$~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 SERVICES
CHARITABLE 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 SERVICES
CHARITABLE 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 SERVICES
CHARITABLE 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 BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
ITA 454-04, 455-04 & 417-05 Page 1 of 9
S. RAVINDRA BHAT, J. (Oral)
1. At the outset, it is stated by the learned counsel for both parties that
another appeal i.e. ITA No. 417/2005, also concerns the same question of
law. 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 the
basis of material on record was correct and justified in
law in holding that the assessee institution which is duly
registered under the Indian Societies Act, was not entitled
in law to the claim of the exemption of its income, uls
10(22A) of the Income Tax Act, 1961 in view of the fact
that Dr. P .N. Behl who is the Managing Trustee and also
founder Director in the Trust was participating in the
profits of the income of the Trust and the same disentitle
the institution to claim aforesaid exemption?"
3. The appellant/ assessee is a society; prior to its constitution, the
institution was established by late Dr. P.N. Behl. Upon the establishment of
the society, entirety of the hospital set up by Dr. Behl was made over to it to
be run for entirely charitable purposes. There is no dispute that the primary
activity i.e. granting medical services to the general public is an essential
charitable 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. The
Memorandum of Association was duly registered subsequently on
21.10.1976. The assessee was also granted exemption certificate from
inception i.e. first being on 01.08.1973. The assessee's hospital treats those
suffering from illness and also provides convalescence to those requiring
medical attention and rehabilitation. It is not in dispute that consistently for
ITA 454-04, 455-04 & 417-05 Page 2 of 9
the period 1974-75 to 1992-93, the assessee's claims of the income and
receipts were being charitable were accepted and not brought to tax. During
one of the earlier years i.e. 1975-76 the assessee's income was sought to be
taxed; on that occasion its revision under Section 264 of the Act was
accepted.
4. For the first time in 1992-93 the Assessing Officer (AO) formed the
opinion 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, had
received ` 3,09,370/- for that assessment year. The assessee had contended
that this receipt, could not in any manner undermine the charitable nature
and functioning of the institution, and rather the patients/ clients from whom
the assessee benefited had brought in much larger amounts of which only a
percentage was given to Dr. Behl. By way of comparison, amounts paid to
certain other consultants/ doctors, was also shown, to say that they received
a much higher proportions of such fees given to the hospital.
5. The assessee had appealed unsuccessfully to the Commissioner of
Income Tax (Appeals) [CIT(A)] and later to the Income Tax Appellate
Tribunal (Tribunal). In the circumstances, a reference was made to this
Court being ITR No. 46/1998. However, that reference was returned
unanswered, and was dismissed for non-prosecution.
6. Following his reasoning, the AO sought to bring to tax the assessee's
income for the succeeding years i.e. 1993-94, 1994-95 and 1995-96. The
CIT(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
ITA 454-04, 455-04 & 417-05 Page 3 of 9
Tribunal fell into an error in holding that the assessee had ceased to provide
charity or services that amounted to a charity under Section 10(22A) of the
Act. 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, these
were out of a more substantial billing. He also justified those amounts on
account of Dr. Behl's involvement with the society; it was submitted that
previously Dr. Behl was not charging any amount and the services were by
and large gratis and entirely without a fee. However, having regard to the
fact that the institution had expanded its activities and expenditure had also
proportionately increased, he felt that it would be in a position to collect
some reasonable fees from customers who could be attributed to his services
especially in regard to consultations vis-a-vis equipment that was owned by
him. According to the arrangement, Dr. Behl could charge in any given year
sums not exceeding 50% of the amounts so received.
8. The learned counsel also contrasted the amounts received by Dr. Behl
with those received by other such consultants in terms of percentage and
submitted that Dr. Behl, in fact, received similar percentage even though in
absolute terms the amounts may have been more.
