DCIT (E) 2(1), MUMBAI vs. SIR KIKABHAI PREMCHAND TRUST SETTLEMENT NO. XI, MUMBAI

The only common issue in these appeals of Revenue is against the order of CIT(A) allowing exemption u/s 11 of the Act, even though the assessee Trust has violated the directions given by the Hon’ble Bombay High Court in respect to doctor’s fee is to be included in regard to creation of a IPF account and transfer the amount to IPF account for betterment of poor and indigent patient. For this Revenue has raised following two grounds in assessment year 2010-11: - “1. Whether on the facts and circumstances of the case and in law, CIT(A), Mumbai has erred in allowing the exemption u/s 11 of the I. T 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 Act, that the assessee trust while calculating 2% of the Gross Billing has excluded the doctor’s fees of As. 10,46,10,192/- and the some has resulted in shortfall of As. 20,92,218/- in the transfer to the Indigent Patient Fund (IPF Account)

Briefly stated facts are that the assessee is a registrar trust with DIT (E), Mumbai, u/s 12A and 80G of the Act. The assessee trust is also registered with Charity Commissioner, Mumbai. The assessee while calculating the amount of gross billing has excluded the doctor’s fee despite the fact that as per the scheme framed by Hon’ble Bombay High Court of indigent patient and weaker section scheme framing Indigent Patient Fund Account. The assessee instead of charging 2% of the gross bill, excluded the doctor’s fee of Rs.7,65,26,156/- The AO noted that there was shortfall of Rs.15,30,523/- in the transfer of Indigent Patient Fund Account due to exclusion of doctor’s fee. Hence, he observed that assessee’s character ceased to be of charitable nature and surplus income of Rs.4,20,30,667/- was assessed as income by denying exemption u/s 11 of the Act. Aggrieved assessee preferred appeal before CIT(A), who allowed the claim of the assessee by following precedents and various case laws by observing as under: - “3.3 I have considered the above submissions of the appellant as well as the facts of the case. The issue in appeal is as to whether the appellant is entitled to exemption u/s 11 of the Act, in view of the violation of the scheme laid out by the Hon'ble Bombay High Court for indigent and weaker section patients. The Bombay High Court has ordered that every charitable hospital shall deduct 2% of the billing of all the patients (other than indigent and weaker section patients) and credited the said amount to the Indigents Patients Fund (IPF). The appellant has although deducted 2% of the billing amount but has Page 2 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 excluded the doctor’s fees from deduction. The question, therefore, is as to whether (i) this amount to violation of the scheme of the High Court and (ii) in case at amount to violation of the scheme of the High Court, whether on this basis exemption u/s 11 of the Act can be denied to the appellant even though the appellant is registered with the Income Tax Department and has been granted certificate as a trust u/s 12A of the Act by the Competent Authority. 3.4 I have gone through the scheme laid out by the Hon'ble Bombay High Court. The said scheme provides power to Charity Commissioner to decide whether the charitable hospital has breached the terms of the scheme and in such cases the Charity Commissioner would be liable to refer the matter to the State Government recommending necessary action against the concerned charitable hospital. The scheme laid out by the Hon'ble Bombay High Court does not have any clause which impinges upon the entitlement of the concerned charitable hospital for exemption u/s 11 of the Act, if a certificate u/s 12A of the Act has been granted to it by the Competent Authority of the IT department.” 3.5 It could thus be concluded that the scheme formulated by the Bombay High court does not directly address or affect the provisions of the Income Tax Act. Further, the question 'whether a charitable hospital has to deduct 2% of the amount of doctor’s fees also, which is included in its bills and credit to the same to the IPF" is apparently not to be answered by the IT Authorities and it is only the Charity Commissioner who has to take a view on this issue. Hence, it cannot be said that by not deducting 2% from the doctor’s fees, the appellant has violated the scheme formulated by the Bombay High Court, unless an adverse view in this regard has been taken by the Charity Commissioner. The intention of the Scheme in this regard is contained in paragraphs 10 and 11 of the Scheme which has to be interpreted by Charity Commissioner. Further. paragraph 10 of the Scheme provides that "if doctor’s forego their charges, then the same shall not be included in the final bill of the weaker section patients". The Charity Commissioner shall therefore be liable to take a decision in this regard, keeping in view paragraphs 10 and 11 of the Scheme including the above sentence (in paragraph 10) Page 3 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 content in the Scheme. Therefore, in my opinion, the AO is not at all competent to deny the exemption to the appellant u/s 11 of the Act, even when the higher Competent Authority has granted certificate to the appellant u/s 12A of the Act and even when the Charity, Commissioner has not taken an adverse view in the matter. 