No exemption u/s 10(23C) if institution exists apparently for philanthropic purpose and in reality for profits

Brief about the case

The Assessee was registered under the Societies’ Registration Act, 1860 with its main objects to relieve persons suffering from disease or illhealth or requiring medical aid by establishing, constructing and maintaining or assisting Charitable Dispensaries, Hospitals, Convalescent Homes, Sanitoria and Maternity Homes etc. The provisions of section 10 (23C) (via) of the Act became applicable to the petitioner with effect from A.Y.2009-10 as its annual receipts exceeded rupees one crore. The assessee, therefore, made an application in accordance with the Income Tax Rules seeking approval under the said provisions for the said exception. However, the respondent rejected the application on the basis of drastic increase observed in the development fund, cash & bank balances and fixed assets which in the opinion of the respondent indicates that the assessee’s hospital earns substantial profits from its basic operations and utilized only a meager amount on the weaker sections of society, thereby not fulfilling the primary requirement for seeking exemption.

Facts of the case:

• The assessee trust, had applied for grant of approval u/s 10(23C) as it was running a hospital with its main objects being the provision of healthcare facilities and establishing, constructing and maintaining charitable hospitals, dispensaries, convalescent homes, sanitoria and maternity homes, etc
• The Chief Commissioner noticed that the existence of the trust was ostensibly for philanthropic purpose and in reality for profit as it reflected from the extravagant balances of the development fund, cash & bank balances and fixed assets.
• There was a huge increase in fixed assets from Rs.63.75 lacs in A.Y. 2006-07 to Rs.8.02 crores in A.Y. 2009-10 which was an increase of approximately Rupees 7.5 crores within four years;
• Cash and bank balances had also increased from Rs.1.42 lacs to Rs.1.74 crores during the same period which was an increase of about Rs.1.30 crores;
• Generation of surplus along with transfer of the amount to the development fund clearly indicated a systematic method of earning profit which are put to use for increasing its capacity to generate more income;
• The primary condition for availing exemption u/s 10(23C) (via) requires the hospital to exist solely for philanthropic purposes and not for profit motive. This primary condition not being fulfilled by the assessee trust, the application was thereby rejected and on writ the plea was dismissed.

Contention of the Revenue

• The contention of the revenue was 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.
• The figures of concessional treatment clearly indicate that the assessee had spent meagre amount on the weaker section of the society which negatives its contention that it is existing solely for philanthropic purpose and not for profit.
• The Revenue relied on the decision of the Supreme Court in S.H.Medical Centre Hospital vs State of Kerala & ors (supra). 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 the assessee’s case although the Memorandum of association reflects that its established for philanthropic purpose but the actual conduct of the institution is required to be seen for the grant of exemption.
• Further reliance was placed on the observations of the Supreme Court in the case of Aditanar Educational Institution (supra) which is squarely applicable to the issue in hand.

Contention of the Assessee

• The assessee asserted that the exemption for the earlier years since establishment of the institution was provided by the authorities on the basis of the fact that the hospital existed for philanthropic purposes only.
• The surplus earned by the assessee was ploughed back for acquisition of capital assets for hospital and for acquisition of land at Thane which was for establishing a new hospital and a medical research centre. The figures for A.Y.2006-07 to 2009-10 showed that the petitioner had no deficits in running its hospital for these Assessment years and that there was nominal surplus at the said Assessment years from medical store activity.
  

Held by High Court

• The alarming figures of large surplus as generated by the assessee and the utilization of those surplus for acquisition of assets would speak against the assessee existing solely for philanthropic purpose and not for profit. This would disentitle the assessee to the benefit of section 10(23C)(via). If the assessee 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 assessee to achieve such a huge surplus and the consequent enabling of the assessee to utilize such surplus funds to generate assets. The material as placed on record do not show that the application of the assessee under section 10(23C)(via) is inappropriately and arbitrarily rejected.
• The writ petition does not call for any interference of this Court and is accordingly dismissed.