Case Law Details

Case Name : Advance Transfusion Medicine Research Foundation Vs The ADIT (Exemption) (ITAT Ahmedabad)
Appeal Number : I.T.A. No. 399/AHD/2013
Date of Judgement/Order : 20/09/2013
Related Assessment Year : 2009-10
Courts : All ITAT (5510) ITAT Ahmedabad (386)

It is an undisputed fact that Assessee is registered u/s 12AA of the Act. It is also an undisputed fact that Assessee had entered into transaction of sale of FFP with CBL and during the year and had supplied to CBL, FFP worth Rs 30.26 lacs. It is also an undisputed fact that CBL is an associate company of Assessee by virtue of majority shareholding held by Chudgar family in both the concerns. AO has held that the Assessee is not eligible for deduction u/s 11 and 12 of the Act as it falls within the purview of section 13(l)(c)(ii), 13(2)(b), 13(2)(d) and 13(2)(g) rws 13(3)(e) and Explanation 1 and Explanation 3 to section 13(3) of the Act as according to AO by entering into transactions with CBL, Assessee has granted concessional benefit to it by charging the price which is less than that charged by Assessee to the patients.

As per sub-section (6) a trust running an educational institution or a medical institution or a hospital shall not lose the benefit of exemption of any income other than the value of benefits of educational or medical facilities provided to the specified persons, solely on the ground that such benefits have been provided to specified persons. It should be noted that the sub-section covers,-(i) only those trusts running an educational  institution or a medical institution or a hospital; (ii) the benefit extends only in respect of educational or medical facilities and not any other facility. In the present case, it is an undisputed fact that Assessee has entered transactions with the related concerns. It is also a fact that it cannot be said that the Assessee is an educational institution and cannot be said to be a hospital or medical institution as it is not engaged in dispensing medical facility though it is engaged in running a blood bank. We are of the view that in the present case considering the totality of facts, the activity of the Assessee cannot be considered to be engaged in medical facilities so as to be entitled to exemption of income.

INCOME TAX APPELLATE TRIBUNAL , AHMEDABAD

(BEFORE SHRI G.C.GUPTA VICE PRESIDENT

& SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 399/AHD/2013 (Assessment Year: 2009-10)

Advance Transfusion- Medicine Research Foundation

Vs.

The ADIT (Exemption)

ORDER

Date of Pronouncement : 20-09-2013

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal is filed by the Assessee against the order of CIT(A)-XXI, Ahmedabad dated 16.01.2013 for assessment year 2009-10.

2. Facts as culled out from the orders are as under:

3. Assessee is a company registered u/s 25 of the Companies Act 1956 and also registered u/s 12AA of the Act vide No III/12AA/192/97-98 dated  20.2.1998. It filed its return of income for AY 2009-10 declaring total income of Rs Nil. The case was selected for scrutiny and thereafter the assessment was framed u/s 143(3) vide order dated 16,12.2011 and the total income was determined and assessed at Rs 75,73,403/-. Aggrieved by the order of AO, Assessee carried, the matter before CIT(A). CIT(A) vide order dated 16.1.2013 dismissed the appeal of the assessee. Aggrieved by the order of CIT(A), Assessee is now in appeal before us and has raised the following grounds:

1. The Id. CIT(A) has erred both in law and on the facts of the case in confirming the action of Id. AO in holding that the Appellant Trust has provided undue benefit to the concern falling u/s 13(3)(c) of the Act and accordingly erred in not allowing exemption of Rs.18,63,860/- claimed u/s 11 & 12 of the Act.

2. The Id. CIT(A) has further erred both in law and on the facts of the case in holding that as a direct benefit is given as per S. 13(l)(c) of the Act, no exemption as envisaged in S.ll & 12 could be granted to the Appellant, and accordingly, the Id. CIT(A) has further erred in dismissing the following grounds as raised by the Appellant in the Grounds of Appeal before Id. CIT(A) without adjudicating on merits :

“2 The learned Assessing Officer has erred in disallowing depreciation of Rs. 43,99,739/- as capital expenditure has been allowed as expenditure in the earlier year as application of fund.

3. The learned Assessing Officer has erred in disallowing “net application of income by purchase of fixed assets during the year worth” Rs. 13,09,804/- claimed by the Assessee u/s 11.

4. The learned Assessing Officer has erred in disallowing Business Loss of Rs. 8,23,58,027/- to be carry forward as deduction u/s 11 has been withdrawn.”

3. Alternatively and without prejudice to above, even if it is held that the alleged benefit is provide to the concern as per S.I3 of the Act, then also, entire exemption as claimed u/s 11 of the Act cannot be declined and it can be declined only vis-avis the alleged transactions in violation of S.13.

