Case Law Details
Brief of the Case: Delhi High Court In the case of Mool Chand Khairati Ram Trust vs DIT (Exemptions) viewed that it was not possible to accept that grant of exemption to the Assessee for the past several decades was palpably erroneous and successive AOs were wrong in accepting that the activities of the Assessee were in furtherance of its charitable objects, entitling the Assessee to escape the levy of income tax. Therefore, it was inter-alia held that the Assessee would not be entitled to exemption under Section 11 of the IT Act if its activities are outside the scope of its objects, even if its activities are charitable in nature.
Facts of the Case: Late Lala Khairati Ram executed a Will in 1927 and Codicil in 1928. In terms of the said Will, certain properties were settled in trust for furtherance of the objects as set out in the Will. In furtherance of the objects, the Assessee set up a hospital named Shri.Mool Chand Khairati Ram Hospital and Ayurvedic Research Institute in Lahore (then in undivided India). After the partition of the country in 1947, the Assessee applied for allotment of land to the Government of India, Ministry of Rehabilitation and Urban Development, in order to continue its activities of running a hospital and an Ayurvedic Research Institute. Pursuant to the application, the Assessee was allotted land at Lajpat Nagar-III, New Delhi and in the year 1958, the Assessee set up an institution known as Shri Mool Chand Khairati Ram Hospital and Ayurvedic Research Institute, which included a hospital dispensing treatment under the allopathic system of medicine. The Assessee has been running a hospital and Ayurvedic Research Institute from the site at Lajpat Nagar-III, since 1958 and it is not disputed that there has been no significant change in the nature of the activities undertaken by the Assessee since 1958. The Assessee was granted registration under Section 12A of the Act in December 1974.
In the assessment order dated 30th December, 2008, the AO noted that in the financial year 2005-06 the Assessee had received a total sum of Rs.18,97,65,365/- out of which the receipts pertaining to Ayurvedic Research Institute were only Rs.55,41,423/-. The AO further found that total expenditure shown by the Assessee for the said financial year was Rs.27,96,97,610/- out of which only an amount of Rs.53,30,595/- was spent on operating expenses pertaining to the Ayurvedic Research Institute. In the circumstances, the AO held that the primary activity of the Assessee was running an Allopathic hospital. According to the AO, this was not in accordance with the object of the trust set out in the Will of Late Sh.Mool Chand Khairati Ram. The AO had denied the exemption claimed by the Assessee under Section 11 and 12 of the IT Act as the AO was of the view that the activities of the Assessee were not in accordance with its objects. In addition, the AO also denied the Assessee’s claim for depreciation on assets purchased by the Assessee by application of its income that was exempt under Section 11 of the IT Act.
Aggrieved by the assessment order, the Assessee preferred an appeal before the CIT (Appeals). The contentions of the Assessee were accepted by the CIT (Appeals).
The Revenue appealed against the aforesaid decision of CIT (Appeals) before the Tribunal, which accepted the contentions of the Revenue.
Aggrieved by the ITAT order, the Assessee preferred the present appeal. The questions of law for consideration in this appeal was as under:
(1) Whether, the Income Tax Appellate Tribunal was justified in law in Confirming the action of the Assessing Officer in denying the claim of exemption u/s 11& 12 of the Income Tax Act, 1961, despite the fact that the assessee is a charitable institution engaged in running a hospital (both allopathic and ayurvedic), which constitutes charitable activity u/s 2 (15) of the Income Tax Act. 1961?
(2) Whether, on the facts and circumstances of the case the assessee trust is not entitled to exemption u/s 11 of the Act even assuming that activities of the trust that beyond of the objects of the trust which activities were wholly charitable in nature?
(3) Whether, the Income Tax Appellate Tribunal was justified in law, in not allowing the depreciation on assets used for providing medical relief through allopathic system of medicines?
