Failure of CIT(E) to examine aspects as directed by High Court unjustified

Shushrusha Citizens Vs CIT (ITAT Mumbai)

ITAT Mumbai held that CIT(E) failed to examine the aspects as directed by the High Court in the matter of application for registration under section 10(23C)(via). Accordingly, matter restored back to CIT(E).

Facts- The assessee is a co-operative society formed under the Maharashtra Co-operative Societies Act, 1960, and was granted registration on 01/09/1964. The assessee was formed to give members of the society and citizens better medical facilities at reasonable charges and provide decent hospital facilities, dispensaries, and other up-to-date scientific medical and surgical amenities. The assessee has also been registered under section 12A of the Act since 28/12/1988, as well as section 80G of the Act, which registration is continuing to be in force. As per the assessee, it is running a hospital providing medical facilities at subsidised rates. The assessee enjoyed the benefit u/s. 10(22A) of the Act and in the past, applications made by the assessee u/s. 10(23C) of the Act were also accepted.

The assessee filed an application for registration u/s. 10(23C)(via) of the Act, which was rejected vide order dated 30/03/2011, holding that the assessee does not satisfy the conditions laid down u/s. 10(23C)(via) of the Act of existing solely for philanthropic purposes and not for the purposes of profit, as surplus year after year are generated out of the systematic activity of profit-making and therefore the assessee is running the hospital for the purpose of profit.

Conclusion- Held that the learned CIT(E) did not analyse all the submissions made by the assessee in light of the various aspects highlighted by the Hon’ble High Court. It is pertinent to note that the matter was restored for the consideration of assessee’s application for registration under section 10(23C)(via) of the Act and the Hon’ble High Court directed the assessee to furnish the information/details regarding the aspects as highlighted in para 17-22 of its judgment. However, the learned CIT(E) without examining all these aspects, as directed by the Hon’ble High Court, has reiterated its findings regarding the non-earmarking of any beds for indigent and weaker sections, which as noted above was held to be not a correct test by the Hon’ble High Court. We find that the learned CIT(E) did not examine all the information as noted on pages 6-9 of the impugned order while rejecting the assessee’s application for registration under section 10(23C)(via) of the Act. Therefore, since the directions of the Hon’ble High Court have not been complied with by the learned CIT(E), we deem it appropriate to restore this issue to the file of the learned CIT(E) for de novo adjudication as per the directions of the Hon’ble High Court vide judgment dated 6^th and 7^th December 2017 passed in Writ Petition No. 949 of 2011. Accordingly, the impugned order passed by the learned CIT(E) is set aside and the sole ground raised by the assessee is allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dated 06/07/2018 passed under section 10(23C)(via) of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Exemptions), Mumbai, [“learned CIT(E)”], pursuant to the judgment dated 6th and 7^th December 2017 passed by the Hon’ble jurisdictional High Court in assessee’s Writ Petition, being W.P. No. 949 of 2011.

2. The sole ground raised by the assessee, in the present appeal, is reproduced as under:-

“The learned CIT(E) erred on facts and in law in passing the impugned order dated 6^th July 2018, under section 10(23C)(via) of the Income–tax Act, 1961 (the ”Act”) rejecting the Appellant’s application for continuation of registration under the section 10(23C)(via) of the Act.

The appellant crave to add, amend, modify and delete any of the above grounds at the time or before the time of hearing.”

3. The only dispute raised by the assessee is against the rejection of its application for continuation of registration under section 10(23C)(via) of the Act.

4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case pertaining, as emanating from the record, are that the assessee is a co-operative society formed under the Maharashtra Co-operative Societies Act, 1960, and was granted registration on 01/09/1964. The assessee was formed to give members of the society and citizens better medical facilities at reasonable charges and provide decent hospital facilities, dispensaries, and other up-to-date scientific medical and surgical amenities. The assessee has also been registered under section 12A of the Act since 28/12/1988, as well as section 80G of the Act, which registration is continuing to be in force. As per the assessee, it is running a hospital providing medical facilities at subsidised rates. The assessee enjoyed the benefit under section 10(22A) of the Act and in the past, applications made by the assessee under section 10(23C) of the Act were also accepted. The assessee filed an application for registration under section 10(23C)(via) of the Act, which was rejected vide order dated 30/03/2011, holding that the assessee does not satisfy the conditions laid down under section 10(23C)(via) of the Act of existing solely for philanthropic purposes and not for the purposes of profit, as surplus year after year are generated out of the systematic activity of profit-making and therefore the assessee is running the hospital for the purpose of profit.

