Case Law Details
Brief of the Case
Delhi High Court held In the case of Hamdard Laboratories India and Anr vs. ADIT (E) & DGIT (E) that Hamdard‟s objects are charitable in nature and its activities relating to manufacture and sale of unani medicines and other allied businesses are only meant to act as a source of funds for its charitable activities. It is undisputedly a case of a business held in trust, and Hamdard has been consistently applying the proceeds of its activities for charitable purposes.
On the matter of accumulation of profits more than permissible years, this Court finds that the DGIT(E) has misintepreted the provision concerning accumulation of income, third proviso to Section 10(23C) (a), which forms condition (a) in the order granting exemption under Section 10(23C)(iv) dated 28.12.2007. That provision mandates that income accumulated in excess of 15% of the total income should be utilized within five years of the period of accumulation. It does not bar all forms of accumulation. The DGIT (E) has nowhere concluded that Hamdard accumulated in excess of 15% of the income, much less concluding that any amount in excess of 15% accumulated by Hamdard was not utilised within a period of five years of its accumulation. Further, Revenue‟s contention that Hamdard had admitted a certain amount to be deemed income within the meaning of Section 11(3) of the Act does not conclusively determine the issue. It is settled that estoppel does not apply under the Act and the assessee can resile from an incorrect position it had adopted earlier (refer CIT v. Bharat General Reinsurance, 81 ITR 303).
On the matter of violation of condition (b) which deal with invest of funds, mentioned in the order dated 21/08/2013, we found that a perusal of the order dated 22.02.2012 indicates that the Revenue had alleged violation of third proviso to Section 10(23C) of the Act. However, there was no finding on the same. Further, the written submissions filed by Hamdard, including the submissions dated 21.05.2013 relied upon by the Revenue, also do not deal with such allegation. Given these facts, this Court does not have any basis to accept the Revenue‟s contention that this issue was the subject matter of hearing before the DGIT (E). Therefore, the Revenue‟s submission that Hamdard was aware of allegations of violation of this condition does not have any merit. In such circumstances, Revenue cannot rely upon this purported non-compliance for withdrawal of exemption under Section 10(23C)(iv). Also Hamdard has contended that its accumulated surplus is invested in fixed deposits with nationalized banks and therefore, there is no violation of condition (b) imposed in the order of exemption dated 28.12.2007..
On the matter of where the DGIT (E)’s determination that Hamdard violated condition (c) of the order of exemption which was based on its finding that Section 11(4A) of the Act applies to an entity in the nature of Hamdard, we find that there is nothing to indicate that the Court rejected the distinction between a business held under trust and a trust carrying on business for the purposes of Section 11(4A). On the other hand, this Court in Mehta Charitable Prajnalay Trust (2013) 357 ITR 560 was categorical in its ruling that Section 11(4A) of the Act does not apply to a business held under trust. The Court arrived at the said conclusion based on an elaborate discussion of the historical background of Section 11(4A), and the interpretation given by the Supreme Court to an analogous provision (Section 4(3)(ia)) under the 1922 Act. This Court rendered a clear finding in the above terms regarding the exclusion of a business held under trust from the scope of Section 11(4A), that too upon an overall consideration of the decision in Thanthi Trust. So it is clear that, Hamdard‟s failure to maintain separate books of accounts is not fatal to its case, since such an obligation would have existed only in the event of applicability of condition (c). This Court‟s ruling in PHD Chamber of Commerce & Industry (2013) 357 ITR 296 also supports this conclusion
On the matter of applicability of the first proviso to Section 2(15) as Hamdard‟s objects fall within the residual category and its activities are in the nature of business, we find that the interpretation of first proviso put forward by the DGIT(E) would exclude all entities advancing an object of general public utility from the definition of ‘charitable purpose’ if such entities carry on any activity of trade, commerce or business, irrespective of the nature of application of surplus generated from such activity. This unduly broad interpretation has been rejected by this Court in Institute of Chartered Accountants of India [2013] 358 ITR 91, where the Court held that while determining whether an assessee is carrying on business, the dominant purpose test laid down in Surat Art Silk (1980) 121 ITR 1, would continue to apply. As per dominant purpose test when the object of a trust was the carrying on of an object of general public utility, it is that object of general public utility which must not involve the carrying on of an activity for profit. It was pointed out that it was immaterial how the money for achieving or implementing such purpose was found. Whether that money was obtained by the running of an activity for profit or not, did not make the charity not charitable. In the given case, dominant purpose of the assessee is charitable in nature, and it is not guided by the motive of profit-making. Therefore, the first proviso to Section 2(15) does not alter the charitable status of the organization.
Facts of the Case
Hamdard is governed by its constitution dated 28.08.1948, under which the partners of a business known as the “Hamdard Dawakhana” dedicated the said business to charity. Following its objectives, Hamdard claims that it is involved in various secular, charitable, nation building activities and humanitarian objectives; and it is not guided by factors relating to caste, creed or religion. It asserts that it is a pioneer in the development and growth of the Unani system of medicine. Hamdard has set up around 25 medical, educational, literary, scientific and cultural organizations. To carry out its charitable activities, Hamdard created a special purpose vehicle, a registered society for philanthropic purposes, i.e Hamdard National Foundation (HNF) on 12.05.1964. Both Hamdard and HNF are registered under Section 12A read with 12AA of the Act.
