2017 (5) TMI 850 - SC - Indian Laws

Exemption from liability of paying building tax under the Kerala Building Tax Act, 1975 - charitable institution - Held that - The Hospital at present conducts heart-transplant surgeries, kidney-transplant surgeries etc. It conducts a number of camps in rural areas as its health check-up programs for creating awareness on blood donation, organ donation, pain and palliative care, free home-care treatment to patients belonging to BPL, free dialysis for deserving patients, etc. The moderate charges which the hospital is levying from its patients, is not for generating profit for the hospital, but only as a mechanism to facilitate free treatment for poor patients, and to treat others at very reasonable rates, as the major chunk of the patients of the hospital belongs to the lower strata of the society. The hospital is charging patients at the lower rate prevalent in other hospitals of its class in the State. With due respect to the Bench which rendered the judgment in S.H. Medical Centre Hospital 2014 (3) TMI 187 - SUPREME COURT , it appears that an error in interpreting Explanation I to Clause 1 of Section 3 of the Act has occurred in not noticing that it contains the word includes and not means . This error led to holding that charitable purpose meant only relief of the poor and free medical relief . Relief to the poor and free medical relief is only one of the facets of charitable purpose and Explanation simply clarifies that too be a charitable purpose. However, the inclusive definition points out that relief to poor and free medical relief is not exhaustive as to what charitable purpose would mean. Thus, in order to find out the true scope of charitable purpose, one will have to look into the judgments of this Court, even if this very expression is examined in the context of the Income Tax Act. We respectfully disagree with the opinion of the Division Bench in S.H. Medical Centre Hospital 2014 (3) TMI 187 - SUPREME COURT . The matter, thus, requires consideration by a Larger Bench.

Issues Involved:
1. Exemption from building tax under the Kerala Building Tax Act, 1975.
2. Interpretation of "charitable purpose" under Section 3(1) of the Kerala Building Tax Act, 1975.
3. Application of the dominant object test for determining charitable purpose.

Detailed Analysis:

1. Exemption from Building Tax under the Kerala Building Tax Act, 1975:
The appellant, a charitable institution, sought exemption from building tax for its hospital building under the Kerala Building Tax Act, 1975. The appellant argued that its institution, which provides medical services, qualifies for exemption under Section 3(1)(b) of the Act, which exempts buildings used principally for religious, charitable, or educational purposes from building tax.

2. Interpretation of "Charitable Purpose" under Section 3(1) of the Kerala Building Tax Act, 1975:
The case hinged on the interpretation of the term "charitable purpose" as defined in Explanation I of Section 3(1) of the Act. The appellant contended that the word "includes" in the explanation should be given a broad interpretation, encompassing various charitable activities beyond just "relief of the poor and free medical relief." The appellant argued that the judgment in S.H. Medical Centre Hospital v. State of Kerala misinterpreted this provision by reading "includes" as "means," thus limiting charitable purposes to only relief of the poor and free medical relief.

3. Application of the Dominant Object Test for Determining Charitable Purpose:
The appellant's counsel, Mr. Nariman, argued that the dominant object test, as established in various Supreme Court judgments under the Income Tax Act, should be applied to determine whether the appellant's activities qualify as charitable. The dominant object test requires that the primary purpose of the institution should be charitable, and any profit-making activities should be incidental. The appellant emphasized that its hospital's primary objective is to provide medical benefits and that any income generated is used for the development of the hospital's infrastructure and subsidized medical treatment for the poor.

Judgment Analysis:

Background:
The appellant, a trust constituted by the Archdiocese of Ernakulam, operates a hospital and claims exemption from building tax under the Kerala Building Tax Act, 1975. The appellant's claim was rejected by the Assessing Officer, and subsequent appeals were also dismissed. The High Court of Kerala dismissed the appellant's writ petition and writ appeal, relying on the Supreme Court's judgment in S.H. Medical Centre Hospital v. State of Kerala.

Supreme Court's Observations:
The Supreme Court noted that the High Court and the Division Bench dismissed the appellant's plea based on the S.H. Medical Centre Hospital judgment. The appellant's counsel argued that the S.H. Medical Centre Hospital judgment contained an apparent error in interpreting Explanation I of Section 3(1) of the Act by reading "includes" as "means," thus limiting the scope of charitable purposes.

Error in Interpretation:
The Supreme Court found substance in the appellant's argument that the term "charitable purpose" in Explanation I should be interpreted broadly, as the word "includes" suggests an inclusive definition. The Court observed that the S.H. Medical Centre Hospital judgment erroneously limited charitable purposes to relief of the poor and free medical relief, ignoring other charitable activities.

Dominant Object Test:
The Supreme Court emphasized that the dominant object test should be applied to determine the charitable nature of the appellant's activities. The Court referred to previous judgments, including Additional Commissioner of Income Tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association, which held that an activity carried out primarily for serving a charitable purpose, even if it generates profit, should not be considered as profit-making if the predominant object is charitable.

Conclusion:
The Supreme Court disagreed with the interpretation of Explanation I in the S.H. Medical Centre Hospital judgment and held that the matter required reconsideration by a Larger Bench. The Court directed the Registry to place the matter before the Chief Justice of India for constituting a Larger Bench to resolve the issue.

Significance:
The judgment highlights the importance of correctly interpreting statutory provisions and applying established legal principles, such as the dominant object test, to determine the charitable nature of an institution's activities. The decision underscores the need for a broader interpretation of "charitable purpose" to include various philanthropic activities beyond just relief of the poor and free medical relief.

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