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TMI Blog1993 (8) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company giving the partners of the firm due credit. For the assessment year 1981-82, the assessee had a net profit of Rs.6,02,123. After making adjustments, the net income for income-tax purposes was shown by the assessee at Rs. 3,81,811. For the assessment year 1982-83, the profit of the assessee was Rs. 18,61,241. However, its total income for income-tax purposes was determined at Rs. 18,97,400. The assessee claimed exemption under section 10(22A) of the Income-tax Act for both these assessment years on the ground that the hospital is existing solely for philanthropic purposes and not for purposes of profit. The Income-tax Officer rejected the claim for exemption and that order was confirmed by the Commissioner of Income-tax (Appeals). However, the Income-tax Appellate Tribunal allowed the appeals filed by the assessee holding that the hospital is existing solely for philanthropic purposes and not for purposes of profit. In obedience to the directions dated September 16, 1991, of this court in O. P. Nos. 6120 of 1988 and 6121 of 1988, the Income-tax Appellate Tribunal has referred the case to this court. Section 10(22A) of the Act is as follows: "10. In computing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aritable, another object which by itself may not be charitable but which is merely ancillary or incidental to the dominant purpose would not prevent the institution from being a charitable institution. It was further held that if the purpose of an institution is the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for profit. So long as the dominant purpose of the institution does not involve the carrying on of any activity for profit, it is immaterial how the money for achieving that purpose is found, whether by carrying on an activity for profit or not. The learned Appellate Tribunal mainly relied on this authority to hold that the assessee is entitled to exemption under section 10(22A) of the Act. However, according to learned counsel for the Revenue, the words "not involving the carrying on of any activity for profit" occurring in section 2(15) and the words "not for purposes of profit" occurring in section 10(22A) cannot be equated since they have different meanings. According to learned counsel, the words in section 2(15) indicate motive for profit and the words in section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of institutions will be exempt from tax altogether, as in the case of universities and other educational institutions at present. (Clauses 4(b) and 13)." When clause (22A) was added to section 10 with almost similar wording as clause (22), it is only proper to infer that the Legislature used those words in clause (22A) taking note of the interpretation given to those words occurring in clause (22) by different courts. Reference may be made to Circular No. 45, dated September 2, 1970, which contains the explanatory notes on the provisions of the Finance Act, 1970. This is produced as annexure "D-1". The circular while dealing with clause (22A) in section 10 states as follows : "The income of all these categories of institutions will be exempt from tax altogether, as in the case of universities and other educational institutions." It is well-settled that the doctrine of contemporanea expositio cannot be applied to widen the amplitude of the statutory language against the subject but can limit the interpretation in favour of the subject (see State of M.P. v. G. S. Dall and Flour Mills [1991] 187 ITR 478 (SC). We are of the view that this circular clarifies the position that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... devoted to the cause of education as and when necessary. This being the objective and there being various ways of control of the income and expenditure, the Board of Secondary Education cannot be said to be existing for purposes of profit. It exists solely for purposes of education. The income of the Board cannot, therefore, be computed in the total income of the previous year under section 10(22) of the Income-tax Act, 1961." The Andhra Pradesh High Court in Governing Body of Rangaraya Medical College v. ITO [1979] 117 ITR 284 considered the claim for exemption under section 10(22) of the Income-tax Act made by the governing body of Rangaraya Medical College, which was a society founded under the Societies Registration Act to manage the college. The society was collecting compulsory contribution of Rs. 12,000 per seat. Jeevan Reddy J. (as the learned judge then was), speaking for himself and Chinnappa Reddy J. (as the learned judge then was), held as follows: "Applying the said tests, we are satisfied that the petitioner-society, whose sole object is managing and maintaining the said medical institution, can be held to be an educational institution without any motive of priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income may be the income of any person but the source of this particular income which is not liable to be includible under sub-section (22) of section 10 must be the income of a university or other educational institutions which fulfils the other requirements of that sub-section, that is to say, the educational institution through which the income is generated must exist solely for educational purposes and the educational institutions be not run for profit. Where the purpose of a trust or institution was relief of the poor, education or medical relief, the requirement of the definition of 'charitable purpose' would be fully satisfied, even if an activity for profit was carried on in the course of the actual carrying out of the primary purpose of the trust or the institution. If the object was educational, the means of achievement or implementation of the object would not alter the character of the object. Therefore, with that object if a source had earned any money from donation, the means of achievement of that object, which are accomplished with that object, would not in any way, in our opinion, detract from the educational