4. Alternatively and without prejudice to above raised grounds, even if it is held that the Appellant-Trust is not eligible for exemption as claimed u/s 11 of the Act and exempt income is treated as taxable business income, appropriate directions may be issued to compute the income of the appellant on commercial principles.

5. Alternatively and without prejudice to above raised grounds even if it is held that the Appellant-Trust is not eligible for exemption as claimed u/s 11 of the Act and exempt income is treated as taxable business income, appropriate directions may be given to allow the set-off of carried forward deficit amounting to Rs.8,23,58,027/- against alleged total income for the year under consideration and balance amount of unutilized brought forward deficit may be allowed to be carried forward to the succeeding assessment year.

6. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

7. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in charging interest u/s 234B/C/D of the Act.

8. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act.

4. During the course of assessment proceedings Assessing Officer noticed that Assessee has entered into business transaction with Celestial Biologicals Ltd (an associate company of Assessee) for supply of 19950 units of “Fresh Frozen Plasma” (FFP) @ Rs 550 per litre aggregating to Rs 30,26;652/-. He further noticed that during the year the Assessee had supplied 15635 units of FFP to patients @Rs 600 per unit (each unit ad measuring to approx 200 ml) and Assessee had also charged Rs 80 per unit as service charges from patients which was not charged to the associate concern. He also noticed that Chudgar Family was having complete shareholding of the Assessee and Chudgar family was also   indirectly having majority shareholding in Celestial Biologicals Ltd. The AO was thus of the view that since the Assessee had provided concessional benefit to its associate, the Assessee is not eligible for deduction u/s 11 considering the provisions of section 13 of the Act. The Assessee was therefore asked to justify its claim. After considering the submissions of the Assessee, AO disallowed the claim of the Assessee by holding as under:

3.9 On the basis of the facts of the case, legal provisions of the Act the assessee ‘s reply, material placed on record and discussion in the preceding paragraphs; It is held that:

The distribution of blood components (FFP) to a corporate entity (Celestial Bioiogicals Ltd), which is an associate concern of the assesses at highly subsidized/ concessional rates (as discussed in preceding paragraphs) cannot be called as charity when the same blood component (FFP) is distributed to needy patients at much higher rates (almost six times the price at which it is distributed: to the corporate entity).

The company’s policy of discarding FFP (which has been collected/ donated from other human beings., and is a scarce resource) as waste, and subsidizing the rates in favor of corporate entities working on the principles of profit maximization instead of doing so in favor of needy patients is a purely commercial activity. It cannot be called as “charitable by any stretch of imagination and is even unethical.

The assassee company is not eligible for deduction u/s. 11 and 12 of the Act as it falls within the purview of section 13(1)(c)(ii), 13(2)(d) and 13(2)(g) r.w.s.-. 13(3)(e) and explanation 1 & explanation 3 to section 13(3)of the Act. The issue has been discussed in detail in para: 3.1,3.2,3.3,3.4,3.5 and the assessee was required to asked to show cause in this regard (para 3.6). The assessee ‘s reply (para 3.7) that the business transaction with Celestial Biologicals Ltd is not a concessional benefit/ undue benefit has been rebutted in paragraph 3.8. By taking all the facts, legal provisions and reply of assessee into consideration, it is held that:

The Celestial Biologicals Ltd is covered in the definition of person u/s 13(3)(e) read with explanation 1 and 3 (Detailed discussion in para 3.2,3.3,3.4,3.5).

Undue benefits as mentioned in section 13(1)(c)(ii), 13(2)(b), 13(2)(d) and 13(2)(g) have been provided to Celestial Biologicals Ltd.

The Assessee company is a tool to maximize profit, and to widen the horizon of Intas group of companies held by Chudgdar Family. The same can be established by the fact that business transactions of the assessee company with the related companies, and hence the concessional benefits have increased in the coming years (para3.4).

3.10 Based on the above discussion, the deduction u/s 11 (and section12) of the Act claimed by the assessee is disallowed.

5. Aggrieved by the order of AO, Assessee carried the matter before CIT(A). CIT(A) dismissed the appeal of the Assessee and upheld the order of AO by holding as under:

