TMI Blog2015 (4) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... charities in good old times. However, in recent times, imparting of education and running a hospital have become one of the main commercial activities. Under the guise of charity, the people are exploiting the charitable institutionally commercially. Although in this case of the assessee, there is no conclusive evidence or material on record to conclude that the hospital itself has been given away by the trustees of the assesseesociety to Max group of companies to exploit the hospital commercially, but, the facts of this case do raise a reasonable suspicion that the hospital itself has been given out by the assesseesociety to Max group of companies to exploit the same commercially and, in a non-charitable manner for reasons best known to the trustees of the assessee-society only. The assessee-society was charitable to only one entity out of the whole planet, i.e., the corporate Max Group of companies. It was not charitable towards the society or public at large but, in fact, it was “uncharitable”. It conducted its affairs in such a way that inspite of charging the most exorbitant fees etc. from its patients in the capital city of the country, if not the highest rates so charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies belonging to Max Group, which was a colourable device to transfer profits to such companies. 2.2 That the DIT(E) erred on facts in law in observing that the Assessee Society was merely a special purpose vehicle to take advantage of concessional land allotted by the State Government and to pass off profit earned from operating hospital to companies belonging to Max Group. 3. That the DIT(E) erred on facts in law in holding that the Appellant Society was not for charitable purpose , alleging that the appellant did not fulfill the minimum criteria of providing concessional/free treatment to patients from Economically Weaker Sections ( EWS ) category, as per the criteria notified by the Delhi High Court to be implemented by the Health Department of Delhi. 3.1 That the DIT(E) erred on facts in law in not appreciating that the non-fulfillment of aforesaid criteria was beyond the control of the Appellant Society and, in any case, not a valid ground to hold that the Appellant Society was not carrying on charitable purpose as referred to in section 2(15) and for withdrawing registration under section 12A of the Act on that basis. 3. The learned senior counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12AA(3) for withdrawal of registration under Section 12A dated 18.11.2011 issued by the DIT(E), a copy of which has been filed in the compilation filed before us. He submitted that the DIT(E) has wrongly taken the area allotted to M/s Max Health Care Ltd. (hereinafter referred to as M/s MHC ) as 1500 sq.mtrs. although the same was only 1500 sq.ft. for the exclusive use of MHC and its personnel. He submitted that M/s MHC is not a group company of the assessee trust. The learned senior counsel argued that the assessee filed its submissions on 27.12.2011 running in about 4300 pages before the DIT(E) and the DIT(E) passed the order on the next date i.e. 28.12.2011. He referred to the contents of the memorandum of association of the assessee wherein the various charitable objects were detailed along with the rules and regulations of the trust, copy of which has been filed in the compilation before the Tribunal. He referred to copies of various documents filed in the compilation before the Tribunal i.e. the agreement between the assessee and M/s MMK Investments Pvt.Ltd. dated 10.12.2001, another agreement dated 10.12.2001 between the assessee and M/s MMK Investments Pvt.Ltd., supplemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance guarantee on the part of the contractor who shall deposit ₹ 3,91,50,000/- with the owner as guarantee for the performance of its obligations under the agreement. The agreement dated 10.12.2001 between the assessee and M/s MMK Investments Pvt.Ltd. provides that the agreement may be terminated at any time solely at the option of the company by giving 30 days notice to the user in terms of clause 13.3 of the agreement. Clause 18 of the said agreement provides for the performance guarantee. Clause 20 of the agreement provides for indemnification by the user to the company against any loss or damage to the equipment or any part thereof due to negligence or willful misconduct of the user. The learned senior counsel for the assessee further referred to the services agreement dated 30.06.2004 between the assessee and M/s MHC which provides that the assessee agrees to engage M/s MHC to render medical services subject to its overall control and supervision by the management of the hospital by the assessee. He referred to clause 2(c) of this agreement wherein the assessee has agreed to provide an area of at least 1500 sq.ft. for the hospital for the exclusive use of MHC and its pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason that the assessee has made provision for free beds but if the poor people do not come forward and avail the facility of free medical services, the assessee could not be blamed. He submitted that on monthly basis, the details of the free beds have to be filed before the Health Department and the authorities appointed under the statute have checked the same and the Income-tax Department could not sit over their judgment. He relied on the decision of Delhi Tribunal in the case of Civil Services Society Vs. DIT(E), Delhi - [2013] 143 ITD 408 (Delhi-Trib.). He referred to the copy of the assessment order for the assessment year 2005-06 in the case of the assessee wherein assessment was framed in scrutiny assessment under Section 143(3) and inspite of similar allegations against the assessee, no adverse view was taken by the Department. He referred to the copy of the map of the hospital building, as filed in the compilation before the Tribunal and submitted that the assessee has about 880 employees of its own and the number of employees of the assessee in the hospital was 88.18% in FY 2007-08, 90.99% in FY 2008-09 and 98.14% in FY 2009-10. He submitted that the provisions of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bangalore). She submitted that on this ground alone, the assessee was not entitled to exemption under Section 12A and the order of the DIT(E) denying the exemption should be confirmed. 