In Additional Commissioner of Income Tax v. Hamdard Dawakhana (Wakf), (1986) 157 ITR 639, on examination of Hamdard‟s objects and activities, it was found them to be charitable. Hamdard had been enjoying exemption under Section 10(23C)(iv) of the Act since AY 1984-85. For renewal of the said exemption for AY 2004-2005, Hamdard submitted its application in the prescribed form. The Revenue sought clarifications from Hamdard and upon an examination of the objects, activities and financial records, renewed the exemption under Section 10(23C)(iv) of the Act on 28.12.2007, with effect from AY 2004-2005, subject to certain conditions stipulated in the order dated 28.12.2007. On 14.01.2009, the DGIT(E) issued a show cause notice to Hamdard, for rescinding the exemption order dated 28.12.2007 on the ground that Hamdard had violated terms (a) and (c) of the exemption order. Relying on this order, on 19.04.2012, the AO raised a demand of Rs. 112 crores against Hamdard for AYs 2006-2007 to 2009-2010 and re-opened the assessment proceedings for the AY 2005-2006. Hamdard challenged the order dated before the Court in W.P.(C) 3598 of 2012.The said writ petition was allowed by the Court on 11.04.2013 and the order was quashed. The Court remanded the matter to the DGIT (E) to decide the issue afresh. Thereafter, Hamdard made detailed written submissions before the DGIT (E) on the issue of exemption under Section 10(23C)(iv) of the Act. The DGIT(E), vide its impugned order dated 21.08.2013, again held that Hamdard was not entitled to exemption under the said provision and withdrew it with effect from AY 2004-05.
Contention of the Assessee
Withdrawal of Exemption under Section 10(23C) (iv)
The ld counsel of the assessee urges that the order withdrawing Hamdard‟s exemption under Section 10(23C)(iv) of the Act is erroneous and legally untenable. Hamdard is an established public charity enjoying exemption from tax for the last six decades; including under the 1922 Act. The nature of its activities has remained unchanged since its inception. Hamdard is a business held under trust for charitable purposes, which business is only the corpus of the trust and its source of income and not its object. It has not effected any change in its avowed activities and objects and has not violated any condition of the grant of exemption dated 28.12.2007; the present being merely a case where the Revenue seeks to take a different view on the same set of facts. Further submits that comparing it with a commercial private pharmaceutical company is ill-founded and perverse as in the case of commercial companies the profits and gains are free for distribution amongst shareholders and there is no obligation to apply the same for charitable objects. On the other hand, no part of its income is distributed or is capable of distribution for the private benefit of the mutawallis.
Considerable reliance is placed on the fact that Hamdard has been enjoying exemption from tax for a considerable period of time. Specifically, Hamdard cites this Court‟s decision in Additional Commissioner of Income Tax v. Hamdard Dawakhana (Wakf), [1986] 157 ITR 639, where its objects and the exact nature of its activities have been examined by this Court in detail in light of the Supreme Court‟s decision in ACIT v. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1, and were held to be charitable. It is submitted that this Court in the said decision had also held that Hamdard‟s objects fall within the ambit of the first three heads of charity under Section 2(15) of the Act, viz. “medical relief‟, “education‟ and “relief of the poor‟. It is emphasised that the decision in Hamdard Dawakhana (Wakf) has been consistently applied, followed and affirmed by this Court in a catena of judgments; including the case of Hamdard itself as also in the case of other parties.
As regards HNF, it is submitted that the Assessment order in its case for AY 2007-2008 – by which the AO had rescinded its charitable status was reversed by the CIT (A) on 31.01.2012 and was thus non-est on the date of passing of the impugned order. HNF is a mechanism having the same objects as that of Hamdard and is a beneficiary of donations made by Hamdard, for effectuating the charitable mandate of the the Trust Deed. The grant of a donation by one charitable institution to another, for the purpose of carrying on charitable activities amounts to an application of income for charitable purposes. Hamdard relies on the UK Court of Appeal‟s decision in Inland Revenue Commissioners v. Helen Slater Charitable Trust Ltd., [1980] 3 WLR 157, to say that this view has been followed and relied upon by the Courts in India in, inter alia, CIT v. Sarladevi Sarabhai Trust, [1988] 172 ITR 698 (Guj); CIT v. Nirmala Bakubhai Foundation, [1997] 226 ITR 394 (Guj), CIT v. Hindustan Charity Trust [1983] 139 ITR 913 (Cal), CIT v. M. Ct. Muthiah Chettiar Family Trust, [2000] 245 ITR 400 (Mad.), CIT v. Trustees of the Jadi Trust, [1982] 133 ITR 494 (Bom), CIT v. Shri Ram Memorial Foundation [2004] 26 ITR 35 (Del).
He relies upon Instruction No. 1132 dated 05.01.1978, issued by the CBDT, which states that a charitable trust will not lose exemption under the Act if it passes a sum of money to another charitable trust for utilization by the donee trust towards its charitable purposes, and that it shall be proper utilization of money by the donor trust for charitable purposes. It is further submitted that, since the formation of HNF in 1964, Hamdard has been carrying out its charitable activities through HNF. This has been undisputedly accepted by the Revenue for all these years in granting registration under Section 12A, according approval under Section 10(23C)(iv) and making assessments under Section 143(3) of the Act.
