and served upon the assessee. The assessee Society was registered as a Charitable Institution under Section 12A(a) of the Income Tax Act, 1961. The ld. AO perused the accounts of the assessee and observed that surplus over income and expenditure is about 31.29%. In other words, the surplus to the assessee is 31.29% of gross receipts. He, thereafter, made comparison of various items purchased by the assessee used for eye surgery as well as treatment of eyes. He was of the ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 3 opinion that the rates charged by the assessee are of such a nature which demonstrate that assessee is engaged in commercial activities and was not doing charitable activities.
Therefore, he did not accept the result of the assessee and made an addition of Rs.6,01,88,516/- which is surplus. In other words, assessee has gross receipts of Rs.19.23 Cr whereas total expenses were of Rs.13.21 Cr. Thus, surplus was resulted to it. It is a very brief assessment running into three pages and the whole finding has been recorded by the AO in paragraph No. 2 to 4. The finding of the AO after taking note of various purchase cost vis-à-vis sale price is being noted as under :
“From the above, it is very much clear that the assessee is involved in commercial activities which is clear violation of provisions of Sub Section (15) of Section 2 of the Income Tax Act, 1961. The activities of assessee are covered under the first proviso to sub section (15) of Section 2 of the Income Tax Act, 1961.
3. Further, it is also reveled from the Income & Expenditure Account for the A.Y. 2017-18 that the assessee had purchased medicines to the tune of Rs.2,74,32,016/-and medicines were sold to the tune of Rs.1,98,l4,225/-only. The assessee had not disclosed the opening &closing stock. The onus of declaring true material facts lies upon the assessee. Therefore the assessee has violated the provisions of the Act and concealed the income by presented incorrect particulars of its income.
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 4
In view of the above, it is held that the assessee is not a charitable institution and is working on commercial lines, therefore, the exemptions u/s 12AA is being denied and net surplus to the tune of Rs.6,01,88,516/- is treated as taxable income for the year under consideration. I am satisfied that the assessee under reported the income as a consequence of misreporting. Therefore, penalty proceedings u/s 270A of the IT. Act are being initiated separately Assessed at Rs.6,01,88,516/-. Charge interest as per provisions of Income Tax Act, 1961.Issue requisite documents along with this order. As per provisions of section 164(3) of the Income Tax Act, 1961, the tax is to be charged at maximum marginal rate. Penalty proceedings u/s 270A of the Act are initiated separately for under- reporting of income as a consequence of misreporting. VIRENDER KUMAR RATHEE ACIT EXEMP 4. Dissatisfied with the additions made to the total income of the assessee, it carried the dispute in appeal before the CIT(A).
The assessee has apprised the ld. CIT(A) about the definition of a ‘Charitable Institution’ provided under Section 2(15) of the Income Tax Act. It was also demonstrated as to how ld. AO has erred in construing this definition while making observation in paragraph No. 2.1 of the impugned order. The ld. First Appellate Authority has gone through the written submissions made by the assessee and thereafter observed that assessee has applied 85% of its surplus on its objectives of charitable
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 5 activities of the assessee and addition cannot be made. Finding of the CIT(A) read as under :
“6. I have gone through the assessment order, grounds of appeal and written submissions of the appellant. The appellant requested for personal hearing through video conference and the same was granted on 08.02.2024 and Mr. Anil Vasudev, CA/AR attended on behalf of the appellant and the case is heard. As seen from the assessment order, the appellant is Charitable Institution registered u/s.12AA of the Act. The assessment u/s. 143(3) of the Act which was completed on 11.12.2019. In completing the assessment, the AO denied exemption granted u/s.12AA of the Act as the appellant according to him was working on commercial lines and not doing the Charitable work. Aggrieved by the said addition, the appellant is in appeal and has raised 09 grounds which are adjudicated as under:-
7. Ground no.1 & 9 are general and hence, not adjudicated.
8. Ground no.2 to 7 are relating to not allowing exemption u/s.12AA of the Act and addition of Rs.6,01,88,516/- being bad-in-law. As all these grounds are relating to the same issue of addition of net profit as per income and expenditure account, they are being adjudicated together. The appellant being a charitable institution can incur expenditure/utilize the receipts for charitable purposes out of revenue expenditure and even capital expenditure. The appellant has used more than 85% of such sources and thus, complied with the provisions of Section 11 of the Act. The AO while completing the assessment has gone by only the income and expenditure account wherein income over expenditure is being shown at Rs.6,01,88,516/-. The AO has totally ignored the computation of total income of the appellant which gives the details of the application of funds from the sources, accumulation permitted u/s.11(1) of the Act and the application consisting of revenue expenditure and capital expenditure. As per the appellant out of the receipts of Rs.19,23,59,914/-, the appellant has applied the income to the tune of Rs.16,39,47,908/- and the appellant is eligible for exemption of 15% of the receipts of Rs.2,84,12,006/-. 8.1 The AO has pointed out that as against IOL purchases of Rs.1,69,60,858/-, the appellant has received IOL dispensing charges of Rs.10,25,45,434/-. Accordingly, the AO came to the conclusion that the appellant was running the hospital on commercial lines rather than charitable purposes. During appellate proceedings, it was submitted that IOL dispensing
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 6 recoveries consist of surgery charges, surgeons charges, operation theater charges and consumables charges. Hence, the recoveries are more but whereas purchases are only relating to consumables and other required items. These aspects are ignored by the AO. It was further pleaded that the appellant is registered under Section 12A of the Act and is engaged in providing charitable services like eye care patients suffering eye ailments. The appellant has 03 eye care hospitals catering to Himachal Pradesh, Punjab and J&K. The appellant also runs general care hospital in 03 districts of Himachal Pradesh and Gynecological and Physiotherapy services are also provided. It is further argued that audit report in Form no.10B gives complete account of the income of the appellant and amount applied and accumulated/set apart as part of the provisions of Section 11(2) of the Act. Out of the total receipts received during the impugned AY of Rs.19,23,59,913/-, a sum of Rs.14,09,47,908/- was applied to the objects of the society, Rs.2,30,00,000/- was set aside for accumulation u/s.11(2) of the Act and hence, there was no reason for the AO to deny exemption provided to the appellant being a charitable institution. 8.2 The appellant's case has merit. The appellant is registered as charitable institution u/s.12A of the Act and was found to be engaged in charitable medical relief as provided in section 2(15) of the Act. The amount received has been either spent for charitable activities or set aside for accumulation as provided in Section 11(2) of the Act. Thus, more than 85% of appellant's income has been applied for charitable activities as provided in the Act. As explained earlier, the recovery made by the appellant are not on commercial line was the cost of medical treatment offered. Hence, the addition made by the AO cannot be sustained and the same amounting to Rs.6,01,88,516/- stands deleted. Ground no. 2 to 7 are treated to have been allowed.
