1. The two appeals are by the assessee against the CIT(A)'s order No.236A/A-11/89-90 dated 27-3-1991, for the assessment year 1986-87 and No. 268/A-IX/90-91 dt. 27-3-1991, for the assessment year 1987-88, are consolidated for the sake of convenience as they relate to the one assessee and points involved are also all common.
2. The ITO completed assessments for the above mentioned two years on 31-3-1989 and 24-3-1990. The assessee claimed exemption Section 10(22A) of the IT Act of its income from interest on the ground that it is an institution fulfilling the condition laid down in Section 10(22A) of the IT Act. The Assessing Officer considered the case of the assessee and rejected the claim of the assessee under Section 10(22A) of the IT Act on the ground that-(i) the main clause of the company does not authorise the company to raise any fund for philanthropic purpose; (2) further, nothing has been stated what source it will get money for philanthropic purpose; (3) even it has got the source, there is no restriction in the Memorandum that the income from the source shall be utilised only for the philanthropic purpose as stated in the memorandum; (4) there is no restriction on the point of the company to declare any dividend or to pay remuneration to their directors; and (5) this is the 1st year of the company and hospital buildings are under construction and no philanthropic purpose is served by the company during the relevant year.
3. The assessee filed appeal to the CIT(Appeals) and the CIT(A) has confirmed the ITO's action after hearing the assessee.
4. The CIT(A) rejected the claim of the assessee on the ground that the assessee was originally incorporated as a Limited company and later on certificate of incorporation was obtained and the name was changed from Public Limited Company to Private Limited Company. According to authorities, this change was effected with the ulterior motive to have a tightening grip over the organisation. The CIT(A) has also observed that the assessee company would have got all the benefits of a limited company with its charitable objects had it been registered under Section 25 of the Companies Act. The CIT(A) has also observed that what prompted the company to register it as a Private Limited Company, when a fairer course was available and open to it under the Companies Act to avail of the benefit of a charitable institution, at the same time retaining its status as a company with limited liability. He has also observed that the company wants all the benefits attached to Section 25 of the Companies Act, but at the same time does not want to undergo the obligations and responsibilities attached to Section 25 of the Companies Act.
5. The CIT(A) has also observed that the memorandum clause of the company speaks loudly that it is philanthropic organisation and it proposes to set up and run institution solely for philanthropic purposes and not for purpose of profit. He has also observed that the organisation started construction of hospital building complex, but, it did not start functioning. In these circumstances he has held that it cannot be said with certainty whether the assessee intends to run the institution for charitable purposes only and not for profit. In this connection the CIT(A) has further observed that the assessee has received only contribution for starting its project of construction of hospitals, it had no income of its own. The surplus shown in its accounts is by way of interest on deposit and not its income on rendering medical services. Therefore, interest income disclosed by the assessee is its income from other source and not derived from hospitals or other institutions, which can be exempted under Section 10(22A) of the IT Act. In view of these facts, the CIT(A) agreed with the Assessing Officer that the assessee is not entitled for the exemption under Section 10(22A) of the IT Act and rejected the assessee's claim and hence, the present two appeals are by the assessee to the Appellate Tribunal.
6. During the course of the hearing of the appeals the learned A.R. of the assessee submitted that the authorities are not justified in refusing to grant exemption under Section 10(22A) of the IT Act to the assessee. In this connection it is submitted that the Memorandum and Articles of Association of the assessee company clearly go to show that the object of the Association is solely for philanthropic purposes and not for purposes of profit. It is submitted that the findings of the ITO that main clause of the Association does not authorise to raise any funds for any philanthropic purpose are not correct and wrong in view of the Clause III(B)(xiv) of the Memorandum of Association which is clear, categorical one and empowers it to receive, accept, get, acquire and own any donation, gift, charity etc. from all sources in furtherance of its objects and interests. As regards ITO's observation regarding the source of the Society, it is submitted that Clause III(B)(xi) and III(B)(xiv) are very specific. These two clauses as well as the share capital of the assessee provide for ample source of money to carry out its objects. As regard ITO's observation that there is no restrictions in the Memorandum for the Institution of the funds only for the philanthropic purposes, it is submitted that this observation of the ITO is wrong. In this regard it is submitted that the company was formed under the Companies Act, 1956, is a distinct legal entity and acts through its Board of Directors. Any company thus formed with all its activities are legally formulated and restricted by such company's Memorandum of Association. Signature clause in the Memorandum (page 5 of the Memorandum of Association) is very clear on this point and restricts the activities of the company to its objects.
