2015 (9) TMI 915 - HC - Income Tax

Withdrawal of exemption granted under Section 10(23C)(iv) w.e.f. AY 2004-05 - status of Hamdard Laboratories questioned - whether the nature of objects/activities of HNF, as well as the third set of trusts (i.e. Jamia Hamdard University, HES, AIUTC, BEB) has a bearing on the classification of Hamdard s objects? - Held that - Hamdard had been carrying out its since charitable activities through HNF since the latter was set up, and HNF enjoyed the benefit of exemption under Section 11 of the Act since its inception on 12.05.1964. HNF s charitable status was further approved by the CIT(A) in its order dated 31.01.2012. However, the DGIT(E) has drawn a distinction between corpus and non-corpus donations of Hamdard to HNF, the non-corpus fund which is the source of HNF s charity comprises of a small proportion of Hamdard s total donation to HNF. The DGIT(E) held that the predominant portion of donation is applied towards building HNF s corpus as opposed to being applied for charitable purposes and the extent of actual charity carried out by HNF is not significant. However, in this Court s opinion, Hamdard rightly contends that the DGIT(E) erroneously drew a distinction between corpus and non-corpus donations made by it to HNF. The resolutions of Hamdard placed on record clearly mandate that the interest income generated from corpus donations was to be utilized for charitable purposes. Revenue argument that Hamdard had been enjoying enormous profit margins year after year, generating considerable surplus and consequently, its activities cannot be considered as those of a charitable organisation runs afoul a plethora of Supreme Court decisions, the most recent being Queen s Educational Society (2015 (3) TMI 619 - SUPREME COURT ), where, following the law laid down in Surat Art Silk 1979 (11) TMI 1 - SUPREME Court , Aditanar Educational Society 1997 (2) TMI 3 - SUPREME Court , and American Hotel and Lodging 2008 (5) TMI 17 - SUPREME COURT OF INDIA , the Court held that merely because an educational institution is generating surplus does not imply that it ceases to enjoy the benefit of exemption under Section 10(23C)(iii-ad) of the Act. This Court finds that the DGIT(E) misconstrued the nature of Hamdard s activities, inasmuch as it held them to be in the nature of business. This Court has already held above that Hamdard s objects are charitable in nature, and its activities relating to manufacture and sale of unani medicines and other allied businesses are only meant to act as a source of funds for its charitable activities. It is undisputedly a case of a business held in trust, and Hamdard has been consistently applying the proceeds of its activities for charitable purposes. Whether Hamdard accumulated and applied its income towards its objects? - Held that - Hamdard continues to apply its income from its business activities for charitable purposes in accordance with its Trust Deed. It is baffling that the DGIT(E), on one hand, justified the ruling in Hakim Abdul Hamid (supra) on the ground that the reserve fund was to be utilized for Hamdard s business whereas on the other hand, withdrew the exemption under Section 10(23C)(iv) of the Act for the reason that Hamdard was applying and accumulating its income for business purposes. The DGIT(E) fell into error in reasoning that in light of the deletion of clauses in the Trust Deed which obligated Hamdard to utilize the Reserve Fund for business purposes this Court s decision in Hakim Abdul Hamid (1972 (2) TMI 14 - DELHI High Court) does not hold any relevance. This Court also notes that the Revenue granted exemption to Hamdard under Section 10(23C)(iv) of the Act vide its order dated 28.12.2007, with complete knowledge of Hamdard s activities. It is obvious that Hamdard would be required to invest funds in such activities in order to sustain its charitable purpose. In such circumstances, it is incomphrenesible that the DGIT(E) would construe Hamdard s application or accumulation of funds towards its activities, which constitute a part of its objects, as a violation of any of the statutory conditions imposed under Section 10 or Section 11 or those imposed by the order dated 28.12.2007. Hamdard has rightly placed reliance on this Court s decision in DIT v. Eternal Science of Man s Society, (2006 (3) TMI 114 - DELHI High Court) where the Court allowed acquisition of moveable and immoveable property if it achieved the objects of a charitable trust. Therefore, this Court holds that Hamdard did not fail to apply or accumulate its income/surplus towards its objects. Whether Hamdard accumulated its income in excess of five years? - Held that - DGIT(E) has misintepreted the provision concerning accumulation of income, third proviso to Section 10(23C) (a), which forms condition (a) in the order granting exemption under Section 10(23C)(iv) dated 28.12.2007. That provision mandates that income accumulated in excess of 15% of the total income should be utilized within five years of the period of