2025 (5) TMI 1235 - AT - Income Tax

Denial of benefit of Section 11/12 - Accumulation of Income - Assessee engaged in charitable activities or commercial activities - HELD THAT - In the present case assessee is running an Eye Hospital providing medical relief clearly covered under first four definitions of Section 2(15) of the Act. It is not carrying any activity in the nature of trade or commerce or business for a cess or fees. Once it is registered as a charitable institution under Section 12AA then it is to be seen whether income derived from the property of the society or activities of the society are being applied to the extent of 85% on its objectivity or not. The AO is totally silent on that part. Sole defect pointed out by him is surplus over the gross receipts is a little bit higher in terms of percentage. But this isolated one factor would not shake the very status of the Society being run in a charitable manner. This objection has nowhere been provided under the scheme of Income Tax Act. It has not been provided that if charitable institution is generating higher percentage of surplus then it would be disqualified as a charitable institution. The requirement of the law is that 85% of the gross receipts are required to be applied for charitable activities which has been fulfilled by the assessee. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the assessee, a registered charitable institution under Section 12A(a) of the Income Tax Act, 1961, is engaged in charitable activities or commercial activities for the assessment year 2017-18.

- Whether the addition of Rs. 6,01,88,516/- made by the Assessing Officer (AO) on account of surplus income is justified.

- Whether the exemption under Sections 11 and 12 of the Income Tax Act is rightly denied by the AO.

- Whether the AO correctly applied the definition of "charitable purpose" under Section 2(15) of the Income Tax Act in assessing the nature of the assessee's activities.

- Whether the AO erred in ignoring the application of income towards charitable purposes and capital expenditure for the purpose of exemption.

- Whether the interest charged under Section 234 of the Income Tax Act consequent to the addition is justified.

- Whether the Cross Objection filed by the assessee is maintainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature of Activities - Charitable or Commercial

Relevant Legal Framework and Precedents: Section 2(15) of the Income Tax Act defines "charitable purpose" to include relief of the poor, education, medical relief, preservation of environment, and advancement of any other object of general public utility. The assessee is registered under Section 12A(a) as a charitable institution, which confers exemption benefits under Sections 11 and 12, subject to fulfillment of conditions.

Court's Interpretation and Reasoning: The AO concluded that the assessee was engaged in commercial activities, relying primarily on the surplus of 31.29% of gross receipts and the disparity between purchase costs and charges for intraocular lenses (IOL). The AO held that such surplus and pricing indicated commercial operation, not charitable activity, and denied exemption under Section 12AA. The AO also noted non-disclosure of opening and closing stock and alleged concealment of income.

However, the CIT(A) and the Tribunal analyzed the issue in light of the statutory definition and facts. The Tribunal emphasized that the activities of running eye hospitals providing medical relief fall squarely within the first four categories of Section 2(15), which are per se charitable. The Tribunal noted that the AO failed to consider whether the income was applied to charitable purposes or capital expenditure, which is critical for exemption under Sections 11 and 12.

Key Evidence and Findings: The assessee's audited accounts and Form 10B demonstrated that out of gross receipts of approximately Rs. 19.23 crore, Rs. 16.39 crore was applied towards charitable objects, including revenue and capital expenditure, and Rs. 2.30 crore was set aside for accumulation as permitted under Section 11(2). The AO's focus on surplus without considering application of funds was found to be erroneous.

Application of Law to Facts: The Tribunal held that the AO's reliance on surplus percentage alone, without considering the application of income, was misplaced. The law requires at least 85% of income to be applied for charitable purposes to claim exemption. The assessee complied with this requirement. The Tribunal further noted that the higher recoveries relating to IOL dispensing charges included surgery, surgeon, operation theater, and consumables charges, which justified the difference in purchase and sale prices.