7. As regards ITO's observation that there is no restriction on the point of the company to declare any dividends or to pay remuneration to their Directors, it is submitted that the ITO's observations are without any basis and contrary to the provisions of the Articles of Association. In this connection it is stated that the proviso in Clause III(B)(xiii) categorically forbids any payment of profit, dividend, remuneration, bonus etc. both directly and indirectly. Likewise, Article 8.1 of the Articles of Association is categorical in forbidding any payment to any director of the assessee company. The said Article not only prohibits payment of any salary, but, also any payment by way of fees, other remuneration or benefit in money or money's worth to any of the assessee company's directors.
8. As regards findings of the authorities that assessee should have been registered under Section 25 of the Companies Act, it is submitted that the authorities have failed to appreciate the provisions of the law. Section 25 of the Companies Act applies both to Public Limited and Private Limited Company. Since the assessee company both in its incorporation as a Public Company and later on, while it converted itself into a private one, has not dispensed with the appendage "Limited" or "Private Limited" is or has never required to seek registration under Section 25 of the Companies Act.
9. The authorities have also not granted exemption under Section 10(22A) on the ground that this is the first year of the company's existence and hospital buildings are under construction and no philanthropic purpose is served by the company during the accounting year relevant to the assessment years under appeal. In this connection it is submitted that the assessee company was incorporated on 20-3-1984, as a Public Ltd. Company, got its certificate for commencement of business on 27-3-1984 and later on converted itself to a Private Ltd. Company on 17-7-1985. It received welfare funds by the end of March '84. It started its infrastructural works for setting up and running Hospitals in the backward areas of tea producing region of the State of Assam. By the end of accounting year relevant to the assessment year 1986-87, it had already spent Rs. 23.82 lakhs out of its income of Rs. 58.65 lakhs. In these facts, it is submitted that the authorities are not justified in not granting exemption under Section 10(22A) of the IT Act as they are factually not correct and as such, legally cannot be upheld.10. The A.R. of the assessee has also further submitted that the society should be registered under Section 25 of the Company's Act is also not the requirement under the IT Act. The authorities have also failed to show that the company has violated the objects of the Association. All the objective clauses are for philanthropic purposes.
The A.R. of the assessee relied on the following cases in support of its arguments:- 1. Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284 (AP) 2. Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 11. The learned D.R., on the other hand, relied on the orders of the authorities and particularly relied on the para 2.4 and 2.7 of the CIT(A)'s order. The D.R. also took us through the Clauses IIIA, (iii), (iv), IIIB's v, vi, x, xv and xvi and submitted that these provisions are not in accordance with the provisions of the Section 10(22A) of the IT Act. The objects of the Memorandum are solely not in accordance with the objects of Section 10(22A) above, but there are different objects also which have been mentioned above. The D.R. in this connection relied in the following decisions: 3. CIT v. Maharaja Sawai Mansinghji Museum Trust [1988] 169 ITR 379 (Raj.) 4. Rao Bahadur A.K.D. Dharmaraja Education Charity Trust v. CIT [1990] 182 ITR 80 (Mad.) The D.R. submitted that the assessee is not entitled for exemption under Section 10(22A) of the IT Act and the CIT(A)'s order should be upheld.12. We have considered the submissions of the parties with reference to the papers filed and are inclined to agree with the submissions made by the A.R. of the assessee. We have also gone through the case laws relied by both the parties and find that there is no case law directly under Section 10(22A) of the IT Act. Most of the case laws relied by the parties are under Section 10(22) of the IT Act. The case laws relied by the parties are not directly on the issue and are distinguishable. The case laws relied by the parties support their respective stands. But most of the case laws relied by the A.R. are of Calcutta High Court's and they are more convincing and appealing. In this connection to decide the issue first we would like to refer the following two cases: wherein it has been held that the provision of Section 10(22) requires that the institution should exist solely for educational purposes and not for purposes of profit. The Hon'ble Courts find that the clauses in the Memorandum of Association establishes that the assessee has come into existence for purpose of establishing, running, managing or assisting colleges, schools and other educational organisations (page 240) and also that the sole purpose for which the assessee has come into existence is education at the levels of college and school (page 241). Since the clauses of Memorandum of Association of the assessee company clearly and categorically records that the objects for which it has been formed are establishment, set up, take over, conduct, run, aid, hold, maintain, or otherwise support schools, colleges, educational institutions etc., therefore, the institution is entitled for exemption under Section 10(22) of the IT Act. The ratio of the above quoted decisions are applicable to the facts of the present case before us also as the main objects of the assessee before us are also identical which are as follows : (i) To establish, set up, take over, conduct, run, aid, hold, maintain, or otherwise support medical units, hospitals, nursing homes, child care centres, dispensaries, clinics, biological investigation units. Family Planning Centres, clinics caring after human and animal ailments and any institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention, treatment, cure, after care and rehabilitation of persons affected with any disease, physical, mental, psychological, surgical, psychotherapical and the like for all inhabitants in India and solely for philanthropic purposes and not for purposes of profit.
