M/S Skin Institute And Public Servicescharitable Trust v. Commissioner Of Income Tax

$~R-4, 5*IN THE HIGH COURT OF DELHI AT NEW DELHI % + Judgment delivered on: 02.01.2017 ITA 454/2004 M/S SKIN INSTITUTE AND PUBLIC SERVICESCHARITABLE TRUST ..... Appellant Through: Mr. C.S. Aggarwal, Sr. Adv. with Mr.Ravi Pratap, Adv. versus COMMISSIONER OF INCOME TAX (EXEMPTION) ..... Respondent Through: Ms. Vibhooti Malhotra, Adv. + ITA 455/2004 M/S SKIN INSTITUTE AND PUBLIC SERVICESCHARITABLE TRUST ..... Appellant Through: Mr. C.S. Aggarwal, Sr. Adv. with Mr.Ravi Pratap, Adv.versus COMMISSIONER OF INCOME TAX (EXEMPTION) ..... Respondent Through: Ms. Vibhooti Malhotra, Adv. +ITA 417/2005 M/S SKIN INSTITUTE AND PUBLIC SERVICESCHARITABLE TRUST ..... Appellant Through: Mr. C.S. Aggarwal, Sr. Adv. with Mr.Ravi Pratap, Adv.versus COMMISSIONER OF INCOME TAX (EXEMPTION) ..... Respondent Through: Ms. Vibhooti Malhotra, Adv. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRI S. RAVINDRA BHAT, J. (Oral) 1.At the outset, it is stated by the learned counsel for both parties thatanother appeal i.e. ITA No. 417/2005, also concerns the same question oflaw. With their consent the said appeal was also taken up for hearing. 2.Following common questions of law were framed in these appeals,which pertain to assessment years 1993-94, 1994-95 and 1995-96: “.....Whether the Income Tax Appellate Tribunal on thebasis of material on record was correct and justified inlaw in holding that the assessee institution which is dulyregistered under the Indian Societies Act, was not entitledin law to the claim of the exemption of its income, uls10(22A) of the Income Tax Act, 1961 in view of the factthat Dr. P .N. Behl who is the Managing Trustee and alsofounder Director in the Trust was participating in theprofits of the income of the Trust and the same disentitlethe institution to claim aforesaid exemption?" 3.The appellant/ assessee is a society; prior to its constitution, theinstitution was established by late Dr. P.N. Behl. Upon the establishment ofthe society, entirety of the hospital set up by Dr. Behl was made over to it tobe run for entirely charitable purposes.There is no dispute that the primaryactivity i.e. granting medical services to the general public is an essentialcharitable object. A certificate under Section 12A of the Income Tax Act,1961 (in short the Act) was granted to the assessee on 28.11.1973.TheMemorandumofAssociationwasdulyregisteredsubsequentlyon21.10.1976.The assessee was also granted exemption certificate frominception i.e. first being on 01.08.1973. The assessee’s hospital treats thosesuffering from illness and also provides convalescence to those requiringmedical attention and rehabilitation. It is not in dispute that consistently for the period 1974-75 to 1992-93, the assessee’s claims of the income andreceipts were being charitable were accepted and not brought to tax. Duringone of the earlier years i.e. 1975-76 the assessee’s income was sought to betaxed; on that occasion its revision under Section 264 of the Act wasaccepted. 4.For the first time in 1992-93 the Assessing Officer (AO) formed theopinion that the society was disentitled to the benefit under Section 10(22A)of the Act.He did so based upon the fact that Dr. Behl, the settler, hadreceived ` 3,09,370/- for that assessment year. The assessee had contendedthat this receipt, could not in any manner undermine the charitable natureand functioning of the institution, and rather the patients/ clients from whomthe assessee benefited had brought in much larger amounts of which only apercentage was given to Dr. Behl. By way of comparison, amounts paid tocertain other consultants/ doctors, was also shown, to say that they receiveda much higher proportions of such fees given to the hospital. 4.For the first time in 1992-93 the Assessing Officer (AO) formed theopinion that the society was disentitled to the benefit under Section 10(22A)of the Act.He did so based upon the fact that Dr. Behl, the settler, hadreceived ` 3,09,370/- for that assessment year. The assessee had contendedthat this receipt, could not in any manner undermine the charitable natureand functioning of the institution, and rather the patients/ clients from whomthe assessee benefited had brought in much larger amounts of which only apercentage was given to Dr. Behl. By way of comparison, amounts paid tocertain other consultants/ doctors, was also shown, to say that they receiveda much higher proportions of such fees given to the hospital. 5.The assessee had appealed unsuccessfully to the Commissioner ofIncome Tax (Appeals) [CIT(A)] and later to the Income Tax AppellateTribunal (Tribunal).In the circumstances, a reference was made to thisCourt being ITR No. 46/1998.However, that reference was returnedunanswered, and was dismissed for non-prosecution. 6.Following his reasoning, the AO sought to bring to tax the assessee’sincome for the succeeding years i.e. 1993-94, 1994-95 and 1995-96. TheCIT(A) and the Tribunal followed their previous orders and reasoning.Therefore, the present appeals. 