Treatment of Competing Arguments: The AO's contention that surplus indicated commercial activity was rejected as the Tribunal found no provision disqualifying a charitable institution on the basis of surplus percentage alone. The Tribunal also rejected the AO's allegation of concealment due to non-disclosure of stock as unsubstantiated.

Conclusion: The assessee is engaged in charitable activities and not commercial activities. The exemption under Sections 11 and 12 is rightly claimed.

Issue 2: Addition of Rs. 6,01,88,516/- as Taxable Income

Relevant Legal Framework: Under the Income Tax Act, surplus income of a charitable institution not applied for charitable purposes is taxable. However, if 85% of income is applied for charitable purposes, exemption is available.

Court's Interpretation and Reasoning: The AO added the entire surplus as taxable income, denying exemption. The CIT(A) and Tribunal found that the AO ignored the detailed computation showing application of funds towards charitable objectives and accumulation permissible under Section 11(2). The Tribunal held that the addition was unsustainable.

Key Evidence and Findings: The detailed application of funds and accumulation was supported by audited accounts and Form 10B, which the AO failed to consider.

Application of Law to Facts: Since the assessee applied more than 85% of income to charitable purposes, the addition of surplus was not justified.

Treatment of Competing Arguments: The AO's argument based on surplus percentage and purchase-sale price comparison was rejected as insufficient to deny exemption or justify addition.

Conclusion: The addition of Rs. 6,01,88,516/- is deleted.

Issue 3: Denial of Exemption under Sections 11 and 12

Relevant Legal Framework: Section 11 provides exemption to income applied for charitable purposes; Section 12 provides exemption to income of charitable or religious trusts or institutions. Registration under Section 12A is a prerequisite for claiming exemption.

Court's Interpretation and Reasoning: The AO denied exemption on the ground of commercial activity. The CIT(A) and Tribunal held that the AO failed to consider the application of income and capital expenditure towards charitable purposes. The Tribunal emphasized that the registration under Section 12A was not withdrawn or cancelled, and no violation under Section 13(3) was pointed out.

Key Evidence and Findings: The assessee's application of income and accumulation complied with Sections 11 and 12. The Tribunal noted that the AO's approach was "very sympathetic" and lacked appreciation of capital expenditure necessary for medical equipment.

Application of Law to Facts: The Tribunal applied the statutory provisions and found exemption rightly claimable.

Treatment of Competing Arguments: The AO's denial based on surplus and pricing was rejected.

Conclusion: The exemption under Sections 11 and 12 is rightly allowed.

Issue 4: Interest Charged under Section 234

Court's Interpretation and Reasoning: The interest under Section 234 is consequential to the addition made. The Tribunal held that since the addition is deleted, the AO shall rework the interest accordingly.

Conclusion: Interest charged is to be recalculated after considering relief granted.

Issue 5: Maintainability of Cross Objection by Assessee

Legal Framework: Section 253(4) allows filing of Cross Objections if aggrieved by any part of the impugned order.

Court's Interpretation and Reasoning: The assessee filed Cross Objection supporting the CIT(A) order. Since no grievance was expressed, the Tribunal held the Cross Objection not maintainable.

Conclusion: Cross Objection is dismissed.

3. SIGNIFICANT HOLDINGS

"The activities of running eye hospitals providing medical relief fall squarely within the first four categories of Section 2(15), which are per se charitable."

"If those receipts are applied up to 85% on the objectivities of the society, then benefit of Section 11/12 is to be granted to the assessee."

"The AO's reliance on surplus percentage alone, without considering the application of income, was misplaced."

"No provision disqualifies a charitable institution on the basis of surplus percentage alone."

"The AO ought to have appreciated that huge investment will be required for purchasing medical instruments and equipment so that good quality of eye treatment could be provided."

"The addition made by the AO cannot be sustained and the same amounting to Rs. 6,01,88,516/- stands deleted."

"Interest under Section 234 is consequential and shall be reworked after considering relief granted."

"Cross Objection filed by the assessee is not maintainable as no grievance has been exhibited."