| SooperKanoon Citation | sooperkanoon.com/369610 |
| Subject | Direct Taxation |
| Court | Mumbai High Court |
| Decided On | Jul-30-1998 |
| Case Number | IT Appeal No. 9713 (Mumb.) of 1990, 817, 7011 & 8061 (Mumb.) of 1991, 8838 (Mumb.) of 1992, 7962 |
| Reported in | [2000]70ITD330(Mum) |
| Appellant | National Health and Education Society |
| Respondent | Assistant Director of Income Tax |
| Advocates: | Y.P. Trivedi, S.A. Joshi & Miss Vasanti Patel, for the Assessee Nageshwar Rao, for the Revenue |
R. V. Easiwar, J M.
A group of migrants, in the aftermath of partition, led by Mr. Parmanand Deepchand Hinduja came and settled in Bombay. They felt the need for medical care. These persons banded together and on account of their efforts, a small outdoor clinic was opened in December 1951. In February 1953, the clinic was converted into an indoor hospital with 30 beds which was progressively increased to 70. In 1954, the persons who started the clinic in a small way, formed a society which was named the 'National Health and Education Society'. It was registered under the Societies Registration Act on 13-4-1954. In 1963 a new 100 bed hospital was commissioned in the same plot of land. Gradually this 100 bed hospital increased its activities and in 1972 ventured into medical research. The research institution also came to be recognised by the Government of India. The name of the hospital, after the advent of the research centre, was changed from National Hospital to 'P.D. Hinduja National Hospital and Medical Research Centre'.
2. The memorandum of association of the society contains the following objects for which the society was established:
'(3) The objects for which the Society is established are to conduct and maintain a Hospital which will hereafter be named as 'Parmanand Deepchand Hinduja National Hospital & Research Centre' for the reception and treatment of persons suffering from illness or for the reception and treatment of persons during convalescence or of persons requiring medical attention and these activities are carried out solely for philanthropic purposes and not for the purpose of profit and without prejudice to the generality of the foregoing:-
to conduct and maintain a Research Centre for research work in diseases, medicines and medical relief.
to provide medical and surgical treatment to persons irrespective of caste, creed or religion whether as in-patients or out-patients.
to provide, conduct and maintain a medical dispensing department, operation theatre, X-Ray and pathological departments, Car, nose, throat, eyes and dental clinics, etc., for the benefit of the public irrespective of caste, creed or religion.
to provide all such medical and surgical appliances and pharmaceuticals and all such provisions and necessities as may be required for the purposes aforesaid or any of them.
to equip the hospital with all necessary furniture, fixtures, fittings, instruments and other paraphernalia for the aforesaid purposes of the hospital.
to procure the services of qualified surgeons, physicians, nurses, lay workers, attendants and servants, both honorary and otherwise, for the aforesaid purposes of the hospital and
to take all actions necessary for fulfillment of the said objects'
Rules and regulations were also framed which provided, in detail, for the different classes of members, general administration, governing Council, executive council and their powers and proceedings.
3. The hospital progressed as time went by and in the year 1986, a new and bigger hospital complex, comprising of a new building opposite to the original building, with a basement, ground floor and 16 upper floors was built. The old building consisted of three floors and a fourth floor was put up. The two buildings which stood on either side of the Veer Savarkar Marg were connected by a bridge across the road. The new hospital was commissioned in August 1986 with the most modern, diagnostic, medical and surgical equipments and a team of dedicated highly trained and well experienced staff. The facilities available in the hospital include casualty department, operation theatres, imaging department with modern facilities such as digital subtraction angiography, cat scanners, ultrasound techniques etc. There is also a pathological laboratory, blood bank and a separate cardiology department. Other specialisations include orthopedics, cardiac surgery etc. The entire hospital is centrally air-conditioned and there are other facilities such as extension counter of a bank, lobby, florist, gift shop, medical store, etc., lifts, imported diesel generating set, a 300 line telephone system and all attendant facilities.
4. With the introduction of section 10(22A) in the Income Tax Act with effect from 1-4-1970, the income of the hospital was exempt up to and including the assessment year 1986-87. The medical research centre was also exempt under section 10(21) of the Act up to and including the assessment year 1987-88. For the first time in the assessment year 1987-88, the assessing officer took the view that in order to claim exemption in respect of the income under section 10(22A) the assessee should be a philanthropic institution which, according to him, meant that the hospital should treat poor persons free of charge or at a highly concessional rate. According to him, the hospital was being run on commercial lines. He noticed that the assessee had a profit motive inasmuch as the treatment given to patients depended on their financial status, the charges levied depended on the classes to which they were admitted and further that service charges of 20% of the bill amount were charged. The criterion of the assessing officer for the purpose of securing exemption, in addition to what has been already stated, was that the hospital should maintain itself through donations, charities and other income, without depending on the charges collected from the patients. In his view the assessee flouted these criteria, was run on commercial lines with a view to earning profit and therefore, the exemption could not be granted. He however held that the assessee was eligible to be treated as a charitable institution and considered its income under section 11 of the Act where under the assessee has to fulfil certain conditions before getting the exemption.
