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Mool Chand Khairati Ram Trust Versus Director of Income Tax (Exemptions)

2015 (7) TMI 922 - DELHI HIGH COURT

Denial of exemption under Section 11 - Assessee contended that the Assessee was a charitable institution engaged in running a hospital (both Allopathic and Ayurvedic) and the same constituted a charitable purpose within the meaning of Section 2(15) of the Act - Held that plain reading of the objects indicates that it includes “devising means for imparting education and improving Ayurvedic system of medicine and preaching the same”. It is also expressly clarified that the Assessee is not prohibit .....

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urce for improving Ayurvedic system of medicine would, plainly, be an activity towards the objects as specified. Merely because, running of an Allopathic hospital is not specifically mentioned, it does not necessarily mean that the same would be ultra vires the objects, as establishment of an Allopathic hospital does assist the Assessee in its object of improving the Ayurvedic system and taking assistance from the Allopathic system of medicine. Any activity reasonably incidental to the object wo .....

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e objects and the intent of the Settlor. Thus the activities of the Assessee cannot be held to be ultra vires its objects. The AO and the Tribunal were unduly influenced by the proportion of the receipts pertaining to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly .....

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veral decades? - Held that:- in cases - such as the present case - where the Assessee’s claim for exemption has been accepted for several decades, it would not be open for AO to think of new grounds, which at best raise contentious issues, to cast a wider net of tax. It is trite law, that if two views are possible, the one favoring the Assessee must be adopted. This rule would apply a fortiori in cases where the Assessee’s claim has been consistently accepted by the Revenue in the past. Thus, in .....

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palpably erroneous and successive AOs were wrong in accepting that the activities of the Assessee were in furtherance of its charitable objects, entitling the Assessee to escape the levy of income tax.

Depreciation on assets used for providing Allopathic systems of medicine - Held that:- Revenue did not dispute that the depreciation would be allowable if the activities of the Assessee were considered to be within the scope of its objects. The Tribunal had denied the claim of depreciat .....

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Appellant, a Charitable Trust, has preferred the present appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) impugning the order dated 3rd February, 2012 passed by the Income Tax Appellate Tribunal (hereafter the Tribunal ) in ITA No. 5681/DEL/2010. 2. By the impugned order, the Tribunal allowed the appeal filed by the Revenue assailing the order of the Commissioner of Income Tax (Appeals), which in turn had allowed the appeal preferred by the Assessee against the assessm .....

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on 11 of the Act. 3. Aggrieved by the assessment order, the Assessee preferred an appeal before the CIT (Appeals). The Assessee contended that the Assessee was a charitable institution engaged in running a hospital (both Allopathic and Ayurvedic) and the same constituted a charitable purpose within the meaning of Section 2(15) of the Act. It was urged that as the Assessee had applied its income for charitable purposes, the same was exempt under Section 11 and 12 of the Act. The Assessee further .....

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nst the aforesaid decision of CIT (Appeals) before the Tribunal being ITA No. 5681/DEL/2010. The Tribunal accepted the Revenue s contention that the properties of the Assessee had not been applied towards its objects. The Tribunal held that the Assessee s activities relating to Allopathic system of medicine had more or less supplanted the activities relating to Ayurvedic system of medicine and concluded that pre-dominant part of the Assessee s activities exceeded the powers conferred on the trus .....

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d medical relief through Allopathic system of medicine. Accordingly, the Tribunal directed that the income and expenditure of the Assessee from the activities relating to the two disciplines of medicine, namely Ayurveda and Allopathy, be segregated. 6. Insofar as the Assessee s claim for depreciation was concerned, the Tribunal held that deprecation on assets, used for providing relief through Ayurvedic system of medicine or used in education and research relating to Ayurvedic system of medicine .....

