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The Income Tax Officer & Others Versus Noble Medical Foundation and Research Centre & Others

2015 (4) TMI 801 - ITAT PUNE

Charitable hospital - Non-fulfilment of conditions prescribed in section 2(15) of the Income Tax Act, 1961 - Denial of deduction u/s 11 of the Income Tax Act, 1961 - Violation of provision of section 13(1)(c) rws 13(2)(b) and 13(2)(g) of the Income Tax Act, 1961 - No concessional treatment to poor peoples - Whole income not applied for trust object i.e. to provide medical relief - Held that:- Where the assessee was engaged in carrying on the activities for attaining the objects of providing medi .....

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recognition given by the Bombay Public Trust Act and also by the registration granted under section 12AA of the Act, we find no merit in the order of Assessing Officer, in this regard.

Similar ratio was laid down by Delhi Bench of the Tribunal in Manav Bharati Child Institute & Child Psychology [2007 (9) TMI 446 - ITAT DELHI], that merely because there was some surplus in the activities carried on by the society, the same would not dis-entitle to claim exemption under section 11 and 1 .....

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the Act. The Hon’ble Kerala High Court in Pulikkal Medical Foundation (P) Ltd. [1993 (8) TMI 16 - KERALA High Court] had also laid down similar proposition that merely because the assessee was running a hospital on commercial lines, it would not be dis-entitled to the exemption under section 10(22) of the Act.

The Hon’ble Supreme Court in Surat Art Silk Cloth Manufacturers Association [1979 (11) TMI 1 - SUPREME Court] had also laid down the proposition that for the accomplishment of .....

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re that the activity must be carried on in such a manner that it does not result in any profit.

We find no merit in the objection of the Assessing Officer, where Dr. Kandekar acting as managing trustee of the assessee trust had supervise the activities of the trust and had devoted time for not only the medical consultancy, but also for administrative work. The assessee had also made available the services of the company Cathlab (I) Pvt. Ltd. for the patients of trust hospital at conce .....

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ndered by such person to trust or institution. The clauses are attracted in case the amount so paid is in excess of what may be paid for such services. Also we find no merit in the order of Assessing Officer in holding that the said medical shop being rented out to interested party attracts the provisions of section 13(1)(c) of the Act. In comparison, part of the building measuring 250 sq. ft. was allotted to M/s. Samarth Diagnostics Pvt. Ltd. on a monthly rent of ₹ 5,000/- and as per the .....

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Another aspect of the denial of deduction under section 11 of the Act to the assessee was that the assessee had failed to provide concessional treatment to indigent / poor patients. Admittedly, this was the first year of operation of the hospital and the plea of the assessee was that it could not provide free medical relief to large numbers of indigent / poor patients. However, in the absence of any limit being provided in the Income-tax Act, violation, if any, of the said limit does not entit .....

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wla, J.M: Two appeals filed by the Revenue are against the respective orders of CIT(A)-I, Pune dated 17.02.2012, 16.08.2012 and another appeal filed by the Revenue is against the order of CIT(A)-IT/TP, Pune relating to assessment years 2008-09, 2009-10 and 2010-11 passed under sections 143(3) r.w.s. 147 and 143(3) of the Income Tax Act, 1961. 2. All the appeals relating to the same assessees were heard together and are being disposed of by this consolidated order for the sake of convenience. How .....

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the facts and in the circumstances of the case and in law, The Learned CIT(A)-I, Pune has grossly erred in not appreciating the fact that the Managing Trustee had diverted the income by using the Trust's infrastructure for his private gains in clear violation of the provisions of section 13(1)(c) read with sections 13(2)(b) and 13(2)(g) of the Income-tax Act. 1961. 3. On the facts and in the circumstances of the case and in law, the Learned CIT(A)-I, Pune has grossly erred in not appreciati .....

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may be vacated and that of the Assessing Officer be restored 5. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon ble Tribunal. 4. The issue raised in the present appeal is with regard to the applicability of the provisions of section 13(1)(c) r.w.s. 13(2)(b) and 13(2)(g) of the Act. 5. The brief facts of the case are that, the assessee was a charitable trust registered under section 12AA of the .....

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. B.E. Kandekar, Cardiologist, the managing trustee of the assessee trust had increased manifold and secondly, the hospital was running on commercial lines without there being charitable activities. The Assessing Officer noted that the prima facie inference that flowed from the observation was that there was violation of provisions of section 13(1)(c) of the Act. The assessee, in response to notice under section 148 of the Act furnished the return of income and also sought reasons for reopening .....

