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.
(2010) 192 TAXMAN 98 (Bom)
HIGH COURT OF BOMBAY
Breach Candy Hospital Trust Vs. CCIT
F.I. REBELLO AND D.G. KARNIK, JJ.
WRIT PETITION NO. 1383 OF 2009
T.D. Mistry and R. Murlidhar for the Appellant. Yogesh Patki for the Respondent.
D.G. Karnik, J. – By this petition, the petitioner challenges the order, dated 31-3-2009 passed by the Chief Commissioner of Income-tax, Mumbai (Respondent No. 1) rejecting the petitioner’s request for grant of approval under section 10(23C)( via) of the Income-tax Act, 1961 (“the Act”) for the assessment year 2002-03 to assessment year 2008-09 and on wards.
2. The petitioner is a company incorporated and registered under the Companies Act, 1913 whose main object is creating and maintaining a hospital for philanthropic purposes. The petitioner is also registered as a public trust under the Bombay Public Trust Act, 1950. The petitioner was granted exemption under section 10(22A) of the Act for the years 1970-71 to 1995-96. In the year 1996-97, an issue was raised by the tax authorities whether the petitioner could be considered as carrying on its activities solely for philanthropic purpose and by an order dated 26-3-1991, the petitioner was assessed to income-tax holding that petitioner did not exist solely for philanthropic purpose. However, by an order dated 22-1-2002, the Commissioner (Appeals) allowed the appeals of the petitioner for the years 1997-98 and 1998-99 holding that the petitioner existed solely for philanthropic purposes. Thereafter, Central Board of Direct Taxes by its order dated 10-4-2003, also granted approval to the petitioner under section 10(23C) of the Act for the years 1999-2000 to 2001-02.
Thus, till the year 2001-02, the petitioner was continuously enjoying exemption from payment of income-tax as an institution existing solely for philanthropic purpose. On 12-2-2002, Director General of Income-tax (Exemptions) however, issued a show-cause notice to the petitioner why its application for renewal of the exemption be not rejected. By a reply dated 15-3-2002, the petitioner replied to the show-cause notice. On 26-12-2002 and 4-10-2005, the petitioner made applications to the Chief Commissioner of Income-tax for the assessment years 2002-03 to 2004-05 and assessment years 2005-06 to 2007-08 respectively seeking renewal of the approval under section 10(23C)( via) of the Income-tax Act. On 31-3-2008, the petitioner filed an application to the Chief Commissioner for renewal of the approval under section 10(23C)( via) of the assessment years 2008-09 to 2010-11. By an order dated 31-3-2009, respondent No. 1 rejected all the aforesaid applications under section 10(23C)( via) for the assessment years 2002-03 to 2010-11.
That order is impugned in this petition.
3. Learned counsel for the petitioner submitted that the petitioner was previously granted approval by the Central Board of Direct Taxes for the years 1999-2000 to 2001-02 and even earlier, the petitioner was granted exemption holding that it exists solely for the philanthropic purpose. He, therefore, submitted that respondent No. 1 could not have taken a contrary view and in the absence of any new material, could not have taken a different view in the matter in rejecting the applications. We are unable to agree. It is settled principle of law that the principle of res judicata does not apply in matters pertaining to tax for different assessment years as the cause of action for each assessment year is distinct. If any authority is needed for this proposition, it is found in C.K. Gangadharan v. CIT  172 Taxman 87 (SC) as also Devidayal Modi v. STO AIR 1965 SC 1150. Grant of approval in the past would not, in our view come in the way of the respondent No. 1 if he is otherwise satisfied that the application for renewal should be rejected on the facts before him.
4. With the help of the counsel for the parties, we have perused the impugned order which gives four grounds for rejection. Firstly, after comparing the total receipts of the hospital and the total expenses incurred for the years 2001 to 2008, the respondent No. 1 found that only for the one year, the expenses exceeded the receipts. For every other year, the receipts exceeded the expenses and the excess of receipts over the expenditure was between 2.58 per cent to 22.08 per cent of the total receipts. The respondent No. 1 also noticed that the assets of the petitioner had increased during this period and, therefore, he deduced that the petitioner had used the excess of receipts over expenses for creating the assets and thereby strengthening its capacity to earn more. Therefore, he inferred that the petitioner did not exist solely for philanthropic purpose but there existed some profit motive. Secondly, respondent No. 1 examined and compared the money spent by the petitioner for concessional treatment to the patients with the amounts received from them for such concessional treatment. On such examination, respondent No. 1 concluded that part of the money received from the patients was needed for free or concessional treatment to the staff members of the hospital run by the petitioner. He held that concessional treatment provided to the staff members could not be regarded as philanthropic purpose. Thirdly, respondent No. 1 took exception to the write off of the amount of Rs. 76,80,723.
