2020 (11) TMI 119 - HC - Income Tax

Exemption u/s 11 - proof of activity carried on by the organisation are charitable in nature - levying and collecting of charges for the services and the earning of surplus income for the periods in question - petitioner is the Parivar Seva Sanstha runs 32 clinics pan India and is engaged in the activities of population control, medical relief, social marketing of contraceptives, mass level programmes, the education of youth in family planning, and other societal measures in the aforesaid areas - Denial of exemption as clinic had earned a surplus in some years - HELD THAT - The grant of exemption to the clinic run by the Sanstha at Defence Colony, New Delhi would also support the position that the activity carried on by the organisation has been accepted to be charitable in nature, subject of course, to the examination of accounts and deployment of surplus earned, if any, for each financial period in question to satisfy the test of pre-dominant activity carried on by the organisation. Though profit earning should not be the dominant object of the institution, there is no bar to it being a mere incident of its operations. To hold that there should be a bar on the earning of profits would only serve to make the institution unviable. The provision for exemption in the Delhi Act specifically provides for this situation in the imposition of the condition that such society is supported wholly or in part by voluntary contributions, (and) applies its profits, if any, or other income in promoting its objectives and does not pay any dividend or bonus to its members . The Madras enactment does not employ the same phrase and extends the exemption to all charitable hospitals and dispensaries but not including residential quarters attached thereto . The deployment of the profits must however, be a pre-condition to the grant of the exemption. The argument to the effect that the mere existence of profit would debar an institution from claiming exemption, thus, stands rejected. What is necessary is for the respondents to have an appropriate mechanism to test and ensure that such profit if and when earned, is, in fact, utilized to subserve the charitable objectives of that institution. Concept of feeding the charity assumes importance and relevance as unless the institution is well-fed, it will wither and die, and along with it, the activity of charity. This cannot be the intention of the policy makers. It must therefore be the objective of every enactment to ensure that institutions engaged in charity are nurtured, of course, with all protocols in place to prevent abuse/misuse of the exemption granted and the surplus earned, if any. In my view, Section 101 of the Act should be interpreted with this end in mind. In light of conclusion to the effect that the mere fact that that clinic had earned a surplus in some years is not material per se for the grant of exemption, what remains is for the respondent to verify specifically the avenues into which the surplus generated for those has been ploughed. This exercise shall be taken up and completed, with all inputs to be provided by the petitioner, within a period of six weeks from date of receipt of this order. The petitioner shall also satisfy the respondent that all conditions imposed by the income-tax authorities for the grant of exemption from income-tax have also been complied with, scrupulously. The impugned order is set aside to be redone, in the light of the directions as above and this writ petition is allowed.

Issues Involved:
1. Entitlement to exemption from property tax under Section 101 of the Madras City Municipal Corporation Act, 1919.
2. Compliance with conditions imposed by the Director of Income Tax (Exemptions).
3. Determination of charitable status and the impact of earning surplus income.

Detailed Analysis:

1. Entitlement to Exemption from Property Tax:

The petitioner, a registered charitable organization, sought exemption from property tax under Section 101 of the Madras City Municipal Corporation Act, 1919, which exempts "charitable hospitals and dispensaries but not including residential quarters attached thereto." The petitioner argued that it provided various family planning services on a no-loss, no-profit basis to economically weaker sections. The respondent, however, rejected the exemption request, noting that the petitioner levied charges for its services, which contradicted the charitable nature required for exemption.

2. Compliance with Conditions Imposed by the Director of Income Tax (Exemptions):

The respondent highlighted several compliance issues with the conditions set by the Director of Income Tax (Exemptions) in order No. DIT(E)/2012-13/973 dated 13.08.2012. These included the requirement that receipts issued to donors bear specific details, no changes in the trust deed without due procedure, and no fees received under the proviso to Section 2(15) of the Income Tax Act. The field inspection revealed that the petitioner levied charges for health services and issued receipts without the exemption order number, raising concerns about compliance with these conditions.

3. Determination of Charitable Status and Impact of Earning Surplus Income:

The petitioner cited previous judicial precedents, such as Govel Trust vs. The Commissioner, where exemptions were granted to charitable hospitals despite earning income, provided the income was used for charitable purposes. Conversely, the respondent referred to cases like The Special Officer and Commissioner, Tiruchirapalli Corporation vs. Hindu Mission Hospital, where the court held that the exemption was not automatic and required a case-by-case analysis of whether the income was used for charitable purposes.

The court considered the financial records of the petitioner, which showed an excess of income over expenditure in some years. The court emphasized that earning a surplus does not automatically disqualify an entity from being considered charitable, provided the surplus is used to further the charitable objectives of the institution. The court directed the respondent to verify the utilization of the surplus income and ensure compliance with all conditions imposed by the income-tax authorities.

Conclusion:

The court concluded that the mere existence of surplus income does not disqualify the petitioner from claiming exemption if the surplus is used for charitable purposes. The court set aside the impugned order and directed the respondent to re-examine the petitioner's compliance with the conditions for exemption and the utilization of surplus income within six weeks. The writ petition was allowed, and the connected miscellaneous petition was closed without costs.

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