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assessee claimed that it had a team of about 60 medical consultants and surgeons, including all the four trustees, who in turn were entitled to consultancy charges only received from the patients. Entire balance charges recovered from the patients i.e. for stay, nursing, pathological tests, etc. were retained by the trust. The assessee incurred the administrative and other incidental expenditure from out of balance amount remaining after payment of consultancy charges. The income from the hospi .....

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t to the maximum number of indigent and weaker section patients. 7. The next plea of the assessee before the Assessing Officer was that it was entitled to the exemption as it was providing medical relief which was one of the charitable objects defined under section 2(15) of the Act and as there was no intention to earn profit, the trust / institution would be a charitable institution. The assessee further stated that the trust was registered under section 12AA of the Act and during the year, it .....

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Daule, M.D. (Ortho), Dr. N.R. Akolkar, M.D. (Paed.), and Dr. P.S. Bandishti, M.D., D.M. (Neuro.), D.N.B. The objects of the trust are reproduced under para 7.2 at pages 5 and 6 of the assessment order, of which, the first object was to acquire, establish and run and maintain, carry on the work as an advanced hospital and to carry out the diagnostic, therapeutic procedures and provide super specialty facilities in all branches of medical, surgical fields, etc. Other important clauses in the trust .....

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decision shall be final and binding on all the matters relating to the running and operations of trust in all its affairs. Next relevant clause was the trustees shall be trustees for life. Further, there was clause for payment of professional fees or proper charges to the trustees. During the year under consideration as reflected in the income and expenditure account, the total receipts were ₹ 3.89 crores, against which the assessee had incurred expenditure of consultancy fees of ₹ 8 .....

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of hospital building was about 45,000 sq. ft. and lease deed was executed on 21.02.2007; b) The trust had leased out certain portions of hospital building i.e. medical shop admeasuring 200 sq. ft. along with furniture & fixture to Shri Vijay Manikrao Nikam, who was the co-brother of managing trustee; c) Part of building admeasuring 475 sq. ft. was leased to Ahmednagar Cathlab (I) Pvt. Ltd. on a monthly rental of ₹ 9,500/- and the directors of the said company were Dr. B.E. Kandekar and .....

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earlier years and also in the return of income relating to assessment year 2008-09. The Assessing Officer was of the view that Dr. Kandekar had shifted his place of private practice to the hospital; e) Part of building admeasuring 250 sq. ft. was rented to M/s. Samarth Diagnostics Pvt. Ltd. on a monthly rent of ₹ 5,000/- and the directors of the said company were unrelated. As per MoU, one of the conditions was that the company shall keep their rates 10% less than the market rate to all p .....

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/- paid to four trustees out of which ₹ 47,08,412/- was paid to Dr. Kandekar, managing trustee. The Assessing Officer noted that out of the total amount paid to four trustees, the consultancy fees paid to Dr. Kandekar alone constitutes 88% and the amount of corresponding gross IPD / OPD receipts attributable to his consultancy alone in the hands of the trust, were of ₹ 2,32,29,690/-, which constitutes more than 72% of the total hospital receipts of the trust, which were declared at & .....

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ncessional medical treatment was provided to some of IPD / OPD patients. The assessee furnished list of concessions allowed to IPD / OPD patients, which reflects that number of patients to whom charity was given were 808 and the total bill amount of charity was ₹ 14,49,969/- as against the total receipt of ₹ 3.36 crores. The examination of IPD charity details revealed that amount of concession was more in the nature of discount for services and also free health check-up camps were co .....

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rent year s income reflected the profit gain. The Assessing Officer was of the view that the assessee trust had directly applied its property and income both, for the benefit of D. Kandekar, in clear violation of provisions of section 13(1)(c) of the Act, consequently, the exclusion provisions contained in sections 11 and 12 of the Act had to be applied. The reply of the assessee was that, in fact the trust had benefited by services of Dr. Kandekar as he had treated more patients in the hospital .....

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; 6 lakhs as against which, the trust had sub-let 250 sq. ft. of a medical shop on monthly rent of ₹ 8/10 lakhs. The medical store was not run by him and the assessee trust was earning huge income from rent from the said store. Further, Dr. Kandekar had mortgaged his individual property as a security for taking loan, which he had advanced to the trust and he had not taken any guarantee commission from the trust and he was also paying interest on the bank loan and no interest was charged to .....