The petitioner had made certain payments to a stock broker for purchasing Trust Securities for the employees’ provident fund trust. The broker delivered part of the securities but failed to deliver the securities worth Rs. 76,80,723 for which the amount was paid. The broker company came under a cloud as it was controlled by Ketan Parekh who is being prosecuted for alleged malpractices on the stock exchange. The amount paid to the broker became irrecoverable and was written off by the petitioner. This fact was also held against the petitioner. Lastly, the Commissioner noted that in addition to the medical treatment, the petitioner was also engaged in conducting medical checkups of the people applying for visa to USA and they paid fees for such checkups.
The expenses incurred for medical checkups between the years 1999-2000 to 2007-08 were less than the examination fees earned and there was a surplus ranging between Rs. 3.9 lakhs to Rs. 7.4 lakhs except for two years when there was a loss of Rs. 4 lakhs and Rs. 5 lakhs respectively. The respondent No. 1 therefore, concluded that the petitioner was earning income out of the medical checkups of USA visa applicants and this earning of income cannot be regarded as philanthropic purpose. For these reasons, respondent No. 1 held that the petitioner did not satisfy the condition that it existed solely for the philanthropic purpose and rejected the applications.
5. As regards the first ground held against the petitioner, viz., there being some surplus, learned counsel for the petitioner invited our attention to the statement given in ground No. A(viii) at page 23 of the petition, which discloses that though there was some surplus for a few years cumulatively for the years 1990-91 to 2008-09 there was a cumulative loss (expenditure exceeding the income) of Rs. 22.30 lakhs. These averments are not denied by the respondent. Thus, cumulatively there was no surplus as observed by respondent No. 1. In the notice of hearing dated 12-3-2009 also there was no mention that there was surplus for a certain number of years and no explanation was sought from the petitioner on that count though explanation was sought regarding write off of Rs. 76,80,723 as also regarding the fees received for medical examination from USA visa applicants. Had the notice been given to the petitioner that their applications were sought to be rejected on the ground that there was surplus of income over expenditure for some years, the petitioner could have explained that there was a cumulative loss for nearly two decades.
Petitioner, therefore, had no opportunity of explaining the true position nor does it appear that the respondent No. 1 was aware of this position.
6. As regards the second ground of the free or concessional treatment given by the petitioner to its own employees, it cannot be said that it is not the philanthropy at all. Philanthropy is not restricted to give the free treatment only to the extremely poor, but it would also be philanthropy to give treatment at a concessional rate to those who though not extremely poor cannot afford to pay the full and normal charges. There was nothing on record to show that the staff members to whom the concessional treatment was provided were the affording lot not deserving any concession. In any event, that aspect has not been considered by the respondent No. 1 at all.
7. As regards the third ground mentioned in the order, it was the duty of the petitioner to pay not only the salary to the staff but to make contributions to the Provident Fund. It is a statutory obligation under the Employees’ Provident Funds Act. On account of unfortunate event of the broker to whom money was paid for investments for the employees’ provident fund, the employees could not suffer. The petitioner and its Directors/Trustees could have been prosecuted and sued for non-payment of the Provident Fund contributions which was their statutory duty. In our view, this was wholly irrelevant for considering whether the petitioner was or was not established solely for philanthropic purpose.
8. As regards the last ground regarding the fees received for medical examination of applications for USA visa, undoubtedly there has been a surplus for seven out of nine years while there was a loss in the remaining two years. But it may be difficult to appropriate every receipt for every activity and medical treatment provided by the petitioner. There may be some surplus in some areas and deficit in other areas. Cross subsidization is not unknown. Even in state function, cross subsidies are provided for. The hospital under the petitioner is one unit run at one place and it is not the case of the respondent, there are multiple units and one unit is subsidizing the other. In the same unit, payment is collected for different services rendered which may result in some cross subsidy. Ultimately, the entire receipts are used for treatment of the patients and medical care. In the absence of any material to show that generally there was a profit, it cannot be said that the petitioner does not exist solely for the philanthropic purpose but exists for the purpose of profit.
9. Our attention was also invited to the Memorandum of Association and Articles of Association of the petitioner which shows objects of the petitioner to be to establish and maintain hospital for philanthropic purpose and prohibit declaration of any dividend to the members. This aspect has also not been considered by the respondent No. 1.
10. In our view, the matter requires reconsideration in the light of what is stated above and in particular, the respondent No. 1 should have given an opportunity to the petitioner to show that there was no net surplus taking into consideration its activities over a period of time. It may also be noted that the respondent No. 1 has rejected the application for renewal for the assessment year 2008-09 on wards. Though this may imply that the application was rejected for the years 2008-09 to 2010-11, according to the petitioner, it amounts to a rejection forever and this could not have been done. In any event, the respondent No. 1 needs to clarify that the rejection is not forever but only for the periods 2008-09 to 2010-11.
11. For these reasons, the impugned order is set aside and the matter is remanded back to the respondent No. 1 for considering it afresh in the light of what is stated above.