3.6 I agree with the appellant that the IPF Scheme has been drawn with the objective of providing decent health care specifically to the indigent and weaker section patients and it accordingly provides a mechanism for the same. Section 11 of the IT Act, 1961 on the other hand, stipulates a requirement for a charitable organisation, to avail the exemption in respect of the surplus earned by it from its charitable activities. This requirement is appropriation of rather utilisation of more than 85% of the earnings towards charitable purpose. The appellant has adhered to this condition by utilising almost 88% of its total earnings towards its charitable objectives. Section 11 does not necessarily stipulate adherence by an assessee to the Scheme drawn by Hon'ble Bombay High Court. Further, as discussed above, whether the appellant has complied with and not violated the conditions stipulated by the Scheme is an issue, about which only the Charity Commissioner has two take a view. The AO has nowhere brought out any such fact that the Charity Commissioner has taken an adverse view against the appellant and has held the appellant to be a non-charitable organisation. 3.7 The appellant has in support of its arguments, cited the number of decisions. The first decision is the case of The Civil Services Society Vs. Director of Income Tax (supra) cited by the appellant, in which the question was as to whether the objects of the society were not charitable in nature and whether the DIT(E) was competent to cancel its registration u/s 12A even when there was no instance of violation of terms and conditions of the society pointed out by the Directorate of Education and/or the Urban Ministry. It has been held that only on an information of de-recognition of the school by the Directorate of Education, the tax authorities can take action of cancelling the registration u/s 12A. The relevant part of this decision given by Delhi Tribunal is as under: Page 4 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 "6.3 There is sufficient evidence available on record which is uncontested that the objects of the society are charitable in nature and a finding to the said effect has been given in the impugned order itself. Regarding the shortfall in the requisite no. of students belonging to the EWS category students in the facts as they stand no evidence of non-compliance has been brought to our notice either in the arguments or in the impugned order. The reasons consistently advanced for the situation in regard to locational aspect in the face of the evidence to the contrary have to be accepted as where there is no alleged violation of any of the requirements either of the Urban Ministry or of the Directorate of Education the authorities under the income- tax Act cannot be said to presume to sit over in judgment for the implementation of the public policy on the judgment of the authorities empowered to implement them. The D1T(E) in the facts of the peculiar case cannot cancel Registration in the facts of the present case for the reasons set out in the impugned order as the same amounts to usurping the Role of an authority constituted to implement the government policy. Only when there is any instance of violation of terms and conditions pointed out by the Directorate of Education and/or the Urban Ministry on the information of de-recognition of the school by the Directorate of Education, the tax authorities can take notice. The gravity of the consequences of holding a certain school as de- recognized is not to be trifled with or taken lightly and it is a powerful tool in the hands of the Directorate of Education and if it is taken away, serious consequences are visited on the school which is not a fact in the present case." 3.8 In the case of Hiralal Bhagwati V. CIT (supra) cited by the appellant Hon'ble Gujarat High Court held that the registration of a charitable trust under s. 12A is not an idle or empty formality and once the registration under section 12A(a) of the Act is granted, the grant of benefit cannot be denied. Hence, the AO was not justified in refusing the benefits which would otherwise accrue under the registration. If there Page 5 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 was no registration, as contemplated under section 12A(a) r.w.r. 17A, the Revenue would have been justified in making a submission that the benefit cannot be granted, but where the application for registration is submitted and the registration has been granted, the benefit cannot be denied on the ground that the scheme is not for the benefit of public at large. In appellant's case, the registration under section 12A has been granted and till that subsists, the AO cannot deny the benefit of exemption to the appellant, unless the provisions under section 11 have been shown to have been violated. 3.9 In the case of Surat City Gymkhana (supra) cited by the appellant Hon’ble Supreme Court held that section 12A provides that for claiming exemption under section 11, it is mandatory that an application for registration of the trust would be filed before the CIT. Further, the grant of registration under section 12A by the CIT does not constitute an empty formality which is to be completed in a routine and mechanical fashion without any scrutiny regarding the charitable nature of the trust or institution and once the institution has been registered under section 12A, the AO has to find out whether the income of the institution has been applied for the objects of the institution and the statutory conditions contained under sections 11 to 13 are fulfilled by the assessee. It is beyond the jurisdiction of the AO to reject the claim of exemption under section 11 by looking into the objects of the Association and holding the same as non- charitable in nature. 3.10 Similar decision has been given by Ahmadabad Tribunal in the case of Stock Exchange, Ahmadabad Vs. ACIT (supra) cited by the appellant. Hence, in my view the AO was unjustified in denying the grant of exemption under section 11 to the appellant. The AO is directed to grant exemption under section 11 accordingly.”