5. The Commissioner (Appeals) who disposed of the appeal for the assessment year 1987-88, disagreed with the view taken by the assessing officer and held that free treatment of the patients was not a criterion for getting exemption and that the question to be examined was whether there existed a motive for making profit which was contrary to the concept of philanthropy. Though the Commissioner (Appeals) agreed with the assessee that running a hospital would be a philanthropic activity, he was not certain whether the assessee ran the hospital without any profit motive. According to him, the financial aspect of a philanthropic purpose could be judged and measured only by the accounts and in the present case the charges fixed by the hospital and the surcharge levied on the bills prima facie suggested profit motive. However, before taking a final decision, the Commissioner (Appeals) noticed that the assessee ran up deficits for the past several years. He agreed with the assessee that merely because the hospital could recoup its expenses by recovering higher charges from patients undergoing treatment in the upper classes, it did not prove that the institution existed for making profits. According to him, unless the cost of treating a patient is determined, it would not be possible to judge whether the assessee operated with a profit motive or not. This, according to the Commissioner (Appeals), could be ascertained only by scrutinising the accounts of various years. He directed the assessing officer to make an overall analysis of the accounts of the earlier, current and later years and make an effort to establish whether there is a systematic or organised pattern suggesting profit motive. As to what was meant by cost per patient, the Commissioner (Appeals) held that it would include direct cost, indirect cost, establishment cost plus operating cost besides provision for meeting the inflationary trend. He held that if the recovery from a particular patient exceeded the cost worked out on the above basis, it has to be further examined whether such excess was absorbed by the shortfall in the recoveries from other patients. He directed such an exercise to be undertaken by the assessing officer in an attempt to prove a profit motive.
6. The position for the assessment year 1988-89 is the same. As regards the assessment year 1989-90, the Commissioner (Appeals) struck a different note. He held that merely because the hospital charged high rates from upper class patients for special deluxe rooms and suits, it did not follow that it existed for purposes of profit and not for philanthropy. He also recorded a finding to the effect that there was no evidence to show any diversion of the funds or profits for personal purposes of the trustees of the hospital. He also noticed that the deficit in the working of the hospital for the year amounted to Rs. 2,40,60,000. He therefore held that the assessee was entitled to the exemption under section 10(22A). For the assessment year 1990-91 the same order was followed by him and the assessee was held entitled to the exemption.
7. In respect of the assessment year 1991-92 a slightly different complexion arose in the case. Apart from the receipts from the hospital, the assessee was also in receipt of certain other income such as interest from banks and UTI, profit on sale of units, income from gift shop and donations received and credited to the general fund account. The Commissioner (Appeals) held that even though the assessee was entitled to the exemption, it was not every income received by the hospital that was exempt and only such income as arose from the hospital from the reception and treatment of patients was exempt and the other items of income did not enjoy exemption. The other aspect of the issue so far as this year is concerned, was that the income from the medical research centre, which was hitherto held eligible for the exemption under section 10(21), was considered by the Commissioner (Appeals) not to be so.
8. The primary question before us for all the years is whether the income of the hospital is exempt under section 10(22A). In order to get the exemption, two conditions have to be satisfied:
The hospital or other institution for the treatment of patients should exist solely for philanthropic purposes; and
It should not exist for purposes of profit.
These two conditions have come up for consideration recently before the Kerala High Court in CITv. Pulikkal Medical Foundation (P.) Ltd. : [1994]210ITR299(Ker) . In this decision, Hon'ble Justice John Mathew referred to the dictionary meanings as well as the meanings given in certain authorities to the word 'philanthropy' and held as follows: (page 310)
'Thus on an understanding of the meaning of the words 'philanthropic purposes', it is clear that the establishment and running of a hospital by the assessee is a philanthropic purpose.'
Immediately thereafter, His Lordship proceeded to consider the question whether the hospital existed solely for philanthropic purposes and not for purposes of profit. It is noteworthy that in that case also, the rejection of the claim for exemption was based on two grounds: firstly that the hospital was being run on commercial lines and that by itself was an indication that it was being run for purposes of profit (see page 311) and secondly that existence for a philanthropic purpose would require a scheme for extending free consultation facility to the poor patients. These very two objections, as we have noticed earlier, have been taken by the assessing officer in the present case also. So far as the first objection is concerned, the Kerala High Court referred to the judgment of the Supreme Court in Addl CITv. Surat Art Silk Cloth Mfrs. Association : [1980]121ITR1(SC) and held that merely because the assessee is running the hospital on commercial lines, it will not be disentitled to the exemption under section 10(22A), as long as the dominant purpose is a philanthropic one and the purpose of earning profit is to spend it for the achievement of the main philanthropic purpose by re-deploying the profits in the same institution or another similar institution. It is noteworthy that in the context of section 11, the Supreme Court has, in the decision cited supra relied on by the Kerala High Court, held that the charitable organization is not required to carry on its activities in such a manner that it does not result in any profit, which would be an impractical task for the persons incharge of the trust. As regards the second condition, the Kerala High Court held (page 314) that free treatment to the poor and needy cannot be the sole philanthropic activity of a hospital because eleemosynary is not one of the essential ingredients of philanthropy.