“4.6 I have carefully considered the order of the AO and the detailed submissions made in this regard. It is an undisputed fact that CBL is an associate concern of the appellant trust and is covered u/s, 13(3)(e) as pointed as pointed by the AO and the same has not been rebutted by the appellant. Insofar as the question of benefit granted to CBL by the appellant trust goes, I find that the appellant has sold FFP @ Rs. 550/- per liter (i.e. Rs. 110/- per unit, each unit of 200 ml.]. On the other hand, the same FFP is sold @ Rs. 600/- per unit to patients during the relevant Asst. Year, that means, this clearly implies that FFP is sold to the associate concern at about 1/6th of the total price of what is being sold to the patients in the relevant financial year. The argument of the appellant that CBL has procured FFP at almost similar price from market does not hold water as the appellant has not sold FFP @ 600/- per liter to any other concern other than CBL, its associate concern. Had the appellant sold off FFP to other concerns in open market at much lesser price as is done with CBL, the argument could have carried some weight. However, this argument cannot be considered in view of the significant observation made by the AO that the demand of various blood products including FFP is increasing over a period of time. I find it difficult to appreciate that how in the scenario of increasing demand of frozen blood product, the same could be sold to an associate concern at much lesser price than what is sold to the patients, as pointed out by the AO. In my view, the action of the appellant in selling FFP totaling to Rs.30,26,652/-, amount to undue benefit u/s. 13, as pointed out by the AO in para 3.9 of the assessment order. I am, thus, in agreement with the finding made by the AO that since section 13 is invoked in the appellant’s case, benefit of section 11 & 12 cannot be granted to the appellant. Since benefit of  Section 11 & 12 are not available to the appellant, the grounds raised by the appellant deserve to the dismissed. Ground Nos. 1, 2, 3 & 4 are therefore dismissed.

6. Aggrieved by the order of CIT(A), Assessee is now in appeal before us.

7. Before us, the Ld. A.R. submitted that in a blood bank 1 unit of blood is made into 3 main components namely Red cells, Platelets and Fresh Frozen Plasma (FFP). FFP can be converted into Cryo Poor Plasma (CPP) and Cryoprecipitate (CPT). There is 100% demand for red blood cells whereas platelets has demand of around 30% and the demand for FFP is around 15-20% of the total blood collection. Surplus platelets have no medical use and are destroyed after deactivation whereas FFP has a pharmaceutical use wherein it can be converted into different types of plasma fractionation proteins. At the beginning of Assessee’s operation in year 2000, there existed only one plasma fractionation Center at KEM Hospital Mumbai with a capacity of only 10000 ltrs p.a. plasma fractionation and therefore there was competition among blood banks to get their plasma picked by it. With great difficulty, Assessee could manage to supply plasma to it at a low rate of Rs 600/ltr and CPP at Rs 400/ltr. Last supply to plasma fractionation Center at KEM Mumbai was made by Assessee in July 2002. Assessee with great difficulty and after legal process could recover the dues from it Rs 5 lacs and had to write off Rs 12,5 1373 as bad debts out of the total outstanding of Rs 20,74,725/-. Later on Reliance Life Science picked up a little plasma for trial purpose but they stopped as their plant was not functional. Later CBL picked up first lot of plasma in July 2006. In the intervening period Assessee lost lot of plasma due to lack of buyer. Thus CBL was the only option available to Assessee to supply plasma as they were the best payers. He further submitted that plasma sent for fractionation brings less revenue compared to that given directly to patients as it is considered as bye-product and not the main product. He further submitted that the purchase price of plasma of CBL from Assessee was at the same price at which it was purchasing from other blood banks. He pointed to the comparative statement of price paid by CBL to different blood banks. He further submitted that considering the charitable nature of Assessee, CBL has provided interest free unsecured loan to the tune of Rs 3.43 crore since FY 2003-04 to the Assessee which goes to prove that Assessee’ s activities were charitable in nature and no benefit has been passed to CBL. He further submitted that while applying provisions of s. 13 of the Act, what is material is whether the underlying transaction is at market price or not. If the transaction is at market price, there is no question of diversion of any income at all. He thus urged that Assessee is entitled to deduction and therefore it be granted the same.

8. Ld.D.R. on the other hand pointed to the various observations made by the AO in his order in support of his contentions and thus supported the order of AO and CIT(A).

9. We have heard the rival submissions and perused the material on record. It is an undisputed fact that Assessee is registered u/s 12AA of the Act. It is also an undisputed fact that Assessee had entered into transaction of sale of FFP with CBL and during the year and had supplied to CBL, FFP worth Rs 30.26 lacs. It is also an undisputed fact that CBL is an associate company of Assessee by virtue of majority shareholding held by Chudgar family in both the concerns. AO has held that the Assessee is not eligible for deduction u/s 11 and 12 of the Act as it falls within the purview of section 13(l)(c)(ii), 13(2)(b), 13(2)(d) and 13(2)(g) rws 13(3)(e) and Explanation 1 and Explanation 3 to section 13(3) of the Act as according to AO by entering into transactions with CBL, Assessee has granted concessional benefit to it by charging the price which is less than that charged by Assessee to the patients.

10. Section 13 makes an exception to the exemption granted u/s 11 rws 12 by way of exclusion from total income. Section 13(l) narrates the situations whereunder the benefit of exemption is not available u/s 11 rws 12 whereas s. 13(2) by way of deeming provision narrates certain situations under which the income or property will be deemed to have been used or applied for the benefit of specified persons so that exemption is to be denied under the provisions of section 13(1).

