2014 (3) TMI 187 - SC - Indian Laws

Building tax exemption entitlement - High Court of Kerala denied the exemption on the ground that the building of the appellant is not used principally for charitable purposes - Held that - the application of income derived from a building for charitable purposes does not amount to the building being principally used for charitable purpose. - The argument that the income is applied for charitable purposes can be accepted only if it is known what portion of the income goes into charity i.e. free medical services. Does the percentage of patients receiving free medical services increase every year? If we hold that the income derived from a building is applied for charitable purposes then that has to be clearly proved, and the fact that the institution is set up for charitable purposes as stated in its Memorandum of Association cannot be enough to hold that income is necessarily applied for charitable purposes, especially in the light of the fact that the patients who can afford to pay for it are being charged for medical services. The fact is that the details furnished in the documents produced would go to show that the appellant hospital is earning money by charging from patients and therefore the claim of the appellant that the entire area taxed is used for charitable purpose is not reflected in the documents produced - The High Court has correctly interpreted the Explanation clause to Section 3(1) of the Act to hold that charitable purpose means relief of the poor and free medical relief . The tax herein is on the building . The society already has income tax exemption and the question here is whether the building is used principally for charitable purpose . Only the building utilized for providing free medical aid can be said to be used principally for charitable purpose and it will go against the letter of the law to grant building tax exemption for all the buildings of the hospital irrespective of what it is used for simply on the ground that the overall object of the hospital is charity although it is being predominantly run on a chargeable basis. In this case, the building used for providing free medical aid must be exempted from paying building tax. - Appeal of the appellant hospital dismissed.

Summary

Issues Involved:
1. Entitlement to building tax exemption for a charitable hospital.
2. Interpretation of "charitable purpose" under Section 3(1) of the Kerala Building Tax Act, 1975.
3. Application of income derived from a building for charitable purposes.
4. Correctness of the High Court's interpretation of the "Explanation" clause to Section 3(1).

Detailed Analysis:

Entitlement to Building Tax Exemption
The appellant, a charitable hospital managed by a religious institution, sought exemption from building tax under the Kerala Building Tax Act, 1975. The High Court of Kerala dismissed the appellant's writ appeal, holding that the hospital is not entitled to building tax exemption because it is not used principally for charitable purposes. This decision was based on the precedent set in Medical Trust Hospital v. State of Kerala, where it was determined that charitable purpose means rendering medical relief free of charge.

Interpretation of "Charitable Purpose" Under Section 3(1)
The High Court interpreted the "Explanation" clause of Section 3(1) to mean that charitable purpose includes relief of the poor and free medical aid. The High Court concluded that since the hospital charged nominal fees to patients who could afford it, it did not qualify for the exemption. The Supreme Court upheld this interpretation, emphasizing that for a building to be considered used principally for charitable purposes, the majority of services should be offered free of charge.

Application of Income Derived from a Building for Charitable Purposes
The appellant argued that the hospital's income was applied for charitable purposes, as evidenced by the significant amount spent on free medical services and charity. However, the High Court and the Supreme Court held that merely applying income for charitable purposes does not suffice to claim the building is used principally for charitable purposes. Detailed evidence is required to show the proportion of income used for free medical services and the number of patients receiving such services.

Correctness of the High Court's Interpretation of the "Explanation" Clause to Section 3(1)
The Supreme Court agreed with the High Court's interpretation that "charitable purpose" means "relief of the poor and free medical relief." The Court noted that while the hospital's overall objective might be charitable, the fact that it charges patients who can afford to pay disqualifies it from claiming the entire building is used for charitable purposes. Only the area used for providing free medical aid qualifies for the exemption.

Conclusion
The Supreme Court upheld the High Court's judgment, dismissing the appeal of the appellant hospital. The Court concluded that the building tax exemption applies only to the portion of the building used for providing free medical aid. The Court emphasized the need for clear evidence to prove that a building is used principally for charitable purposes to qualify for tax exemption. The stay order dated 16.7.2009 was vacated, and the appeal was dismissed without costs.