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s Court, by an order dated 15th July, 2013, framed the following questions of law for consideration:- (1) Whether, the Income Tax Appellate Tribunal was justified in law in Confirming the action of the Assessing Officer in denying the claim of exemption u/s 11& 12 of the Income Tax Act, 1961, despite the fact that the assessee is a charitable institution engaged in running a hospital (both allopathic and ayurvedic), which constitutes charitable activity u/s 2 (15) of the Income Tax Act. 1961 .....

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he controversy in the present appeal are as under:- 8.1 Late Lala Khairati Ram executed a Will dated 23rd December, 1927 and Codicil dated 8th January, 1928. In terms of the said Will, certain properties were settled in trust for furtherance of the objects as set out in the Will. The relevant extract of the said Will reads as under:- After meeting the above mentioned allotments the following institutions shall be observed with regard to the property of every description that may remain after my .....

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e and according to need oneor more than one Ayurvedic Hospital may be opened. 8.2 In furtherance of the objects, the Assessee set up a hospital named Shri Mool Chand Khairati Ram Hospital and Ayurvedic Research Institute in Lahore (then in undivided India). After the partition of the country in 1947, the Assessee applied for allotment of land to the Government of India, Ministry of Rehabilitation and Urban Development, in order to continue its activities of running a hospital and an Ayurvedic Re .....

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n no significant change in the nature of the activities undertaken by the Assessee since 1958. The Assessee was granted registration under Section 12A of the Act in December 1974. 8.4 It is not disputed that the Assessee runs dedicated indoor facility and manages 40 beds where Ayurvedic treatment is provided free of cost. It is also asserted by the Assessee that it has made significant contribution in advancing Ayurvedic medicine. The Assessee further claims that the hospital run by it at Lajpat .....

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ficantly lower than the gross receipts from providing treatment under the Allopathic system of medicine. In the year 1959-60, the percentage of receipts pertaining to Ayurvedic system of medicine to the total receipts was 6.34%. The proportion of receipts pertaining to Ayurvedic system of medicine to the gross receipts in the following years has been lower. In the financial year 2005-06 the gross receipts pertaining to Ayurvedic system of medicine constituted 2.66% of the total gross receipts of .....

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he Ayurvedic Research Institute. In the circumstances, the AO held that the primary activity of the Assessee was running an Allopathic hospital. According to the AO, this was not in accordance with the object of the trust set out in the Will of Late Sh. Mool Chand Khairati Ram. This view was also accepted by the Tribunal in the impugned order. 10. Mr. Aggarwal, the learned senior counsel appearing for the Assessee contended that since there was no dispute that the activities of the Assessee fell .....

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act that the proportion of receipts and expenditure for providing treatment under the Allopathic system was larger than for providing Ayurvedic services would not render the activity of running an Allopathic Hospital ultra vires the object of the trust. He contended that the treatment under both, the Ayurvedic system of medicine as well as Allopathic system of medicine was being rendered in the hospital and the Assessee had been endeavoring to advance the cause of Ayurveda by drawing on the Allo .....

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in conformity with the objects of the trust, the registration granted under Section 12A could be revoked by the Commissioner Income Tax. And, as this was not done in this case, it would not be open for the AO to go behind the registration. Mr. Aggarwal submitted that it was not open for the AO to examine the issue whether activities of the Assessee were in conformity with the object since the same had been considered by the Commissioner Income Tax at the time of granting registration under Sect .....

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e year 1959-60 and the same had been accepted by the Revenue. He further pointed out that in several years in the past, the Assessee had been granted exemption under Section 10(22), 10(22A) and Section 10(23C)(via) of the Act. He emphasized that, admittedly, the activities of the Assessee had remained the same since 1959-60 and since the Revenue accepted the claim of the Assessee for exemption under Section 11 of the Act and/or under Section 10(22), 10(22A) and 10(23C) of the Act, in the past, i .....

