2009 (3) TMI 233 - AT - Income Tax

Benefits of sections 11 and 12 - Free and subsidized treatment only given to the relatives/friends of doctors/employees of the hospital - The solitary grievance of revenue is that ld. CIT(A) has erred in directing AO to allow benefits of sections 11 and 12 - assessee enjoying status of a scientific research center within the meaning of section 35(1)(ii) - In earlier as well as subsequent assessment years benefit of sections 11 and 12 were granted to the assessee - In present year such benefit has been denied to the assessee by AO. HELD THAT - We have perused that list available. In this list name of 443 indoor patients are available. The patients have came from far flung areas also from Uttar Pradesh, Punjab, Haryana and Himachal Pradesh. From the list it is not discernible as to how AO has considered them as employees or relatives of employees. We could understood the stand of AO if he would have make out a case that assessee is applying its income for any other purpose than the charitable purpose. As rightly observed by the ld. CIT(A) that profitability is not the sole criteria to judge the charitable nature of a society. In a charitable activity incident of profit can be there but that would not goad any quasi-judicial authority to say that society ceases to be a charitable society. AO fails to point out any defects in the objects of society or in the means of achieving those objects. His only area of grievance is that income is resulting to the society by carrying out such activity. But again he fails to take into consideration that such income was only applied for the purpose of charity. AO also pointed out that assessee has entered into contracts with the doctors in such a way that the hospital should not suffer any loss. In our opinion from those contracts nothing adverse can be drawn against the assessee because in order to provide best facilities assessee is supposed to keep best doctors on its panels. Similarly it has to see that hospital should able to run its activity. If it starts loosing the resources then its existence would be in dark. Therefore, taking into consideration all the material on record and the findings recorded by the CIT(A) we do not find any error in the order of ld. First Appellate Authority. In the result, the appeal of the revenue is dismissed.

Summary

Issues Involved:

1. Eligibility for benefits under sections 11 and 12 of the Income-tax Act.
2. Determination of whether the hospital is run on commercial lines or for charitable purposes.
3. Examination of the hospital's financial practices and charges.
4. Analysis of the application of income for charitable purposes.

Detailed Analysis:

1. Eligibility for benefits under sections 11 and 12 of the Income-tax Act:

The revenue's primary grievance is that the CIT(A) erred in directing the Assessing Officer to allow benefits of sections 11 and 12 to the assessee. The assessee, a registered society under section 12A, filed a NIL income return. The Assessing Officer scrutinized the accounts and noted a substantial increase in receipts and profits over the years, forming an opinion that the hospital was being run as a profit-earning concern. Consequently, the Assessing Officer denied the exemption under section 11.

2. Determination of whether the hospital is run on commercial lines or for charitable purposes:

The Assessing Officer based his adverse inference on two grounds: high hospital charges comparable to commercial hospitals and the terms of contracts with doctors similar to commercial hospitals. Additionally, he noted that subsidized/free treatments were primarily given to doctors' relatives/friends or hospital employees. The CIT(A), however, found that the hospital was established for general public welfare, with no profit-sharing among members. The CIT(A) emphasized that the hospital rates were set to cover running costs, maintenance, and future expansion, and that the surplus was applied to charitable purposes.

3. Examination of the hospital's financial practices and charges:

The CIT(A) compared the hospital's room charges with other similar hospitals enjoying the same tax benefits and found them to be lower. The CIT(A) also noted that the hospital provided significant rebates for government and defense personnel. The CIT(A) highlighted that the hospital's surplus was used for charitable activities like publishing cancer information and organizing conferences, which were not indicative of a profit motive.

4. Analysis of the application of income for charitable purposes:

The CIT(A) observed that the assessee had consistently applied its income towards charitable activities, such as cancer awareness and research, and had not violated section 13 of the Income-tax Act. The CIT(A) pointed out that the assessee had not claimed full depreciation as per the Income-tax Act, which would have reduced the apparent profitability. The CIT(A) concluded that the Assessing Officer had no basis to deny the benefits under sections 11 and 12, as the assessee's activities were aligned with its charitable objectives.

Conclusion:

The appeal of the revenue was dismissed. The CIT(A) correctly directed the Assessing Officer to allow benefits under sections 11 and 12, as the assessee's activities were charitable in nature and the income was applied towards charitable purposes. The Assessing Officer's adverse inferences were found to be unsupported by material evidence, and the assessee's financial practices and charges were consistent with its charitable objectives.