9. Hon'ble Justice Narayana Kurup wrote a separate judgment agreeing with His Lordship Justice John mathew. In the separate judgment, His Lordship observed that the expression 'philanthropic purpose' assumes importance because the section requires that the hospital or institution should not exist for purposes of profit and that though the expression is popularly used, its legal connotation was not properly understood. According to His Lordship, the legislature must be presumed to have used the expression with an altogether different intention qua charity, as otherwise there was no need to bring about an amendment (in 1970) incorporating the word 'philanthropy' in section 10(22A). His Lordship then referred to the English decision in Macduff v. Macduff (1896) 2 Ch. 451 (CA), wherein the view taken was that philanthropy had nothing to do with charity and there were certain purposes which, though not charitable, would nevertheless be philanthropic, indicating goodwill towards mankind or a great portion of them. After referring to the judgment, His Lordship concludes the judgment by saying that the assessee was entitled to succeed even if it is found that the beneficial fallout of the philanthropic activity carried on by it is not confined to the poor alone.
10. It will be thus seen that neither the absence of a scheme for treating the poor patients free of charge nor the earning of profits was, by itself, considered fatal to the claim of exemption in respect of the income of a hospital. We however hasten to clarify that the decision should not and cannot be understood as giving a fiat or licence to profiteering in the guise of running a hospital because Their Lordships have cautioned that the earning of the profits should only be incidental to the carrying out of the dominant purpose and whatever profit that was earned should be redeployed in the same institution or in a similar institution.
11. In Governing body of Rangaraya Medical College v. Income Tax Officer : [1979]117ITR284(AP) it was held that merely because certain surplus arose from the society's operations, it cannot be held that the institution was run for purposes of profit, so long as no person or individual was entitled to any portion of the profit and the profit was utilised for the purpose and for the promotion of the objects of the institution. Though this decision was rendered in the context of section 10(22) of the Act, the same is applicable with equal force to cases under section 10(22A) because in both the provisions the condition is that the institution claiming exemption should not exist for purposes of profit.
12. In CIT v. Economic & Entrepreneurship Development Foundation (1997) 188 ITR 540, the Calcutta High Court, in the context of section 10(22A), held that if the earnings of the hospital are utilised for the purposes or objects for which it was established and there is no attempt on the part of the institution to accumulate the surplus without spending the same for philanthropic purposes, then the hospital must be taken to exist not for purposes of profit.
13. The above principles have also been recognised by the CBDT in their Circular No. F. No. 194/16-1711(A-1) which has been reproduced at page 453 of Birla Vidhya Vihar Trust v. CIT : [1982]136ITR445(Cal) .
14. We may now turn to the facts of the case before us. As already stated, the assessee is a society registered under the Societies Registration Act. It is also required to comply with the Bombay Public Trusts Act, 1950,having been registered under the said Act also. At page 47 of the paper book, a copy of the certificate dated 4-8-1990 issued by the Assistant Charity Commissioner, Greater Bombay Region, Bombay, has been furnished. The certificate shows that the hospital has, apart from complying with the provisions of the Bombay Public Trusts Act and maintaining prescribed registers according to the rules framed thereunder, also reserved and earmarked 10% of the total number of operational beds and 9% to 10% of the total capacity of patients treated for medical examination. It also shows that indigent patients treated free of charge and the weaker sections of the people are charged at subsidised rates, as required by the aforesaid Act. Page 48 is a certificate given by the Joint Director of Health Services, Directorate of Health Services, Government of Maharashtra, on 14-6-1990 regarding customs duty exemption in respect of certain medical equipment. The certificate states that the Assistant Director of Health Services, Bombay, has visited the hospital and the medical research centre on 31-5-1990 and has verified the records and has found fit to recommend customs duty exemption in respect of import of the medical equipment. It appears that a five-point certificate is required for granting the exemption. Accordingly, a certificate was issued to the following effect:
'Certified that the Institution provides diagnostic and curative aid or treatment to all citizens of India without distinction of caste, creed, race, religion and language.
Certified that the institution provided diagnostic preventive or curative care free to 24,531 patients out of total 52,732 out patient attendance in the year 1989. Which comes more than 40 per cent.
Certified that indoor treatment facilities are provided free to all with income of less than Rs. 500 p.m. whenever made available for this purpose not less than 10% of beds are reserved.
Certified that the charges levied for other indoor patients are reasonable either on the basis of the income of patients /guardians or otherwise.
Certified that the Medical, Surgical and Diagnostic Equipment apparatus and appliances to be imported will be used in the institution itself only and will not be removed there from* for private use and will not be sold or otherwise disposed off without prior permission of the Government.
*THE CERTIFICATE IS VALID FOR CURRENT FINANCIAL YEAR I.E. 1990-91.'