7. Learned CIT-DR submitted that the land on which the hospital of the assessee-society is situated was allotted to them by the Government of India vide perpetual lease deed dated 5th June, 1996 executed between on behalf of President of India and the assesseesociety and the terms of the perpetual lease deed was to provide 10% totally free indoor treatment and 20% free OPD for the weaker sections of the society respectively was violated by the assessee-society. She submitted that the title deeds of the assessee-society were hypothecated to the bank to raise loans to the benefit of M/s MHC, which is not a charitable trust and was admittedly a profit-making concern. She submitted that the act of giving securities of its properties given by the assessee to a commercial entity i.e. M/s MHC, could not be called an activity charitable in nature. 8. The learned CIT-DR submitted that as per the agreement between the assessee-society and M/s MMK Investments Pvt.Ltd. (Max Group) dated 10.12.2001, the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r financial year has been defined to include every receipt from whatever source of income. She referred to supplementary agreement between the assessee-society and M/s Max Medical Services Limited (formerly known as MMK Investments Private Limited) dated 21.02.2009 wherein the Adjusted Turnover has been defined. She referred to the agreement between the assessee-trust and M/s MMK Investments Pvt.Ltd. dated 10.12.2001 wherein the term Use of Equipment by the hospital has been detailed and it specifically provides that M/s MMK Investments Pvt.Ltd. could terminate the agreement at any time solely at its option by giving a 30 days written notice to the assessee. It is further provided in clause 13.2 thereof that the assessee-trust shall have no right to terminate this agreement, save and except in the case of material breach by M/s MMK Investments Pvt.Ltd. of its obligation etc. The payment mechanism is defined in clause 17.2 thereof which provides that the assessee-trust shall pay to M/s MMK Investments Pvt.Ltd. a sum equivalent to 10% of the gross annual turnover of the hospital. She referred to the services agreement between the assessee and M/s MHC dated 30th June, 2004 whereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided at the hospital and that MHC shall have no liability whatsoever in respect of the claim asserted against the assessee or MHC by any third party including government or bodies for any act of omission whatsoever. The Annexure-1 to the said services agreement provides that MHC shall be paid services fees at ₹ 12 crores in each of the first three years and ₹ 15 crores in each year from the fourth year up to the ninth year and ₹ 20 crores in each year from the ninth year onwards from the effective date, if the invoiced amount net of all taxes falls below the specified amount of ₹ 12 crores to ₹ 20 crores as detailed above. It further provides that in addition to the fees as detailed above, the assessee-society shall reimburse to MHC all expenses incurred by MHC on behalf of assessee-trust on monthly basis. She submitted that the totally free OPD to weaker sections of the society was raised from 20% of the total OPD to 25% by the Government of India on the direction issued by the Hon'ble Delhi High Court in a writ petition and still, the said direction was violated by the assessee-trust. She submitted that the number of free beds provided were me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety do provide and create charge by way of hypothecation over its current assets on pari passu basis with working banking capital and exclusive charge over its fixed assets in favour of IIBL to secure its obligation etc. She referred to the agreement dated 15.12.2005 between the assessee-trust and M/s Vascard Healthcare and Services Limited (hereinafter referred to as M/s Vascard ) whereby M/s Vascard was to provide doctors who have specialized knowledge and experience in the heart and vascular field. It further provides that on execution of the agreement, the assessee-society shall pay M/s Vascard on a Sign on Bonus of ₹ 2 crores over and above the payments contained in items 4, 5 and 6 of the agreement that will accrue to M/s Vascard after the signing of the agreement. It further provides that in the event of termination of this agreement for any reason whatsoever, the assessee-society shall compensate M/s Vascard by paying ₹ 2.5 crores if the termination takes place within one year of the agreement and by paying ₹ 2 crores if the termination is after the end of the one year but within two years of the agreement and so on and by ₹ 0.50 crore if the termin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that entities whose object is education or medical relief would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to