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2016 (3) TMI 690 - CALCUTTA HIGH COURT

2016 (3) TMI 690 - CALCUTTA HIGH COURT - [2016] 383 ITR 79 - Exemption under Section 10(22A) - whether the assessee had lent money on interest to different companies - dominant or primary purpose of the institution - Held that:- Applying the test laid down in Pulikkal Medical Foundation (1993 (8) TMI 16 - KERALA High Court) one has to ask the question as to what is dominant or primary purpose of the institution. The answer according to us is that the assessee was incorporated with the idea of ta .....

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was incurred by way of expenditure. Thus the surplus was ₹ 42,14,772/- (53,87,985/- 11,02,965/- = 42,85,020/- 70,247/-).

CIT(A), in the second reason assigned by him, though he held that “to qualify for the exemption what is needed is existence of a hospital or other institution solely for philanthropic purposes” but omitted to notice that there was in fact no hospital or other institution for philanthropic purposes. The hospital and health units were in the tea gardens of the t .....

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quoted above, is equally unsound because during that period the learned Tribunal was under the impression, on the basis of evidence adduced, that the assessee had rendered benevolent medical services to the inhabitants of the area besides providing medical assistance to the employees of the tea gardens.

The fourth ground assigned by the CIT(A) that “it cannot probably be said that for the purpose of Section 10(22A) the benefit should, in fact, be aimed at or available to the public a .....

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t ) it cannot in any event be said that the assessee existed in the relevant year for philanthropic purposes because the assessee admittedly accumulated its income.

It is true that the expression used in the section is “any income of a hospital or institution”. But there has to be a nexus between the income and the hospital before any claim for exemption can be made. The nexus is altogether missing. The dominant or primary purpose of the institution should be to render any one or more .....

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e activities outlined above in order to qualify for exemption. But the statute does not provide that the income should have accrued to a hospital or an institution engaged in any one of the five activities. Therefore existence of a nexus between the hospital or an institution engaged in any one of the five activities, and the income is essential. This nexus is missing in this case. This is in addition to the other reasons discussed above why is the assessee not entitled to exemption. - Decided a .....

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g exemption under Section 10(22A) of the Income Tax Act (hereinafter referred to as the Act ). The following questions of law were formulated at the time of admission of the appeal:- i) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in granting exemption under Section 10(22A) of the Act ignoring the fact that the assessee had lent money on interest to different companies? ii) Whether on the facts and in the circumstances of the c .....

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ission by the Central Government the assessee has been registered as a private limited company on 17th July, 1984. During the first accounting period relevant to the assessment year 1986-87, the paid up capital was ₹ 5,040/-. Soon after incorporation as a public limited company, between 28th March, 1984 and 30th March, 1984 the assessee raised a welfare fund of ₹ 4 crores from Assam Frontier Tea Limited, Singlo (India) Co. Ltd. and Empire Plantation (India) Ltd. All the aforesaid thr .....

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was filed, with a claim for refund of tax of ₹ 4,98,664/-. It was claimed that a sum of ₹ 42,14,772/-, earned by way of interest from investments, was the surplus over the expenditure and was exempt under Section 10(22A) of the Act. The assessing officer found that during the relevant assessment year the assessee had earned a sum of ₹ 4,75,673/- by way of interest on fixed deposits and a sum of ₹ 49,12,312/- by way of interest from the different group of companies aggrega .....

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uded a sum of ₹ 7,17,993/- reimbursed by the assessee to Assam Frontier Tea Ltd., Singlo (India) Co. Ltd. and Empire Plantaion (India) Ltd. The assessing officer refused to allow this expenditure and the total income of ₹ 53,17,738/- was assessed to tax. Penalty proceedings were also initiated. The assessing officer refused to allow the exemption under Section 10(22A) of the act on the following grounds:- (a) The employees of the aforesaid three tea gardens at the aforesaid health un .....

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s lent on interest to different companies of the Apeejay Groups. On the aforesaid basis he was of the opinion that the major portion of the corpus was utilized for the purpose of earning interest and not for any philantrophic purposes and medical welfare as claimed. The assessing officer went on to hold that the assessee was an investment company engaged in money lending business. The CIT(A) reversed the order of the assessing officer refusing exemption under Section 10(22A) of the Act on the fo .....