We find that similar certificates have been issued in the years 1987, 1988 and 1989 also, which are all filed at pages 49 to 51 of the paper book. The assessee has treated poor patients free (as well as on subsidised rates) the details of which are as under:
Year
Free patients
1986
24,673*
1988
14,907*
Y.E. 31-3-1989
24,531*
Y.E. 31-3-1990
18,975**
*(Figures as per certificates issued by DHS - pages 48 to 51 of paper book)
* *(Figures as per order of Commissioner (Appeals) for Assessment Year 19 90-1991)
We have already seen from the judgment of the Kerala High Court in Pulikkal Medical Foundation (R) Ltd.'s case (supra) that free treatment of poor patients is not one of the essential ingredients of philanthropy. The Kerala High Court have observed that free treatment of the poor and needy cannot be the sole philanthropic activity of a hospital but have hastened to observe that one of the philanthropic activities which a hospital can pursue should be to render free treatment to the needy and poor. This test is answered in the present case as we have found that there is a scheme for treating poor patients free of cost. The details have been given in the above chart for some of the years. At our instance, the assessee has furnished before us the copies of the relevant forms which the patients requesting free or concessional treatment should fill-up. The modus operandi is discussed in the order of the Commissioner (Appeals) for the A.Y. 1990-91 at paragraphs 4 and 3, The patient is given the form which he is required to be filled up. Depending on the type of disease he is also asked to select the doctors from the panel of consultants. The hospital-based full time consultant, who normally charges Rs. 100 for the first time and Rs. 50 thereafter, also provides free or concessional consultation to economically weaker sections of the society. Only a nominal fee of Rs. 3 is charged from a patient in the Out Patient department. There is no doctor's or consultation fee. Between 2 P.M. and 4 P.M. everyday patients are treated free in the OPD. The employees of the hospital and their families are given free treatment. Those patients from the public who seek free or concessional treatment, as already stated, are required to full-up the relevant particulars in the prescribed form and the same is scrutinised by the Patients Relation Manager who recommends the nature of the free or concessional treatment that may be provided. The hospital maintains proper records in respect of such patients and it is these records which are scrutinised by the Charity Commissioner. We have already seen this aspect while referring to the certificate issued by the Charity Commissioner. Even in the case of patients treated free or at concessional rates, the amount of charity involved is shown in each bill and according to the Commissioner (Appeals), such amount for the assessment year 1990-91 was Rs. 53.17 lakhs.
15. The above facts thus show that a large number of patients are treated free or at a concessional rate. This is one indication that the assessee does not exist solely for purposes of profit.
16. It has been stated by the assessing officer that the hospital is being run on commercial lines. We have already seen that the hospital has a scheme for treating patients free of charge or at a concessional rate and has also implemented the scheme. There is one more important aspect which militates against the view that the hospital is run on commercial lines or that it is run with a profit motive. This is the f act that for a number of years the assessee has been consistently suffering deficits, namely excess of expenditure over its income. Reference may be made to the certificate issued by the Chartered Accountants of the hospital, M/s. R. K. Khanna & Associates on 23-11-1991. Though a certificate dated 16-4-1990 was filed at page 60 of the paper book, at our instance a certificate dated 23-11-1991 has been furnished by the assessee in the additional papers which shows the deficits from 1961 to 31-3-1991, covering a period of 30 years. Following are the details of the deficits
Financial Year
Deficit Amount
For the Year
Rs.
1961 (January - December)
11,003.96
1962
32,965.66
1963
59,570.92
1964
72,442.05
1965
1,16,197.34
1966
93,989.92
1967
1,20,132.92
1968
1,07,135.89
1969
77,898.56
1970
1,19,883.46
1971
1,34,248.69
1972
2,24,800.21
1973
1,19,552.56
1974
1,98,233.13
1975
1,67,590.76
1976
85,941.55
1977
1,01,621.26
1978
62,638.09
1979
1,13,961.26
1980
3,40,904.87
1981
4,27,675.16
1982
5,64,884.02
1983
5,398.80
1984
2,82,582.60
1985
4,61,159.14
1986
1,72,91,223.41
1987-88(15 months 1-1-1987 to 31-3-1988)
6,03,76,540.87
1988-89 (1-4-1988 to 31-3-1989)
3,29,11,068.64
1989-90 (1-4-1989 to 31-3-1990)
1,88,11,886.08
1990-91 (1-4-1990 to 31-3-1991)
1,80,67,989 89
15,15,61,121.67
Had there been an intention to run the hospital on commercial lines, it is difficult to imagine that the assessee would have refrained from hiking the rates for paying patients so as to cover tip or substantially reduce the deficit. After all it is common knowledge that there is a crying need for specialty medical services and in a place like Mumbai there would be no dearth of patients willing to pay whatever is charged so long as top class medical services are made available. But going by the huge deficits especially from 1986, the year in which the new block was inaugurated, it is difficult to come to the conclusion that profit motive has been the driving force behind the running of the hospital. The income and expenditure account of the National Hospital for the year ended 31-12-1986 shows that out of the collection of Rs. 37.59 lakhs from the patients, and interest income of Rs. 5,411 and other income of Rs. 33,445, the major part has been spent towards salaries and allowances of Rs. 25. 10 lakhs, medical expenses of Rs. 4.74 lakhs, hospital expenses of Rs. 9.08 lakhs and administrative expenses of Rs. 1.62 lakhs. After providing for depreciation, there is a deficit of Rs. 3,68,065 which has been transferred to the general fund. There is also a deficit of Rs. 1.69 crores in the medical research centre for the same period which has been transferred to the medical research fund. The other year for which the accounts are available in the paper book is the period I- 1- 1987 to 31-3-1988. For this year, the hospital collections have been Rs. 3.92 crores and the other income is Rs. 13.19 lakhs. After incurring medical expenses of Rs. 98.06 lakhs, employees remuneration of Rs. 1.69 crores, hospital running expenses of Rs. 1.32 crores and other administrative expenses of Rs. 1.24 crores and after providing for depreciation on the equipment, the net deficit came to Rs. 27.20 lakhs. In the medical research centre for the same period, the deficit came to Rs. 33.17 lakhs. Thus year after year there has been a deficit in the running of both the hospital as well as the research centre. The deficit has steadily eroded the medical fund and the medical research fund and but for the donations received from philanthropists, including the founder's family members and the Hinduja group of concerns, the corpus funds would have been wiped out long back. For instance, in the year ended 31-12-1986 a donation of just above Rs. 4 crores was received in cheques from the Hinduja group while foreign equipment costing Rs. 1.41 crores was received as donation in kind through the Hinduja Foundation.