It is urged that the DGIT (E) erroneously surmised that Hamdard did not apply/accumulate its surplus towards its objects in violation of condition (a) of the order of exemption dated 28.12.2007. As correctly observed by the DGIT(E), the manufacture and sale of medicinal products is not the object of Hamdard in terms its Trust Deed. Not only are Hamdard‟s objects charitable but the activities are also charitable, the business being an asset dedicated to charity, and Hamdard utilizes the income generated from the manufacture and sale of Unani and Ayurvedic medicines for the attainment of the charitable objects. The details of accumulation and purpose thereof are a part of the return of income. Accumulation of income for the capital expansion of the asset is indispensable and incidental to put into effect the charitable purpose. No part of the surplus of Hamdard is distributable amongst the sons and grandsons of the Wakif Mutawallis, who are the current mutawallis. Like other employees of Hamdard, the mutawallis are also drawing nominal, fixed salaries.
As regards the investment in the Okhla and Manesar projects, he submits that the purpose and nature of the accumulations for these projects has been consistent since long and has been disclosed to and accepted by the Revenue at every stage. To support this contention, Hamdard relies upon the audited accounts filed by it with the Revenue for the Financial Years 2003-2004, 2004-2005, 2006-2007 and 2007-2008.
He submits that the accumulation of income for legitimate expansion of the activities of Hamard is merely ancillary to the predominant charitable purpose. Further, details of the same have been specifically stated in the documents accompanying the return of income and have been accepted by the Revenue. A genuine, unintentional inability to spend the accumulated amount in a particular assessment year, for reasons beyond its control, cannot result in a permanent and retrospective withdrawal of the approval under Section 10(23C)(iv) of the Act.
He relies on the concurring judgment of Pathak J, in Surat rt Silk Cloth Manufacturers Association (1980) 121 ITR 1 stating that it drew a clear distinction between a charitable purpose on the one hand and the method, mode and powers applied and adopted for the fulfillment of that purpose. Any application/permitted accumulation of the income of Hamdard for the capital expansion and maintenance of the charitable assets is ex-facie indispensable and incidental to the effectuation of the charitable purpose. Furthermore, the period of accumulation provided in clause (a) of the third proviso to Section 10 (23C) of the Act is only five years and the Revenue had no jurisdiction to embark upon an enquiry into accumulations prior to AY 2002-2003; which were incidentally old details not in the possession of Hamdard.
He submits that DGIT(E) fell into error in determining that Hamdard violated clause (b) of the third proviso to Section 10(23C) of the Act by reinvesting in its on going projects; as the said projects are an application of monies for charitable purposes. Further, he submits that Hamdard has made all investments in the specified modes, therefore, the Revenue‟s finding to the contrary is unfounded. No query or show cause, was raised in regard to this aspect of the matter. If the Revenue had issued a show cause regarding the violation of clause (b) of the third proviso to Section 10(23C) of the Act, Hamdard would have relied upon the details of its fixed deposits, being investments in specified modes, to show that the same had increased from Rs.134.45 Crores in AY 2004-2005 to Rs. 419.56 Crores in AY 2012-2013.
He argues that the law laid down by the Supreme Court in CIT v. Thanti Trust, [2001] 247 ITR 985 has been misconstrued by the DGIT (E) in its application to Hamdard‟s case. Hamdard submits that the principle that a business undertaking can also be in the nature of a “property held under a trust”, entitling it to tax exemptions, finds statutory recognition in section 11(4) of the Act. In light of this Court‟s decision in CIT v. Mehta Charitable Prajnalay Trust, (2013) 357 ITR 560 (Del), it is urged that Section 11(4A) is not applicable to Hamdard‟s case, and thus, the DGIT(E) erred in concluding that condition (c) of the order of exemption had been violated.
As regards the amendment in definition of „charitable purpose‟ in Section 2(15) of the Act with effect from 01.04.2009, he relies upon CBDT‟s Circular No.11/2008 dated 19.12.2008, which clarified that the newly inserted proviso to Section 2(15) does not apply in respect of „relief of the poor‟, „education‟ or „medical relief‟. Reliance is also placed on the speech of the Finance Minister relating to the amended definition of „charitable purpose‟, wherein he had stated that it is not meant to apply to genuine charitable organizations. Thus, he submits that the scope, ambit and mischief of the newly introduced proviso is confined only to organisations which come under the fourth category of the definition of “charitable purpose”, namely “advancement of any other object of general public utility” and it is not the intention of the legislature to target institutions engaged in genuine charitable activities. Further, it is contended that this Court in Hamdard Dawakhana (Wakf) has held that Hamdard‟s objects and activities are specifically relatable to and identifiable with the first three heads of charity; and that Hamdard‟s business is a business held under trust and is merely incidental to the effectuation and fulfillment of the charitable purpose. Therefore, given the decision in Dharmadeepti v. CIT, (1978) 3 SCC 499, Hamdard‟s objects cannot be said to fall outside the scope of definition of „charitable purpose‟ in Section 2(15).
Reopening of Assessment Proceedings
He contends that the reopening of assessment proceedings is based merely on a change of opinion on the same set of facts, and thus, the notice of reopening of proceedings and order dismissing Hamdard‟s preliminary objections to such reopening ought to be quashed. Reliance is placed on the decisions in CIT v. Kelvinator of India Ltd., (2002) 256 ITR 1, approved by the Supreme Court in (2010) 320 ITR 561 (SC); BLB Limited v. ACIT, (2012) 343 ITR 129 (Delhi); Atma Ram Properties Pvt. Ltd. v. DCIT, (2012) 343 ITR 141; CIT v. Purolator India Ltd., (2012) 343 ITR 155; Titanor Components Ltd. v. ACIT, (2012) 343 ITR 183; CIT v. Cray Research India Ltd., (2012) 343 ITR 212; and Artech Infosystems (P) Ltd. v. CIT, 206 Taxman 432. Finally, it is stated that the reference to the withdrawal of the notification under Section 10(23C)(iv) of the Act does not justify the reopening and exemption can still be examined under Section 11 of the Act.