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evant assessment year on the basis of the order dated 9th December, 1992 passed by the learned Tribunal for the assessment years 1986-87 and 1987-88, inter alia, because the basic facts relevant for the assessment year under appeal are essentially the same as were considered by the Tribunal in relation to the appeals for preceding two assessment years. (D) As regards the ground assigned by the assessing officer that the benefits of the alleged philantrophic activities were derived, according to .....

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rm to the object declared. Record is clear that despite objection to deficiency in the object as laid down in the memorandum, the Assessing Officer had nothing to state as regards contravention of the declared object. In an appeal preferred by the revenue the learned Tribunal dismissed the appeal holding as follows:- We find that for the present assessment year the A.O. denied exemption to the assessee following his earlier years orders. This issue came up before the Tribunal for the earlier yea .....

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circumstances, in our opinion, the issue is now covered by the aforesaid decisions of the Tribunal. Mr. Saraf, learned advocate appearing for the appellant submitted that the assessee is an investment company engaged in money lending business as rightly held by the assessing officer. The income earned by the assessee has nothing to do with any hospital. The memorandum of association of the company suggests that the assessee is a commercial house. The alleged philanthropic purposes adverted to in .....

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objects of the company. There are the powers which can be exercised for the purpose of feeding the philanthropic purposes. He submitted that it has been clearly recorded in the memorandum of association that the profits are not to be distributed by way of dividend among the members. We shall examine the rival contentions in our judgment and shall have occasion to advert to the submissions of the learned counsel during discussion to be made hereafter. Section 10(22A) of the Act at the relevant t .....

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eatment of persons suffering from illness or; (b) any income of a hospital or other institution for the reception and treatment of persons suffering from mental defectiveness or; (c) any income of a hospital or other institution for the reception and treatment of persons during convalescence or; (d) any income of a hospital or other institution for the reception and treatment of persons requiring medical attention or; (e) any income of a hospital or other institution for the reception of persons .....

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ted as sing. or pl.] a particular nation, community, or ethnic group: the natives peoples of Canada 3. (one s people) one s employees or supporters. 4. (one s people) dated one s parents or relatives. v. 1 (of a particular group of people) inhabit. fill or be present in.2 fill (an area or place) with a particular group of inhabitants. The word Persons therefore appears to mean human beings in general. A hospital or an institution falling in any one of the five categories mentioned above can come .....

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hropic purposes . Black s Law Dictionary, sixth edition - charitable : The word charitable , in a legal sense includes every gift for a general public use, to be applied consistent with existing laws, for benefit of an indefinite number of persons, and designed to benefit them from an educational, religious, moral, physical or social standpoint. This term is synonymous with beneficent , benevolent . And eleemosynary . Ramanatha Aiyar s Law Lexicon, 1987 edition, explains the meaning of the word .....

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ulchandani, Philanthropic purpose ; It is not always necessary that a philanthropic use must be such as may be beneficial to the humanity at large but it could be limited to the welfare or benefit of fellow human beings belonging to a well defined class or community, who are joined together by comon bonds of religion, race, social, or economic unity. After all, the purpose which is beneficial to a section of the public, is in the larger context beneficial to the human society, but an act solely .....

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appearing in Section 2(15) of the Act and their Lordships laid down the following test:- …The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominan .....

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ng profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg, J., when he said in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] that: if the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, .....

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Gandhi Peace Foundation which has been established for propagation of Gandhian thought and philosophy, which would admittedly be an object of general public utility, undertakes publication of a monthly journal for the purpose of carrying out this charitable object and charges a small price which is more than the cost of the publication and leaves a little profit, would it deprive the Gandhi Peace Foundation of its charitable character? The pricing of the monthly journal would undoubtedly be made .....

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s activity. But it is possible that in a given case the degree or extent of profit making may be of such a nature as to reasonably lead to the inference that the real object of the activity is profit making and not serving the charitable purpose. If, for example, in the illustration given by us, it is found that the publication of the monthly journal is carried on wholly on commercial lines and the pricing of the monthly journal is made on the same basis on which it would be made by a commercial .....