institution existing solely for the educational pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not necessary that the income which has been derived from one health centre has to be ploughed back in the same centre and the assessee cannot be permitted to extend such centres or open new centres. So long as the health centres fulfil the objects mentioned in section 10(22A), there is no reason why the benefit of exemption as provided therein should not be allowed to the assessee." Before the amendment by the Finance Act, 1983, with effect from April 1, 1984, the definition of the words "charitable purpose" occurring in section 2(15) of the Act contained the words "not involving the carrying on of any activity for profit". The Supreme Court as well as different High Courts have interpreted these words in several cases. The majority of the learned judges of the five-judge Bench of the Supreme Court in Surat Art Silk Cloth Mfg. Association's case [1980] 121 ITR 1, held that the dominant or primary purpose of the assessee was one not involving the carrying on of any activity for profit and, therefore, the assessee was entitled to exemption under section 11(1)(a) of the Act. The court also held that even if an activity for profit were carried on in the course of the actual carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose. However, the main question is whether the hospital exists solely for philanthropic purposes and not for purposes of profit. The most important point to be considered is the meaning of the words "not for purposes of profit" occurring in section 10(22A) of the Income-tax Act. According to the Revenue, the hospital is being run on commercial lines and that itself is an indication that the hospital is being run for purposes of profit. The very same words occur in section 10(22) of the Act. According to the Income-tax Officer, the assessee is availing huge borrowals from banks to execute its expansion programme and in that process huge interest liability is incurred. The interest and the loan can be repaid only by generating huge profits. "Therefore, while availing of the loans the company must have intended to make profits from it's activities." (see para 15 of the assessment order) The Income-tax Officer also observed that the directors are taking some advantage or other from running the hospital and that there is nothing in the memorandum or articles which can prevent the shareholders from taking certain advantages or benefits from the company (see para 17 of the order). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect an unsound principle of management." We respectfully adopt this dictum and hold that merely because the assessee is running the hospital on commercial lines, it will not be disentitled to the exemption under section 10(22A) of the Act. As long as the dominant purpose is a philanthropic one, the mere circumstance that the managing director or director gets some advantages or exercises some patronage while running the institution, that will not be a ground to hold that the main purpose of the institution is not philanthropic. These benefits would be merely incidental to the carrying out of the main or primary purpose and so, such benefits would not militate against the philanthropic character of the institution. As long as the purpose of earning profit is to expend such profit for the achievement of the main philanthropic purpose, the assessee may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be claimed. In that judgment it was held that the hospital which is otherwise charitable will not cease to be charitable from the mere fact that money was collected from patients. This judgment was confirmed in appeal by a Division Bench of this court in State of Kerala v. St. Gregorios Medical Mission [1992] 1 KLT 230. Special Leave Petition No. 16439 of 1991 filed against this judgment was dismissed by the Supreme Court. These decisions also support the view that if the hospital exists mainly for philanthropic purposes, even if incidentally profit is earned, the hospital will be a philanthropic institution. Another aspect to be considered is whether philanthropic purpose will require a scheme for extending free consultation facility to the poor patients. The Income-tax Officer after verifying the records found out that it is the practice of the assessee to allow some discount from certain bills and such discounts are accounted as free treatment. It was also observed that such discounts need not be to poor and indigent patients. The Officer also fairly stated that there may be some cases where the assessee has rendered free treatment to some patients. However, a substantial po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he best services may be rendered to the patients. The shareholding pattern referred to by the Income-tax Officer shows that the shares of the company are held by members of one family. In case any of the provisions of the Companies Act are not complied with, there are provisions under which the assessee can be proceeded against. So also, if the method of revaluation of buildings referred to in paragraph 15 of the order of the Income-tax Officer discloses any illegality or non-compliance with any legal provision, that also has to be dealt with applying the proper provisions of law. We do not think that these grounds have any bearing to the claim of exemption under section 10(22A) of the Act. As we have already held, the intention of making profits is not a valid ground disentitling the claim for exemption if the main purpose is philanthropic. The apprehension that the assessee may violate the objects in the memorandum and articles of association in future will not be a ground for refusing the exemption claimed since there is no such violation during the assessment years in question. Although learned counsel for the Revenue submitted that if this court holds that the assessee is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the members of the company but shall be given or transferred to such other company having objects similar to the objects of the company, to be determined by the members of the company at or before the time of dissolution or in default thereof by the High Court of judicature that has or may acquire jurisdiction in the matter." The articles of association of the assessee contain the following clauses: "68. The company shall not pay any dividends to the shareholders and the shareholders are not entitled to any share in the profits of the company in any form whatsoever. 