Contention of the Revenue: Revenue controverted the submissions made by the Assessee and submitted that the objects of the trust did not permit running of an Allopathic hospital and thus, the activities of the Assessee were in excess of its objects. The AO was fully justified in examining whether income of the Assessee was applied towards its object as that was the pre-condition for grant of exemption under Section 11(1) of the Act. The expression “such purposes” as used in Section 11(1) of the IT Act would refer to the objects of the Trust and not to charitable or religious purposes in general. Consequently, even if the income of the Assessee had been applied for charitable purposes, the exemption under Section 11 of the Act would not be available if the same had not been applied towards the objects of the Trust. In the present case, it was not disputed that the activities of the Assessee fell within the scope of charitable purposes as defined under section 2(15) of the IT Act, however, this was not sufficient for availing exemption under Section 11(1) of the IT Act.
The Revenue referred to the decision of the Supreme Court in Commissioner of Income Tax, Ujjain v. Dawoodi Bohara Jamat: (2014) 364 ITR 31 (SC) in support of his contention that the exemption under Section 11(1) of the Act would be available only if the income of the Assessee was applied for its objects. Revenue contended that the principle of consistency would not be applicable in the facts of the present case as there had been no definite determination that the hospital run by the Assessee was in accordance with the objects of the Trust. The principle of res judicata was not applicable to proceedings under the IT Act and even if the exemption had been incorrectly granted in the previous year, it would not entitle the Assessee to claim the same in subsequent years also. It was also submitted that the provisions relating to exemption had also undergone material changes from time to time. The Revenue referred to the decision of the Division Bench of this Court in Krishak Bharati Cooperative Ltd. V. Deputy Commissioner of Income Tax: (2013) 350 ITR 24 (Delhi) to contend that the rule of consistency did not have wide application.
In respect of the issue regarding depreciation, it was contended that there was no dispute that the depreciation would be allowable on the asset that was purchased by the Trust by application of its income which was exempted under Section 11(1)(a) of the IT Act. However, it was submitted that where the exemption under Section 11(1)(a) of the IT Act has been granted but the asset is applied towards the activities which are not in conformity with the object of trust, further depreciation would not be available on such assets.
Contention of the Assessee: The Assessee contended that the Assessee was a charitable institution engaged in running a hospital (both Allopathic and Ayurvedic) and the same constituted a charitable purpose within the meaning of Section 2(15) of the Act. The Assessee had applied its income for charitable purposes, the same was exempt under Section 11 and 12 of the IT Act. The Assessee further contended that it had been granted registration under Section 12A of the IT Act after considering the nature of its activities and, therefore, it was not open for the AO to deny the exemption under Section 11 of the Act. Since there was no dispute that the activities of the Assessee fell within the meaning of charitable purposes as defined under Section 2(15) of the Act, the condition for grant of exemption under Section 11 of the IT Act was satisfied. The only requirement under Section 11 of the IT Act was to apply the income for charitable or religious purposes and, therefore, the Assessee was entitled to the exemption under Section 11 of the IT Act.
It was next contended that running an Allopathic hospital would fall within the object of the trust and the mere fact that the proportion of receipts and expenditure for providing treatment under the Allopathic system was larger than for providing Ayurvedic services would not render the activity of running an Allopathic Hospital ultra vires the object of the trust. The treatment under both, the Ayurvedic system of medicine as well as Allopathic system of medicine was being rendered in the hospital and the Assessee had been endeavoring to advance the cause of Ayurveda by drawing on the Allopathic system of medicine.
Assessee further contended that the registration granted to the Assessee under Section 12A of the IT Act has not been revoked. Assessee referred to Section 12A(3) of the IT Act and contended that in cases where it was found that the activities of the Assessee were not in conformity with the objects of the trust, the registration granted under Section 12A could be revoked by the Commissioner Income Tax. And, as this was not done in this case, it would not be open for the AO to go behind the registration. It was not open for the AO to examine the issue whether activities of the Assessee were in conformity with the object since the same had been considered by the Commissioner Income Tax at the time of granting registration under Section 12A of the IT Act. Assessee referred to the decision of the Supreme Court in Assistant Commissioner of Income Tax v. Surat City Gymkhana: (2008) 300 ITR 214 (SC) in support of his contention that once registration had been granted under Section 12A of the Act, the same is a fait accompli and the AO could not thereafter further probe into the objects of the trust.