certain conditions. The learned senior counsel argued that whether the assessee charged ₹ 100/- or ₹ 1,000/- for a particular service does not make the service rendered for medical relief as not charitable. He submitted that the hospital may not cut the cost to compromise the quality of medical aid to the public. He submitted that the assessee has never earned profit in any year and has in fact incurred losses. He argued that does an assessee loses its charitable tag merely because ₹ 40/- out of ₹ 100/- were paid to Max Group, when there is no dispute that the other ₹ 60/- were spent for charitable purposes only by the assessee-society. He submitted that the provision of Section 12AA(3) applies to the case of the assessee and not Section 12AA(4) of the Act. 11. He submitted that the assessee-trust has taken permission of equitable mortgage of land allotted by DDA and, therefore, had accordingly mortgaged its movable and immovable properties to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2005-06 by the Assessing Officer and, therefore, this plea should not have been taken by the learned CIT-DR. He submitted that in fact with the engagement of MHC, it was the assessee who had benefitted due to specialized medical services. He submitted that regarding the free beds not availed by the weaker sections of the society, the relevant authorities of the Delhi Government have not objected and, therefore, the department could not sit over the judgments of the concerned authorities appointed under the law. He submitted that on the same facts, the Delhi Tribunal has decided the issue in favour of the assessee in ADIT(E) Vs. RB Seth Jassa Ram Charitable Hospital vide ITA No.1721/Del/2008. He referred to the assessment order framed in scrutiny assessment under Section 143(3) for the assessment year 2008-09 wherein the Assessing Officer held that the assessee has not carried out charitable activities and that huge payments were made to Max Group and were assessed in the status of AOP and charged to tax at the maximum marginal rate and, therefore, he argued that there is no power to DIT(E) to deny exemption under Section 12A since there is alternate mechanism by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iality - Cancer detection and care - Communicable diseases - Nutritional and Deficiency disease - Diseases of Pregnancy Newborn - Diseases of Poverty and illiteracy B. OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECT : 1. In consonance with the main object, to engage in management sciences research with special reference to methods of organization methods of financing and choice of technology in delivery of health care. 2. In consonance with the main object, to engage in population science research with special reference to contraception and other scientific methods of population control. 3. To promote, establish, maintain and manage Centres/Institutions of Health/Medical Sciences to provider necessary infrastructure with required physical facilities, equipment, staff, labourers and other inputs including scientific work environment and logistics support for the design, conduct and evaluation of research programs for the accomplishment of the objects of the Society. 3(a) To provider financial assistance and/or to provide security, tangible and intangible, including inter alia hypothecation, mortgage, guarantees and such other secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... All the income earnings from movable or immovable properties of the society shall be solely utilized and applied towards the promotion of its aims and objects as set forth in the Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly or by way of dividends, bonus, profit, etc., to the present or past member of the Society or to any person claiming through any one or more of the present or the past members. 15. The learned CIT-DR has emphasized on the fact that the assessee has not carried out its activities as per the main object of the society. The main object of the society as reproduced above was to engage in medical, biological, social, environment and allied sciences research so as to enhance human understanding regarding the epidemiological basis of health and disease through acquisition etc. in humans in general and with reference to certain identified diseases mentioned therein. The opening words of other objects were objects incidental or ancillary to the attainment of the main object had to be in consonance with the main object . The learned CIT-DR submitted that the assessee has not undertaken any research work and has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umans by the pharmaceutical companies for its commercial application at large. In this case, the facts of the case lead to the only conclusion that the assessee has not undertaken any research activity in accordance with the objects of the assessee-society. It is wellestablished that the registration for exemption under Section 12A is granted by the DIT(E) on the basis of objects of the assessee-society as detailed in the memorandum of association and if the DIT(E) finds that the objects of the assessee are charitable in nature, and that other legal formalities are fulfilled by the assessee, DIT(E) has no other choice but to grant registration under Section 12A of the Act. However, the assessee is bound to carry on its activities in accordance with the objects of the society which were submitted to the Department for grant of exemption under Section 12A of the Act. In case the assessee, at a later date, after the registration granted to it, considers it expedient