11. Briefly stated, as per section 13(1) in the following cases the benefit of exemption under section 11 is barred (to the extent applicable to the present case) are :

(a)

(b)

(bb)

(c) (i) .

12. (ii) if any part of the income or property of the trust/institution is used or applied directly or indirectly for the benefit of specified persons subject  to the two provisos given under the sub-clause (c) and also subject to the Explanation given under sub-clause (d) [section 13(l)(c)(ii)];

13. Both these sub-clauses are also subject to sub-section (4) of section 13. (d)

14. Sub-section (2) of section 13 specifies certain situations where-under the property or income of the trust or institution is deemed to have been used or applied for the benefit of any of the persons specified in sub-section (3). These situations are as under:

(a) Where any part of the income or property of the trust is or continues to be lent to any specified person for any period during the year without adequate security and/or interest.

(b) Where any land, building or other property of the trust/institution is made available or continues to be made available to such person for any period during the previous year without charging adequate rent or other compensation.

(c) Where any amount is paid by way of salary, allowances or otherwise for services rendered by such persons and the amount so paid is excessive and unreasonable.

(d) Where the services of the trust/institution are made available to any such person without adequate remuneration or other compensation;

(e) If any share, security or property is purchased by or on behalf of the trust/institution from any such person for more than adequate consideration during the previous year.

(f) If any share, security or property is sold by or on behalf of the trust to such person for less than adequate consideration.

(g) If the income or property of the trust/institution is diverted during the year in favour of any specified person, to the extent of more than rupees one thousand.

(h) If any funds of the trust/institution are or continue to remain invested for any period during the previous year (not being a period before 1st Jan., 1971) in any concern in which any specified person has a substantial interest.

For the purpose of barring exemption if any part of the income of the trust or institution benefit, section 13(l)(c) specifies the persons, which are as under:

(a) the author of the trust or the founder of the institution or their relatives;

(b) any person who has made total contribution upto the end of the relevant previous year exceeding Rs 50000/-relative of such author or founder or his relatives;

(c) where the author/founder is an HUF, any member of that family or their relatives

(c)(c) any trustee of the trust or manager (by whatever name called) of the institution and his relatives and the concern in which any of them has substantial interest.

(d) the author of the trust or the founder of the institution or any of his relatives;

(e) any person who has made a substantial contribution to the trust or institution or any of his relatives; where the author, founder or substantial contributor is an HUF, a member of the HUF or any relative of such member; and any concern in which any of the aforesaid persons has a substantial interest.

As per Explanation 3 to section 13 a person is deemed to have a substantial interest in a concern if such person either by himself or along with any of the other specified person in case the concern is a company, owns beneficially shares (not being preference shares), carrying not less than 20% of the voting power at any time during the previous year, or in case of any other concern, is entitled , at any time during the previous year, to not less than 20% of the profits of that concern.

15. As per sub-section (6) a trust running an educational institution or a medical institution or a hospital shall not lose the benefit of exemption of any income other than the value of benefits of educational or medical facilities provided to the specified persons, solely on the ground that such benefits have been provided to specified persons. It should be noted that the sub-section covers,-(i) only those trusts running an educational  institution or a medical institution or a hospital; (ii) the benefit extends only in respect of educational or medical facilities and not any other facility. In the present case, it is an undisputed fact that Assessee has entered transactions with the related concerns. It is also a fact that it cannot be said that the Assessee is an educational institution and cannot be said to be a hospital or medical institution as it is not engaged in dispensing medical facility though it is engaged in running a blood bank. We are of the view that in the present case considering the totality of facts, the activity of the Assessee cannot be considered to be engaged in medical facilities so as to be entitled to exemption of income. In view of the aforesaid facts, we find no reason to interfere with the order of AO and thus this ground of the Assessee is dismissed.

16. With respect to other grounds namely disallowing depreciation, disallowing of net application of income by purchase of assets and dis allowance of business loss, the Assessee has stated that the same were not adjudicated by CIT(A).

17. Before us, the Ld A.R. submitted that the aforesaid grounds have not been adjudicated by CIT(A) though the Assessee had raised the grounds before CIT(A).

18. On perusing the order of CIT(A), we find the issues raised by Assessee has not been adjudicated on merits by CIT(A). We therefore feel that the issue needs to be adjudicated on merits and therefore restore the issue to the file of CIT(A) for him to decide the issue afresh on merits after considering the submissions of the assessee and pass a speaking order and after giving reasonable opportunity of hearing to both the parties. Thus these issues are allowed for statistical purposes.

19. In the result the appeal of the Assessee is partly allowed for statistical purposes.

Order pronounced in Open Court on 20-09-2013.

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