2018 (3) TMI 795 - HC - Income Tax

Grant of exemption u/s 10(23C)(vi) - satisfaction of the condition of existing solely for philanthropic purposes and not for the purpose of profit - Held that - It is not the case of the petitioner that the room charges or bed charges are negotiable. What is set out by the petitioner in the said letter is that in case of nonmember patients admitted to rooms, the consultants or doctors are permitted to negotiate with the patients for fixing the procedure/surgery charges. The specific case of the petitioner was that liberty is granted to the doctors to negotiate with the patients for fixing the procedure charges and surgery charges and not in respect of room charges. In fact 10% of the negotiated charges are taken by the petitioner. The negotiated amount of fees is collected by the petitioner. After deducting 10% affiliation charges, remaining amount is sent to the doctors through ECS. If in a particular year, very large number of such patients are treated, it is a different matter. If in a given year, only few such cases are entertained 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.

Summary

Issues Involved:
1. Rejection of exemption under section 10(23C)(via) of the Income Tax Act.
2. Determination of whether the petitioner exists solely for philanthropic purposes and not for profit.
3. Consideration of the petitioner's surplus and its impact on the exemption status.
4. Analysis of the petitioner's activities and Byelaws in relation to philanthropic purposes.
5. Evaluation of the petitioner's control over fees charged by consulting doctors and the implications on its charitable status.

Issue-wise Detailed Analysis:

1. Rejection of Exemption under Section 10(23C)(via):
The petitioner, a nonprofit society registered under the Maharashtra Cooperative Societies Act, 1960, had its application for continuation of exemption under section 10(23C)(via) of the Income Tax Act, 1961, rejected by the first respondent. The petitioner argued that it provides medical facilities at subsidized rates and free services to needy patients, and had previously enjoyed exemptions under sections 10(22A) and 80G of the Act. The impugned order was based on several grounds, including the petitioner's surplus, the inclusion of non-philanthropic objects in its Byelaws, and the lack of control over fees charged by consulting doctors.

2. Determination of Whether the Petitioner Exists Solely for Philanthropic Purposes and Not for Profit:
The court emphasized the need to apply the predominant object test, as laid down by the Apex Court in Queen's Educational Society vs. Commissioner of Income Tax. The test requires determining whether the primary objective of the institution is to carry out charitable purposes or to earn profit. The court noted that merely earning a profit does not disqualify an institution from being considered charitable, provided the profit is incidental to the charitable purpose.

3. Consideration of the Petitioner's Surplus and Its Impact on the Exemption Status:
The first respondent had considered the petitioner's surplus over the last 2-3 years as a factor against granting the exemption. However, the court held that the presence of a surplus does not automatically imply a profit motive. The court referenced the decision in Breach Candy Hospital Trust vs. Chief Commissioner of Income Tax, which stated that cross-subsidization within a single unit does not negate the charitable nature of an institution. The court also noted that the petitioner had not diverted surplus funds to non-charitable activities.

4. Analysis of the Petitioner's Activities and Byelaws in Relation to Philanthropic Purposes:
The first respondent had raised concerns about certain Byelaws of the petitioner, such as the provision for payment of honoraria to non-members and the payment of bonuses to employees. The court found that these provisions did not negate the charitable nature of the petitioner, as they were necessary for maintaining a decent hospital and providing good medical facilities. The court also referenced the decision in Deccan Gymkhana vs. Commissioner of Income Tax, which distinguished between the objects and powers of an institution, and held that the presence of certain powers in the Byelaws does not alter the primary charitable objective.

5. Evaluation of the Petitioner's Control Over Fees Charged by Consulting Doctors and the Implications on Its Charitable Status:
The first respondent had noted that the petitioner had no control over the fees charged by consulting doctors for certain procedures and surgeries, and that a percentage of these fees was retained by the hospital as affiliation charges. The court held that this factor alone was insufficient to conclude that the petitioner existed for profit. The court emphasized the need to consider the overall activities and the extent to which medical services were provided at concessional rates or free of charge to non-members and economically weaker sections.

Conclusion:
The court quashed the impugned order and remitted the case to the first respondent for fresh consideration, specifically addressing the aspects related to the provision of medical treatment to economically weaker sections and the fees charged by consulting doctors. The petitioner was given the opportunity to produce additional material within one month, and the first respondent was directed to pass a fresh order within four months. The court kept all contentions on merits open and made the rule absolute on the specified terms.