Case Law Details

Case Name : M/s Yash Society Vs CCIT (Bombay High Court)
Appeal Number : Writ Petition No .2565 OF 2010
Date of Judgement/Order : 12/03/2015
Related Assessment Year :
Courts : All High Courts (3629) Bombay High Court (654)

A plain reading of Section 10(23C) makes it clear that the   legislature   has   categorised   for   deduction   income   of   those  institutions   which   ‘exist   solely’   for   philanthropic   purpose   with   a  further   stipulation   that   they   would   exist   ‘not   for   the   purpose   of  profit’.     In   other   words,   the   institution   should   not   exist   for   a commercial purpose.  The first proviso to this sub­section requires an   assessee   to   make   an   application   in   a   prescribed   form   to   the prescribed   authority   for   the   purpose   of   grant   of   exemption   or continuance thereof. The second proviso provides that the prescribed authority before granting an approval may call for such documents, including audited annual accounts or information and as it may think necessary in order to satisfy itself about the genuineness of activities  of such a trust or fund and may make such inquiries as may deem necessary   in   that   behalf.     It   is   the   further   requirement   of     the provision   that   an   assessee   should   apply   its   income   solely   and exclusively for the objects for which it is established.    Rule 2CA of the Income Tax Rules lay down the guidelines for grant of approval.

A   plain   reading   of   the   above   provision   shows   that   the legislative emphasis is on a twin requirement.  Firstly the purpose for which the trust is existing, which should be solely an existence for a philanthropic purpose and secondly it should not be for profit.   This interpretation   subserves   the   object   of   the   provision.   The   clear language of the provision show that the intention of the legislature is to   benefit   those   institutions   which   cater   to   variety   of   illness   and  suffering   as   a   service   to   the   society   and   solely   for   philanthropic purpose   and   not   for   the   purpose   of   profit.     An   existence   of   the institution ostensibly for a philanthropic purpose and in reality for profit, would not qualify an institution for a deduction under this provision.     This   would   not   mean   that   such   an   institution   cannot incidentally   have   a   reasonable   surplus   which   it   utilizes   for philanthropic purposes.

In the light of the above legal requirement, we now proceed to  examine   the   facts   of   the   present   case   so   as   to   determine   as   to  whether   respondent   no.1   was   right   in   rejecting   the   petitioner’s  application seeking an approval   under section 10 (23C) (via).   In  doing so, we examine whether the impugned decision suffers from any arbitrariness and/or an illegality.  From the material on record as placed before respondent no.1 it was reflected that the petitioner was earning surplus revenue from its activities and that the assets were increasing. The fact that surplus was generated is not disputed by the petitioner. This surplus revenue  was utilized for acquisition of  assets which in the opinion of respondent no.1 was capable of generating  more income.   In the Assessment years 2006­07, 2007­08, 2008­09 and   2009­10,   the   percentage   of   transfer   of   gross   surplus   to   the development fund was at 19.12 % 28.37 % 73.17 % and 12.12 % respectively.     Accompanied with this, there was a huge increase in fixed assets from Rs.63,75,577/­ in A.Y.2006­07 to Rs.8,02,75,706/­ in Assessment year 2009­10 which was approximately an increase of Rs.7.50 crores within four years. Petitioner’s cash and bank balances also   increased   from   Rs.1,42,420/­   to   Rs.1,74,15,757/­   during   the same   period   which   was   an   increase   of   about   Rs.1.30   crores.   The petitioner had purchased land admeasuring 8,350 sq.meters for an amount of Rs.363.63 lacs.   All these figures are borne out by the details as submitted by the petitioner before respondent no.1.   The reasoning as given by respondent no.1 that all these figures go to show   that   there   was   a   systematic   generation   of   profits   from   the activities of the petitioner coupled with the increase in assets which would generate more income / profits cannot be said to be without any basis, arbitrary or perverse. Hence, it was not improper for the respondent no.1 to draw a reasonable inference that the petitioner is not existing solely for philanthropic purpose and for profits, in ouropinion cannot be faulted.

We have also perused the statement of expenditure incurred by the petitioner showing the concessional treatment claimed to be offered by it.   The figures of concessional treatment clearly indicate that the petitioner has spent meagre amount on the weaker section of the society which negatives the contention of the petitioner that the petitioner   is   existing   solely   for   philanthropic   purpose   and   not   for profit.

A perusal of the statement of the hospital charges and fees furnished by the petitioner for Financial year 2006­-07, 2007­-08 and 2008­-09 shows the very negligible percentage of poor/needy patients receiving treatment in the hospital of the petitioner.    What is more glaring are the details in the two columns namely ‘Gross Concessional Amount Receivable’ and ‘The amount Received from Poor patients.’ These figures in no manner would inspire any confidence or make a prudent   person   believe   that   the   petitioner   is   in   fact   existing   for philanthropic   purposes.     We   say   so,   for   the   reason,   that   it   is Court inconceivable that poor patients would be in a position to pay large amounts   as   indicated   by   the   petitioner   in   details   given   in   these financial statements.