to undertake some other activity which is charitable in nature, it is obliged under the law to amend its objects clause in accordance with law and to submit the same before the DIT(E). No such exercise was undertaken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned senior counsel for the assessee that on monthly basis, the details of free beds have to be filed with the Health Department and the authorities appointed under the statute have checked the same and the Income-tax Department could not sit over their judgement, seems to be not relevant to the issue before the Tribunal. The issue before us is not that whether any legal action should have been taken by the Health Department and the authorities appointed under the statute to check the details of free beds provided by the assessee and, in our view, any failure on the part of the authorities of the Health Department to take action, would not immune the assessee for violating the condition of allotment of land itself to it at a nominal price. The issue before us is whether the assessee is conducting its affairs in a charitable manner or whether on commercial lines. 18. In our view, the plea of the learned senior counsel that Max group of companies is not connected to the assessee-society is also of no consequence since the assessee, a charitable society, could not make charity to a commercial organisation, although not connected with it, by paying exorbitant amounts totallin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Pvt.Ltd. (Max Group), the owner, i.e., the assessee could not terminate the contract and the contractor i.e. M/s MMK Investments Pvt.Ltd. could terminate the contract. Clause 4.04 of this agreement dated 10.12.2001 provides that in case the contractor M/s MMK Investments Pvt.Ltd. terminates the agreement before the expiry of the term or the extended term in accordance with certain provisions mentioned in the agreement or the assessee society terminates the agreement otherwise in accordance with clause 4.02 of the said agreement, the assessee trust shall be liable to pay the contractor i.e. M/s MMK Investments Pvt.Ltd. liquidated damages amounting to the sum of ₹ 12 crores together with interest at the rate of 2% per annum over the short term prime lending rate of SBI payable from the date of such termination till the date of actual payment, less the amounts already paid by the owner towards construction of the building. It is not understandable that the contractor M/s MMK Investments Pvt.Ltd. was entitled to terminate the agreement and the assessee was made liable for liquidated damages of a very high amount of ₹ 12 crores along with interest thereon. As per the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(c) of this agreement provides that the assessee-trust shall not make any attempt to solicit or source the services for the hospital from any third party during the term of the agreement. However, M/s MHC shall have the option to provide the services of any kind to any other person etc. Clause 6(f) of the services agreement provides that assessee-trust has agreed to utilize the funds of the hospital including all its receipts of whatever nature only for the purpose of management and operations of the hospital and shall not be diverted to or used by the assessee-society for any other purposes. We find that it is not understandable that how the contractor M/s MHC could impose such a condition which binds the assessee-society to utilize its funds in a particular manner. We find that in view of this condition of utilizing the receipts of the hospital in a particular manner, it is not understandable that how the assessee could undertake any research work as provided in its main object in the memorandum of association in view of the specific bar to utilize the funds of the hospital for the purpose of management and operations of the hospital. Clause 8(a) of this agreement makes the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that the reliance on the contents of this Circular issued by the CBDT is misplaced firstly because the assessee is not running its activities in accordance with the objects of the assessee-society and, secondly, in this case, the issue is not that whether the assessee has incidentally carried on any commercial activity. In this case, the activity of the assessee in providing medical relief itself is not conducted in a charitable manner and, therefore, the ratio of the Circular issued by the CBDT does not apply to the facts of the case of the assessee. The assessee is running its affairs of running a hospital totally on commercial lines to extract the maximum revenue from its patients and, therefore, could not be said to be charitable in nature. The plea of the learned senior counsel for the assessee, that if the assessee receives ₹ 100/- from its activities and passed ₹ 40/- to the Max Group of companies and spent the balance ₹ 60/- in running the hospital, it could not be said that the assessee is not running its affairs in a charitable manner, does not have any merit. We find that the assessee has managed its affairs in a way that after paying exorbitant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 12A of the Act is altogether separate and whose jurisdiction lies with DIT(E) and not with the Assessing Officer. 