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ors to take care of his patients and had not utilized the services of the trust staff or their services. According to the assessee, there was no violation of provisions of section 13(1)(c) of the Act. The assessee further explained that providing medical relief itself was a charity and if any trust was engaged in medical relief work and the profit was not taken by the trustee, then it could be said that the trust was for charitable purposes. Another plea raised by assessee was that since the Inc .....

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for treating patients or stipulates that fixed number of patients be treated on free / concessional basis, but the assessee s claim that the exemption could not be rejected as it treated only small number of free / concessional basis, was not accepted by the Assessing Officer. The Assessing Officer was of the view that in the context of term medical relief occurring in section 2(15) of the Act, where the pre-dominant intention was to provide medical relief and not to earn profits, the trust woul .....

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enses by recovering high charges from the patients undergoing treatment in the upper class, but had also made huge operative surplus in cash in the activity of running the hospital. As per the Assessing Officer, the hospital was being run on commercial lines and which indicated that the hospital was running for the purpose of profit. The Assessing Officer thus held that since the profit motive was contrary to the concept of charity and where the assessee had treated total of 388 on concessional .....

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the trust activity and carrying out the charitable was only incidental. The Assessing Officer further held that there was no charity in running the hospital since there was profit gain by Dr. Kandekar in setting up the institution, though he had given large amount to the trust and had also let out the private property to the trust, but when the hospital was commissioned, he not only shifted his base to the trust hospital but also shifted the Cathlab (I) Pvt. Ltd. to the trust hospital, exercisin .....

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stitution could not be considered as being run for charitable object. In view thereof, the Assessing Officer was of the view that from the amounts of consultancy receipts paid to the managing trustee and the corresponding IPD / OPD receipts in the hands of the trust, it was clear that Dr. Kandekar, the managing trustee himself alone had diverted the income by using the trust infrastructure for his profit / gains, in clear violation of provisions of section 13(1)(c) r.w.s. 13(2)(b) and 13(2)(g) o .....

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ns in respect of the clauses of the Trust Deed, then the matter could be referred to higher authority, but he could not give a finding that the clauses of the Trust Deed were in violation of purposes defined in section 2(15) of the Act. The only provision which was available to the Assessing Officer was to decide whether the activities of the trust being carried out from year to year and more particularly in the year under consideration were in accordance with the definition given in section 2(1 .....

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and embraces objects of general public utility. The Hon ble Supreme Court further held that every object of general public utility would therefore be charitable under the Indian law subject to the conditions imposed by restrictive words i.e. not involving the carrying on of any activity for profit. The CIT(A) noted that the restrictive words referred to in the judgment of the Hon ble Supreme Court were omitted by the Finance Act, 1983 w.e.f. 01.04.1984 and remained so up to assessment year 2008 .....

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g on record adequate materials which could support the finding of denial of benefit of exemption under section 11 of the Act to the assessee, since the Assessing Officer had not appreciated the position of law correctly and the facts for arriving at conclusion. After considering the various observations of the Assessing Officer, which we have already made reference to in the paras hereinabove, the CIT(A) held that from the perusal of submissions made by the assessee, it could be seen easily that .....

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effect on record. On the other hand, assessee had clearly demonstrated that the rates at which the medical services has been provided to the patients are much less than the normal rates and was falling within the concept of medical relief under the definition of charitable purposes given under section 2(15) of the Act. The CIT(A) further held that the Assessing Officer had failed to consider that the higher income of Dr. Kandekar was explained due to the larger capacity of the hospital vis-&agr .....

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rent earned by the trust from letting out only part of the premises itself and on this account also, the benefit had actually flown to the trust and not to Dr. Kandekar as claimed by the assessee. Further, the claim of the Assessing Officer in not following the procedure of allotment of medical shop through open tender, as per the CIT(A), it could not be the basis for rendering the trust in-eligible for the benefit of section 11 of the Act. In view thereof, the CIT(A) was of the view that there .....

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ed to the assessee trust as the dominant object of the assessee trust was profit making. Further, the concessional medical relief provided by the trust was insignificant. The learned Departmental Representative for the Revenue pointed out that the CIT(A) was silent on the violation of provisions of section 13(1)(c), whereas the Assessing Officer had deliberated upon the said aspect in detail. The second objection of the learned Departmental Representative for the Revenue was that the building wa .....