On the basis of details as submitted by the petitioner  the   respondent   no,.1   has   rightly   come   to   a   conclusion   that   the  concessional   treatment   as   given   by   the   petitioner   for   the   above  assessment   years   being   meagre   3.56   %,   6.45%   and   4.45%  respectively,   definitely   does   not   speak   of   the   existence   of   the petitioner for philanthropic purposes.

One more factor which needs to be noted is in regard to the  resolution dated 28.8.2008 passed by the petitioner which does not specify the purpose of acquisition of the land but only authorises the acquisition of the land at a particular price from one Birla India Ltd. The contention on behalf of the petitioner that   the preamble of the resolution is required to be taken into consideration is misconceived and cannot be accepted seen from the totality of the circumstances. The alarming figures of large surplus as generated by the petitioner and the utilization of those surplus for acquisition of assets   would speak against the petitioner existing solely for philanthropic purpose and not for profit. This would dis­entitle the petitioner to the benefit of   section   10   (23)   (via).   If   the   petitioner   was   to   solely   exist   for philanthropic purposes and was to conduct the hospital to achieve that   object   by   providing   treatment   to   the   weaker   sections   of   the society, it could not have been possible for the petitioner to achieve such a huge surplus and the consequent enabling of the petitioner to utilize such surplus funds to generate assets.   In our opinion, the material as placed on record do not show that the application of the petitioner under section 10 (23C) (via) of the Act is inappropriately and arbitrarily rejected by the respondent no.1 so as to warrant our interference   in   exercise   of   jurisdiction   under   Article   226   of   the Constitution of India.

The contention on behalf of the petitioner that looking to the manner in which the exemption was allowed in the past,  respondent no.1 ought to have granted its application under section 10 (23C) (via)  of  the Act,  in  our opinion,  is  completely   misconceived and contrary to the requirement of the statutory provision.   It was the legal   duty   of   respondent   no.1   to   consider   independently   the application of the petitioner for the assessment year in question   on the basis of the material as submitted by the petitioner and applying the requirements of the provisions of sub­clause 23C (via) of section 10 decide the same independently. Any deduction and/or exemption as granted to the petitioner for earlier assessment years   cannot be claimed to be of any consequence by the petitioner so as claim this deduction as a matter of right for A.Y.2009­10 and thereafter. We therefore, reject this submission as urged on behalf of the petitioner.

The decision of the Division Bench of this Court in the case of Breach Candy Hospital vs CCIT & ors (supra) as relied on behalf of the petitioner is of no assistance to the petitioner.  The Division Bench in the facts of the case   had held that there was  absence of any material to show that generally there was a   profit in the hospital  activities of the petitioner therein.  In this context, it was held that it cannot   be   said   that   the   petitioner   did   not   exist   solely   for philanthropic purpose but, for the purpose of profit and the rejection of   the   application   of the   petitioner   therein   was   held   not   valid. However,   situation   in   the   present   case   is   quite   different. In petitioner’s   case   there   is   accumulation   of     surplus   and   there   is utilization of this surplus for generation of assets.

The reliance of the petitioner on the decision of the Division bench of this Court in Tolani Educational Institution vs Director of Income Tax  (Exemption) (supra)  also  is of no avail.     In this case, activities   of   the   petitioner   were   educational   and   the   surplus   was utilized towards upgrading college facilities. It was held that with the advancement of technology no college or institution can   afford to remain   stagnant   and   hence   applying   the   provisions   of   section   10 (23C) (vi) it was held that it does not require that the college must maintain status quo, as it were, in regard to its knowledge based infrastructure. It was observed that educational institutions have to modernise, upgrade and respond to the changing ethos of education. In   this   context,   it   was   held   that   section   10   (23C)   cannot   be interpreted regressively to deny exemption as educational institution exist for educational purpose and not for profit.   There is no finding of the Court that the   utilization of surplus was for acquisition of fixed assets. It was also not the case that the petitioner had not spent on   educational   activities   but,   for   some   other   purpose   outside   the parameters of educational activity which was the sole object of the petitioner.     However,   in   the   present   case,   the   petitioner   has successively incurred a meagre  expenditure on philanthropic activity namely   expenditure   towards   treatment   of   weaker   sections   of   the society and major amount was utilized for generation of assets. These facts   therefore,   completely   differentiate   the   case   of   the   petitioner from the facts of the case in Tolani Education Society (supra.)   The intention of the legislature in making provisions of section 10 (23C) (via) is that an institution shall exist solely for philanthropic purpose and   not   for   the   purpose   of   profits.     The   expression   “solely   for philanthropic purpose” and “not for the purpose of profits” spells out a  clear   intention   of  the   legislature  that the  institution   should not merely exist for philanthropic purpose but existence shall not be  for profits.   Satisfaction of this  twin  test  by an institution   claiming  a deduction would entitle it for the benefit of the provisions of section 10 (23C) (via) of the Act. In the petitioner’s case, from the details of the  accounts   as   submitted  by  the   petitioner,  this   position   remains hardly   satisfied   so   as   to   enable   the   respondent   no.1   to   grant   an approval for the purpose of the petitioner claiming exemption under the said provisions.