accumulation. It does not bar all forms of accumulation. The DGIT(E) has nowhere concluded that Hamdard accumulated in excess of 15% of the income, much less concluding that any amount in excess of 15% accumulated by Hamdard was not utilised within a period of five years of its accumulation. Further, Revenue s contention that Hamdard had admitted a certain amount to be deemed income within the meaning of Section 11(3) of the Act does not conclusively determine the issue. It is settled that estoppel does not apply under the Act and the assessee can resile from an incorrect position it had adopted earlier (see CIT v. Bharat General Reinsurance, 1970 (12) TMI 5 - DELHI High Court ). Did Hamdard invest its funds in violation of condition (b) stipulated in the order dated 21.08.2013? - Held that - A perusal of the order dated 22.02.2012 indicates that the Revenue had alleged violation of third proviso to Section 10(23C) of the Act. However, there was no finding on the same. Further, the written submissions filed by Hamdard, including the submissions dated 21.05.2013 relied upon by the Revenue, also do not deal with such allegation. Given these facts, this Court does not have any basis to accept the Revenue s contention that this issue was the subject matter of hearing before the DGIT(E). Therefore, the Revenue s submission that Hamdard was aware of allegations of violation of this condition does not have any merit. In such circumstances, Revenue cannot rely upon this purported non-compliance for withdrawal of exemption under Section 10(23C)(iv). Did Hamdard violate condition (c) of the order of exemption - Held that - Hamdard s failure to maintain separate books of accounts is not fatal to its case, since such an obligation would have existed only in the event of applicability of condition (c). This Court s ruling in PHD Chamber of Commerce & Industry (2012 (11) TMI 429 - DELHI HIGH COURT ) also supports this conclusion. In that case, the Court held that the services performed by a trade, professional or similar association, such as a chamber of commerce and industry, could not be held to be in pursuit of a business or trade with a profit motive and would not qualify as a business activity. Thus, Section 11(4A) of the Act would be inapplicable to such associations and they are not required to maintain separate books of accounts to avail exemption from tax. This Court, upon an examination of Hamdard s objects, has already concluded that it is not carrying on a business of the nature envisaged in condition (c) of the order of exemption/seventh proviso to Section 10(23C). Consequently, it is not required to maintain separate books of accounts. Did Hamdard cease to be a charitable institution with effect from 01.04.2009? - Held that - arguendo if Hamdard s objects were to be construed to be falling within the residual category of charitable purpose with the result of attracting the applicability of the first proviso, it would not cease to be a charitable organisation with effect from 01.04.2009. The interpretation of first proviso put forward by the DGIT(E) would exclude all entities advancing an object of general public utility from the definition of charitable purpose if such entities carry on any activity of trade, commerce or business, irrespective of the nature of application of surplus generated from such activity. This unduly broad interpretation has been rejected by this Court in Institute of Chartered Accountants of India (2013 (7) TMI 205 - DELHI HIGH COURT ), where the Court held that while determining whether an assessee is carrying on business, the dominant purpose test laid down in Surat Art Silk 1979 (11) TMI 1 - SUPREME Court , albeit in a different context, would continue to apply. This Court has already held above that Hamdard s dominant purpose is charitable in nature, and it is not guided by the motive of profit-making. Therefore, the first proviso to Section 2(15) does not alter the charitable status of the organisation - Decided in favour of assessee. Reopening of assessment - Held that - In the order dated 25.05.2012, besides a general reference to Hamdard s alleged failure to disclose all material facts, there is no reference to the particular facts which have not been disclosed. In such circumstances, this Court holds that the pre-condition for reopening of assessment after the expiry of four years has not been met in this case. Also the reasons for reopening of assessment stated in the orders dated 16.04.2012 and 25.05.2012 are identical to those contained in the order dated 28.07.2013. Therefore, in light of this Court s order the basis for re-opening of assessment proceedings for AY 2005-06 does not survive. Consequently, the notice of reopening dated 27.03.2012 and orders dated 16.04.2012 and 25.05.2012 passed by the ADIT(E) are hereby quashed.- Decided in favour of assessee. The orders dated 10.07.2013 passed by the CIT(A) for AYs 2006-07 to 2009-10 denying exemption to Hamdard under Section 11 of the Act are quashed - Decided in favour of assessee.