It was also contended that the Assessee had been claiming exemption under Section 11 of the IT Act since the year 1959-60 and the same had been accepted by the Revenue. Assessee further pointed out that in several years in the past, the Assessee had been granted exemption under Section 10(22), 10(22A) and Section 10(23C)(via) of the IT Act. Assessee emphasized that the activities of the Assessee had remained the same since 1959-60 and since the Revenue accepted the claim of the Assessee for exemption under Section 11 of the IT Act and/or under Section 10(22), 10(22A) and 10(23C) of the IT Act, in the past, it could not have taken a view contrary to the settled position. Assessee relied on the decision of the Supreme Court in Radhasoami Satsang v. CIT:(1992) 193 ITR 321 (SC) and Commissioner of Income Tax v. Excel Industries Ltd.: (2013) 358 ITR 295 (SC) in support of his contention that following the principle of consistency, a view consistently accepted ought not to be unsettled.
Held by CIT (A): The contentions of the Assessee were accepted by the CIT (Appeals) to grant exemption. In addition, the CIT (Appeals) also held that the Assessee was entitled for depreciation on the assets purchased by application of its income, which was exempt under Section 11 of the Act.
Held by ITAT: ITAT accepted the Revenue’s contention that the properties of the Assessee had not been applied towards its objects. The ITAT held that the Assessee’s activities relating to Allopathic system of medicine had more or less supplanted the activities relating to Ayurvedic system of medicine and concluded that pre-dominant part of the Assessee’s activities exceeded the powers conferred on the trustees and the objects of the Assessee Trust were not being followed. Whilst the activities of the Assessee relating to providing medical relief by the Ayurvedic system of medicine were intra vires its objects, the activities of providing medical reliefs through Allopathic system of medicine was ultra vires its objects. Consequently, the Assessee was not entitled to exemption under Section 11 of the Act in respect of income from the hospital run by the Assessee, which offered medical relief through Allopathic system of medicine. Accordingly, the ITAT directed that the income and expenditure of the Assessee from the activities relating to the two disciplines of medicine, namely Ayurveda and Allopathy, be segregated.
Insofar as the Assessee’s claim for depreciation was concerned, the ITAT held that deprecation on assets, used for providing relief through Ayurvedic system of medicine or used in education and research relating to Ayurvedic system of medicine, was allowable notwithstanding that the expenditure on purchase of the assets was exempted under Section 11(1)(a) of the Act. However, insofar as the assets purchased for providing medical relief through Allopathic system of medicine was concerned, the Tribunal held that depreciation would not be available if the expenditure incurred on purchase of the assets had been exempted under Section 11(1)(a) of the IT Act.
Held by High Court: High Court observed that a plain reading of Section 11(1)(a) of the IT Act indicates that for income to be excluded under the said clause the following conditions must be met: (a) That the income is derived from property held under Trust wholly for charitable purposes; and (b) The income is applied for such purposes in India. Income from the property, which is set apart for application for such purposes, is also exempted to the extent that it is not in excess of 15% of the income from such property. The expression “such purposes” clearly refers to the purposes for which the property is held in Trust. Both the conditions i.e. the income should be derived from the property held in Trust for charitable or religious purposes and the condition that the income is applied for such purposes, are cumulative.
The High Court opined that the expression “such purposes” wouldn’t mean any charitable or religious purpose, even if the said purpose is not the purpose for which the property is held in Trust. The contention that as long as the Assessee applies the income from a property held in Trust for charitable or religious purpose, to any charitable or religious purpose, the exemption under Section 11(1)(a) of the Act would be available, notwithstanding that the purpose for which the income is applied is not the purpose for which the property is held in Trust, cannot be sustained as the same would be contrary to the plain language of Section 11(1)(a) of the Act. In order for any income to be excluded from the scope of total income, the same must be derived from a property held in Trust for a charitable or religious purpose and must also be applied for that purpose. In the aforesaid circumstances, the Assessee would be entitled to the exemption under Section 11(1)(a) of the Act, only if the income is applied for the charitable purpose for which the properties are held in Trust.