7.Mr. C.S. Aggarwal, the learned Senior Counsel urges that the Tribunal fell into an error in holding that the assessee had ceased to providecharity or services that amounted to a charity under Section 10(22A) of theAct. He urges that even though Dr. Behl was paid sums of ` 3.7 lacs and`4.7 lacs and a similar amount in the concerned assessment years, thesewere out of a more substantial billing. He also justified those amounts onaccount of Dr. Behl’s involvement with the society; it was submitted thatpreviously Dr. Behl was not charging any amount and the services were byand large gratis and entirely without a fee. However, having regard to thefact that the institution had expanded its activities and expenditure had alsoproportionately increased, he felt that it would be in a position to collectsome reasonable fees from customers who could be attributed to his servicesespecially in regard to consultations vis-a-vis equipment that was owned byhim. According to the arrangement, Dr. Behl could charge in any given yearsums not exceeding 50% of the amounts so received. 8.The learned counsel also contrasted the amounts received by Dr. Behlwith those received by other such consultants in terms of percentage andsubmitted that Dr. Behl, in fact, received similar percentage even though inabsolute terms the amounts may have been more. 9.The learned counsel submitted that the Tribunal fundamentallymisconstrued the law in reading into section 10(22A) as it were theprovisions of Section 13(1) and 13(3) of the Act. It was stated that section13(1) of the Act specifically states that the benefit of section 11 or section12 would not operate, if certain prohibited categories of expenditure wereincurred. Most specifically section 13(3) refers to income received by theauthor or the founder of the institution or the society.It was stated thatsection 10(22A) has no co-relation with section 13(1) or section 13(3) and in overlooking this aspect the Tribunal fell into error. It was, secondly, urgedthat having regard to the finalized assessments for all preceding years, andeven subsequent years, such as AY 1994-95, 1997-98 and 1998-99 onwardsthe revisiting of the issue and bringing to tax amounts received by theassessee is unsustainable. overlooking this aspect the Tribunal fell into error. It was, secondly, urgedthat having regard to the finalized assessments for all preceding years, andeven subsequent years, such as AY 1994-95, 1997-98 and 1998-99 onwardsthe revisiting of the issue and bringing to tax amounts received by theassessee is unsustainable. 10.Ms. Vibhooti Malhotra, the learned counsel for the Revenue arguedthat the Tribunal’s findings are justified. She relied upon the ruling of thisCourt in Director of Income Tax (Exemption) vs Charanjiv CharitableTrust 267 CTR 305 (Delhi) as well as Director of Income Tax vs BharatDiamond Bourse (2003) 179 CTR 225 (SC).It is submitted that as long asany benefit passed to a settler or founder of the institution, regardless ofwhether the larger purpose of the charity was sub-served, its entitlement toreceive the benefit under law so as to exclude exempted incomes, ceased.She, therefore, submitted that the Tribunal’s finding should not be disturbed. 11.Section 10(22A) of the Act, excluded income received by hospitals orother institutions, for the reception and treatment of persons suffering fromillness. It was on the statute book for the period 01.04.1970 to 31.03.1999.It inter alia read as under: " 10. In computing the total income of a previous year ofany person, any income falling within any of thefollowing clauses shall not be included- ...... (22A) any income of a hospital or other institution forthe reception and treatment of persons suffering fromillness or mental defectiveness or for the reception andtreatment of persons during convalescence or of personsrequiring medical attention or rehabilitation, existingsolely for philanthropic purposes and not for purposes 12.The Tribunal in this case was influenced by the text of Section 13which contains conditions imposed upon income which is otherwiseexcluded by virtue of Section 11 or Section 12 from taxation. Section 13, tothe extent it is relevant, reads as follows: “......13. (1) Nothing contained in section 11 (or section12) shall operate so as to exclude from the total incomeof the previous year of the person in receipt thereof- (a) any part of the income from the property held undera trust for private religious purposes which does notenure for the benefit of the public. (b) in the case of a trust for charitable purposes or acharitable institution created or established after thecommencement of this Act, any income thereof if thetrust or institution is created or established for thebenefit of any particular religious community or caste; (c)in the case of a trust for charitable or religiouspurposes or a charitable or religious institution, anyincome thereof- (i)if such trust or institution has been created orestablished after