5. Being aggrieved, the assessee filed a writ petition, being W.P. No. 949 of 2011, before the Hon’ble jurisdictional High Court challenging the order dated 30/03/2011, rejecting assessee’s application filed under section 10(23C)(via) of the Act. The Hon’ble jurisdictional High Court vide order dated 6^th and 7th December 2017 quashed the aforesaid order dated 30/03/2011, whereby the assessee’s application for registration under section 10(23C)(via) of the Act was rejected. The Hon’ble High Court held that merely because a hospital or institution is getting a profit, that by itself will not attract disqualification and it will attract disqualification only if the hospital or institution exists for the purpose of gaining profit. The Hon’ble High Court held that if the object of the assessee is to set up a decent hospital for providing medical facilities and medical help at a reasonable charge and for providing medical facilities to the needy and poor free of charge or at subsidised rates, it is necessary for the assessee to engage trained staff and medical practitioners, for which the professionals or other persons, who rendered services, have to be paid honorarium. The Hon’ble High Court also found that there is nothing wrong if the bonus is paid to the members of the staff, as the staff and other members as well as medical practitioners are not expected to work with the assessee on a charitable basis if a decent hospital is to be maintained and good facilities are to be provided for the patients. The Hon’ble High Court further noted that it is not the case of the Revenue that the surplus which is generated was diverted to any non-charitable activity. The Hon’ble High Court, however, found that there are certain aspects which require further examination and accordingly remitted the matter for fresh consideration of the application for registration filed by the assessee under section 10(23C)(via) of the Act, by observing as under:-

“17 There is one more adverse finding which is recorded against the petitioner. The said adverse finding is that there is no system prevailing of reserving beds for poor or indigent patients. The issue to be addressed was whether the petitioner is providing medical treatment or facilities at nominal charge or free of any charge to a patient belonging to economically weaker section visiting the hospital. Therefore, the test applied of keeping specific number of beds reserved weaker section of the society is for economically not correct at all. Another aspect which is considered by the first respondent is that the amounts spent by patients belonging to economically weaker societies was on an average only 0.93% of the total receipts for the last 4 years. In our view, this by itself is not sufficient to hold that the character of activities carried out by the petitioner indicates that the object was to earn profit. In fact it was necessary for the first respondent to look into the entire record for ascertaining the income received by the petitioner from the beds/rooms provided in the hospital. to have It was necessary for the first respondent ascertained as to how many patients, treatment was rendered either free of cost or at a concessional rate. One of the factors which ought to have to be considered is as to how many non- members were given treatment at a concessional rate.

18. The learned counsel appearing for the petitioner submitted that any non­member before taking treatment from the hospital is entitled to become a member. If there are cases where such non- members treatment have at become members and concessional rate, have received it will be a a factor to be considered in favour of the petitioner. Merely going by percentage of receipts spent on giving medical treatment to economically weaker section patients may not be a full proof test. On this aspect, we find that the petitioner has not produced respondent. relevant details before the first It is true that it was the duty of the petitioner to produce the details. However, it appears that virtually it is an admitted position that till the year for which the application was made, the petitioner was granted benefit of exemption. On this aspect, the case of the petitioner needs reconsideration at the hands of the first respondent.

19. Lastly, one factor which is considered against the petitioner is on the basis of letter dated 16th March, 2011 submitted by the petitioner to the Income Tax officer. In paragraph 2 of the said letter, the petitioner has stated thus:-

“The hospital has provided small cabins with patient examination tables in the out patients department for consultants. The hospital has got control over the fees charged to the patients. Consultation fees and visits fees charged to patients are fixed by the hospital. Procedure Charges and Surgery Charges are negotiable to non- member patients admitted in Room Category only. These fees are collected by hospital and payable to doctors after deducting affiliation charges @ 10% p.m. through ECS. Negotiable fees are paid in the subsequent month and non- negotiable fees are paid after 3 months. Fees for the patients referred by institutions are paid in subsequent month from the date of collection from Institutions.”