At the outset, learned Counsel for the assessee stated that the issue is squarely covered in favour of assessee and against Revenue by the decisions of co-ordinate 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 Bench of this Tribunal of ITAT Pune Bench in the case of ITO v. Noble Medical Foundation & Research Centre (2015) 68 SOT 343 (Pune-Trib), wherein the Tribunal has decided the issue vide Para 23 as under:

Further, the learned Counsel for the assessee stated that the Revenue in assessment year 2008-09 has accepted the position vide order u/s 143(3) of the Act dated 21-12-2010 while framing assessment in assessee’s own case. He filed a copy of assessment order for the relevant assessment year. In view of the principle of consistency also learned Counsel stated that the issue is covered in favour of the assessee. On query from the Bench, the learned Sr. DR relied on the assessment order only. & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 6. We have heard rival contentions and gone through the facts and circumstances of the case. We find that the assessee is a public charitable trust registered under Bombay Public Trusts Act, 1950 by the charity commissioner since 1964. The assessee is registered u/s 12A and 80G of the Act. The assessee is engaged in quality health care at affordable rates to the members of the society of all strata. This institute started cardiac services in May 1999 by foxing on quality, safety and economy. During the year under consideration assessee’s gross receipts was to the tune of Rs. 37,55,60,944/- before considering the amount spent on the object trust permitted accumulation and the amount deemed to have been applied for the object of the Trust. There is no dispute about these facts. Hon’ble Bombay High Court on 17-08-2006 notified a scheme applicable to public charitable trusts registered under Bombay Public Trust 1950 which are running charitable hospitals including nursing home, maternity home, dispensaries or any other centre for medical relief whose annual income exceeds Rs.5 lakhs. This scheme stipulates to provide compulsory free and concessional medical treatment to the indigent and weaker patients. As per the scheme Trust has to credit 2% of the gross billing to the Indigent Patient Fund every year and this fund should be utilized for providing medical treatment to the poor patients.

We find that Para no. 18 of the scheme framed by Hon’ble High Court of Indigent Patient Fund reads as follows: 18. ln case of the breach of the Scheme and/or the terms and conditions of section 4IAA by any Charitable Hospitals, besides the penal action as is provided under section 66 of the B.P.T. Act, the Charity Commissioner shall make report to the State Government recommending withdrawal of the exemption granted to the concerned hospitals during the next preceding year in payment of contribution towards P.T.A Fund and the amount of contribution towards P.T.A. Fund be recovered from the said hospital. The Charity Commissioner may also request the Government to withdraw any other concessions/ benefits given to the said hospital." Page 8 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 The above clause of this scheme indicates that the power to decide whether a Charitable Hospital has breached the terms of the Scheme rests with the Hon'ble Charity Commissioner who can in turn refer the matter to the State Government recommending even the withdrawal of various benefits provided to such Charitable Hospital, if necessary. These benefits do not include the exemption granted to the trust u/s 11 of the Act. So, effectively, it is the State Government with whom, rests the ultimate power to adjudicate whether a Public Trust is or is not in compliance with the Scheme and to take consequential corrective measures. We find that during the year under consideration, the assessee has transferred 2% of the billing net off doctor’s fees to the IPF and not 2% of the total billing without considering doctor’ss' fees. Now before us, the learned Sr. DR argued that the assessee has violated the High Court's order and that for this sole reason its character ceases to be charitable in nature. In this regard, we are of the view that has not violated the scheme stipulated by the Hon'ble Bombay High Court for the reason that the assessee has duly transferred 2% of its billing to the IRE as required by the scheme. The assessee includes in his bill, doctor’s fees, which is collected by the assessee and paid to the doctors. We are of the view that for administrative convenience and control, the doctor’s fees are also collected by the assessee in its bills and then paid to the doctors and further the doctor’s fees do not constitute the income and it is merely facilitating the collection of fees on behalf of the doctors. Therefore, the assessee, under bonafide belief did not transfer 2% of such doctor’s fees included in its bills to the IRE.