(ii) To establish, set-up, take over, conduct, run, aid, hold, maintain or otherwise support Health Care unit, Convalescent Homes, Research Establishment, First Aid Centre and the like solely for philanthropic purposes and not for purposes of profit.
(iii) To hold, conduct, run, operate or otherwise support any research activities in medicine, discovery of cure for any ailment of human beings or animal in India either alone or jointly with other similar associations, organisations, bodies, hospitals, investigation teams and the like solely for philanthropic purposes and not for purposes of profit.
(iv) To run, operate, maintain and make provision for Welfare, upliftment, development and improvement of moral, physical, mental and general health generally of a community as a whole without any distinction of caste, creed and religion in any part of India.
(22A) any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit.
13. In this connection we may refer The Finance Bill, 1970. The statement of objects and reasons in respect of Clause 4, seeks to amend Section 10 of the IT Act, 1961, wherein it has been stated that Sub-clause (b) seeks to insert a new Clause (22A) in Section 10 of the IT Act. The effect of the proposed Amendment will be that "the income of the hospital and other medical institutions will be completely exempt from tax notwithstanding that such income is not fully spent during the year in which it is earned".
14. In this connection we deem it fit to mention the Memorandum explaining the provisions in the Finance Bill, 1970, which provides for measures for providing tax relief and avoiding inconvenience to assessee's in certain cases. The heading is exemption from tax of the income of hospitals and other medical institutions - At present, Universities and other educational institutions existing solely for educational purposes and not for purposes of profit enjoy complete exemption from tax on their incomes. However, in the case of hospitals and similar other institutions for treatment of illness, there is no specific exemption from tax, unlike in the case of Universities. Medical institutions come under the category of charitable institutions and have to satisfy the conditions relating to application of not less than 75 per cent of their current incomes to their objects in the same year in which is accumulated. In the context of the modifications proposed in the provisions relating to the exemption from tax of the income of charitable and religious trusts and institutions (vide paragraphs 18.1 to 18.5 of this memorandum) it is proposed to make a specific provision for exemption from tax the income of hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit. The provisions, as proposed, will cover also institutions for treatment of mental defectiveness as also those for treatment of persons during convalescence or of persons requiring medical attention or rehabilitation. The income of all these categories of institutions will be exempt from tax altogether, as in the case of Universities and other educational institutions at present (Clause 4(b) and 13).
15. These provisions clearly go to show that the assessee is entitled for exemption under Section 10(22A) of the IT Act.
16. We may also mention the case of Governing Body of Rangaraya Medical College (supra), wherein the facts of the case showed that the Society was constructing buildings for the medical and educational colleges out of the donations and other receipts from various parties.
There occurred certain surpluses in a particular year. In this connection the High Court at page 289 has observed- Applying the said test we are satisfied that the petitioner-society, whose sole object is managing and maintaining the said Medical Institution can be an educational institution without any motive of private or personal profit.
... The ITO has not recorded any finding, nor is it suggested...
that any surplus arising from the operations of the institution is distributed by way of profit to any individuals.
17. These facts clearly go to show that the facts of the cases before us are also identical and the ratio of the decision of the above case also applies to the case before us.
18. In Academy of General Education's case (supra) their Lordships at page 139 have held that "We may state at the outset that the assessee in order to claim the benefit of Section 10(22) need not necessarily be a school or college where education is imparted... it will be, therefore, obvious that the income of the assessee is exempt under Section 10(22) if the assessee is an educational institution or an establishment which primarily engages itself in educational activities... it may invest into funds in any manner, but the income generated therefrom must be utilised exclusively for educational activity. If these requirements are complied with, the assessee's income shall be exempt under Section 10(22) of the IT Act".
19. The ratio of the above decision also squarely applies to the assessee's case.
20. In Birla Vidhya Vihar Trust's case (supra) the Hon'ble Calcutta High Court has held that the condition precedent for claiming exemption under Section 10(22) of the IT Act, is that the university or educational institution must exist solely for the educational purposes and not for purposes of profit (page 454) and that the expression existing in Section 10(22) must not be judged with reference to the facts of the relevant year only. Though the facts of the relevant year would be very material whether an institution exists or is existing solely for any particular purpose or not cannot be judged only by the facts of one year. All the factors will have to be taken into consideration, namely, the clause or power enabling the institution to function, its activities in general etc. Neither the fortuitous factor having a large surplus in any particular year... would be decisive of the matter (page 463). In this connection the circular of the Central Board of Direct Taxes No. F.No. 194/16-17/IT(AI) is very relevant to decide the issue in Birla Vidya Vihar Trust's case (supra). This circular is issued by the C.B.D.T. with reference to Section 10(22A) of the IT Act. The para 3 of the said circular reads as follows: The question for consideration is whether an educational institution existing solely for educational purposes but which shows some surplus at the end of the year is eligible for this exemption. If the profit of the educational institution can be diverted for the personal use of the proprietor thereof, then the income of the educational institution will be subject to tax. However, there may be cases where the educational institutions may be owned by the trust or societies to whom the provisions of Section 11 may be applicable. Where all the objects of these trusts are educational and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit.