79. If for any reason the company is wound up or if any of the institutions of the company has to be wound up, the assets of such institutions cannot be utilised for any other institution or activity of the company, the whole of the assets of the company when it is wound up or such of the assets of the institution as are found to be unsuitable for any other institution or activity of the company shall not be distributed to any shareholder and shall be handed over to a charitable trust or institution having similar or substantially similar objects subject to the provisions contained in clause X of the memorandum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that the members will not be entitled to receive any payments under clause IIIB (6). Payment to a retired employee of the company by way of annuity, pension or gratuity will not be against the restriction in the memorandum that no profit or dividend is to be paid to its members (see in this connection Cyclists' Touring Club v. Hopkinson [1910] 1 Ch 179). It was also contended that sub-clause (6) of the memorandum is a provision which shows that the hospital is not existing solely for philanthropic purposes and, therefore, the assessee is not entitled to the benefit under section 10(22A) of the Income-tax Act. In support of his contention learned counsel relied on East India Industries (Madras) P. Ltd. v. CIT [1967] 65 ITR 611 (SC), where a three-judge Bench of the Supreme Court held that the carrying on of a business of manufacture, sale and distribution of pharmaceutical, medicinal and other preparations was neither charitable nor religious in character. Therefore, it was held that the assessee was not entitled to claim deduction under section 15B of the Income-tax Act. Learned counsel also relied on certain observations in paragraph 25 of the judgment in Municipal Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pushpam Hospital Trust [1990] 181 ITR 512 (Ker), the distinction between object and power is drawn at page 515. Although the payments that may be made under sub-clause (6) are to be charged to the working expenses of the company, a reading of sub-clause (6) shows that that clause confers on the company incidental or ancillary power for the attainment of the main objects mentioned in clause IIIA of the memorandum. The Revenue can examine whether in any particular year the assessee violated any of the objects (see Assam Co-op Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338 (SC). We are in respectful agreement with the reasoning in the judgments in Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445 (Cal) and CIT v. Bimetal Bearings Ltd. [1985] 152 ITR 85 (Mad), that even in case some of the objects are not purely charitable, if the main object is charitable, even then the institution is a charitable institution. Accordingly, we reject the contentions raised by learned counsel for the Revenue on the basis of clause IIIB(6) of the memorandum. Whether the exemption under section 10(22A) is to be construed strictly or liberally may now be examined. One view is that being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of diverting some income to objects which are not philanthropic in itself would be decisive of the matter. Even from the order of the Income-tax Officer it is clear that during the assessment years in question the directors or members of the assessee-company did not participate in the profits or dividends of the company in any form. In fact, the directors are not receiving any salary. Therefore, the directors and members have strictly complied with the prohibition in the memorandum of association against distribution of profits or dividends. Even according to the assessment order, the assessee is spending its income for the expansion of the hospital facilities. There is no evidence that the directors or shareholders of the assessee have utilised the profit for their personal purposes. Thus the assessee-company has satisfied all the conditions for claiming exemption under section 10(22A) of the Income-tax Act. The provision in the objects clause of the assessee-company that in the event of the company being wound up, the assets shall not be distributed among its shareholders and they shall be handed over to an institution having similar or substantially similar objects also sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter satisfying the conditions specified in section 11 of the Income-tax Act. In spite of the provisions relating to exemption from tax of the income of charitable and religious institutions, the Finance Act, 1970, inserted a new clause (22A) in section 10 of the Income-tax Act under which the income of hospitals and other institutions of like nature which exist solely for philanthropic purposes and not for purposes of profit were totally exempted from tax, as in the case of universities and other educational institutions. The amendment took effect from 1st April, 1970. It is in this context that the meaning of the expression "philanthropic" assumes importance. Though that expression is of popular usage, its legal connotation is not properly understood. No judgment of a court defining that word was brought to our notice. Is it synonymous with the word "charity" or is it something different from charity? Given the general principles of interpretation of statutes, the Legislature must be presumed to have used that expression with an altogether different intention qua charity, as otherwise there was no need to bring about an amendment incorporating the word "philanthropy" in section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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