17. The fact that year after year for nearly 30 years the hospital has been running on deficit, sustaining itself only through donations, goes to show that profit earning has not been the motive. It is also not correct to say that the hospital is being run on commercial lines. A reference in this connection has been made by the assessing officer to the high rates charged by the hospital for the beds in different classes or wards. It has also been stated that five-star facilities are given to the patients who are in the highest class. We are not able to appreciate the relevance of such references. They do not in any way detract from the philanthropic nature of the activity, nor do they indicate any motive to cam profits. The modern concept of a Super-specialty or a multi-specialty hospital has to be kept in view. In our humble opinion, facilities such as central air-conditioning and TNT. in certain categories of rooms can no longer be looked upon as signs of luxury but they have to be and in fact they are looked upon as part of the patient-care, especially in the psychological aspect of the treatment. It should also be remembered that most of the modem and sophisticated medical equipment requires clean and dust-free atmosphere which is ensured by central air-conditioning. In our view therefore these are matters which are not relevant for judging the motives in running the hospital. The section exempts profits from tax and it is an implicit assumption that there would be profits. If there are no profits there is no question of any exemption being granted. The condition is that such profits should be incidental to the dominant object which should be philanthropic and earning of profit should only be a means to feed the philanthropic purpose. When the assessee has consistently suffered deficits, the position is 'a fortiori'.
18. Much has been made by the assessing officer on the fact that the assessee was charging service charges of 20% on the bill which indicated a profit motive. The assessee's explanation, which also forms part of the papers submitted by it at our instance, is that the practice of levying these charges was adopted because it was prevalent in many of the charitable hospitals of Mumbai. Subsequently when it was realised that this was only additional tariff, the practice was discontinued and it has now been merged with the regular tariff. It was also clarified that the fixation of the tariff is essentially a management function which depends on the practical side of the administration and therefore no separate resolution by the general body or executive body is required. On the question of the basis of charging the tariffs for different categories of beds, such as general ward, economy, second class, first class, deluxe and super deluxe, it has been explained in writing by the assessee that the tariff is fixed to broadly cover the following:
Labour cost, i.e., nursing staff, house keeping staff, services of doctors for 24 hours.
Water tax, property tax, sewage tax, electricity charges and maintenance charges.
Cost of food, i.e., lunch and dinner, tea, milk and snacks. It is to be noted that the food is the same for all classes of patients and is given as regulated by the concerned doctor. Outside food is not allowed.
Cost of linen, ie. daily change of bedsheets, patients' uniform, towels, napkins, etc. at least once a day and as many times in the case of they getting soiled.
Miscellaneous items such as cotton, gauges, dressing material, disinfectants in the rooms, toilets etc.
Depreciation on cost of beds and building.
The necessity to revise the bed charges periodically arises because of the increase in the dearness allowance of the staff every six months and the .yearly increment consequent upon the agreement arrived at with the union, increase in the material cost of food, linen, etc. and increase in the taxes and other, direct expenses such as electricity etc.
19. For the assessment years 1987-88 and 1988--89, as we have already seen, the Commissioner (Appeals) has directed the assessing officer to examine the accounts of the assessee and ascertain therefrom the cost per patient so as to judge whether the assessee is recovering more or less than such cost. In our opinion, such an exercise is not necessary. Apart from the fact that it will be a herculian task, given the limitations on the assessing officer with regard to time and manpower, it is also unnecessary for another reason.
This is that whatever may be the tariff and the cost per patient, it would not be possible to arrive at a proper conclusion from such a minute examination of the matter, which we are afraid would result in missing the woods for the trees. An overall or broad perspective of the matter would, in our opinion, be better suited for ascertaining the object in running the hospital. After all, all the receipts and the expenses have been recorded and are exhibited in proper manner. It is nobody's case that there are certain receipts or expenses which have not been taken into account. It is also nobody's case that the expenses are not incidental to the running of the hospital. If that is the case, the deficit itself is an indication that the hospital is not charging what it should, in order to break even. We should also bear in mind the note of caution sounded by the Supreme Court in Surat Art Silk Cloth Mfrs. Association's case (supra), referred to by the Kerala High Court in Pulikkal Medical Foundation (P) Ltd.s case (supra), that it would be difficult for persons in-charge of a trust or institution to carry on the activity in such manner that the expenditure balances the income and there is no resulting profit and further that such an exercise would not only be difficult of practical realisation but would also reflect an unsound principle of management. Having regard to this view, it would be wholly unnecessary or, if we may say so with respect to all concerned, a futile exercise to go about finding out the cost per patient in the lines indicated by the Commissioner (Appeals) for these two years.