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of the Division Bench of this Court in Director of Income Tax (Exemption) v. M/s Indraprastha Cancer Society: Income Tax Appeal No. 240/2014, decided on 18th November, 2014. 15. Mr. Raghvendra Singh, learned counsel appearing on behalf of the Revenue controverted the above submissions made on behalf of the Assessee. Mr. Singh submitted that the objects of the trust did not permit running of an Allopathic hospital and thus, the activities of the Assessee were in excess of its objects. He further .....

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11 of the Act would not be available if the same had not been applied towards the objects of the Trust. He stated that in the present case, it was not disputed that the activities of the Assessee fell within the scope of charitable purposes as defined under section 2(15) of the Act, however, this was not sufficient for availing exemption under Section 11(1) of the Act. 16. Mr. Singh referred to the decision of the Supreme Court in Commissioner of Income Tax, Ujjain v. Dawoodi Bohara Jamat: (2014 .....

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no definite determination that the hospital run by the Assessee was in accordance with the objects of the Trust. He further contended that the principle of res judicata was not applicable to proceedings under the Act and even if the exemption had been incorrectly granted in the previous year, it would not entitle the Assessee to claim the same in subsequent years also. He further submitted that the provisions relating to exemption had also undergone material changes from time to time. He referr .....

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t. However, it was submitted that where the exemption under Section 11(1)(a) of the Act has been granted but the asset is applied towards the activities which are not in conformity with the object of trust, further depreciation would not be available on such assets. 19. At the outset, it would be necessary to refer to clause (a) of sub Section (1) of Section 11 of the Act which reads as under:- 11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in .....

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Section 11(1)(a) of the Act indicates that for income to be excluded under the said clause the following conditions must be met:- (a) That the income is derived from property held under Trust wholly for charitable purposes; and (b) The income is applied for such purposes in India. Income from the property, which is set apart for application for such purposes, is also exempted to the extent that it is not in excess of 15% of the income from such property. 21. The expression such purposes clearly .....

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long as the Assessee applies the income from a property held in Trust for charitable or religious purpose, to any charitable or religious purpose, the exemption under Section 11(1)(a) of the Act would be available, notwithstanding that the purpose for which the income is applied is not the purpose for which the property is held in Trust, cannot be sustained as the same would be contrary to the plain language of Section 11(1)(a) of the Act. In order for any income to be excluded from the scope of .....

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ses and sets out which income shall be exigible to taxation. Section 11(1) relates to application of income towards the objects of the trust and exempts income of trusts with objects wholly charitable or religious or parts of income which relate to such objects. 24. Mention may also be made of the decisions rendered by this Court in CIT v. Hotel & Restaurant Association: (2003) 261 ITR 190 (Del.), Bharat Kalyan Pratisthan v. Director of Income-Tax (Exemption): (2008) 299 ITR 406, Director of .....

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ied under Section 11(2) of the Act are met. Although these decisions were rendered in the context of Section 11(2) of the Act, the same would also be applicable while interpreting Section 11(1)(a) of the Act, as Section 11(2) of the Act also uses the expression such purposes which has been interpreted to mean the charitable/religious objects for which the properties are held in Trust. At this stage, it is necessary to refer to Section 11(2) of the Act, which reads as under:- 11(2) Where eighty-f .....

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me, provided the following conditions are complied with, namely:- (a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years; (b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5): 25. The expression such purpose .....

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a) of the Act, only if the income is applied for the charitable purpose for which the properties are held in Trust. 27. We also do not find any merit in the contention that the AO is not entitled to inquire whether the income is applied towards the charitable or religious purpose for which the property, from which the income is derived, is held in Trust. It is necessary for the AO to satisfy himself that the conditions for exclusion, as specified under Section 11(1)(a) of the Act, are met and fo .....

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tion, is wholly without merit. The opening words of Section 12A(1) of the Act read as under:- Section 12A(1) The provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely:- …. 29. The opening words of Section 12A(1) of the Act clearly indicate that the conditions imposed under that section are in addition to the conditions or exemptions as specified under Section 11 and 12 of the Act. .....