Orders dated 10.07.2013 passed by the CIT (A)
He submits that the orders dated 10.07.2013 wrongly record the presence of the authorized counsel for Hamdard, who never attended any proceedings before the second respondent. No such presence is recorded in the order sheets of 28.06.2013 and 08.07.2013. The presence recorded in the order dated 10.07.2013 is contrary to the order sheets dated 28.06.2013 and 08.07.2013. Prior to 28.06.2013, the second Respondent had not even assumed charge of the office of CIT (A). According to him, a valuable right of oral hearing available to it has been rendered nugatory by the second respondent. It is incomphrensible that an appeal which was heard at length by the predecessor of the second Respondent over several months was allegedly “heard” by the second Respondent on one day, and that too in the absence of the counsel.
Contention of the Revenue
Withdrawal of Exemption Under Section 10(23C)(iv)
The ld counsel of the revenue justifies the withdrawal of exemption under Section 10(23C)(iv) of the Act, stating that the impugned order comprehensively deals with all the facts in light of the prevalant position of law. It is stated that Hamdard is engaged purely in business activities and accordingly notification dated 28.12.2007 under Section 10(23C)(iv) for AY 2004-05 onwards has been withdrawn. The assessment records for AY 2006-07 to 2009-10 show that Hamdard is carrying on the business of manufacturing and sale of medicine on commercial scale and donating a part of its surplus to its sister organization – HNF.
The Revenue argues that a bare reading of Section 2(15) reveals that Hamdard‟s purposes are not covered by the definition of „charitable purpose‟ because it engages only in manufacture and sale of Ayurvedic and Unani Medicines like any other organization manufacturing pharmaceutical products. The revenue also urges that Hamdard has enjoyed huge profit margins year after year and generates huge surplus. Therefore, by no stretch of imagination, it contends, can this activity be equated with any charitable organisation.
Revenue disputes that the objects of Hamdard and HNF are identical. While both Hamdard and HNF are registered under Sections 12A read with 12AA of the Act, the objects of Hamdard are commercial in nature, i.e. manufacture and sale of Ayurvedic and Unani Medicines on commercial basis like any other pharmaceutical organization manufacturing medicines – with the sole intention of earning profit.The revenue submits that although Hamdard‟s objects are charitable, its entire activity is of manufacturing and selling medicines, which implies that it is a commercial organization. Transfer of a part of the surplus generated from such activity to a charitable organization (HNF) would not mean that the assessee is also a charitable institution.
In response to Hamdard‟s reliance on this Court‟s decision in Hamdard Dawakhana (Wakf), the Revenue submits that this Court did not minutely analyse Hamdard‟s activities in that case. Since this was done for the first time, it cannot be said that the Revenue has attempted to dislodge a settled position of law. Further, it is submitted that the Court in this case did not find Hamdard‟s activities to be falling within the first three heads of charity under Section 2(15) of the Act; in fact, Hamdard‟s activities fall within the residual category under Section 2(15).
He urges that the DGIT (E) has correctly held that Hamdard violated conditions (a), (b) and (c) of the order granting exemption dated 28.12.2007. Hamdard has accumulated and applied its income towards its business activities – involving manufacture and sale of unani medicines and other allied products. This does not constitute application/accumulation of income towards its objects. Further, Hamdard has accumulated its income in excess of five years, in violation of the second part of condition (a) in the order of exemption. He reiterates that Hamdard has not invested its surplus in accordance with the provisions of Section 11(5) of the Act, as the said provision does not permit investment in business activities. He submits that none of the decisions relied upon by Hamdard deal with a case of investment in business.
As regards condition (c), it is stated that it is an admitted fact that Hamdard has not been maintaining separate books of accounts for its income applied to charitable activities. Hence, there is a blatant violation of condition (c) imposed in the order of exemption as well seventh proviso to Section 10(23C), which disentitles it for the exemption granted by the revenue under the law. Hamdard‟s contention that Section 11(4A) does not apply to businesses held in trust does not hold good in light of the Supreme Court‟s decision in Thanthi Trust.
It is further submitted on behalf of the revenue that Hamdard ceases to be a charitable institution in light of the amended definition of “charitable purpose‟ with effect from 01.04.2009. The first proviso extends to institutions falling within the residual category of “charitable purpose‟ in Section 2(15), including Hamdard, and does away with the test laid down in Surat Art Silk [1980] 121 ITR 1 (SC). Therefore, it is immaterial that Hamdard applies its surplus towards charitable activities. Since it carries on an activity of trade, commerce and business, it ceases to be a charitable organisation with effect from 01.04.2009.
Reopening of Assessment Proceedings
The Revenue’s justification for reopening the assessment proceedings for AY 2005-06 is premised primarily on the withdrawal of Hamdard‟s exemption under Section 10(23C)(iv) of the Act. In addition, it is contended that there was no procedural irregularity in reopening the assessment under Sections 147/148 of the Act.