According to us, AO has mingled two unrelated sets of legal compliances stipulated by different Authorities; viz. compliance of a Scheme drawn by the Hon’ble Bombay High Court and compliance of section 11 of the Act. The scheme has been drawn with the objective of providing decent health care specifically to the indigent and weaker section patients and it accordingly provides a mechanism for the same. Section 11 on the other hand, stipulates the fundamental requirement for a charitable organization to avail the exemption in respect of the surplus earned by it from its charitable activities. This requirement being appropriating or rather utilizing more than 85% of its earnings towards charitable purpose. The Assessee has duly adhered to this condition by utilizing almost 88% of its total earnings towards its charitable objectives. The AO has denied exemption u/s 11 of the Act contending Page 9 of 12 ITA No.3141& 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 violation of a Scheme drawn by Hon'ble Bombay High Court. But we are of the view that section 11 does not stipulate adherence by an Assessee to the said Scheme rather the Assessee has complied with and not violated the conditions stipulated by the Scheme. Accordingly, we are of the view that the AO has usurped the power of the Charity Commissioner and the State Government; by making the decision that the assessee has breached the provisions of the Scheme. This is clearly contrary to Clause 18 of the Scheme as discussed in Para no. 7 above. According to us, the charity commissioner who has been entrusted with the responsibility of verifying the genuineness of the activities of the trust or institution before registering such trust or institution u/s. 12A of the Act has been usurped the power. Subsection 3 of the said section has also vested the Charity Commissioner and not the Assessing Officer with the power to pass an order cancelling the registration of such trust or institution where subsequent to registration, he is satisfied that its activities are no longer genuine in nature. Till such time, the benefits available pursuant to such grant of the registration cannot be denied.

In this regard, we place reliance on the decision of the co-ordinate Bench of Delhi Tribunal in the case of The Civil Services Society’ Sanskriti School Vs. Director of Income Tax (Exemption) in wherein it is held as under: - “6.3 There is sufficient evidence available on record which is uncontested that the objects of the society are charitable in nature and a finding to the said effect has been given in the impugned order itself. Regarding the shortfall in the requisite no. of students belonging to the EWS category students in the facts as they stand no evidence of non-compliance has been brought to our notice either in the arguments or in the impugned order. The reasons consistently advanced for the situation in regard to locational aspect in the face of the evidence to the contrary have to be accepted as where there is no alleged violation of any of the requirements either of the Urban Ministry or of the Directorate of Education the authorities under the Income- tax Act cannot be said Page 10 of 12 & 5441/Mum/2015 Sir Kikabhai Premchand Settlement Trust No XI: AY.10-11 & 11-12 to presume to sit over in judgment for the implementation of the public policy on the judgment of the authorities empowered to implement them. The DIT(E) in the facts of the peculiar case cannot cancel Registration in the facts of the present case for the reasons set out in the impugned order as the same amounts to usurping the Role of an authority constituted to implement the government policy. Only when there is any instance of violation of terms and conditions pointed out by the Directorate of Education and/or the Urban Ministry on the information of de-recognition of the school by the Directorate of Education, the tax authorities can take notice. The gravity of the consequences of holding a certain school as de-recognized is not to be trifled with or taken lightly and it is a powerful tool in the hands of the Directorate of Education and if it is taken away, serious consequences are visited on the school which is not a fact in the present case."

Similar to the above, even in the case of the assessee, non-compliance of one of the statutory stipulations should not nullify its efforts made towards achieving its charitable objectives. The same can be observed from the fact that it has appropriated 88% of its Income towards achieving the objectives of the trust. Further, the assessee has not altogether shrugged off its responsibility towards the Indigent and Weaker Section Patients. There is a difference of opinion w.r.t the amount of funds to be transferred to the Indigent Patient's Fund (IPF). It is noteworthy, that the assessee has not simply waited for the clarification and stalled the appropriation of funds to the IPF and its utilization towards the requisite purpose. Rather, until clarification on such matter, the assessee has chosen to transfer 2% of the total hospital billing net of doctor’s' fees to the IPF and has utilized the same towards the medical treatment of the Indigent and Weaker Section Patients. There is no single evidence which would suggest otherwise. The rationale behind the same being that the doctor’s fees is not a part of the hospital's earnings, but rather a reimbursement to the hospital. The hospital merely acts as a collecting agent between the two for this particular aspect. Neither is there any evidence which would suggest the assessee’s status of that of a "Charitable Trust registered under the Bombay Public Trusts Act, 1950" being Page 11 of 12