20. In respect of the assessment year 1991-92 there is one more aspect of the matter which needs to be resolved. The assessee, it may be recalled, runs the National Hospital as well as the Medical Research Centre (MRC). In the assessment, the MRC claimed exemption under section 10(21) of the Act and the claim was also accepted, as the assessee has been approved for the purposes of section 35(1)(ii) of the Act. There was no appeal on this issue before the Commissioner (Appeals). However in the course of the appeal, the Commissioner (Appeals) required the assessee to show why the income of the MRC which was shown as 'other income' in Schedule XV of the accounts should not be included in the total income. The CIT (Appeals) was prima facie of the view that the income had no connection with the research activities. After considering the assessee's explanation, the Commissioner (Appeals) held that the following income of the MRC did not enjoy exemption:
Rs.
(1)
Service charges from Indian Overseas Bank
1,00,000
(2)
Interest on SB account
9,457
(3)
Interest on BEST deposit
1,32,970
(4)
Interest on investment
5,98,746
(5)
Miscellaneous income
. 5,310
Total
8,46,483
It appears Commissioner that there is a totalling error and the amount is wrongly mentioned as Rs. 9,46,483 in the order of the Commissioner (Appeals). The correct amount however is Rs. 8,46,483. In the opinion of the Commissioner (Appeals) the aforesaid items of receipts had no connection with the research activities and, therefore, cannot be considered as the income of the research centre. He further observed that the medical research centre is only one of the activities of the assessee and it is the assessee who is entitled to the income which it can utilise as it desired. For these reasons he considered the income to be not exempt under section 10(21).
21. As regards the mount of Rs. 1,00,000, the brief facts are that certain portion of the premises belonging to the medical research centre has been given to Indian Overseas Bank (IOB) for running an extension counter of the bank for facilitating services such as collection of patient deposits, bills of patients etc. The bank has been provided with security and the employees are supplied subsidised food and beverages. For these facilities the assessee receives Rs. 1,00,000 from the bank. This amount as well as the other amounts of income have been treated by the Commissioner (Appeals) as income earned not in relation to the medical research activities and was therefore not entitled to the exemption u/s 10(21). We are, however, unable to uphold the view taken by the Commissioner (Appeals). It is true that the assessee has two separate activities: the hospital and the medical research centre. It is also true that separate accounts are being maintained in respect of both. But it should be remembered that the assessee is one and the same. If a part of its activities is eligible for exemption under section 10(21) the same should be granted, provided that part of the activity satisfies the conditions of the section. We have already seen that in the circular (cited supra) of the Board, it has been stated that where all the objects of the institution are philanthropic and the surplus from running the institution is used only for philanthropic purposes, it should be held that the institution does not exist for purposes of'profit. What has been stated in respect of section 10(22) and section 10(22A), is applicable in respect of section 10(21) also provided the other conditions of the section are satisfied. The proviso to section 10(21) makes it a condition for exemption that the research organisation applies its income or accumulates it for application wholly and exclusively for the objects for which it is established. Certain other conditions prescribed by section 11(2) and (3) have also been made applicable to such an institution with certain modifications. There is no reference to any of such provisions having been contravened by the MRC. But the more important aspect is that the entire income including the aforesaid income of the research centre has been applied only for the research purposes as can be seen from the income and expenditure account. The income and expenditure account for the year ended 31-3-1991 of the MRC is as under:
Expenditure
Income
Medical expenses
Rs. 19,42,049
Other income
Rs. 1,04,68,630
Employees remuneration
Rs. 54,73,442
Net deficit
Rs. 1,74,79,745
Research centre running expenses
Rs. 30,03,944
Nurses College expenses
Rs. 7,34,875
Other administrative expenses
Rs. 97,01,484
Depreciation
Rs. 70,92,579
Rs. 2,79,48,375
Rs. 2,79,48,375
From the above account it is clear that the entire receipts and much more than that have been applied only for the purposes of the medical research centre and not for any other object. The various items of expenditure have all been given in detail in the schedules to the printed accounts and even from such details we are unable to find any expenditure not relating to the research activity. In fact, even the Commissioner (Appeals) has not held (sic) that any of the amounts spent by the MRC is not for the purpose of the research. The major item of income is the amount of Rs. 96,22,147 which is the amount recovered from the National Hospital for the use of the assets belonging to the medical research centre. This requires a little explanation. When the assets allocated to the hospital are used by the medical research centre or vice versa, entries are made in the account of the hospital and the medical research centre, as the case may be, showing notional receipt or notional expenditure without actual amounts being transferred. The Commissioner (Appeals) has observed that there is no real income arising out of such notional entries. During the year the position is as under:
Amount transferred to medical research centre by the hospital
Rs. 96,22,147
Amount received from the medical research centre
Rs. 76,27,905
Net
Rs. 19,94,242
This amount represents the amount payable by the hospital to the medical research centre for use of its assets by the hospital. Since entries undisputedly are only notional and actual transfer of the amounts has not taken place, the question of application of such income also cannot arise in the hands of the medical research centre. Notwithstanding this position, as we have already seen, the medical research centre has spent an aggregate of Rs. 2,79,48,375 on its activities. The net deficit of Rs. 1,74,79,745 has been debited to the medical research centre fund. During the year the medical research centre has received donations of Rs. 88,11,000. This has been added to the medical research centre fund. Thus it appears that the expenditure has been partly or substantially met out of the donations only. Whatever may be the position, it cannot be said that there has been application of the'income of the medical research centre for purposes other than the research activities.