Orders dated 10.07.2013 passed by the CIT (A)
It is urged that the second Respondent stated that Hamdard was afforded opportunity of hearing and lists the various dates on which hearings were scheduled. It is argued that the hearing in this case commenced on 18.01.2013, and Hamdard requested for adjournment on 30.01.2013, 25.02.2013, 26.03.2013, 11.04.2013 and 28.06.2013. Further, there was no compliance by Hamdard for the hearings scheduled on 30.04.2013 and 28.05.2013. The case was heard only on 04.03.2013 and 07.05.2013 and 08.07.2013. It is incorrect that Hamdard‟s counsel never appeared in the appellate proceedings, as he appeared on 07.05.2013 when the matter was discussed with him. It is contended that that since Hamdard‟s written submissions dated 04.03.2013 and 06.05.2013 were already on record, they were good enough for the said respondent to understand Hamdard‟s submissions, keeping in mind the oral submissions made on the respective hearings. Further, it is incorrect that the orders dated 10.07.2013 do not deal with Hamdard‟s submissions.
Held by High Court
Grounds for withdrawal of exemption under Section 10(23C) (iv)
The contention of the assessee that they are enjoying the same exemption from last many decades, however, is not sound, because the Revenue is entitled to continuously monitor an assessee’s activities and its compliance with the conditions for grant of exemption statutory or otherwise. This has been affirmed by the Supreme Court recently in Queen’s Educational Society v. CIT, (2015) 372 ITR 699 in which it was held that “…the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn.” At the same time, this court recognizes that to the extent there is no change in the facts and circumstances of the case- or the law applicable, the Revenue is bound to follow the principle of consistency (refer Radhaswami Satsang v. CIT, (1992) 193 ITR 321 (SC) and DIT v. Escorts Cardiac Diseases Hospital Society, (2008) 300 ITR 75 (Delhi).
The contention of the revenue on the ground that Hamdard ceases to be a charitable organization w.e.f. 01/04/2009, we found that while examining Hamdard‟s objects, the DGIT(E) noted that its primary mode of expenditure on charitable activities is through HNF, and that its direct expenditure on charitable objects is negligible. It was held that since Hamdard does not have control over the charitable activity of HNF, as it may choose to spend on activities falling within the residual category as opposed to the first three categories of charitable purpose in Section 2(15), Hamdard ought to be classified under the residual category. Hamdard‟s direct charitable activities were held to be insignificant to have a bearing on the determination of its objects. In the opinion of this Court, while the activities of donee trusts may have some relevance for determining the nature of Hamdard‟s objects for the purposes of Section 2(15), the primary basis for such determination must needs be Hamdard‟s trust deed containing its objects.
It was noted that while Hamdard may pursue charitable activities for the advancement of objects of general public utility (owing to the generality of clause 44), clauses 45, 46 and 47 indicates that Hamdard‟s objects fall within the first three categories of „charitable purpose‟ spelt out in Section 2(15), and not in the residual category. Here, this Court relies on the Supreme Court‟s ruling in Dharmadeepti v. CIT, (1978) 3 SCC 499, where the Court construed a general provision concerning charitable object in the trust deed in light of a specific clause.
With regard to HNF‟s objects, this Court finds that they are identical to those of Hamdard, and the Revenue‟s contention to the contrary is without any merit. Textually, HNF‟s objects and „functions‟ would indicate that HNF only has the additional objective of receiving, controlling and supervising the income received from Hamdard and any other body and applying it for the purposes enumerated thereafter, which are identical to clauses 44 to 47 of Hamdard‟s Trust Deed. The fact that they have been classified under two different heads, viz. „objects‟ and „functions‟ is immaterial, as it is only a matter of form and does not alter the manner of application of donations received by HNF. The DGIT (E) itself has held that 36% of HNF‟s direct charity falls within the first three heads of ‘charitable purpose’. As regards the balance 64%, the DGIT (E) erroneously classified scholarship schemes under the head ‘object of general public utility’. However, this Court holds that since scholarship schemes are directed towards incentivizing students to pursue education, it must fall under the category of ‘education’ as opposed the residual category. This determination sufficiently establish that Hamdard‟s objects fall within the head of ‘education’, ‘medical relief’ and ‘relief of the poor’, and not the residual category under Section 2(15).
There is no weightage in the contention of the revenue that donating the surplus to an educational institution would not qualify Hamdard under the category of ‘education’ .In the decisions in Sarladevi Sarabhai Trust [1988] 172 ITR 698 (Guj) and Shri Ram Memorial Foundation [2004] 26 ITR 35 (Del), it is well established that an entity carrying out its chartiable activities through another charitable institution is entitled to exemption under the Act. For instance, a trust may donate its surplus to another trust, which runs and manages an educational institution, or transfers the surplus received to another educational institution. Therefore, if the donee trust is engaged in managing an educational institution, the first trust‟s charitable activity would also fall under the category of ‘education’. The Revenue‟s contention that donation of surplus by Hamdard to HNF which transfers its surplus primarily to Jamia Hamdard University, does not come within the head of ‘education’ is rejected.
Further it was found that the DGIT (E) erroneously drew a distinction between corpus and non-corpus donations made by it to HNF. The resolutions of Hamdard placed on record clearly mandate that the interest income generated from corpus donations was to be utilized for charitable purposes.
On the matter of where the DGIT (E) held that Hamdard accumulated and applied its income towards expansion of its business – and since Hamdard‟s business does not form a part of its objects, it was in violation of condition (a) imposed in the order of exemption dated 28.12.2007, it was found that the Supreme Court in Thanthi Trust (2001) 247 ITR 785 did not discuss the issue of applicability of the test laid down in Surat Art Silk (1980) 121 ITR 1 in light of the insertion of Section 11(4A). The DGIT(E)‟s ruling – that Surat Art Silk is no longer applicable in light of the decision in Thanthi Trust – presupposes, at the least, the applicability of Section 11(4A) to instances of businesses held in trust, such as the instant case (and it was so held by the DGIT(E), in its impugned order). However, this Court (for reasons explained in the section concerning violation of condition (c) below) holds that in light of the decision in CIT v. Mehta Charitable Prajnalay Trust, (2013) 357 ITR 560, Section 11(4A) is not applicable to Hamdard‟s case. Further, the Supreme Court in CIT v. Gujarat Maritime Board, (2007) 295 ITR 561 as well as in its recent decision in Queen‟s Educational Society has also applied the Surat Art Silk test to determine the dominant object of the respective assessees, notwithstanding its earlier pronouncement in Thanthi Trust and the insertion of Section 11(4A).