Ground no.8 is relating to charging interest u/s.234 of the Act. The interest under this section is consequential in nature and has to be charged. However, the AO shall rework the said interest after considering the relief granted to the appellant in deciding ground no.2 to 7 above. Ground no. 8 is treated to have been partly allowed.
In the result, the appeal is partly allowed.”
With the assistance of ld. Representative, we have gone through the record carefully. There is no dispute with regard to ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 7 the fact that assessee is registered as a Charitable Society with the Income Tax Department under Section 12A(a) of the Income Tax Act, 1961. This registration has not been withdrawn or cancelled. The expression ‘Charitable Purpose’ has been defined in Section 2(15) of the Income Tax Act which read as under :
“Charitable Purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or place or objects of artistic or historic interest and the advancement of any other object of general public utility.”
A bare perusal of the above definition would indicate that this clause provided two sets of activities. In the first compartment, four activities are being referred which are per-se charitable and thereafter, in the second compartment, advancement of any other object of general public utility has been included. Relief of the poor education, medical relief preservation of the environment are the activities which are per-se ‘charitable’ under this definition. However, if an activity of advancement of any other object of general public
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 8 utility is concerned, then lots of issues are required to be examined before treating that activity of a charitable nature.
In the present case, assessee is running an Eye Hospital providing medical relief, clearly covered under first four definitions of Section 2(15) of the Act. It is not carrying any activity in the nature of trade or commerce or business for a cess or fees. Once it is registered as a charitable institution under Section 12AA, then it is to be seen whether income derived from the property of the society or activities of the society are being applied to the extent of 85% on its objectivity or not. The AO is totally silent on that part. He has not even whispered anything about that. If those receipts are applied upto 85% on the objectivities of the society, then benefit of Section 11/12 is to be granted to the assessee. It is pertinent to observe that ld. AO while working out the alleged surplus on the gross receipts did not take into consideration the capital expenditure or application of money, required to be made by the assessee for upgrading its operative apparatus for the purpose of achieving its objects. The AO ought to have ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 9 appreciated that huge investment will be required for purchasing medical instruments and equipments so that good quality of eye treatment could be provided to the citizens. This aspect has totally been lost sight by the AO and he analyzed the accounts in a very sympathetic manner. All these aspects have been brought to the notice of CIT(A) in the written submissions reproduced by the CIT(A) from page No. 3 to 11 of the impugned order. Ld. First Appellate Authority has perused the submissions and appreciated them in a right perspective.
The AO has not pointed out any single defect within the meaning of Section 13(3) of the Income Tax Act whereby it could be demonstrated that certain undue benefit is being extended by the Society to the persons mentioned in sub- clause (3) of Section 13 and such benefit was given by virtue of their relationship/position with the Management of the Society.
No such defects have been pointed out. The sole defect pointed out by him is surplus over the gross receipts is a little bit higher in terms of percentage. But this isolated one factor would not shake the very status of the Society being run in a ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 10 charitable manner. This objection has nowhere been provided under the scheme of Income Tax Act. In other words, it has not been provided that if charitable institution is generating higher percentage of surplus, then it would be disqualified as a charitable institution. The requirement of the law is that 85% of the gross receipts are required to be applied for charitable activities, which has been fulfilled by the assessee.
CROSS OBJECTION
The assessee, on receipt of facts in the appeal filed by the Revenue, has filed Cross Objection. A perusal of the grounds would indicate that no grievance has been exhibited by the assessee in the grounds. Rather the grounds in the Cross Objection are in support of the order of the CIT(A).
A perusal of sub-clause (4) of Section 253 would indicate that respondent could file Cross Objections if aggrieved with any part of the impugned order. In the present case, assessee has not demonstrated its grievance in the grounds, hence such Cross Objection is not maintainable.
ITA 390/CHD/2024 & C.O. 21/CHD/2024 A.Y. 2017-18 11
9. In view of the above, appeal of the Revenue as well as Cross Objection of the assessee are dismissed.
Order pronounced on 30.04.2025.