2016 (3) TMI 690 - HC - Income Tax

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 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 of which ₹ 11,02,965/- was spent in reimbursing the medical cost of the three companies and a sum of ₹ 70,247/- 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 three tea companies who had provided the welfare fund of ₹ 4 crores. The assessee had merely reimbursed a sum of ₹ 11,02,965/- to those companies 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 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 as a whole is not a correct statement of law. We already have expressed our views in that regard which need not be reiterated. The learned Tribunal was wrong in proceeding on the basis that the facts and circumstances in the relevant assessment year were the same as in the assessment years 1986-87 and 1987-88. Going by the test laid down by a Division Bench of this Court in the case of Economic & Enterpreneurship Development Foundation (1991 (1) TMI 126 - CALCUTTA High Court ) 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 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 of the five activities. It is true that the statute does not provide that the income should have been derived from hospital or any of aforesaid five 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 against assessee

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was justified in granting exemption under Section 10(22A) of the Income Tax Act despite the assessee lending money on interest to different companies.
2. Whether the Tribunal was justified in holding that the assessee fulfilled the conditions stipulated in Section 10(22A) of the Income Tax Act, 1961, and directing to allow deduction under Section 10(22A) of the Act.

Issue-wise Detailed Analysis:

Issue 1: Justification of Exemption Under Section 10(22A) Despite Lending Money on Interest
The revenue appealed against the Tribunal's decision affirming the CIT(A)'s order allowing exemption under Section 10(22A) of the Income Tax Act for the assessment year 1988-89. The main contention was that the assessee had lent money on interest to various companies, which the assessing officer argued indicated that the assessee was engaged in money lending business rather than philanthropic activities. The assessing officer found that a substantial portion of the corpus was utilized for earning interest rather than for philanthropic purposes, leading to the conclusion that the assessee was an investment company engaged in money lending.

Issue 2: Fulfillment of Conditions Stipulated in Section 10(22A)
The CIT(A) reversed the assessing officer's decision, stating that lending money to group companies did not necessarily mean the assessee was an investment company or existed solely for profit. The CIT(A) emphasized that the existence of a hospital or other institution for philanthropic purposes was sufficient for exemption under Section 10(22A). The CIT(A) also referenced a previous Tribunal order for assessment years 1986-87 and 1987-88, which found similar facts and granted exemption. The Tribunal upheld the CIT(A)'s decision, noting that the primary object and activities of the assessee conformed to the declared philanthropic purposes, and the funds were raised for such purposes.

Detailed Judgment Analysis:

Legal Framework and Interpretation:
Section 10(22A) of the Income Tax Act exempts "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 purposes of profit." The court analyzed the meaning of "philanthropic purposes" and "not for purposes of profit," referencing various legal dictionaries and precedents. The court concluded that the exemption applies if the hospital or institution exists solely for philanthropic purposes and not for profit, and the income is used for such purposes.

Assessment of Assessee's Activities:
The court found that the assessee's primary activity during the relevant year was earning interest, not engaging in any of the five specified activities under Section 10(22A). The assessee's claim for exemption was based on the objects in its memorandum of association and the reimbursement of medical expenses to three group companies. However, the court noted that the income arose from interest, not from any philanthropic activities. The predominant object of the assessee's activities was to earn interest, not to carry out charitable purposes.

Previous Tribunal Decisions and CIT(A) Reasoning:
The court disagreed with the CIT(A)'s reasoning that lending money to group companies did not negate the assessee's philanthropic purpose. The court also found that the Tribunal's reliance on previous decisions for assessment years 1986-87 and 1987-88 was misplaced, as the facts and evidence differed. The court emphasized that the assessee did not undertake any of the specified activities for philanthropic purposes during the relevant year and that the predominant objective was profit-making.

Conclusion:
The court concluded that the assessee did not fulfill the conditions for exemption under Section 10(22A) as it did not engage in any of the specified activities for philanthropic purposes and its primary objective was to earn interest. The court answered both questions in the negative, in favor of the revenue, and allowed the appeal.

Final Judgment:
The appeal was allowed, and the court held that the assessee was not entitled to exemption under Section 10(22A) of the Income Tax Act for the assessment year 1988-89. The decision of the Tribunal and the CIT(A) was overturned.

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