Summary

Issues Involved:
1. Withdrawal of exemption under Section 10(23C)(iv) of the Income Tax Act, 1961.
2. Reopening of assessment proceedings for AY 2005-06.
3. Validity of CIT(A)'s orders dated 10.07.2013 for AYs 2006-07 to 2009-10.

Detailed Analysis:

1. Withdrawal of Exemption Under Section 10(23C)(iv)
The primary issue was whether Hamdard Laboratories (India) ("Hamdard") violated conditions for exemption under Section 10(23C)(iv) of the Income Tax Act, 1961. The DGIT(E) withdrew the exemption citing:
- Hamdard applied and accumulated income towards business activities, not its charitable objects.
- Accumulated income beyond five years.
- Investments not in accordance with Section 11(5).
- Business not incidental to objectives and lack of separate books of accounts.
- Post-01.04.2009, Hamdard ceased to be a charitable institution due to the amended definition of "charitable purpose."

The court examined Hamdard's Trust Deed and concluded that its objects fell within the first three categories of 'charitable purpose' under Section 2(15) (i.e., relief of the poor, education, and medical relief), and not the residual category. It was held that Hamdard's activities, including donations to Hamdard National Foundation (HNF), were in furtherance of its charitable objectives. The court rejected the DGIT(E)'s reliance on the Supreme Court's decision in Thanthi Trust, holding that Section 11(4A) was not applicable to businesses held under trust. The court also found that Hamdard did not fail to apply or accumulate its income/surplus towards its objects and that the first proviso to Section 2(15) did not apply to Hamdard post-01.04.2009 as its dominant purpose remained charitable.

2. Reopening of Assessment Proceedings for AY 2005-06
The reopening of assessment for AY 2005-06 was primarily based on the withdrawal of exemption under Section 10(23C)(iv). The court found that Hamdard had disclosed all material facts during the original assessment proceedings, and there was no failure on its part to disclose fully and truly all necessary facts. The reopening was thus based on a mere change of opinion, which is not permissible. Consequently, the notice of reopening and the orders dismissing Hamdard's preliminary objections were quashed.

3. Validity of CIT(A)'s Orders Dated 10.07.2013 for AYs 2006-07 to 2009-10
The CIT(A) denied exemption under Section 11 of the Act, holding Hamdard as not engaged in charitable activities. The court found that the CIT(A) passed the orders without providing Hamdard an opportunity for oral hearing and without considering its submissions. The orders were also based on the erroneous withdrawal of exemption under Section 10(23C)(iv). The court held that the CIT(A) violated principles of natural justice and quashed the orders.

Conclusion
The court quashed the DGIT(E)'s order dated 21.08.2013 withdrawing Hamdard's exemption under Section 10(23C)(iv) and directed a refund of any amounts collected. The notice of reopening assessment for AY 2005-06 and related orders were also quashed. Additionally, the CIT(A)'s orders denying exemption under Section 11 for AYs 2006-07 to 2009-10 were set aside.