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e medical relief being given to the poor and disadvantaged persons, our attention was drawn to the observation of Assessing Officer in para 9 at page 10 of the assessment order, wherein it was pointed out that out of total receipts of ₹ 3.22 crores, the receipts of ₹ 14,49,969/- only were in the nature of discounts. The learned Departmental Representative for the Revenue referred to the para 12 of the assessment order and pointed out that the CIT(A) has not decided the violation of s .....

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Foundation Vs. DCIT, in ITA Nos.861 & 1423/PN/2012, vide order dated 31.07.2014. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Hon ble Supreme Court in ACIT Vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC). The learned Authorized Representative for the assessee further referred to the clauses of trust deed and pointed out that the Act does not prohibit payment of charges to the trustees but only prohibits .....

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was against the observation of Assessing Officer that the hospital was being used for self-use and it was pointed out that on the other hand, the trustee was running the Cathlab (I) Pvt. Ltd. against which, it was paying rent and was also providing concessional services to the patients of the trust hospital. In view thereof, the activities were not in violation of section 13(1)(c) of the Act. Reliance in this regard was placed on the following decisions:- i) CIT Vs. Pulikkal Medical Foundation .....

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having modern diagnostic, medical and surgical equipment was providing facilities in all branches of medicine by engaging services of several medical specialists. The trust deed was executed on 16.08.2004 and was registered under the Bombay Public Trust Act w.e.f. 16.10.2004. The settlor of the trust was Dr. B.E. Kandekar, who was M.D., D.M. in Cardiology and was the managing trustee of the trust along with his wife and three other trustees. The objects of the trust are reproduced under para 7. .....

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ns 12AA and 80G(5) of the Act, which admittedly, has not been withdrawn till date. The assessee during the year under consideration had shown receipts of ₹ 3.22 crores and income from other sources i.e. the rent received from various portions rented out by the assessee and bank interest at ₹ 48,53,003/- and had declared gross receipts of ₹ 3,89,67,621/-. The expenditure totaling ₹ 3,36,43,059/- included the consultancy fees of ₹ 81,13,117/-, professional fees of  .....

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ily members and in view thereof, the assessee trust was not entitled to the claim of exemption under section 11 of the Act. 15. Under the provisions of section 11 and 12 of the Act, it is provided that the income arising from a property held for charitable or religious purpose shall not be included in the total income of the person, subject to the fulfillment of conditions provided under the said section. In order to avail the benefit of section 11 and 12 of the Act, it is mandatory that the tru .....

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ritable institution fall within the purview of section 13 of the Act. Section 13(1) of the Act starts with a non-obstitute clause i.e. nothing contained in section 11 or 12 of the Act, etc. The section thus, provides that even if income is exempt by virtue of section 11 and/or section 12 of the Act, no such exemption would be allowed to the trust or charitable institution, if any of the provisions of section 13 of the Act are contravened. The provisions of section 13 of the Act are attracted in .....

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religious trust, activities of which are enuring to the benefit of creator or founder or his relation, provisions of section 13(1)(c) of the Act are applicable, which read as under:- 13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof- (a) ….. (b) ….. (c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof .....

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ution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious .....

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the 1st day of June, 1970 16. Under clause (c) to section 13(1) of the Act, it is provided that a trust for charitable or religious purposes or a charitable or religious institution, created or established on or after 01.04.1962, shall forfeit the exemption under section 11 of the Act, if any part of its income enures to the benefit of any interested person referred to in sub-section (3) or any part of such income or property of the trust or institution is, during the previous year, used or app .....

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nues to be made available for the use of the interested party and where any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) and the amounts so paid is in excess what may be reasonably paid for such services and also where the services of the trust or institution are made available to any interested person without adequate remuneration or other compensation. There are other conditions also laid down in sub-section (2) o .....

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erson, member, etc. are the interested parties, in addition to any concern, in which any of the person referred to in clauses (a) to (d) has a substantial interest, are also the interested parties. As referred to by us in the paras herein-in-above, the deduction under section 11 of the Act has been denied to the assessee on two accounts i.e. first for the non-fulfillment of conditions prescribed in section 2 (15) of the Act and also for violation of the provisions of section 13(1)(c) of the Act .....

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Act, 2008 under section 2(15) of the Act w.e.f. 01.04.2009, under which, it has been provided that in case of advancement of any other subject of general public utility shall not be charitable, if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to such trade, commerce or business for a cess, fees, or any other consideration. The restriction clause by way of proviso to section 2(15) is with regard to advanc .....