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ch a case, the blood bank would be serving an object of general public utility but since it advances the charitable object by sale of blood as an activity carried on with the object of making profit, it would be difficult to call its purpose charitable. Ordinarily there should be no difficulty in determining whether the predominant object of an activity is advancement of a charitable purpose or profit making. But cases are bound to arise in practice which may be on the borderline and in such cas .....

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by Khanna, J. in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] : [I]f the activity of a trust consists of carrying on a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit. And to the same effect, observed Krishna Iyer, J. in the Indian Chamber of Commerce cas .....

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on - such a condition will qualify for charitable purpose. Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be drawn, in the abse .....

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there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the forme .....

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ion, race, social or economic unity, purely as a matter of charity or goodwill or benevolence and not for profit is entitled to exemption. There is one more condition that such a hospital or institution should exist solely for the aforesaid purposes which can only be achieved if the hospital or institution is actually engaged in any one or more of the aforesaid five activities. The assessee has not undertaken any of the aforesaid five activities. The claim for exemption is based on (a) the objec .....

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to be taken into account according to the judgement in the case of Surat Art Silk Cloth Manufacturers Association (supra). The predominant object of the activity in the relevant year was not to carry out any act of charity or goodwill or bvenevolence. It was on the contrary to earn interest. In the case of Birla Vidya Bihar Trust -Vs- CIT reported in (1982) 136 ITR 445, the question was whether the income arising out of the two schools run by the trust was exempt under Section 10(22) of the Act. .....

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(4), which sought to amend s. 10 of the I.T. Act, it was explained in the memo of the Finance-Bill, 1970, as follows: Sub-clause (a) seeks to insert a new clause (20A) in section 10 of the Income-tax Act retrospectively from the 1st April, 1962, i.e., the date of commencement of the Income-tax Act. The effect of the proposed amendment is that income of the Housing Boards or other statutory authorities set up for the purpose of dealing with or satisfying the need for housing accommodation or for .....

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ence may also be made to the memorandum explaining the provisions in the Finance Bill, 1970, wherein it was observed as follows [(p. 93 of 75 ITR (St.)]: 34. Exemption from tax of the income of hospitals and other medical institutions.-At present, universities and other educational institutions existing solely for educational purposes and not for purposes of profit enjoy complete exemption from tax on their incomes. However, in the case of hospitals and similar other institutions for treatment o .....

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e of charitable and religious trusts and institutions (vide paragraphs 18.1 to 18.5 of this Memorandum), it is proposed to make a specific provision for exempting from tax the income of hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit. The provision, as proposed, will cover also institutions for treatment of mental defectiveness as also those for treatment of persons during convalescence or of persons requiring medical attentio .....

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ofit and, therefore, the exemption u/ss. 10(22) and 10(22A) is not available to them. 2. U/s. 10(20) income of an university or other educational institutions existing solely for educational purposes and not for purposes of profit is exempt. U/s. 10(22A) income of a hospital or other institution referred to therein which exists solely for philanthropic purposes and not for purposes of profit is also exempt. 3. The question for consideration is whether an educational institution existing solely f .....

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, and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption u/s. 10(22). But, in such cases, the applicability of section 11 can be examined and .....

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case of CIT -Vs- Economic and Entrepreneurship Development Foundation reported in (1991) 188 ITR 540 (Cal) the assesee was running a health centre. The surplus of the health certre had been utilized for purchasing a piece of land and medical equipment and the land was intended to be used for setting up another health centre. The question arose whether exemption under Section 10(22A) of the Act was permissible. The Division Bench of this Court held as follows:- …The contention urged by the .....

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other sum of ₹ 59,646 had been spent for purchasing medical equipment. These expenses were incurred exclusively for the health centre and they completely offset the overall surplus of ₹ 3,70,279 for the year under consideration. It is not disputed that the health centre run by the assessee is an institution for reception and treatment of persons suffering from illness or requiring medical attention. A separate account has also been made out for the health centre which was filed befor .....

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t for philanthropic purposes, as the surplus has not been accumulated. The surplus of one health centre has been utilised for philanthropic objects by establishing another health centre. This has been done in furtherance of the philanthropic objects. It is not necessary that the income which has been derived from one health centre has to be ploughed back in the same centre and the assessee cannot be permitted to extend such centres or open new centres. So long as health centres fulfil the object .....