What has been stated in respect of educational institutions will equally apply to hospitals and other institutions referred to in Section 10(22A). In the case of hospitals and similar institutions, if the surplus is used for philanthropic purposes, the income of the institution will be eligible for exemption under Section 10(22A). It is not necessary that the surplus should be used for medical purposes only.
21. In Doon Foundation's case (supra), the Hon'ble Calcutta High Court has held on page 216 as follows :- The condition precedent for claiming exemption under Section 10(22) is, whether the educational institution exists solely for educational purposes and not for purposes of profit. There is no dispute nor can it be disputed that the assessee-society exists solely for educational purposes. The assessee has commenced activities connected with the imparting of education for the purposes of holding regular classes for teaching of Hindi, the assessee has taken all preliminary steps including purchase of books and periodicals. Such activities are the steps towards running of a fulfledged-teaching course. We are, therefore, unable to accept the contention of the Revenue that the assessee did not start running any educational institution during the previous year in question.
The educational institution has been established or set on foot during the relevant previous year.
22. In this connection the Hon'ble Andhra Pradesh High Court's decision in the case of Governing Body of Rangaraya Medical College's case (supra), is also worth-noting. In this case Their Lordships have held that constructing buildings for the colleges tantamount to educational activities and this view is also equally applicable to the assessee's case. In this connection we may mention that the assessee spent nearly Rs. 27,54,000 for the establishment and running of the hospitals and philanthropic institution at Longsoal. In these circumstances it cannot, therefore, be denied that the hospital and philanthropic institutions have not been established or set on foot.
23. Their Lordships of Karnataka High Court in the case of Mangilal Gotawat Charitable Trust v. CIT [1984] 150 ITR 682 have held that - In our opinion, an institution may not have any facility for treatment of in-patients and yet it could qualify for the benefit of Section 10(22A) provided it exists for treatment of persons solely for philanthropic purposes.
24. In this connection we may also mention that Sub-clause (b) of Finance Act, 1970 introduced a new Clause (22A) in Section 10 of the IT Act. The effect of the proposed amendment will be that the income of the hospitals or other medical institutions will be completely exempt from tax, notwithstanding that such income is not fully spent during the year in which it is earned [see (1970) 75 ITR, Statute section, page 70].
25. From the foregoing facts and discussions one thing is very clear that the intention of the Legislature in the enactment of the provisions under Section 10(22A) is and has been to foster the growth of philanthropic institutions, of course without any purpose of making any profit to any one. Therefore, the words "other medical and other philanthropical purposes" should be given liberal and should be in no way narrowed down or restricted to some closetted meaning, whereby, the provision will run counter to the laudable intention of the Legislature and dampen the enthusiasm of the people who may like to build hospitals and other philanthropic institution. In this connection we may mention that Their Lordships of the Calcutta High Court while deciding the issue under Section 10(22) of the IT Act in the case of Birla Vidhya Vihar Trust (supra) have referred to the Finance Bill, 1970 and its memorandum explaining the provisions in the Finance Bill, 1970 and also referred to the Board's circular which was issued under Section 10(22A) of the IT Act. Their Lordships considered all the aspects and have held that the Trust is entitled for exemption under Section 10(22) of the IT Act. From the above facts one can draw the inference that the provisions of Section 10(22) and Section 10(22A) are identical.
Therefore case laws decided under Section 10(22) are equally applicable to Section 10(22A) of the IT Act. The various case laws discussed in above paras wholly supports the assessee's claim. The main objects of the assessee which are clearly brought out in Memorandum of Association are all solely for philanthropic purposes and not for profit. The assessee has also not violated its objects. The exemption also cannot be denied to the assessee on the basis of incidental or ancillary objects of the institution as they are not against the main object and rather support it. The certificate from the Assistant Labour Conimissioner-cum-Deputy Chief Inspector of Plantation, Tinsukia and Medical Inspector of Plantation, Tinsukia, which is in page 30 of the Paper Book also clearly states that the assessee is maintaining and conducting free medical and hospital facilities for both the tea garden labourers and their families as well as for the inhabitants of surrounding areas since 1985. Therefore, considering the totality of facts and circumstances, we hold that authorities were not justified in denying exemption to the assessee under Section 10(22A) of the IT Act for both the years and accordingly we would direct them to grant exemption.