23. The learned senior counsel for the assessee has relied upon the decision of Hyderabad Bench of the Tribunal in the case of St. Joseph Academy (supra). We find that the ratio of this decision of the Tribunal is not applicable to the facts of the case of the assessee as the main issue in this case before the Hyderabad Tribunal was that where the assessee-society was formed with the object of establishing schools, colleges, training institutions, hospitals, orphanages, hostels etc. for the benefit of Christian minority community in particular and others in general. The CIT rejected the assessee s application for registration under Section 12AA that the society was formed for the benefit of a particular community. The Tribunal decided the issue in favour of the assessee and granted the registration to the assessee. In the case of the present assessee before us, there is no such issue and, therefore, the decision cited has no application to the facts of the case of the assessee. 24. The learned senior counsel has relied upon the decision of Delhi Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Rashmi Metaliks Limited and Another (supra) which has followed the decision of Hon'ble Supreme Court in Mohinder Singh Gill Vs. Chief Election Commissioner - [1978] 1 SCC 405. We find that these decisions shall not help the case of the assessee as it was held by the Hon ble Apex Court in Mohinder Singh Gill s case cited supra that when the validity of an order by a statutory functionary is judged, it could not be supplemented by fresh reasons in the shape of an affidavit or otherwise. It was further observed by the Hon ble Apex Court that otherwise an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We find that no such exercise was undertaken by the Revenue in this case and, therefore, this decision of the Hon'ble Supreme Court does not help the case of the assessee. 28. The learned senior counsel has also relied on the decision of Delhi Tribunal in the case of RB Seth Jassa Ram Charitable Hospital (supra), wherein the exemption under Section 11 was denied to the assessee on various grounds including that the running of the hospital was given to M/s Fortis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtant for determining whether such an action is in the course of business or charity. What is really, therefore, required to be carefully examined, in order to find whether an act of the institution is charitable or not, is not only to assess the work being done by the institutions, which claim to be pursuing charitable activities, but also the economic dynamics and motivations of such activities. 30. In the light of this fundamental position, let us take a look at what the assessee is doing and whether the manner in which activities of the assessee are being carried out indicate any compassion, benevolence or generosity towards others or as a community as a whole. When object of an institution is to help the poor or sick, the working pattern of the institution must be shown as such in its approach, the way in which its charges are fixed and in its commitment towards underprivileged sections of society. Undoubtedly, the mere charging of a reasonable fees for services offered by a charitable institution does not vitiate its charitable character but that is as long as the charging of fees does not have scant regard for humane values. Similar is the position with regard to other op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in medical sciences and the activities carried out by it in the facts of the case could not be said to be charitable in nature and, therefore, the exemption u/s 12A was rightly cancelled by the DIT(E). 34. We find that the DIT(E) has passed a well-reasoned speaking order on the issue. He has recorded a finding that the assessee s foundation has not been in operation as a charitable institution as the trustees allowed the property as to be taken over by the Max group by creating various financial and legal obligations as detailed in the foregoing paragraphs of his order. He has further recorded that the hospital is virtually run by the Max Group of concerns which are corporate bodies established with the clear intention of profit motive and this is against the basic principles of the charitable organization. The learned DIT(E) has recorded that huge payments to the Max group concerns were made under various agreements totalling to over ₹ 40 crores in assessment year 2008-09 which shows that the assessee was working only for the monetary benefit of certain corporate concerns and not working as a philanthropic organisation. The DIT(E) has recorded a finding that assessee-soc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a right conclusion that whether the assessee-society/trust is carrying on its activities for charitable purposes in accordance with the objects of the society. There could not be any exhaustive list of such tests but the following may be found relevant to decide the issue along with other tests that may be relevant :- (i) Whether the society/trust was running its activities in accordance with the objects of the society/trust as has been given at the time of registration of the society/trust; (ii) Whether the conditions provided in the lease deed of the land allotted or any other benefit derived by the society/trust from the government or semi-government or from any section of the society have been complied with in letter and spirit; (iii) The element of profit earned by the society/trust whether reasonable with regard to the total volume of activities undertaken by it; (iv) The activities whether they are charitable in nature or not; (v) Whether any siphoning of funds is present in the payments made by the society/trust to any person whether connected with the assessee or not; (vi) Whether the activities of such society/trust were genuine; (vii) Whether the s ..... 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