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he case of CIT -Vs- Pulikkal Medical Foundation Pvt. Ltd. reported in (1994) 210 ITR 299 (Kerala) submitted in a compilation by Mr. Kapoor the following views were expressed:- In case a hospital exists solely for philanthropic purposes, even if incidentally profit is earned, the hospital is entitled to the benefit under section 10(22A) of the Act. In order to achieve the main philanthropic objects, the hospital may do some profit earning business provided such profit is appropriated towards the .....

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thropic purposes. All cumulative factors will have to be taken into consideration in order to decide whether the institution exists for philanthropic purposes and not for purposes of profit. Neither the fortuitous factor of having a large surplus in any particular year, nor the fact of diverting some income to objects which are not philanthropic in itself would be decisive of the matter. (Emphasis supplied by us.) Our attention has also been drawn by Mr. Kapoor to a judgement in the case of CIT .....

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), as held above, the amount invested belongs to the hospital and the income derived on such investment is also b. that of the hospital. A hospital is not merely the building in which it is housed. or the equipment that is contained in it, but something more. It is an institution, and that institution belongs to the trust. In dealing with the question whether the income is that of the hospital, the significance of the expression any income of a hospital" in section 10(22A) has to be noted. .....

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of the income. If that is the hospital, that is the trust running it, section 10(22A) must apply. (Emphasis supplied by us.) The aforesaid views were expressed in the light of the following facts of the aforesaid case:- The works related to the hospital of the assessee were started in the year 1973 though it became functional as a hospital only on April 25, 1978. All the activities in the meanwhile were geared to the establishment of the institution and its functioning as a hospital and, theref .....

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or primary purpose of the institution. The answer according to us is that the assessee was incorporated with the idea of tax planning by the Apeejay group. The assessee has merely been sub-serving that purpose. Originally the return was filed showing net surplus of ₹ 42,14,772/-. The expenditure incurred in reimbursing the medical costs to the three group of companies was not shown. By a revised return it was clarified that total income arising out of interest was ₹ 53,87,985/- out .....

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eimbursement of the medical expenses incurred by the donors of the welfare fund, in advancing medical facility to their employees is neither an act beneficial to the humanity at large nor is the same beneficial to a well defined class or community, who are joined together by common bonds of religion, race, social or economic unity. This at best is for the benefit of a group persons employed by the donors of the welfare fund. In the light of the aforesaid discussion we find that the CIT(A), in th .....

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ies incurred in providing medical facilities to their employees. The predominant objective of the activity undertaken in the relevant year was to earn profit and not to render any act of philanthropy. Therefore, the first reason, quoted above by us, assigned by the CIT(A) is also wrong. The third reason given by the CIT(A), quoted above, is equally unsound because during that period the learned Tribunal was under the impression, on the basis of evidence adduced, that the assessee had rendered be .....

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t the facts and circumstances in the relevant assessment year were the same as in the assessment years 1986-87 and 1987-88. During the aforesaid period of two years the learned Tribunal in its judgement dated 5th July, 1995 CIT -Vs- Apeejay Medical Research & Welfare Association (P) Ltd. had granted benefit of exemption on the following basis:- The main objects of the assessee which are clearly brought out in Memorandum of Association are all solely for philanthropic purposes and not for pro .....

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e medical and hospital facilities for both the tea garden labourers and their families as well as for the inhabitants of surrounding areas since 1985. Therefore, considering the totality of facts and circumstances, we hold that authorities were not justified in denying exemption to the assessee u/s.10(22A) of the I.T. Act for both the years, and accordingly we would direct them to grant exemption. The learned Tribunal in deciding the matter for the relevant year altogether ignored the evidence d .....

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re any claim for exemption can be made. The nexus is altogether missing. The dominant or primary purpose of the institution should be to render any one or more of the five activities indicated above. Such a purpose cannot be said to exist in this case because neither of the five activities has been undertaken by the assessee. The income admittedly has no nexus with any one of the aforesaid five activities. Therefore the income is not an income of any hospital or an institution engaged in any one .....

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which is used for agricultural purposes and is either assessed to land revenue in British India or subject to a local rate assessed and collected by officers of the Crown as such. Their Lordships answered the question as follows:- The interest clearly is not rent. Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrear is not su .....

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