The decision of the Division Bench in the case of Rukmarani Education Foundation (supra) as relied by the petitioner in support of the proposition that the petitioner has not been informed by the respondent no.1 on the grounds and reasons before the application by the petitioner was rejected.   The petitioner in the said case had sought   to   furnish   information/evidence   to   meet   the   grounds   on which the impugned order was passed which is not the position in the present case.   In the present case respondent no.1 had issued a show cause to the petitioner.  Apart from that ample opportunity was given  to  the  petitioner  to  place  all  the  material  to  show  that the petitioner   becomes   eligible   to   the   deduction   as   claimed   for   the assessment year in question.  A personal hearing was also granted to the petitioner ‘s representative to present the facts of the case on 23.9.2010.   After   taking   into   consideration   the   entire   material respondent no.1 has passed a detailed order giving reasons as to why application of the petitioner has not been accepted.   The petitioner has not made out any case of a prejudice it has suffered for want of hearing.  We are therefore of the clear opinion that respondent no.1 in passing the impugned order has in no manner acted in breach of the   principles of natural justice.

Learned counsel for the Respondents has appropriately relied on   the   decision   of   the   Supreme   Court   in  S.H.Medical Centre Hospital vs State of Kerala & ors (supra).  The Supreme Court was considering an issue as to whether income derived from a building can be said to be used for charitable purpose by running of a free medical aid to the needy and poor in the context of tax exemption under Municipal laws.  It was held that income   derived from the building was being applied for charitable purpose   was to be clearly proved and that the fact that the institution is set up for charitable purpose   as   stated   in   the   Memorandum   of   Association   cannot   be enough   to   hold   that   income   is   necessarily   applied   for   charitable purposes.  In this context, the Supreme Court in paragraph 16 and 17 observed  thus:

16. “In our considered view, the High court was correct in holding that the application of income derived from a building for charitable purposes does not amount to the building being “principally used” for charitable purpose. In the present case, if we have to rule against the High Court’s judgment, it will be necessary to have more evidence with respect to details such as what the nominal charges are for patients who can afford it and the number of patients offered free medical care vis-a-vis the number of patients who pay for the services. The argument that the income is applied for charitable purposes can be accepted only if it is known what portion of the income goes into charity i.e. Free medical services. Does the percentage of patients receiving free medical services increase every year. If we hold that the income derived from a building is applied for charitable purposes then that has to be clearly proved and the fact that the institution is set up for charitable purposes as stated in its memorandum of association cannot be enough to hold that income  is necessarily applied for charitable purposes especially in the light of the fact that the patients who can afford to pay for it are being charged for medical services.

17. Now, we will examine the question of what “charitable purpose” means. The Oxford English Dictionary defines “charitable “as of or relating to the assistance of those in need”. In the present case, it can be argued that all medical services relate to the assistance of those in need. This is a valid interpretation but cannot be accepted for the purposes of tax. If these medical services in the present case were being offered free to a majority of the patients rather than a minority of patients, then the conclusion could have been reached that the buildings are principally used for charitable purposes. Further, an amount of approximately Rs.26,00,000 of the expenses are towards “social work and charities” as per the income and expenditure accounts provided, whereas “free medical aid” is around Rs.60,00,000 for the year 2004-2005. It is not clearly mentioned that “social work and charities” is. Furthermore, an exemption is provided for that area in which free medical aid is provided by the appellant Hospital. The appellant has not produced cogent material evidence before the competent authority or the State Government or before the High Court to show that the entire building has been used for charitable purpose by rendering free medical aid to the needy poor people of society. The fact is that the details furnished in the documents produced would go to show that the appellant Hospital is earning money by charging from patients and therefore the claim of the appellant that the entire area taxed is used for charitable purpose is not reflected in the documents produced. Hence, we are not inclined to interfere with the impugned orders. The High Court has correctly interpreted the “Explanation” clause to section 3 (1) of the Act to hold that “charitable purpose” means “relief of the poor and free medical relief”. (Emphasis supplied)

In the petitioner’s case it may be that the memorandum of association shows that it is established for philanthropic purpose but as   to   whether   such   philanthropic   activities   are   reflected   from   the actual conduct of the institution is a fact which is required to be seen by   the   appropriate   authority   by   appreciating   the   evidence   in   that regard in considering the application under section 10 (23C) (via). Such examination is an independent examination and it is only on the   basis   of   the   material   as   submitted   by   the   petitioner,   the respondent no.1 has taken a decision to reject the application of the petitioner.

The observations of the Supreme Court in its decision in the case   of  Aditanar Educational Institution vs Addl.Commissioner of Income Tax (1997) 3 SCC 346   are   squarely applicable  to  the  issue  in  hand.     In  dealing  with an  issue  arising under   section   10   (22)   of   the   Act   which   concerned   income   of   a University   or   other   educational   institution   existing   solely   for educational purpose and not for profit the Supreme Court observed thus :

“ We may state that the language of section 10 (22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for the purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.” (Emphasis supplied)

In the light of our above observations, we are certain that the writ petition does not call for any interference of this Court. Writ Petition is accordingly dismissed.    In the facts and circumstances of the case,there shall be no order as to costs.

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