2019 (11) TMI 83 - AT - Income Tax

Exemption u/s 11 - Withdrawing registration granted earlier u/s 12A - proof of charitable activity u/s 2(15) - assessee foundation has not been operating as a charitable institution as the trust has allowed the property/hospital of the society to be taken over by Max group by creating various financial and legal obligations and has virtually handed over the activity of the hospital to Max group which are corporate bodies established with a clear intention of profit motive which, according to him, is against the basic principles of charitable organizations - the assessee trust did not fulfill the minimum notified criteria of providing 25% of OPD and 10% of beds in IPD as free treatment to the economically weaker section - Whether activities of the assessee society fall within the meaning of charitable purpose u/s 2(15) read with section 11? - HELD THAT - There is nothing on record to suggest that the hospital is operated by the said companies or by the Board of Management/Directors or shareholders of those companies. From the various details furnished by the assessee in the paper book, it is noticed that the hospital activities were always under the control and supervision of its management/Board of Trustees. A perusal of the analysis of the percentage of payment made by the assessee to Max group of companies vis- vis the total expenditure incurred by the assessee in various years shows that the same was maximum of 25% in the financial year 2005-06 which has gradually reduced to 20% in financial year 2013-14. The above details furnished by the assessee in the paper book suggest the independence of the assessee vis- -vis Max entities with gradual decline in the obtaining of services from them over a period of time. This also substantiates that the assessee society was incurring substantial expenses on its own account other than the payments made to Max entities. We find force in the argument of the ld. counsel for the assessee that the assessee, due to lack of own funds and expertise in the field of construction of hospital and rendering medical services being a highly specialized and technical field, has entered into the agreements with Max group of companies who were already engaged in the said field which not only helped the assessee in building the state of the art facility, but, also to attract talent in terms of specialized doctors and other paramedical staff. Under these circumstances, we are of the considered opinion that it is difficult to agree with the allegation of the DIT(E) that there is diversion of the control of the property of the assessee i.e., the hospital in favour of Max group of companies. Various details furnished by the assessee such as minutes of the meeting of the governing body of the assessee society substantiating that various financial and operational decisions were taken by the said body without involvement of Max entities. The copy of various approvals applied and allotted were in the name of the assessee society without any indication of Max entities. We find the organizational structure of the assessee society/hospital shows that the assessee had independent management and heads of various departments looking after its various operations which were independent from Max entities and no involvement of Max entities have been brought on record. None of the members of the governing body/trustees of the assessee and the directors/board of management of Max are persons specified u/s 13(3) of the IT Act - we are of the considered opinion that the trust has not handed over the management of the hospital to the Max group of concerns. Since there is no allegation by the Revenue that the activities of the trust/society are not genuine or are not being carried out in accordance with the objects of the trust and since the ld. counsel for the assessee before us has demonstrated clearly that the management and control of the hospital was always with the assessee society and the assessee society has not virtually handed over the management of the hospital to the Max group of concerns which are corporate bodies established with the clear intention of profit motive and since the Revenue also failed to bring on record any material to suggest that the assessee trust has refused any patient from the economically weaker section of the society in violation of the guidelines laid down by the Hon'ble Delhi High Court, we find no justification on the part of the Ld.DIT(E) for withdrawing the registration granted u/s 12AA of the Act with retrospective effect. - Decided in favour of assessee

Issues Involved:

1. Withdrawal of registration under Section 12A of the Income Tax Act.
2. Allegation of working for the monetary benefit of Max Group.
3. Compliance with minimum statutory criteria for providing free treatment to economically weaker sections (EWS).
4. Retrospective withdrawal of registration.

Issue-wise Detailed Analysis:

1. Withdrawal of registration under Section 12A of the Income Tax Act:

The appeal was filed against the order dated 28.12.2011 by the Director of Income Tax (Exemptions) [DIT(E)], Delhi, which withdrew the registration granted earlier under Section 12A of the Income Tax Act since inception. The DIT(E) initiated proceedings under Section 12AA(3) based on a proposal from the Assistant Director of Income-tax (E), Investigation Circle-1, New Delhi, which noted various facts during the assessment proceedings for the assessment year 2008-09. The DIT(E) issued a notice to the assessee requiring an explanation for the alleged violation of the Act's provisions.

The Tribunal noted that the DIT(E) could withdraw registration only if either the activities of the trust were not genuine or not carried out in accordance with the trust's objects. The Tribunal found that the assessee was genuinely running a hospital and the activities were in line with its objects of providing medical relief and research. The Tribunal also emphasized that the question of exemption under Section 11 should be examined during the assessment of each year, and the registration under Section 12AA(3) can only be withdrawn if the twin conditions are met.

2. Allegation of working for the monetary benefit of Max Group:

The DIT(E) alleged that the assessee was working for the monetary benefit of Max Group and not as a philanthropic organization. The DIT(E) noted several agreements between the assessee and Max Group entities, including agreements for construction, maintenance, and supply of medical equipment, which were linked to the hospital's gross annual turnover. The DIT(E) argued that these agreements indicated that the assessee was not operating as a charitable institution.

The Tribunal found that the agreements with Max Group entities were commercially prudent decisions due to the assessee's lack of resources and expertise. The Tribunal noted that the hospital's activities were always under the control and supervision of the assessee's management and trustees, and Max entities were only service providers. The Tribunal also observed that the payments to Max Group entities constituted a reasonable percentage of the total expenditure and gradually declined over the years, indicating the assessee's increased independence.

3. Compliance with minimum statutory criteria for providing free treatment to economically weaker sections (EWS):

The DIT(E) alleged that the assessee did not fulfill the minimum statutory criteria of providing free treatment to EWS patients as per the guidelines notified by the Delhi High Court. The DIT(E) noted that the assessee's free treatment and concessional treatment percentages were below the prescribed norms.

The Tribunal found that the assessee had displayed relevant information at the hospital's reception and entertained EWS patients as and when they visited. The Tribunal also noted that the Directorate of Health Services (DHS), Government of NCT of Delhi, had issued appreciation letters for the assessee's work in treating EWS patients. The Tribunal held that non-achievement of the statutory limit, which was beyond the assessee's control, could not be a ground to allege that the assessee was not providing free services to EWS patients.

4. Retrospective withdrawal of registration:

The assessee argued that the power under Section 12AA(3) could not be exercised retrospectively to cancel or withdraw registration for the period before the notice was issued. The Tribunal admitted this additional ground for adjudication, noting that it was purely legal and all material facts were already on record.

The Tribunal referred to various judicial decisions, including the Hon'ble Allahabad High Court in ACIT vs. Agra Development Authority and the Hon'ble Madras High Court in Auro Lab vs. ITO, which held that registration could only be withdrawn from the date of issue of the show cause notice and not retrospectively. The Tribunal concluded that the DIT(E) was not justified in withdrawing the registration since inception.

Conclusion:

The Tribunal set aside the order of the DIT(E) and restored the registration granted earlier under Section 12A of the Income Tax Act. The Tribunal found that the allegations against the assessee were not supported by evidence and that the assessee was genuinely operating as a charitable institution. The additional grounds raised by the assessee regarding retrospective withdrawal of registration were rendered academic and not adjudicated. The appeal filed by the assessee was allowed.

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