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Assessee has been granted a registration under Section 12A of the Act, it would be necessary for the Assessee to comply with the conditions of Section 11 of the Act in order to claim any benefit under the provisions of that Section. 30. The reliance placed by the Assessee on the decision of the Supreme Court in Surat City Gymkhana (supra) is also misplaced. In that case, the Assessee had asserted that its objects were exclusively charitable and had claimed exemption under Section 10(23) of the A .....

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) of the Income- Tax Act constituting as a section of public and not a body of individuals? (B) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that registration under section 12A was a fait accompli to hold the Assessing Officer back from further probe into the objects of the trust? 31. A Division Bench of the Gujarat High Court held that the questions of law raised by the Revenue were covered by its earlier decision in the .....

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tion. Subsequently, the Supreme Court found that the second question was also covered by the decision of the Gujarat High Court in Hiralal Bhagwati (supra) and, accordingly, dismissed the appeal. In Hiralal Bhagwati (supra), the Gujarat High Court had held that once registration is granted under Section 12A of the Act, after accepting that the objects of the Trust are charitable, the AO cannot take a decision to the contrary. This would stand to reason because once a higher income tax authority .....

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necessary for the AO to conduct this exercise for each assessment year and the grant of registration under Section 12A of the Act would not prevent or in any manner impede the AO from conducting this exercise. 32. The only controversy that remains to be addressed is whether the AO and the Tribunal were justified in holding that the Assessee had applied its income for purposes other than its objects. 33. According to the Revenue, the objects of the Trust would not permit running of a hospital wh .....

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atients and the Ayurvedic treatment provided by the hospital utilizes methods of investigation used under the system of modern medicine. The relevant extract of the said letter is quoted below:- As is evident from the name of the hospital, this hospital is pioneer in the field of Ayurvedic Education and improving Ayurvedic system of medicine by Ayurvedic Research. Over the past several years the hospital has developed new techniques of tendering services in the ayurvedic medicine; to name a few: .....

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Churna for Sciatica c) Mukhdushikahar Churna for acne, Hyper pigmentation d) Shwitrahar Churna for leucoderma 3. To spread awareness and educate the ayurvedic physicians, the following work has been done; a. Tenth Century granths have been translated into Hindi like Ashtang Hridya, Charak Samhita, Bhashjya Ratnawali etc. b. The following books and literature has been published; i. Dehadhatwagni Vigyanam ii. Panch Karma Chitiksa iii. Chikitsa - Kalika iv. Compilation of Sutras from Different &qu .....

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c medicines are dispensed and provided at nominal cost and in case of deserving patient even free. iv. Every third Friday of the month, trust organizes Ayurvedic Sambhasha Parishad and doctors from far and wide come and attend the event. v. Scholarships to the students of Shrimadhyanand Ved Arsh Mahavidhayala Nyas are given to encourage and promote Ayurveda. vi. On side camps are organized at various places to promote Ayurvedic system of medicine. vii. Our Ayurveda charyas are involved and engag .....

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of patients coming for Ayurvedic treatment to the hospital. Besides this, Moolchand has developed the following important patient medicines: a. Moolchand Chitrak Haritaki for bronchitis, allergic rhinitis, sinusitis and continuous dry cough b. Raj Rasayan for rejuvenation, prostate enlargement, urinary disorders. c. Chyawan Prash as general rejuvenative tonic. d. Abhrak Miasma for cardiac ailments, fever, bronchitis, chest congestion, bronchial asthma. 5. It has been clinically proven as result .....

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icine (Gastroenterology, Respiratory & Pulmonology, Cardiology, Oncology and internal Medicine): Department of surgery (General Surgery, Uro Surgery, cosmetic and plastic surgery, paediatric surgery); Department of Orthopedics; Department of Anesthesia; Department of Paediatrics; Department of Neonatology, Department of Nephrology; Department of Obs & Gynae; Department of Neurology; Department of Dental; Department of Ophthalmology; Department of ENT and Department of physiotherapy. This .....

