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TMI Blog2012 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... charitable activities of the Society - sale of medicine in the pharmacy is certainly a charitable activity Cancellation of Registration u/s. 12AA(3) of the Act – Smile Surgery Projects – Held that:- Smile Surgery Project is an International Charitable - Organization providing assistance to the children born cleft lips and platelet - Hospital doesn't charge the patients under this project. The cost incurred may be less than the amount reimbursed by the Smile Project or it may be more which has to be borne by the Hospital - There is no commercial or business element as alleged - Smile Project cannot be said to be commercial activity Cancellation of Registration u/s. 12AA(3) of the Act – Fun Fair Fund - assessee has submitted that the Fair is conducted by the employees of the Society wherein the employees of the Hospital participate and hold lucky draw – Held that:- Amount collected is used to make ex-gratia payment to the exNemployees on retirement, exigencies - income is reflected in the statement of total income of the respective years - activity cannot said to be commercial/business activity - employees are part and parcel of the society - Any activity undertaken to help th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration u/s 12A(a) with effect from assessment year 2009-10 and onwards, discarding the fact that the Society is engaged in providing medical relief to the public at large which is a charitable purpose within the meaning of Section 2(15). The order u/s 12AA(3) is wrong and bad in law and should be withdrawn. l.(b) The DIT (E) without bringing on record that the activities of the assessee were not genuine or were not being carried out in accordance with the objects of the assessee-society cancelled the registration with retrospective effect. The action taken by the DIT(E) does not fall within the parameters of sub-Section (3) of Section 12AA of the I.T. Act. Therefore, his action in cancelling the registration by invoking the provisions of section 12AA(3) of the I.T. Act is not sustainable and be set aside. 1. (c) Without prejudice, to the above ground, the appellant contends that the power to withdraw registration in case of Institutions registered u/s 12A has been conferred w.e.f. 1.6.2010 and therefore the order canceling the Registration w.e.f. Assessment Year 2009-10 and onwards is without jurisdiction and hence nonest in law and deserved to be cancelled. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court judgment in the case of Allahabad Agricultural Institute vs. Union of India Othrs. (2007) 291 ITR 116 (All). In this case, the objects based on which Registration was granted were totally altered i.e. on "wholesale basis" affecting the very foundation which lead to cancellation of Registration. No such change has been made by the Assessee in the objects. Hence, this case law would not apply. 6. The DIT(E) has failed to appreciate that the withdrawal of exemption from import duty for equipment imported in 1990 does not pertain to the year under consideration. However, exemption from customs duty under the customs Act has nothing to do with the Income Tax exemption which is allowed on the basis of 85% application of income for charitable purposes which has been complied by the Assessee. Further, the said matter is sub-judice and can not be used as a reason for cancellation of registration. 7. The DIT(E) has erred on facts and in law in alleging that the Assessee is involved in activity of manufacturing medicines. It is only compounding /mixing and diluting which is undertaken in any pharmacy attached to a Hospital. This is done for the benefit of the patients as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, the pharmacy mainly is for the in-patients and only for those patients with the prescription of the Hospital. It is not run on commercial basis. The allegations of the Special Auditors are totally baseless. The working of so-called profit is totally hypothetical and should be rejected. 13. The DIT(E) has failed to appreciate that the allegation of the Special Auditor of making 34% profit (5.59 crores) is totally misleading. Special Auditor has failed to consider the establishment cost, the fees of the doctors, other fixed over heads for making the calculation. Even if for argument sake there is surplus, it is again ploughed back for the medical relief activity and therefore, this cannot be a ground for withdrawal of Registration. 14. The DIT(E) has erred in alleging that there is violation of sec. 13 of the Income Tax Act, 1961 and the predominant intention of the Assessee Society is to benefit particular community. The allegations are without any evidence, baseless on surmises and conjectures. Any conclusion .drawn is totally perverse and should be ignored. 15. The Appellant contends that there is no violation of any of the provisions of sec. 13 of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act read with section 13(1) of the Act.Further, on going through the submissions it is very clear that the advertisements were made only in religious institutions directory/brochures. This is not clear why the advertisements didn't find place in any other general magazine. If the advertisements are made only in religious institutions directory/brochures then it is very well clear that it will cater to the need of some particular section of the society. Thus this doesn't serve any public purpose as common public at large doesn't read the abovementioned directory/brochures. Sale of medicines in the pharmacy The Special Auditor in its report has arrived at the conclusion that assessee society has been involved in commercial sale of various types of medicines in the hospital and pharmacy to out patients and general public. As a result of such activities, the society has earned huge profits on account of sale of medicines from hospital premises. In response, the assessee society submitted certain details with respect to 'expenses incurred and contended that Auditors have not considered such expenses before working out profit margin and profit of Rs. 5.26 crores is app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such activities, by no stretch of imagination, can be regarded as charitable in view of provisions of section 2( 15) of the Act read with section 11 and 12 of the Act. Smile Surgery Project: The assessing officer found that under the Smile Surgery Project, society is charging excess money from the patients for treatment against billed amount. In reply, it was stated that The Smile Surgery project is funded by a charitable international organization and its objective is to provide assistance to children born with cleft lip and palate around the world. In this regard, the assessee has not given any specific and satisfactory reply to the point raised in the show cause, rather it has repeated the same arguments which were put up during the course of assessment proceedings before the AO. Further, it has not provided any supporting documentary evidence in respect of the actual expenditure incurred on individual smile surgery. Though the object of smile surgery is charitable but the manner in which the activities are being carried out under Smile surgery makes it profitable in nature. Fun Fair fund The assessee society is showing opening income amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, mixing and diluting the medicines which are already available with the assessee. There is no violation of the Delhi Narcotic Drug Rules, 1985 as per Rule Book where compounding/mixing and diluting is permitted in any pharmacy specially those attached to large hospitals. The reply furnished has been considered and found untenable, as the manufacturing of medicines claimed to be compounding by assessee falls within the ambit of manufacturing of drugs as per Drug Control Act and related laws. Also, even the term "manufacturing" has been used by them in their financial records and on the documents signed by Chief Pharmacist of the Society who has been awarded many awards in the field, as mentioned in the annual report, and seems to be an expert of the matter. The assessee society purchases different types of drugs in bulk and refills the same in small bottles after making some changes or diluting the same. Also, on examination it was found that apart from fixing the price, various processes were involved such as mixing of ingredients, boiling, refilling, labeling etc, which is nothing but manufacturing. It appears that to avoid legal consequences, the act of manufacturing was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the patients concerned or otherwise, to patients other than those specified in. clauses (a) and (b). The customs exemption was withdrawn for non-compliance of conditions as laid down in the said Notification. The hospital has not provided free treatment to indoor and outdoor patients as per the conditions prescribed under the said Notification. The above observations clearly indicate the intentions of assessee society despite getting exemptions from the authority, it was not providing relief benefit for which exemption was granted to it. Further, the claim that the matter is still sub-judice for a long time itself does not exonerate the assessee from the liability of wilful violation of conditions envisaged in the above said notification. Thus, assessee society was found to be involved in non- fulfillment of promises for providing medical benefit to poor and other deserving patients. This weakens the assessee claim that all its activities were charitable in nature. Alteration in MOA vis-a-vis communication with revenue authorities As per the record, the assessee has obtained registration u/s 12A(a) of the Income Tax Act, 1961 vide registration No. 1- 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances mentioned above and also keeping in view of provisions of Section 2(15) of the Income Tax Act, 1961, it is held that the activity of the society does not fall within the meaning of Charitable activity, as the assessee society has been found to be involved in activities which would not be called charitable as per the provisions of section 2(15). It is established beyond reasonable doubt that certain activities of the society are not charitable in nature and thus the society does not qualify for registration u/s 12A. Accordingly, registration granted u/s 12A to the assessee society is cancelled from A.Y. 2009-10 onwards. 4. Against the above order of the Ld. DIT(E), assessee is in appeal before us. 5. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. counsel of the assessee has submitted the point-wise rebuttal of the observations of the ld. DIT(E) made in his order. The same read as under:- Contribution to Churches Details of RS.22,500 I-which has been given to 8 Institutions also reported by SAR for advertisement is only information relating to assessee Hospital of the various facilities available a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1999-00 is enclosed at page 377 (Volume II) of the paper-book. The Fair is conducted by the employees of the Society wherein the employees of the Hospital participate and hold lucky draw. The amount collected is used to make ex-gratia payment to the exNemployees on retirement, exigencies. The income is reflected in the statement of total income of the respective years which can be verified from the records of the Department. Assessee fails to understand how this activity is labeled as commercial activity / business activity. The employees are part and parcel of the society. Any activity undertaken to help them cannot be considered as non-charitable. This fund was appearing as opening balance of 40.95 lacs and there are no receipt during the year. Manufacturing of Medicines: Assessee does not manufacture any medicines. The pharmacy undertakes only compounding, mixing and diluting the medicines already available with the assessee. This is done for reducing the strength of the medicine, making it cost effective when smaller doses are required or in case medicines are available in large proportions in the market it is made into smaller portions for patients. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olesale change in the objects without giving its immediate intimation to the Commissioner." In the assessee's case the amendment is insignificant and does not alter the basic object of the Society. 6. In view of the above, ld. counsel of the assessee submitted that the activities of the assessee are genuine, as per the Income and Expenditure Account as on 31.3.2008 the total application of income for the purpose of running of the Hospital namely St. Stephen s Hospital comes to ₹ 68.56 crores which has been accepted by the Ld. DIT(E). The so-called income from commercial activities are also ploughed back into the Society for charitable activity. The assessments in the past has been done u/s. 143(3) from A.Y. 1994-95 onwards granting benefit u/s. 11. Therefore, ld. counsel of the assessee pleaded that order of Ld. DIT(E) for cancellation of registration u/s. 12AA(3) may be set aside. 6.1 Ld. Departmental Representative on other hand relied upon the order of the Ld. DIT(E). 6.2 We find that assessee has cogently rebutted all the charges leveled against it by the DIT(E). 6.3 As regards allegation relating to Contribution to Churches. It has been submitted by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in this regard is quite cogent enough and the Smile Project cannot be said to be commercial activity. 6.6 As regards allegation of Fun Fair Fund, assessee has submitted that the Fair is conducted by the employees of the Society wherein the employees of the Hospital participate and hold lucky draw. The amount collected is used to make ex-gratia payment to the exNemployees on retirement, exigencies. The income is reflected in the statement of total income of the respective years. Thus, this activity cannot said to be commercial/business activity. The employees are part and parcel of the society. Any activity undertaken to help them cannot be considered as non-charitable. 6.7 As regards allegation of Manufacturing of Medicines, assessee has submitted that assessee does not manufacture any medicines. The pharmacy undertakes only compounding, mixing and diluting the medicines already available with the assessee. This is done for reducing the strength of the medicine, making it cost effective when smaller doses are required or in case medicines are available in large proportions in the market it is made into smaller portions for patients. There is neither violation of any lice ..... X X X X Extracts X X X X X X X X Extracts X X X X
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