20. Perhaps, the details such as number of patients including non-member patients admitted in the category of said rooms, the amounts charged to them by the doctors and the amounts received by the petitioner were not Relying placed upon on record by this statement, the in paragraph 6.4, the first respondent has recorded the following finding:-

“From the details filed it is found that the total number of beds available in the hospital in the general ward is 55, neo nata 4, pediatric 4 and ICU 17. However, as submitted, there is no system of reserving beds for the indigent/economically weaker patients. There are 56 beds in different rooms, wherein the higher class of patients can get admitted. Although the hospital exercises control over the fees for patients in the ward, as mentioned above, there is no control whatsoever over patients referred by consulting doctors or patients who get admitted to rooms and the same is negotiable between the patient and the doctor. The same is the case in respect of surgeon fees also. The hospital has no control over such fees charged by the doctors. There is no cap prescribed by the hospital over the fees charged by the doctors. It is also an admitted fact that a percentage of fees is retained by the hospital from the doctors as affiliation charges. Where patients are compelled to negotiate with the doctors independently and the doctors are free to charge any amount as fees on which the hospital has no control and rather a percentage of such fees is received back by the hospital the trust cannot be said to be existing solely for the philanthropic purposes in a scenario where profits are systematic and continuous.”

21. Firstly, we may note it is not the case of the petitioner that the room charges or bed charges are negotiable. What is set out by the petitioner in the said letter is that in case of non-member patients admitted to rooms, the consultants or doctors are permitted to negotiate with the patients for fixing the procedure / surgery charges. In paragraph 2 of the letter, the specific case of the petitioner was that liberty is granted to the doctors to negotiate with the patients for fixing the procedure charges and surgery charges and not in respect of room charges. In fact 10% of the negotiated charges are taken by the petitioner. The negotiated amount of fees is collected by the petitioner. After deducting 10% affiliation charges, remaining amount is sent to the doctors through ECS. If in a particular year, very large number of such patients are treated, it is a different matter. If in a given year, only few such cases are entertained d) by the petitioner, it will not militate against the character of the activities of the petitioner. this aspect neither the petitioner has On placed details on record nor the first respondent called upon the petitioner to produce the details.

22. Therefore, in our view, all grounds which are held against the petitioner, except the two grounds held against the petitioner set out in paragraphs 17 to 22 above, have no basis and on those grounds, the claim of the petitioner could not have been rejected. However, on the two grounds set out in paragraphs 18 to 22 above, the case will have to be remitted to the first respondent for reconsideration with liberty to the petitioner to produce all the material before the first respondent as indicated in the body of the judgment.

23. Therefore, the petition must succeed in part and we pass the following order:–

(i) The impugned order dated 30^th March, 2011 is quashed and set aside and the petitioner’s application is remitted for fresh consideration to the first respondent confined to the aspects/findings referred in paragraph 17 to 22 above;

(ii) It will be open for the petitioner to produce records/additional additional documents before materials/the first respondent within a period of one month from the date of judgment and order be uploaded;

(iii) After considering the additional material and after giving an opportunity of 200 being heard to respondent shall the petitioner, the first pass a fresh order within a period of 4 months from the date on which this order is uploaded;

(iv) All contentions of the parties on merits are kept open to the above extent;

(v) Rule is made absolute on above terms.

(vi) All concerned to act authenticated copy of the judgment.”

6. Thus, from the above, it is evident that the Hon’ble High Court directed the Revenue to consider, inter-alia, the following aspects:-

(a) Whether the assessee is providing medical treatment or facilities at a nominal charge or free of any charge to a patient belonging to an economically weaker section visiting the hospital. Thus, the adverse inference drawn by the Revenue on the basis that there is no system prevailing of reserving beds for poor or indigent persons was held to be not correct at all.

(b) It is necessary for the Revenue to look into the entire record for ascertaining the income received by the assessee from beds/rooms provided in the hospitals. Further, it is to be examined as to how many non-members were given treatment at a concessional rate.

