By TIOL News Service

MUMBAI, MAR 18, 2015: THE issue before the Bench is - Whether achieving of huge surplus and the consequent utilization of such surplus funds to generate assets, is sufficient to draw an inference that the institution does not solely exist for philanthropic purposes. YES is the answer.

Facts of the case

The assessee was registered as a Public Trust under the Bombay Public Trust Act, 1950. The objective of the assessee in its Memorandum and Articles of Association was to relieve persons suffering from disease or ill health or requiring medical aid by establishing, constructing and maintaining or assisting charitable dispensaries, hospitals, convalescent homes, sanitoria and maternity homes. In the meantime, Clause (22A) was inserted u/s 10 w.e.f 1st Apr, 1970 so as to exclude income inter alia of a hospital offering service for treatment as provided therein. Accordingly, for the period between 1970-71 to 1998-99 the assessee was allowed exemption u/s 10(22A). For the A.Y 1989-90, the Tribunal after examining the issue as to whether the provisions of section 10(22) were applicable to the assessee which was running a hospital, answered in favour of the assessee by observing that the assessee trust existed for philanthropic purposes. On appeal, the order of Tribunal was upheld by this court. Subsequently, w.e.f 1st Apr, 1999 Clause (22A) was deleted and section 10 (23C) (iiiae) was inserted and was made applicable inter alia to a hospital not covered by Section 10 (23C) having annual receipts of less than Rs.1 crore. Beginning with A.Ys. 1999-00, up to the A.Y. 2008-09 the assessee was granted exemption u/s 10(23C) (iiiae). Later on, the provisions of section 10(23C) (via) became applicable to the assessee A.Y.2009-10 as its annual receipts exceeded rupees one crore. The assessee, therefore, made an application to the CIT in Form No.56D as prescribed under Rule 2CA seeking approval under the said provisions for the A.Y.2009-10. On examining the material, the CIT called upon the assessee to show cause as to how its activities could be said to be carried out for philanthropic purposes and not for earning profits. This show cause was issued on the basis of annual accounts furnished by the assessee which showed increase of development fund, cash/bank balances and fixed assets. The assessee's Chartered Accountant informed that the surplus earned by the hospital was utilized for incurring capital expenditure for the hospital and also for the acquisition of land at Thane for the purpose of establishing a new hospital and medical research centre. The CIT however, rejected the application refusing to grant approval u/s 10(23C)(via) for A.Y.2009-10 on the ground that the assessee had failed to fulfill primary requirement for granting exemption under the said section, as the increase in asset base along with generation of surplus show that there was systematic generation of profits from the activities of the trust and the increase in assets has helped the assessee to generate more income and thereby earn more profits.

Having heard the parties, the High Court held that,

++ the issue which has arisen for our consideration is, whether the decision of the CIT holding that the assessee is not entitled for an approval u/s 10(23C)(via), is legal and valid. A plain reading of section 10(23C)(via) makes it clear that the legislature has categorised for deduction income of those institutions which "exist solely" for philanthropic purpose with a further stipulation that they would exist "not for the purpose of profit". The first proviso to this subsection requires an assessee to make an application in a prescribed form to the prescribed authority for the purpose of grant of exemption or continuance thereof. The second proviso provides that the prescribed authority before granting an approval may call for such documents, including audited annual accounts or information and as it may think necessary in order to satisfy itself about the genuineness of activities of such a trust or fund and may make such inquiries as may deem necessary in that behalf. It is the further requirement of the provision that an assessee should apply its income solely and exclusively for the objects for which it is established. The clear language of the provision show 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;

++ from the material on record, it was reflected that the assessee was earning surplus revenue from its activities and that the assets were increasing. The fact that surplus was generated is not disputed by the assessee. This surplus revenue was utilized for acquisition of assets which in the opinion of CIT was capable of generating more income. The figures showing more transfer of gross surplus to development fund, increase in fixed assets, increase in bank balances and purchase of land during relevent A.Y show that there was a systematic generation of profits from the activities of the assessee. Hence, the reasonable inference drawn by the CIT that the assessee is not existing solely for philanthropic purpose and for profits, cannot be faulted. The figures of concessional treatment clearly indicate that the assessee has spent meagre amount on the weaker section of the society which negatives the contention that the assessee is existing solely for philanthropic purpose and not for profit. A perusal of the statement of the hospital charges and fees furnished by the assessee for F.Y 2006-07, 2007-08 and 2008-09 shows the very negligible percentage of poor patients receiving treatment in its hospital. The figures appearing in the columns namely 'Gross Concessional Amount Receivable' and 'The amount Received from Poor patients.', in no manner would inspire any confidence or make a prudent person believe that the assessee is in fact existing for philanthropic purposes. One more factor which needs to be noted is in regard to the resolution passed by the assessee which does not specify the purpose of acquisition of the land but only authorises the acquisition of the land at a particular price from one Birla India Ltd. The contention on behalf of the assessee that the preamble of the resolution is required to be taken into consideration is misconceived and cannot be accepted seen from the totality of the circumstances. 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 petitioner to achieve such a huge surplus and the consequent enabling of the assessee to utilize such surplus funds to generate assets. In the opinion of this court, the material as placed on record do not show that the application of the assessee u/s 10(23C)(via) is inappropriately and arbitrarily rejected so as to warrant any interference in exercise of jurisdiction under Article 226 of the Constitution of India;

++ the contention on behalf of the assessee that looking to the manner in which the exemption was allowed in the past, the CIT ought to have granted its application u/s 10(23C)(via), is completely misconceived and contrary to the requirement of the statutory provision. It was the legal duty of CIT to consider independently the application of assessee for the A.Y in question on the basis of the material and applying the requirements of the provisions of sub-clause 23C (via) of section 10, decide the same independently. Any deduction and/or exemption as granted to the assessee for earlier A.Ys cannot be claimed to be of any consequence by the assessee so as claim this deduction as a matter of right for A.Y.2009-10 and thereafter. In the assessee's case it may be that the memorandum of association shows that it is established for philanthropic purpose but as to whether such philanthropic activities are reflected from the actual conduct of the institution is a fact which is required to be seen by the appropriate authority by appreciating the evidence in that regard in considering the application u/s 10(23C)(via). Such examination is an independent examination and it is only on the basis of the material as submitted by the assessee, the CIT has taken a decision to reject such application. Therefore, the writ petition does not call for any interference of this Court.

(See 2015-TIOL-661-HC-MUM-IT )