This Court in Institute of Chartered Accountants of India v. DGIT, [2013] 358 ITR 91 has also held that the dominant object test of Surat Art Silk continues to apply for determining whether an entity carries on business. The reliance placed by the DGIT(E) on CIT v. Dharmodayam, (2001) 116 Taxman 204 is out of place, as the Supreme Court in that case did not hold that the Surat Art Silk test had been rendered obsolete in light of the insertion of Section 11(4A). In light of this overwhelming authority in favour of Hamdard on this issue, this Court has no hesitation in holding that the DGIT(E) erred in holding that the dominant purpose test laid down in Surat Art Silk does not apply in light of the decision in Thanthi Trust and insertion of Section 11(4A). As a result, the DGIT (E)‟s basis for rejecting this Court‟s determination in Hamdard Dawakhana (Wakf) , on the nature of Hamdard‟s objects, does not survive.
This Court in a series of decisions has considered the absence of profit motive to be a vital factor in determining the charitable nature of an entity (refer M/s. GS1 India v. DGIT, [2014] 360 ITR 138; Institute of Chartered Accountants of India v. DGIT, [2013] 358 ITR 91; PHD Chamber of Commerce & Industry v. DIT, (2013) 357 ITR 296). A look at Hamdard‟s Trust Deed and its activities unequivocally establish that they are not guided by profit motive. Indeed, in furtherance of the charitable purpose, Hamdard‟s Trust Deed dated 28.08.1948 was amended on 10.10.1985 with effect from 01.01.1973 to abolish the concept of family income; and all proceeds generated from Hamdard‟s activities are solely in furtherance of its charitable objectives.
The Revenue urges that Hamdard had been enjoying enormous profit margins year after year, generating considerable surplus and consequently, its activities cannot be considered as those of a charitable organisation. However, this submission runs afoul a plethora of Supreme Court decisions, the most recent being Queen‟s Educational Society, where, following the law laid down in Surat Art Silk , Aditanar Educational Society and American Hotel and Lodging Association v. CBDT, (2008) 301 ITR 86, the Court held that merely because an educational institution is generating surplus does not imply that it ceases to enjoy the benefit of exemption under Section 10(23C)(iii-ad) of the Act.
On the matter of whether Hamdard applied and accumulated its surplus towards its objects, this Court finds that the DGIT (E) misconstrued the nature of Hamdard‟s activities, inasmuch as it held them to be in the nature of business. This Court has already held above that Hamdard‟s objects are charitable in nature, and its activities relating to manufacture and sale of unani medicines and other allied businesses are only meant to act as a source of funds for its charitable activities. It is undisputedly a case of a business held in trust, and Hamdard has been consistently applying the proceeds of its activities for charitable purposes.
A Full Bench of this Court in Hakim Abdul Hamid v. CIT, (1973) 90 ITR 203, concerning Hamdard, held that the amount transferred by Hamdard to its Reserve Funds would be exempt from tax under Section 11 if it is applied or finally set apart for charitable or religious purposes.
Further it is found that Hamdard continues to apply its income from its „business‟ activities for charitable purposes in accordance with its Trust Deed. It is baffling that the DGIT(E), on one hand, justified the ruling in Hakim Abdul Hamid on the ground that the reserve fund was to be utilized for Hamdard‟s business whereas on the other hand, withdrew the exemption under Section 10(23C)(iv) of the Act for the reason that Hamdard was applying and accumulating its income for business purposes. The DGIT (E) fell into error in reasoning that in light of the deletion of clauses in the Trust Deed – which obligated Hamdard to utilize the Reserve Fund for business purposes – this Court‟s decision in Hakim Abdul Hamid does not hold any relevance. This Court also notes that the Revenue granted exemption to Hamdard under Section 10(23C)(iv) of the Act vide its order dated 28.12.2007, with complete knowledge of Hamdard‟s activities. It is obvious that Hamdard would be required to invest funds in such activities in order to sustain its charitable purpose. In such circumstances, it is incomphrenesible that the DGIT(E) would construe Hamdard‟s application or accumulation of funds towards its activities, which constitute a part of its objects, as a violation of any of the statutory conditions imposed under Section 10 or Section 11 or those imposed by the order dated 28.12.2007.
In light of the above, this Court holds that the decision in Abul Kalam Azad Islamic Awakening 2013 VAD (Delhi) 44, where it was held the application of income derived from investment in commercial property to be the determining factor, is squarely applicable. Here, too, Hamdard, in accordance with its Trust Deed, has been applying and accumulating its income from business activities for charitable purposes. Hamdard has rightly placed reliance on this Court‟s decision in DIT v. Eternal Science of Man‟s Society, (2007) 290 ITR 535, where the Court allowed acquisition of moveable and immoveable property if it achieved the objects of a charitable trust. Therefore, this Court holds that Hamdard did not fail to apply or accumulate its income/surplus towards its objects.
