2025 (5) TMI 1865 - AT - Income Tax

Rejection of application for approval u/s. 80G(5) - as stated activity of the Trust falls under commercial in nature and hence cannot be treated as charitable in nature HELD THAT - We note that the assessee has provided medical facilities and lab testing facility to the people residing in rural areas apart from pharmacy stores. On perusal of comparative fees chart provided by the ld.AR we find that the medical charges and lab charges collected from the patients are very minimal compared to the charges collected by other hospitals. CIT(E) has not doubted the activity carried out by the assessee by providing any other evidence. We find that decision of this Tribunal in the case of Idhayangal Charitable Trust 2025 (3) TMI 1213 - ITAT CHENNAI has observed that the medical facilities provided at nominal prices to the patients at rural areas is eligible to be a charitable activity for considering it as medical relief as per section 2(15) of the Act. Thus the activities carried out by the assessee is in the nature of charity u/s. 2(15) falls under medical relief . Thus we set aside the order of ld. CIT(E) by directing to grant approval u/s.80G of the Act. Appeal filed by the assessee trust is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the activity of providing medical services by the appellant trust, which charges nominal or concessional fees, qualifies as a charitable purpose under the first six limbs of Section 2(15) of the Income Tax Act, 1961, specifically under "medical relief".

2. Whether the proviso to Section 2(15), which disqualifies entities carrying on commercial activities exceeding 20% of total receipts from claiming charitable status, applies to the appellant trust's activities.

3. Whether the rejection of the appellant's application for approval under Section 80G of the Act by the Commissioner of Income Tax (Exemption) was justified on the ground that the trust's activities were commercial in nature.

Issue-wise Detailed Analysis:

Issue 1: Qualification of Medical Services as Charitable Purpose under Section 2(15)

The legal framework centers on the definition of "charitable purpose" under Section 2(15) of the Income Tax Act, which enumerates six specific limbs including "medical relief." The appellant trust contended that its activities fall squarely within these first six limbs, thus qualifying as per se charitable activities. The trust was established in 1996 with the primary object of providing medical relief to rural populations, either free or at concessional rates.

The Court examined the trust's audited financial statements for the years ending 31.03.2021, 31.03.2022, and 31.03.2023, which demonstrated that the bulk of expenditure was on medical relief, including payments to doctors and hospital operations. Additionally, a comparative fee chart was submitted showing that the fees charged by the trust for medical and lab services were significantly lower than those charged by other hospitals in the same locality, thereby supporting the claim of concessional treatment rather than commercial pricing.

The Court also considered the precedent set by this Tribunal in the Idhayangal Charitable Trust case, where it was held that a diabetic clinic run by the trust at nominal charges did not constitute a commercial activity and fell within the ambit of medical relief under Section 2(15). The Tribunal emphasized that the proviso to Section 2(15) applies only to entities engaged in "advancement of any other object of general public utility" and not to the first six limbs, which include medical relief.

Applying these principles to the facts, the Court found that the appellant trust's activities were charitable in nature and qualified under the medical relief limb of Section 2(15).

Issue 2: Applicability of the Proviso to Section 2(15) Regarding Commercial Activities

The proviso to Section 2(15), introduced to curb abuse of charitable exemptions, stipulates that if an entity carrying out "advancement of any other object of general public utility" engages in commercial activities exceeding 20% of total receipts, it shall not be considered charitable. The appellant argued that this proviso does not apply to activities falling within the first six limbs, including medical relief.

The Court referred to Circular No. 11/2008 issued by the CBDT dated 19.12.2008, which clarifies that the proviso applies exclusively to entities pursuing advancement of objects of general public utility (the fourth limb) and not to those engaged in the first six limbs of Section 2(15). The Circular further states that whether an activity is commercial is a question of fact determined by the nature, scope, extent, and frequency of the activity.

In this case, the CIT (Exemption) had rejected the application on the ground that the trust's commercial receipts from hospital and pharmacy activities exceeded 20% of total receipts. However, the Court found no evidence disputing the trust's claim that fees were concessional and the activities were incidental to the charitable purpose of medical relief. The CIT (Exemption) failed to appreciate the distinction drawn in the Circular and judicial precedents that the proviso does not affect the first six limbs.

Therefore, the Court concluded that the proviso to Section 2(15) was not applicable to the appellant trust's activities.

Issue 3: Validity of Rejection of 80G Approval Application

The appellant sought approval under Section 80G, which enables donors to claim deductions for contributions made to charitable entities. The CIT (Exemption) rejected the application, holding that the trust's activities were commercial and thus not charitable.

Upon reviewing the facts, the Court noted that the trust had valid registration under Section 12A, which was not challenged. The Court also observed that the CIT (Exemption) did not produce any contrary evidence to rebut the appellant's claim of concessional fees and charitable intent.

Relying on the Tribunal's earlier ruling in the Idhayangal case and the CBDT Circular, the Court held that the CIT (Exemption) erred in rejecting the application. The trust's activities were charitable and did not constitute commercial activity disqualifying it from 80G approval.

The Court directed the CIT (Exemption) to grant approval under Section 80G.

Significant Holdings:

The Court held:

"The newly inserted proviso to section 2(15) will apply only to entities whose purpose is 'advancement of any other object of general public utility' i.e. the fourth limb of the definition of 'charitable purpose' contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities."

"The activities carried out by the assessee is in the nature of charity u/s. 2(15) of the Act falls under 'medical relief'."

"The ld. CIT (E) has erred in rejecting the application for approval under Section 80G(5) of the Act by stating that the activity of the trust is commercial in nature."

Core principles established include:

• The proviso to Section 2(15) excluding entities carrying on commercial activities applies only to entities engaged in advancement of objects of general public utility and not to those engaged in the first six limbs including medical relief.
• Provision of medical services at concessional or nominal fees to rural poor qualifies as charitable activity under medical relief.
• Approval under Section 80G cannot be denied solely on the ground of incidental fees charged if the activity is essentially charitable.

Final determinations:

• The appellant trust's activities fall within the first six limbs of Section 2(15) and constitute medical relief.
• The proviso to Section 2(15) is not attracted as the trust does not pursue advancement of other objects of general public utility.
• The rejection of the application for 80G approval was erroneous and is set aside.
• The CIT (Exemption) is directed to grant approval under Section 80G.