22. The question can also be approached from another angle. The assessee is the society which has two wings, namely, the hospital and the medical research centre. Both are closely connected with each other since both relate to the field of medicine only. Whereas the hospital provides facilities for the reception and treatment of patients the medical research centre has been established to carry out research activities in the field of medicines which will be fruitful to the field of medicine generally and to the hospital run by the assessee, in particular. Since both are closely connected to each other, it would be more appropriate to view both the institutions as forming part of the same object which is being pursued by the society. Therefore though for the sake of administrative convenience and as a matter of accounting policy the accounts of both the wings are kept separate, in the larger context of the purpose for which both have been established and are being run, it would be proper to view both as falling within the exemption under section 10(22A). We have already seen that a part of the receipts - a substantial part - of the medical research centre consists of notional charges paid to it by the hospital its assets. We have also seen that the application of the income by the medical research centre is more than its income and there is a huge deficit at the end of the year which has been debited to the medical research centre fund. Section 10(22A) says that any income of a hospital or other institution is exempt, if it exists solely for philanthropic purposes and not for purpose of profit. The Calcutta High Court in the case of Birla Vidya Vihar Trust (supra) and the Madras High Court in the case of Addl CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) have held that there must be some co-relation between the income earned and the purpose sought to be achieved, which in this case should be a philanthropic purpose. The Madras High Court, in the context of section 10(22), has held that interest received from a deposit made by an educational institution with the university is exempt because it has a direct relation to the institution which imparts education. Applying this test to section 10(22A), it has to be seen whether the income has a direct relation to the hospital or the medical research so that it may be said to be exempt under section 10(22A). In our opinion, out of the five items of income referred to by us earlier, except the service charges of Rs. 1,00,000 received from Indian Overseas Bank, which has a connection with the activities carried on by the assessee, the other items of income cannot be stated to have any connection with the philanthropic purpose for which the assessee has been established. Therefore the amount of Rs. 7,46,483 cannot enjoy exemption u/s 10(22A).
23. The Commissioner (Appeals) also examined the position with regard to the hospital. He noticed that the hospital's collections stood at Rs. 14,91,80,123 and the other income came to Rs. 91,84,209. He has held that the following items of income out of the other income do not enjoy exemption:
(1)
Interest from banks
Rs. 2,22,826
(2)
Interest from UTI
Rs. 5,40,000
(3)
Profit on sale of units
Rs. 27,000
(4)
Gift shop income
Rs. 38,475
(5)
Donations received by the society and credited to the general fund account
Rs. 2,47,188
Rs. 10,75,489
We have gone through the order of the Commissioner (Appeals) and find that he has examined the nature and source of each of the above items and said income to the conclusion that they have no connection with the activities of the hospital and are therefore not entitled to the exemption. We agree with his conclusion and confirm his order on this point.
24. Our conclusion, therefore, is that except to the extent indicated in the two preceding paragraphs, the other income of the assessee is exempt under section 10(22A). In the view we have taken, it is not necessary to examine the correctness of the other grounds raised by the assessee in its appeals because they would arise for decision only if the main ground relating to section 10(22A) is held against the assessee. Further certain grounds have been taken by the assessee such as allowance of depreciation, etc. in its appeals which would also arise for. decision only if the applicability of the provisions of section 11 is to be considered which in turn would arise only if the exemption under section 10(22A) is denied.
25. However. for the sake of completeness and since there are certain other. grounds in some of the years, it is necessary to dispose of the appeals year wise with reference to the grounds raised in each of the years by both the parties.
Assistant year 1987-88
26. In the assessee's appeal the main ground relates to the exemption under section 10(22A) which we have accepted. The only other ground relates to an income of Rs. 5,000 from house property. It is contended that the property was agreed to be sold and the vendee was also put in possession of the same and was in receipt of the rent. Having regard to the recent judgment of the Supreme Court in CIT v. Podar Content (P) Lid. : [1997]226ITR625(SC) the vendee must be taken to be the owner of the property. The assessment of the amount of Rs. 5,000 in the assessee's hands is, therefore, not correct in law. The addition is deleted. The assessee's appeal is allowed.
27. In the appeal by the department the first ground is that ihe Commissioner (Appeals) ought to have confirmed that the voluntary contribution of Rs, 4,00,05,000 represented the income of the hospital and not of the medical research centre. It is pointed out that in respect of these donations, receipts were issued to the donors by the hospital but the amount's were credited in the medical centre's books. The Commissioner (Appeals) has dealt with this issue in paragraphs 39 to 41 of his order. The Commissioner (Appeals) noticed that the assessec issued two kinds of receipts, one for the purpose of enabling the donor to get deduction under section 80G and the other for- the purpose of enabling the donor- to get deduction under section 35,1)(ii). Specimen copies of these receipts were filed before the Commissioner (Appeals). In respect of receipts issued for the purpose of section 35(1)(ii), the words 'being contribution towards research centre' were added in handwriting. Since the assessee had made a clear distinction between the two types of receipts and since the words written in handwriting were only to clarify the purpose for which the donation was given, the Commissioner (Appeals) directed the assessing officer to treat the receipts amounting to Rs. 4,00,05,000 as constituting receipts of the medical research centre, which was exempt under section 10(2 1) of the Act.
