TMI Blog2018 (3) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... by the petitioner, it will not militate against the character of the activities of the petitioner. On this aspect neither the petitioner has placed details on record nor the first respondent called upon the petitioner to produce the details. Therefore, all grounds which are held against the petitioner, except the two grounds held against the petitioner set out in paragraphs 17 to 22 above, have no basis and on those grounds, the claim of the petitioner could not have been rejected. However, on the two grounds set out in paragraphs 18 to 22 above, the case will have to be remitted to the first respondent for reconsideration with liberty to the petitioner to produce all the material before the first respondent as indicated in the body of the judgment. - Writ Petition No.949 OF 2011 - - - Dated:- 7-12-2017 - MR. A. S. OKA AND MR. A. K. MENON, JJ. For The Petitioner : Mr.M.L.Naniwadekar a/w Mr.Rohan Deshpande and Mr.Ruturaj Gurjar For The Respondents : Mr.Suresh Kumar ORAL JUDGMENT : ( PER A. S. OKA, J.) 1 The submissions of the parties were heard on the earlier date. With a view to appreciate the submissions, the controversy which factu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l treatment. A finding recorded by the first respondent is that it is not the primary object of the petitioner to exist exclusively for philanthropic purposes. Another aspect noted in the impugned order was that from the details filed by the petitioner, it appears that the petitioner has no control whatsoever on the fees charged to the patients referred by the consulting Doctors or the patients of the consultants who get admitted to the rooms as charges are negotiable between the patients and the consulting Doctors. It was observed that the petitioner has no control over the fees charged by the said Doctors. In fact there was no cap prescribed by the petitioner on the amount of fees charged by the Consultants. Further, it was observed that a percentage fees charged by the doctors is retained by the hospital as affiliation charge. This is the one of the main reasons given by the first respondent. 3 Moreover, it was held that in Byelaw 47(e) of the Byelaws of the petitioner, there is a provision for payment of honourariam to members for rendering service and for payment of special bonus to the persons who are not members on the basis of the support and services rendered. Further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e members have better facilities available, any member of public can pay membership fees and get facilities which are available to the members of the petitioner. 5 The learned counsel for the respondent supported the impugned order by submitting that the petitioner is indulging in profiteering. He invited our attention to the findings recorded by the first respondent and in particular the finding recorded in paragraph 6.4 of the impugned order. 6 We have given careful consideration to the submissions. Firstly, it will be necessary to make a reference to relevant provisions of the said Act. What is invoked in the present case is section 10 (23C)(via). For the sake of convenience, we are reproducing relevant portion of section 10 of the said Act which reads thus: 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- ( 1)........................................... ( 23C) any income received by any person on behalf of- ( I)............................................... ..................... ( via) any hospital or other institution for the reception an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting 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 Lok Shikshana Trust case [Lok Shikshana Trust v. CIT, (1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] that: (SCC pp. 274-75, para 41) 41. 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, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Krishna Iyer, J., in Indian Chamber of Commerce case [Indian Chamber of Commerce v. CIT, (1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] where a blood bank collects blood on payment and supplies blood for a higher price on commercial basis. Undoubtedly, in such 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 cases the solution of the problem whether the purpose is charitable or not may involve much refinement and present real difficulty. 19. There is, however, one comment which is necessary to be made whilst we are on this point and that arises out of certain observations made by this Court in Lok Shikshana Trust case [Lok Shikshana Trust v. CIT, (1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] as well as Indian C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be proscribed. Even if 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 former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost.(emphasis supplied) 8 The test which has been 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 profitmaking is the predominant object of the activity, though the purpose is an object of general public utility, it would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d thus: 5. As regards the second ground of the free or concessional treatment given by the petitioner to its own employees, it cannot be said that it is not philanthropy at all. Philanthropy is not restricted to give free treatment only to the extremely poor, but it would also be philanthropy to give treatment at a concessional rate to those who though not extremely poor cannot afford to pay the full and normal charges. There was nothing on record to show that the staff members to whom the concessional treatment was provided were the affording lot not deserving any concession. In any event, that aspect has not been considered by respondent No. 1 at all. 6. As regards the third ground mentioned in the order, it was the duty of the petitioner to pay not only the salary to the staff but to make contributions to the provident fund. It is a statutory obligation under the Employees' Provident Funds Act. On account of unfortunate event of the broker to whom money was paid for investments for the employees provident fund, the employees could not suffer. The petitioner and its directors/trustees could have been prosecuted and sued for non-payment of the provident fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the fees. 12 The learned counsel appearing for the petitioner relied upon a decision of Kerala High Court in the case of Commissioner of Income Tax v/s. Pulikkal Medical Foundation (P.) Ltd. (1994) 210 ITR 299 The Division Bench of