(c) As regards the 10% of the negotiated charges retained by the assessee from the payment made by the non-member patients admitted to the rooms, wherein the consultants or doctors are permitted to negotiate the procedure/surgery charges, the Hon’ble High Court held that if in a given year only a few such cases are entertained by the assessee, it will not militate against the character of the activities of the assessee.

7. Since on the aforesaid issues, inter-alia, neither the assessee has filed details on record nor the Revenue had called upon the assessee to produce the details, the Hon’ble High Court restored the matter for fresh consideration of assessee’s application for registration under section 10(23C)(via) of the Act.

8. We find that pursuant to the remand by the Hon’ble High Court, the assessee submitted the following information to the learned CIT(E), as noted from pages 6-9 of the impugned order:-

• Details of non-member who became members
• Details of indoor concession given to member and non-member patient
• Details of total no. of patients admitted year-wise
• Total amount collected from patients
• Details availing discounts offered for poor patients
• Details availing discount offered for indigent patients
• Admission of patients under negotiable and non-negotiable categories
• Details of surgeries done
• Details of occupation of beds
• Details regarding indigent patient fund

9. We find that the learned CIT(E), vide impugned order, by referring to the guidelines issued by the Charity Commissioner for charitable hospitals held that the assessee was not following any of these conditions prior to the order rejecting the assessee’s application under section 10(23C)(via) of the Act was passed. The learned CIT(E) further held that even after that, the main condition of earmarking 10% of the total no. of operational beds for indigent patients in providing medical treatment to the indigent patients free of cost and reserve and earmark 10% of the total no. of operational beds at a concessional rate to the weaker section patients is not met at all, while there are serious violations of the other conditions laid down by the Charity Commissioner. The learned CIT(E), vide impugned order, held that till the order dated 30/03/2011, which was set aside by the Hon’ble High Court, the no. of indigent patients admitted by the assessee was nil, while the average percentage of poor patients admitted is also only around 2.2%. The learned CIT(E) further held that no indigent patient fund was created prior to the order dated 30/03/2011 rejecting the application of the assessee under section 10(23C)(via) of the Act and subsequently also more than 50% of the said fund remained unutilised. The learned CIT(E) further held that the percentage of total no. of patients admitted in the negotiable category varies from 27% to 32% which cannot be said to be a small number. Accordingly, the learned CIT(E), again rejecting the application filed by the assessee under section 10(23C)(via) of the Act, held that the assessee is not existing solely for philanthropic purposes and even if only the profit of the assessee is not taken as the sole criteria for deciding the applicability of the provisions of section 10(23C)(via) of the Act, it is not a fit case for granting registration under section 10(23C)(via) of the Act.

10. Upon perusal of the impugned order passed by the learned CIT(E), we find that the learned CIT(E) did not analyse all the submissions made by the assessee in light of the various aspects highlighted by the Hon’ble High Court. It is pertinent to note that the matter was restored for the consideration of assessee’s application for registration under section 10(23C)(via) of the Act and the Hon’ble High Court directed the assessee to furnish the information/details regarding the aspects as highlighted in para 17-22 of its judgment. However, the learned CIT(E) without examining all these aspects, as directed by the Hon’ble High Court, has reiterated its findings regarding the non-earmarking of any beds for indigent and weaker sections, which as noted above was held to be not a correct test by the Hon’ble High Court. We find that the learned CIT(E) did not examine all the information as noted on pages 6-9 of the impugned order while rejecting the assessee’s application for registration under section 10(23C)(via) of the Act. Therefore, since the directions of the Hon’ble High Court have not been complied with by the learned CIT(E), we deem it appropriate to restore this issue to the file of the learned CIT(E) for de novo adjudication as per the directions of the Hon’ble High Court vide judgment dated 6^th and 7^th December 2017 passed in Writ Petition No. 949 of 2011. Accordingly, the impugned order passed by the learned CIT(E) is set aside and the sole ground raised by the assessee is allowed for statistical purposes.

11. In the result, the appeal by the assessee is allowed for statistical purposes.

Order pronounced in the open Court on 01/08/2023