2018 (12) TMI 1390 - HC - Income Tax

Cancellation of registration u/s 12AA - charitable activities - Display and distribution of religious books free of cost in a small book shop without charging any rent or electricity charges - Held that - The assessee had set up a bookshop in the assessee s hospital for displaying Christian literature, which were distributed free of costs. Although no rent or electricity charges were received, as per the Assessment Order, the assessee had violated and had incurred disqualification under Section 13(1)(b) of the Act. The argument of the Revenue fails to notice however that the primary function of the assessee was to operate and run a hospital and provide medical facilities to public at large. Medical aid and facilities were not denied on the ground of religion or restricted to persons of a particular religion. General public was the beneficiary. Book shop had also stored and was distributing books on philosophy, moral science etc. In cases of illness etc. patient and attendants do like to read religious books and pray. To attract and fall foul of Section 13(1)(b) the trust or the institution should be created or established for the benefit of a particular religion or group. Display and distribution of religious books free of cost in a small book shop without charging any rent or electricity charges would not change the core and primary nature of charitable activity carried out by the respondent-assessee as to attract disqualification under Section 13(1)(b) of the Act. Recovery of expenses from the employees was found to be much less than the actual expenditure incurred by the assessee - Held that - This Court is of the opinion however, that part payment of electricity or water charges or incurring maintenance expenses for the residential accommodation for employees would not result in violation of Section 13(2)(b) of the Act. This provision is attracted when land, building or other property of the trust or charitable institution is made available to a person referred to in subsection (3) to Section 13 without charging adequate rent or other compensation. Assessing Officer has not pointed out any abnormal or high expenditure on the aforesaid account made to benefit a particular employee covered under Section 13(3) of the Act. It is not shown that the employees were not discharging duties of equal market value. Residential accommodation within the hospital and assets owned by the respondent-assessee had to be maintained. Payment of electricity charges etc. would depend on the terms of employment. The assessment order does not refer to the specific details of purported subsidy paid/incurred and also how employees were covered under Section 13(3) of the Act. As not disputed and challenged that the respondent-assessee was providing medical facilities including free medical facilities. Cost of medicine would depend on several aspects and assumptions should not be drawn. Purchase price of medicines was not disputed. Charging of market prices from those who can afford, and lower prices from others attending free OPD would in fact support the stand of the respondent-assessee. Even otherwise the assertion would not establish and show that the respondent-assessee was not providing or was not engaged in charitable activities. Income and revenue earned have not been diverted or misused. Without controverting the statement the Assessing Officer held that there was a possibility that the Specific Purpose Fund might have been credited to the corpus directly in earlier years. This possibility, he observed, could not be ruled out. This adverse finding was purely an assumption and not a finding in law. In case of doubt, the Assessing Officer should have examined and verified the issue in depth and detail. The respondent-assessee, as is apparent, had stated that the amount of the Specific Purpose Fund had been examined in earlier years and the addition was not justified. - Decided in favour of assessee

Issues:
1. Appeal by Revenue under Section 260A of the Income Tax Act, 1961 regarding cancellation of registration of respondent-assessee under Section 12AA.
2. Contribution to churches/institutions for advertisement.
3. Selling of medicines from the pharmacy.
4. Smile Surgery Project and commercial activity.
5. Surplus generated in the Fun Fair Fund.
6. Manufacture of medicines.
7. Incident relating to import of medical equipment.
8. Alteration in Memorandum of Association.
9. Setting up a bookshop in the hospital for Christian literature.
10. Expenses incurred on residential accommodation.
11. Difference in cost of medicines in General OPD and free OPD.
12. Specific Purpose Fund treatment as income.

Analysis:
1. The Tribunal upheld the cancellation of registration of the respondent-assessee under Section 12AA of the Act. The Tribunal found that the respondent's contributions to churches/institutions for advertisement were justified as the amount was meager and did not indicate a benefit to any particular community. The Tribunal also dismissed the objection regarding selling of medicines from the pharmacy, stating it was not the main objective and the profits were used for charitable activities.

2. The Tribunal rejected the objection related to the Smile Surgery Project, stating that the surgeries performed were not commercial activities as patients were not charged. The Tribunal also found no issue with the surplus generated in the Fun Fair Fund, as it was used for ex-gratia payments to ex-employees. The manufacture of medicines in the pharmacy was deemed acceptable as the profits were utilized for charitable purposes.

3. The Tribunal addressed the incident of import of medical equipment, stating it was distant in time and still under consideration. The alteration in the Memorandum of Association was considered minor and did not change the primary purpose of providing medical relief. The Tribunal dismissed the Revenue's additional aspects, stating they were not raised before and should not be considered.

4. The Tribunal analyzed the setting up of a bookshop in the hospital for Christian literature, concluding that it did not violate the Act as the primary function was to provide medical aid to the public. The objection regarding expenses on residential accommodation was dismissed, as it did not violate Section 13(2)(b) of the Act. The difference in cost of medicines for patients was deemed unsubstantiated, and the treatment of the Specific Purpose Fund as income was based on assumptions and not a legal finding.

5. The Court found no substantial question of law for consideration and dismissed the appeal, noting that the raised issues were not argued before the Tribunal and should not be entertained at this stage. The judgment highlighted that no injustice had been done, and the issues were thoroughly examined to ensure fairness.

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