The High Court appreciated that lot of activities was being done to improve Ayurvedic system of medicines and preaching the same. It was respectfully submitted that the Assessee’s contentions/observations that ‘it is no where permitted to open and run Allopathic Hospital’ is prima facie untenable because of the fact that Trust has opened primarily an Ayurvedic Hospital and taking help from Allopathic system of medicines or any other system of medicines is not prohibited, it means that it is permitted. While promoting Ayurveda, the other system of medicine also got promoted. It serves the General good of the community while retaining its charitable nature at a all points of time. It will be appreciated that this is permissible under the provisions of the Trust Deed as well as under the provisions of the Income Tax, 1961.
High court also relied on Apex Court Judgment in the case of Lakshmanaswami Mudaliar v. Life Insurance Corporation : AIR 1963 SC 1185 in which it was held that ” (13) Power to carry out an object, undoubtedly includes power to carry out what is incidental or conducive to the attainment of that object, for such extension merely permits something to be done which is connected with the objects to be attained, as being naturally conducive thereto.”
It was also appreciated that the Trust has not changed its activities/system of medicines of be it Ayurveda or be it allopathic from the very beginning. It was submitted that Trust can only open hospital but can not compel the community to choose the system of medicines. Thus while providing Ayurveda and continuously improving the Ayurvedic system of medicines, patents wanting allopathic treatment are being provided Allopathic treatment as well. This was unique Hospital where in order to improve Ayurvedic system of medicines and create awareness about the Ayurvedic system of medicines are being adopted. The name of the Hospital is not Moolchnd Hospital but Moolchand Khairati Ram Hospital and Ayurvedic Research Institute.”
Thus, HC viewed that the AO and the ITAT erred in concluding that the Assessee’s activities were in excess of its objects. Running an integrated hospital would clearly be conducive to the objects of the Assessee. The trustees have carried out the activities of the trust bonafide and in a manner, which according to them best subserved the charitable objects and the intent of the Settlor. Thus the activities of the Assessee cannot be held to be ultra vires its objects. The AO and the Tribunal were unduly influenced by the proportion of the receipts pertaining to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly, significant activities are carried out by the Assessee for advancement and improvement of the Ayurvedic system of medicine in the institution established by the Assessee and though the receipts from the Allopathic treatment are larger, the same does not militate against the object for which the institution has been set up and run.
HC further observed that the activities carried out by the Assessee have been accepted as being amenable to exemption under Section 11 of the Act for the past several decades. In the past period, the Assessee has been granted exemption under Section 11 of the Act and also under Section 10(22)/10(22A) or Section 10(23C) of the IT Act. Concededly, the exemptions granted to the Assessee for past several decades would not be available if the activities of the Assessee were considered by the concerned AOs/Authorities to be ultra vires its objects. In the circumstances, it would not be apposite to permit the Revenue to challenge a position that has been sustained over several decades without there being any material change.
After examining the facts and circumstances, the High Court viewed that it is not possible to accept that grant of exemption to the Assessee for the past several decades was palpably erroneous and successive AOs were wrong in accepting that the activities of the Assessee were in furtherance of its charitable objects, entitling the Assessee to escape the levy of income tax.
Therefore, it was held that the Assessee would not be entitled to exemption under Section 11 of the IT Act if its activities are outside the scope of its objects, even if its activities are charitable in nature. However, the first question was answered in the negative and in favour of the Assessee that the Tribunal was not justified in allowing the Revenue’s appeal and denying the Assessee’s claim under Section 11 of the IT Act.
In respect of the issue regarding depreciation on assets used for providing Allopathic systems of medicine, The High Court observed that the Revenue did not dispute that the depreciation would be allowable if the activities of the Assessee were considered to be within the scope of its objects. The Tribunal had denied the claim of depreciation, in respect of assets used for providing medical relief through Allopathic system of medicine, only on the basis that the Assessee’s activity for running the hospital was ultra vires its objects. In the circumstances, it was held in the negative and in favour of the Assessee.
In view of the aforesaid, the impugned order of the ITAT was set aside. The appeal was disposed of.