Kerala High Court dealt with the earlier provision of section 10 (22A) of the Act which is similar to the provision with which we are dealing with. Clause (22A) of Section 10 provided that any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for the purposes of profit, is not to be included in the total income. In the context of the said provision, the Division Bench of the Kerala High Court considered the meaning of the words philanthropic purposes . Paragraph 16 of the said decision reads thus: 16. Now, we may advert to the meaning of the words philanthropic purposes . Black's Law Dictionary, sixth edition charitable : The word 'charitable', in a legal s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, it will not be disentitled to the exemption under Section 10(22A). It was held that the dominant purpose is a philanthropic one and merely because the Managing Director or the Director getting some advantages while running the institution, it will not be a ground to hold that the purpose of the institution is not philanthropic. It was held that the benefits which are extended to the Managing Director or the Director would be merely incidental to carrying out of the main or primary purpose and so, such benefits would not militate against the philanthropic of character of the institution. Even on the aspect of earning profit, it was held that the philanthropic purpose does not cease to exist so long as profit is being redeployed in the same institution or any other similar institution. Ultimately, in paragraph 28 it was held thus: 28. Thus our main conclusions are as follows : 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding medical facilities and medical help at a reasonable charge and for providing medical facilities to needy and poor free of charge or at subsidised rates, it is necessary for the petitioner to engage a trained staff and medical practitioners. For achieving the aforesaid objects, the professional or other persons who render services have to be paid honourariam. ByeLaw 46 provides that no part of the funds, of society shall be paid by way of bonus or dividend or otherwise distributed to the members. Though the petitioner society is registered under the said Act of 1960, none of the members are entitled to dividend or distribution of profit in any form. This is one factor which ought to have been considered in favour of the petitioner. The first respondent was impressed by the petitioner pays bonus to its staff members. Apart from the contention of the petitioner that the bonus will be a part of wages or salary, the staff and other members as well as medical practitioners are not expected to work with the petitioner on charitable basis if a decent hospital is to be maintained and good facilities are to be provided to the patients. There is nothing wrong, if bonus is paid to the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Division Bench was considering the question whether the assesee Club was a charitable institution. In paragraphs 10 and 11 of the said decision, the Division Bench held thus: 10. As stated above, we are confining our judgment to the facts of this case, Section 2(15), as it stood at the relevant time, defines the words charitable purpose to include relief of the poor, education, medical relief and advancement of any other object of general public utility, not involving carrying on of any activity for profit. In the case of Thiagarajar Charities v. Addl. CIT (1997) 225 ITR 1010 (SC), it has been held that the correct test to be applied was whether the predominant object of the activity was to subserve the charitable purpose or to earn profit. Where profitmaking was the predominant object of the activity, the purpose would cease to be charitable purpose. But, where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose the character of charitable purpose merely because some profit arises from the activity. In that judgment, it has been further laid down that there is a difference between the objects of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t respondent based on the objects specified in the clause (3) of the ByeLaws has no relevance at all. 17 There is one more adverse finding which is recorded against the petitioner. The said adverse finding is that there is no system prevailing of reserving beds for poor or indigent patients. The issue to be addressed was whether the petitioner is providing medical treatment or facilities at nominal charge or free of any charge to a patient belonging to economically weaker section visiting the hospital. Therefore, the test applied of keeping specific number of beds reserved for economically weaker section of the society is not correct at all. Another aspect which is considered by the first respondent is that the amounts spent by patients belonging to economically weaker societies was on an average only 0.93% of the total receipts for the last 4 years. In our view, this by itself is not sufficient to hold that the character of activities carried out by the petitioner indicates that thte object was to earn profit. In fact it was necessary for the first respondent to look into the entire record for ascertaining the income received by the petitioner from the beds/rooms provided in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r were not placed on record by the petitioner. Relying upon this statement, in paragraph 6.4, the first respondent has recorded the following finding: From the details filed it is found that the total number of beds available in the hospital in the general ward is 55, neo nata 4, pediatric 4 and ICU 17. However, as submitted, there is no system of reserving beds for the indigent/economically weaker patients. There are 56 beds in different rooms, wherein the higher class of patients can get admitted. Although the hospital exercises control over the fees for patients in the ward, as mentioned above, there is no control whatsoever over patients referred by consulting doctors or patients who get admitted to rooms and the same is negotiable between the patient and the doctor. The same is the case in respect of surgeon fees also. The hospital has no control over such fees charged by the doctors. There is no cap prescribed by the hospital over the fees charged by the doctors. It is also an admitted fact that a percentage of fees is retained by the hospital from the doctors as affiliation charges. Where patients are compelled to negotiate with the doctors independently and the docto ..... X X X X Extracts X X X X X X X X Extracts X X X X
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