On the matter of accumulation of profits more than permissible years, this Court finds that the DGIT(E) has misintepreted the provision concerning accumulation of income, third proviso to Section 10(23C) (a), which forms condition (a) in the order granting exemption under Section 10(23C)(iv) dated 28.12.2007. That provision mandates that income accumulated in excess of 15% of the total income should be utilized within five years of the period of accumulation. It does not bar all forms of accumulation. The DGIT (E) has nowhere concluded that Hamdard accumulated in excess of 15% of the income, much less concluding that any amount in excess of 15% accumulated by Hamdard was not utilised within a period of five years of its accumulation. Further, Revenue‟s contention that Hamdard had admitted a certain amount to be deemed income within the meaning of Section 11(3) of the Act does not conclusively determine the issue. It is settled that estoppel does not apply under the Act and the assessee can resile from an incorrect position it had adopted earlier (refer CIT v. Bharat General Reinsurance, 81 ITR 303).
On the matter of violation of condition (b) which deal with invest of funds, mentioned in the order dated 21/08/2013, we found that a perusal of the order dated 22.02.2012 indicates that the Revenue had alleged violation of third proviso to Section 10(23C) of the Act. However, there was no finding on the same. Further, the written submissions filed by Hamdard, including the submissions dated 21.05.2013 relied upon by the Revenue, also do not deal with such allegation. Given these facts, this Court does not have any basis to accept the Revenue‟s contention that this issue was the subject matter of hearing before the DGIT (E). Therefore, the Revenue‟s submission that Hamdard was aware of allegations of violation of this condition does not have any merit. In such circumstances, Revenue cannot rely upon this purported non-compliance for withdrawal of exemption under Section 10(23C)(iv). Also Hamdard has contended that its accumulated surplus is invested in fixed deposits with nationalized banks and therefore, there is no violation of condition (b) imposed in the order of exemption dated 28.12.2007. However, in the absence of this fact having been examined by the DGIT(E), this Court cannot determine the veracity of the same at first instance.
On the matter of where the DGIT (E)’s determination that Hamdard violated condition (c) of the order of exemption which was based on its finding that Section 11(4A) of the Act applies to an entity in the nature of Hamdard, we find that given the similarity in the phraseology of Section 11(4A) and the seventh proviso to Section 10(23C)/condition (c), the DGIT(E)‟s approach of applying the principles of interpretation of the former provision for interpreting the applicability of the latter cannot be faulted with. Therefore, if Section 11(4A) were held to be applicable to Hamdard, so would condition (c)/seventh proviso, and vice-versa. As a corollary, if the nature of Hamdard‟s activities were such that no compliance with Section 11(4A) was required, the issue of violation of Section 11(4A) or condition (c) or the seventh proviso to Section 10(23C)(iv) would not arise.
There is nothing to indicate that the Court rejected the distinction between a business held under trust and a trust carrying on business for the purposes of Section 11(4A). On the other hand, this Court in Mehta Charitable Prajnalay Trust (2013) 357 ITR 560 was categorical in its ruling that Section 11(4A) of the Act does not apply to a business held under trust. The Court arrived at the said conclusion based on an elaborate discussion of the historical background of Section 11(4A), and the interpretation given by the Supreme Court to an analogous provision (Section 4(3)(ia)) under the 1922 Act. This Court rendered a clear finding in the above terms regarding the exclusion of a business held under trust from the scope of Section 11(4A), that too upon an overall consideration of the decision in Thanthi Trust. In such circumstances, we hold that the DGIT(E)‟s refusal to follow Mehta Charitable Prajnalay Trust is erroneous. The distinction drawn by the DGIT(E) on facts, viz. that in Mehta Charitable Prajnalay Trust the business was not held in trust, which is admittedly the case herein, is immaterial, given that the Court‟s ruling therein was on the precise issue which fell for determination before the DGIT(E) in the instant case. Therefore, Section 11(4A), and consequently, condition (c) and the seventh proviso to Section 10(23C) are not applicable in Hamdard‟s case.
So it is clear that, Hamdard‟s failure to maintain separate books of accounts is not fatal to its case, since such an obligation would have existed only in the event of applicability of condition (c). This Court‟s ruling in PHD Chamber of Commerce & Industry (2013) 357 ITR 296 also supports this conclusion
On the matter of where the DGIT(E) held that the first proviso to Section 2(15) squarely applies in Hamdard‟s case, as Hamdard‟s objects fall within the residual category and its activities are in the nature of business, we find that the interpretation of first proviso put forward by the DGIT(E) would exclude all entities advancing an object of general public utility from the definition of „charitable purpose‟ if such entities carry on any activity of trade, commerce or business, irrespective of the nature of application of surplus generated from such activity. This unduly broad interpretation has been rejected by this Court in Institute of Chartered Accountants of India, where the Court held that while determining whether an assessee is carrying on business, the dominant purpose test laid down in Surat Art Silk , albeit in a different context, would continue to apply. More recently, this Court in India Trade Promotion Organization v. Director General of Income-tax (Exemptions), [2015] 371 ITR 333, while adjudicating upon the constitutional validity of the first proviso to Section 2(15), read down the said proviso when applied in the context of Section 10(23C)(iv) and reiterated the dominant purpose test discussed in Institute of Chartered Accountants of India.
This Court has already held above that Hamdard‟s dominant purpose is charitable in nature, and it is not guided by the motive of profit-making. Therefore, the first proviso to Section 2(15) does not alter the charitable status of the organisation. This outcome is also in consonance with the rationale for the insertion of first proviso to Section 2(15), which was noted by this Court in M/s. GS1 India v. DGIT, [2014] 360 ITR 138, citing a CBDT Circular of 2008.