28. At our instance specimen copies of the receipts were furnished before us in the additional papers submitted by the assessee. We find therefrom that the findings of the Commissioner (Appeals) are correct. We also are of the opinion that he has correctly directed the assessing officer to treat the amounts as the receipts of the research centre. In our view, the assessing officer has taken a hypertechnical view of the matter overlooking the substance thereof. We confirm the order of the Commissioner (Appeals) and dismiss the ground.
29. The second ground which relates to depreciation does not call for any decision in view of our decision to allow exemption under section 10(22A) of the Act.
30. The third ground which is against the setting aside of the order of the assessing officer in respect of the property income is also dismissed since in the assessee's appeal we have allowed its ground that the income from the property after the same has been transferred to the vendee cannot be taxed. The ground is dismissed.
Assessment year 1988-89
31. In the assessee's appeal the grounds are identical to those for the assessment year 1987-88 and in line with our decision for that year, we accept the grounds and allow the appeal.
32. In the departmental appeal the first ground is with regard to the deletion of the addition of Rs. 14,70,960 as net profit on account of issue of medicines to the patients. This ground does not call for decision in view of our decision to exempt the assessee under section 10(22A). The ground would arise only if the exemption is not available to the assessee and the income has to be computed under section 11 of the Act. Since that is not the position that ground becomes academic. It is dismissed.
33. The second ground relates to depreciation and in tune with our decision for the assessment year 1987-88 in respect of a similar ground taken by the department, we dismiss the same.
34. Thus the appeal by the department is dismissed.
Assessment year 1989- 90
35. The assessee has not filed any appeal for this year.
36. In the department's appeal the first ground is against the decision of the Commissioner (Appeals) exempting the assessee under section 10(22A). In line with our decision for the earlier years, we uphold the assessee's claim for exemption and reject the ground.
37. The second ground relates to the allowance of depreciation on assets of the medical research centre. The third ground relates to the gift of medical equipment of the value of Rs. 1,30,7 1,000 which according to the department should not have been exempted under section 10(22A) or under. section 11 since there was a contravention of the provisions of section 11(5). The Commissioner (Appeals) has considered the question of depreciation on asset is of the medical research centre in paragraph 6 of his order. He has issued certain directions to the assessing officer in the said paragraph to the effect that the assessing officer should consider the claim according to the provisions of law and should allow depreciation on the actual cost or written down value, as the case may be, according to law. So far as the gift of medical equipment is concerned, this is discussed in paragraphs 5 and 5.1 of the order of the Commissioner (Appeals). He has found that the medical equipment has been gifted to the hospital but at the same time he has directed the assessing officer to verify this fact. He has directed the assessing officer to obtain the details of the equipment, place the same on record and to grant exemption under section 10(22A) if he finds that the equipment has been donated to the hospital. The donation has also been directed to be considered as part of the corpus of the hospital and exempt under section 10(22A). Considering these directions, we are of the view that no interference is required. The grounds are rejected.
38. Thus departmental appeal is dismissed.
Assessment year 1990-91
39. The assessee has come in appeal in respect of depreciation. It is contended that the Commissioner (Appeals) should not have clarified the rates of depreciation, that the depreciation should be allowed on the value of the assets even if the assets are treated as income applied under section 11 of the Act. The ground relating to depreciation is academic in the view we have taken that the assessee's income is exempt under section 10(22A). The grounds relating to depreciation are dismissed.
40. The other ground relates to the assessment of the value of medical equipment in the amount of Rs. 67,11',466 as income under section 12. This ground is also dismissed as academic for the same reason.
41. The assessee's appeal is dismissed.
42. In the appeal by the department, the first ground is against the exemption granted by the Commissioner (Appeals) under section 10(22A). This ground is dismissed since we have upheld the assessee's claim.
43. The other grounds relate to depreciation on assets, and they are dismissed as academic since we have upheld the assessee's claim for exemption under section 10(22A). As noticed elsewhere, the claim for depreciation would be relevant only if the income is to be computed as per section 11.
44. The appeal by the revenue is dismissed.
Assessment Year 1991- 92
45. In the assessee's appeal the first ground is that certain items of income received by the hospital as also by the medical research centre, amounting to Rs. 10,75,489 and Rs. 8,46,483 respectively should also have been to Rs. 10,75,489 and Rs. 8,46,483 respectively should also have been exempt from tax. We have covered these grounds in paragraphs 20 to 23 and the assessing officer is directed to carry out our decision.
46. The second ground is that the Commissioner (Appeals) was not justified in holding that the amount of Rs. 19,94,242 paid to the medical research centre run by the assessed-society should be taxed as it was not applied for the purposes of the hospital. This ground has also been considered in paragraph 21, where we have held that it cannot be said that the amounts represent income applied for non -philanthropic purposes. The grounds, therefore, allowed.
47. The assessee's appeal is partly allowed.
48. In the department's appeal the only ground relates to the exemption under section 10(22A) and in tune with our decision for the other years, the exemption is upheld and the appeal is dismissed.
CO. No. 1141
49. The cross objection is directed against the observations of the Commissioner (Appeals) in respect of the claim for depreciation on the assets. This would arise only if the exemption under section 10(22A) is denied and the provisions of section 11 are held applicable. Since we have upheld the claim for exemption under section 10(22A) this ground is dismissed as infructuous. The cross objection is thus dismissed.
50. The appeals and the cross objection are disposed of in the above terms.