the commencement of this Act andunder the terms of the trust or the rules governing theinstitution, any part of such income enures, or (ii) if any part of such income or any property of thetrust or the institution (whenever created or established)is during the previous year used or applied, Directly or indirectly for the benefit of any personreferred to in sub-section (3)..... xxxx xxxx (2) Without prejudice to the generality of the provisionsof clause (c) [and clause (d)] of sub-section (1), the income or the property of the trust or institution or anypart of such income or property shall, for the purposesof that clause, be deemed to have been used or appliedfor the benefit of a person referred to be in sub-section(3), - (a) if any part of the income or property of the trust orinstitution is, or continues to be, lent to any personreferred to in sub-section (3) for any period during theprevious year without either adequate security oradequate interest or both;... xxxx xxxx (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely:- (a)the author of the trust or the founder of theinstitution; xxxx xxxx (2) Without prejudice to the generality of the provisionsof clause (c) [and clause (d)] of sub-section (1), the income or the property of the trust or institution or anypart of such income or property shall, for the purposesof that clause, be deemed to have been used or appliedfor the benefit of a person referred to be in sub-section(3), - (a) if any part of the income or property of the trust orinstitution is, or continues to be, lent to any personreferred to in sub-section (3) for any period during theprevious year without either adequate security oradequate interest or both;... xxxx xxxx (3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely:- (a)the author of the trust or the founder of theinstitution; (b) any person who had made a substantial contributionto the trust or institution, [that is to say, any personwhose total contribution up to the end of the relevantprevious year exceeds {fifty} thousand rupees]; (c) whether such author, founder or person is a Hindu undivided family, a member of the family; [(cc) any trustee of the trust or manager (by whatevername called) of the institution;] (d)any relative of any such author, founder, person,[member, trustee or manager] as aforesaid; (e) any concern in which any of the persons referred to in clause (a), (b), (c) [(cc)] and (d) has a substantialinterest....” 13.A plain reading of section 13 of the Act, which sets out rules ofexclusion, as it were (from the entitlement or eligibility of certain incomethe immunity of taxation) opens with the exception “Nothing contained insection 11 (or section 12) shall operate”. What is immediately apparent is that the exclusion of amounts received by virtue of section 10(22A) is notthe subject matter of section 13(1) of the Act or any of its further conditions.In other words, the disqualification which attaches in absolute terms byvirtue of provisions of section 13(1) especially through section 13(3) to theincome out of which some benefit flows to a settler/ founder, does not per seapply to institutions covered by section 10(22A) of the Act. 14.Section 13 was brought into force in its present form on 01.04.1989.Concededly, the provision refers to all manner of charitable income whichwould otherwise be not subject matter of exclusion under section 10. Thelater provision specifically deals with receipts, that should not bear thecharacter of income at all. Like section 10(22A), the Parliament providedfor other receipts which would otherwise have fallen in the category ofincome, but which are deemed not to be part of the total income, such asSections 10(1), 10(2), 10(2A), 10(3), 10(4), 10A, 10B and so on.Theseprovisions operate in a sui generis manner, so to speak. There is no windowfor the tax administrator to import disqualifications applicable to categoriesof income that may otherwise be eligible to exemption, into these amountswhich are per se entitled to be treated as not forming part of the totalincome. 15.In this Court’s opinion this fundamental error led the Tribunal to holdthat since Dr. Behl received significant amounts, the entire charitable basisof the assessee stood undermined by reason of Section 13 of the Act. Thiserror persisted for the three assessment years in question. Having regard tothe specific nature of the income which till 31.03.1999 could not be includedas part of the total income, which the Parliament later subsumed throughsections 10(23C) and 12A of the Act (subject to conditions) by deleting section 10(22A), in the present case there was no question of confusion theamount received by Dr. Behl as benefits that could debar the assessee to theeligibility it fundamentally had under section 10(22A) of the Act. 16.For these reasons, the question of law framed is answered against theRevenue and in favour of the assessee for all the three years. The appealsare, consequently, allowed. S. RAVINDRA BHAT, J.NAJMI WAZIRI, J.JANUARY 02, 2017/kk