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reas in order to augment health care services using Ayurvedic system of medicine. 7. In order to further - spread education, awareness and help in research in ayurvedic and Modern Medicine a full fledged scientific library is maintain by the hospital which has : a. More than, one thousand hooks are available in the library including all leading journals. b. Besides various subscriptions available, the library is open for student staff physicians, traiees, interns and technicians. 8. To further s .....

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one to improve Ayurvedic system of medicines and preaching the same. It is respectfully submitted that your contentions/observations that 'it is no where permitted to open and run Allopathic Hospital' is prima facie untenable because of the fact that Trust has opened primarily an ayurvedic Hospital and taking help from Allopathic system of medicines or any other system of medicines is not prohibited, it means that it is permitted. While promoting Ayurveda, the other system of medicine al .....

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mmunity to choose the system of medicines. Thus while providing Ayurveda and continuously improving the Ayurvedic system of medicines, patents wanting allopathic treatment are being provided Allopathic treatment as well. This is unique Hospital where in order to improve Ayurvedic system of medicines and create awareness about the Ayurvedic system of medicines are being adopted. The name of the Hospital is not Moolchnd Hospital but Moolchand Khairati Ram Hospital and Ayurvedic Research Institute. .....

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urvedic system of medicine draws significantly from investigation techniques used under modern medicine system. In the circumstances, the limited issue to be addressed is whether running of such hospitals which provides Allopathic as well as Ayurvedic treatment and includes investigation techniques of modern medicine would be contrary to the object of the Assessee Trust. 35. A plain reading of the objects indicates that it includes devising means for imparting education and improving Ayurvedic s .....

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sessee s endeavour of running a hospital providing modern techniques and treatment which would also be a source for improving Ayurvedic system of medicine would, plainly, be an activity towards the objects as specified. Merely because, running of an Allopathic hospital is not specifically mentioned, it does not necessarily mean that the same would be ultra vires the objects, as establishment of an Allopathic hospital does assist the Assessee in its object of improving the Ayurvedic system and ta .....

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he attainment of that object, for such extension merely permits something to be done which is connected with the objects to be attained, as being naturally conducive thereto. 37. Although the above observations were made in the context of interpretation of the Object Clause of a Memorandum of Association of a Company, the principle would also be applicable to determine whether any activity is ultra vires the purpose of a Trust. 38. Thus, in our view, the AO and the Tribunal erred in concluding t .....

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g to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly, significant activities are carried out by the Assessee for advancement and improvement of the Ayurvedic system of medicine in the institution established by the Assessee and though the receipts from the Allopath .....

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ed out by the Assessee have been accepted as being amenable to exemption under Section 11 of the Act for the past several decades. In the past period, the Assessee has been granted exemption under Section 11 of the Act and also under Section 10(22)/10(22A) or Section 10(23C) of the Act. Concededly, the exemptions granted to the Assessee for past several decades would not be available if the activities of the Assessee were considered by the concerned AOs/Authorities to be ultra vires its objects. .....

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have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.. 41. In Parashuram Pottery Works Co. Ltd. v. ITO: (1977) 106 ITR 1 SC, the Supreme Court reiterated the principle that if the parties have allowed a position to sustain, it would not be appropriate to change the position in a subsequent year. The said decisions have also been followed by the Supreme Court in its later decision in Ex .....

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usible, it would be, plainly, whimsical to frame an assessment contrary to the position accepted in earlier years. This would render the exercise of assessment highly subjective; clearly, an Assessee cannot be subjected to such vagaries. Indisputably, the powers of AO are wide but its exercise cannot be undisciplined. In cases where there is a palpable mistake or the position accepted by the Revenue in earlier years is apparently erroneous, the AO would not be bound to accept the view of his pre .....

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