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rendering the services in furtherance of its activities, it cannot be said that the trust is not charitable. It has been laid down by various legal propositions that where the predominant object of the trust or institution is to carry out the activities for charitable purposes and not to earn profit, it would not lose its character of being for charitable purpose, merely because some profit arises from the activity. The CBDT in its Circle No.11, dated 19.12.2008 had clarified that where the purp .....

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that it was not engaged in charitable activities. Further, the assessee trust was established for the purpose of granting medical relief and the activities having been carried out as per the terms of settlement and the said activities having been recognized as charitable under the provisions of the Act, even recognition given by the Bombay Public Trust Act and also by the registration granted under section 12AA of the Act, we find no merit in the order of Assessing Officer, in this regard. 18. W .....

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wherein it has been laid down that the profitability is not the sole criteria to judge the charitable nature of a society and where the Assessing Officer has failed to take into consideration that income was only applied for the purpose of charity, there was no justification in non-grant of benefit under section 11 of the Act. The Hon ble Kerala High Court in CIT Vs. Pulikkal Medical Foundation (P) Ltd. (supra) had also laid down similar proposition that merely because the assessee was running .....

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effect, but the said issues have not been adjudicated as registration under section 12A of the Act was allowed to the assessee on other issues. It was further held that the Assessing Officer while assessing the income in the hands of charitable trust, has the power to deny exemption to the extent it is covered under section 13(1)(c) of the Act. Accordingly, we find no merit in the reliance placed upon by the learned Authorized Representative for the assessee. 19. The Hon ble Supreme Court in CIT .....

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om the activities. Reference was made to the exclusionary clause applicable at that time and it was held that the same does not require that the activity must be carried on in such a manner that it does not result in any profit. 20. Now, coming to the second aspect of exemption under section 11 of the Act to the assessee, in view of violation of provisions of section 13(1)(c) of the Act. In the facts enumerated herein-in-above and also while making reference to the observations of the Assessing .....

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iven to a company called Cathlab (I) Pvt. Ltd. on a monthly rental of ₹ 9,500/-, which company belonged to Dr. Kandekar and his wife. A MoU was entered into between the trust and the company, as per which it was understood that the company would exclusively provide its services at concessional rates to the patients of the hospital. It has been noted by the Assessing Officer that Dr. Kandekar was carrying out a private practice before joining the hospital run by the assessee trust. The obje .....

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47,08,412/- out of total consultancy fees of ₹ 53,44,934/- paid to four trustees. In this regard, the Assessing Officer observed that the consultancy fess paid to Dr. Kandekar alone constitute 88%. However, the Assessing Officer also admitted that the amount of corresponding gross IPD/OPD receipts attributed to his consultancy alone in the hands of the trust were of ₹ 2.32 crores, which was about 72% of the total receipts of the trust, which stood at ₹ 3.22 crores. 21. We find .....

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es of only ₹ 47,08,412/-. The balance receipts were attributable to the trust as per the agreement between consultant doctors and the trust, wherein only consultancy fees was transferred to their account and the balance charges received from the patients were transferred to the account of the assessee trust. We also find no merit in the objection of Assessing Officer that Dr. Kandekar had shifted his private practice to the trust hospital. Looking at the remuneration generated by Dr. Kande .....

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s paying for their services and claiming the expenditure without utilizing the services of doctors of the hospital trust. The said claim of the assessee has not been rebutted by the Assessing Officer and the contrary inference drawn in this regard, cannot be accepted. We find no merit in the objection of the Assessing Officer, where Dr. Kandekar acting as managing trustee of the assessee trust had supervise the activities of the trust and had devoted time for not only the medical consultancy, bu .....

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to be applied where any amount is paid by way of salary, allowance or other to any interested person out of reserves of the trust or institution, for services rendered by such person to trust or institution. The clauses are attracted in case the amount so paid is in excess of what may be paid for such services. The Assessing Officer has not established the case of non-reasonableness of the amount paid to Dr. Kandekar, who was the interested party in this case and in the absence of the same, the .....

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ad to be paid. If we look at this transaction and compare the same with the MoU signed by Dr. Kandekar with the assessee trust while handing over his building with constructed area of 45,000 sq. ft. on monthly rent of ₹ 6 lakhs, we find no merit in the order of Assessing Officer in holding that the said medical shop being rented out to interested party attracts the provisions of section 13(1)(c) of the Act. In comparison, part of the building measuring 250 sq. ft. was allotted to M/s. Sama .....

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