It has thus been established that Hamdard is by no means a mask or a device to conceal any income generated from any of its activities.
Reopening of Assessment Proceedings
W.P.(C) 3599 of 2012
It is not disputed that an order of assessment under Section 143(3) of the Act was passed for AY 2005-06 on 21.03.2007 and the assessment proceedings for AY 2005-06 have been re-opened after the expiry of four years prescribed in the first proviso to Section 147. According to the first proviso, re-opening of assessment beyond this stipulated time-period is permissible only if: a) the assessee has failed to file a return under Section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148; or b) to disclose fully and truly all material facts necessary for assessment. The former does not concern this case. As regards the latter, the ADIT(E) in the order dated 25.05.2012 dismissed Hamdard‟s preliminary objections to reopening of assessment on account of its failure to disclose all material facts, besides the withdrawal of exemption under Section 10(23C)(iv) of the Act. The order dated 16.04.2012, while noting that Hamdard‟s surplus to the tune of Rs. 25,23,36,930/- may have escaped assessment, does not state that the said conclusion was being arrived at based on new facts discovered by the ADIT(E). Indeed, the letters dated 01.02.2007, 20.02.2007 and 12.03.2007 placed on record by Hamdard demonstrate that all information sought by the ADIT(E) in the letter dated 17.01.2007 was provided by it, specifically details regarding the surplus for past 10 years, along with the audited balance sheet and profit and loss account for FYs 2002-03 and 2003-04. In the order dated 25.05.2012, besides a general reference to Hamdard‟s alleged failure to disclose all material facts, there is no reference to the particular facts which have not been disclosed. In such circumstances, this Court holds that the pre-condition for reopening of assessment after the expiry of four years has not been met in this case.
Even on the merits of the reasons provided by the ADIT(E) for the reopening of assessment proceedings, contained in the orders dated 16.04.2012 and 25.05.2012, the Revenue‟s case does not succeed. It is evident from these orders that the reopening of assessment was premised on the withdrawal of Hamdard‟s exemption under Section 10(23C)(iv) of the Act by the CIT(A)‟s order dated 22.02.2012. Indeed, owing to withdrawal of exemption the ADIT(E) refused to rely on the precedent cited by Hamdard. The order dated 22.02.2012 withdrawing the exemption has been set aside by this Court on 11.04.2012 in W.P.(C) 3598/2012. Even the subsequent order dated 28.07.2013, withdrawing the exemption under Section 10(23C)(iv), has been set aside in W.P.(C) 5711 of 2013 above. The reasons for reopening of assessment stated in the orders dated 16.04.2012 and 25.05.2012 are identical to those contained in the order dated 28.07.2013. Therefore, in light of this Court‟s order in W.P.(C) 5711 of 2013, the basis for re-opening of assessment proceedings for AY 2005-06 does not survive. Consequently, the notice of reopening dated 27.03.2012 and orders dated 16.04.2012 and 25.05.2012 passed by the ADIT(E) are hereby quashed.
Orders dated 10.07.2013 passed by the CIT (A)
WP (C) Nos. 5715, 5716, 5718 and 5729 of 2013
This Court holds that the second Respondent, acting as the CIT(A), has passed the impugned orders dated 10.07.2013 in violation of the principles of the natural justice, without having given Hamdard an opportunity of presenting its case and having failed to consider Hamdard‟s written submissions in the impugned orders. The Supreme Court in G. Nageswara Rao 1959 SC 308 held in unequivocal terms and dismissed the notion that an authority that decides a dispute may be different from the one that heard the same. The material on record establishes that the CIT (A), the second Respondent in the four writ petitions herein, assumed charge on 28.06.2013 and the submissions by Hamdard were made prior to the said date before the second Respondent‟s predecessor. There is no dispute regarding the fact that second Respondent did not hear the matter on 28.06.2013. As regards the scheduled hearing on 08.07.2013, Hamdard contends that no such hearing took place on the said date whereas the second Respondent contends that Hamdard‟s counsel – Mr. R.M. Mehta – made submissions on that date. Hamdard has placed on record letters dated 19.07.2013 and 04.09.2013 wherein the second Respondent was urged to clarify that Hamdard‟s counsel did not appear before the second Respondent on 08.07.2013.
Further, a perusal of the impugned orders dated 10.07.2013 would indicate that the second Respondent has omitted to consider Hamdard‟s submissions filed before the second Respondent‟s predecessor on 04.03.2013 and 06.05.2013. Indeed, this Court‟s order dated 11.04.2012 in W.P.(C) 3598 of 2012, whereby it set aside the order of withdrawal of Hamdard‟s exemption under Section 10 (23C)(iv) dated 22.02.2012, does not even find mention in the four impugned orders, notwithstanding that this fact was highlighted by Hamdard in its written submissions dated 06.05.2013. The case law cited by Hamdard in its written submissions of the said date also do not find any mention in the impugned orders. This Court cannot go into the propriety of Hamdard‟s submission that the second Respondent got orders dated 28.06.2013 and 08.07.2013 signed by Hamdard‟s representative on a false pretext. However, the other facts discussed above are sufficient to establish that the second Respondent violated principles of natural justice in passing the impugned orders. The charitable status of Hamdard under Section 2(15) has been affirmed in W.P.(C) 5711 of 2013 above. For this reason as well, the impugned orders dated 10.07.2013 concerning AYs 2006-07 to 2009-10 are set aside.
Accordingly, all appeals of the assessee allowed.