9. The learned counsel submitted that the Tribunal fundamentally
misconstrued the law in reading into section 10(22A) as it were the
provisions of Section 13(1) and 13(3) of the Act. It was stated that section
13(1) of the Act specifically states that the benefit of section 11 or section
12 would not operate, if certain prohibited categories of expenditure were
incurred. Most specifically section 13(3) refers to income received by the
author or the founder of the institution or the society. It was stated that
section 10(22A) has no co-relation with section 13(1) or section 13(3) and in
ITA 454-04, 455-04 & 417-05 Page 4 of 9
overlooking this aspect the Tribunal fell into error. It was, secondly, urged
that having regard to the finalized assessments for all preceding years, and
even subsequent years, such as AY 1994-95, 1997-98 and 1998-99 onwards
the revisiting of the issue and bringing to tax amounts received by the
assessee is unsustainable.
10. Ms. Vibhooti Malhotra, the learned counsel for the Revenue argued
that the Tribunal's findings are justified. She relied upon the ruling of this
Court in Director of Income Tax (Exemption) vs Charanjiv Charitable
Trust 267 CTR 305 (Delhi) as well as Director of Income Tax vs Bharat
Diamond Bourse (2003) 179 CTR 225 (SC). It is submitted that as long as
any benefit passed to a settler or founder of the institution, regardless of
whether the larger purpose of the charity was sub-served, its entitlement to
receive 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 or
other institutions, for the reception and treatment of persons suffering from
illness. 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 of
any person, any income falling within any of the
following clauses shall not be included- ......
(22A) any income of a hospital or other institution for
the reception and treatment of persons suffering from
illness or mental defectiveness or for the reception and
treatment of persons during convalescence or of persons
requiring medical attention or rehabilitation, existing
solely for philanthropic purposes and not for purposes
ITA 454-04, 455-04 & 417-05 Page 5 of 9
of profit. "
12. The Tribunal in this case was influenced by the text of Section 13
which contains conditions imposed upon income which is otherwise
excluded by virtue of Section 11 or Section 12 from taxation. Section 13, to
the extent it is relevant, reads as follows:
"......13. (1) Nothing contained in section 11 (or section
12) shall operate so as to exclude from the total income
of the previous year of the person in receipt thereof-
(a) any part of the income from the property held under
a trust for private religious purposes which does not
enure for the benefit of the public.
(b) in the case of a trust for charitable purposes or a
charitable institution created or established after the
commencement of this Act, any income thereof if the
trust or institution is created or established for the
benefit of any particular religious community or caste;
(c) in the case of a trust for charitable or religious
purposes or a charitable or religious institution, any
income thereof-
(i) if such trust or institution has been created or
established after the commencement of this Act and
under the terms of the trust or the rules governing the
institution, any part of such income enures, or
(ii) if any part of such income or any property of the
trust or the institution (whenever created or established)
is during the previous year used or applied,
Directly or indirectly for the benefit of any person
referred to in sub-section (3).....
xxxx
xxxx
(2) Without prejudice to the generality of the provisions
of clause (c) [and clause (d)] of sub-section (1), the
ITA 454-04, 455-04 & 417-05 Page 6 of 9
income or the property of the trust or institution or any
part of such income or property shall, for the purposes
of that clause, be deemed to have been used or applied
for the benefit of a person referred to be in sub-section
(3), -
(a) if any part of the income or property of the trust or
institution is, or continues to be, lent to any person
referred to in sub-section (3) for any period during the
previous year without either adequate security or
adequate 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 the
institution;
(b) any person who had made a substantial contribution
to the trust or institution, [that is to say, any person
whose total contribution up to the end of the relevant
previous 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 whatever
name 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 substantial
interest...."
13. A plain reading of section 13 of the Act, which sets out rules of
exclusion, as it were (from the entitlement or eligibility of certain income
the immunity of taxation) opens with the exception "Nothing contained in
section 11 (or section 12) shall operate". What is immediately apparent is
ITA 454-04, 455-04 & 417-05 Page 7 of 9
that the exclusion of amounts received by virtue of section 10(22A) is not
the 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 by
virtue of provisions of section 13(1) especially through section 13(3) to the
income out of which some benefit flows to a settler/ founder, does not per se
apply 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 which
would otherwise be not subject matter of exclusion under section 10. The
later provision specifically deals with receipts, that should not bear the
character of income at all. Like section 10(22A), the Parliament provided
for other receipts which would otherwise have fallen in the category of
income, but which are deemed not to be part of the total income, such as
Sections 10(1), 10(2), 10(2A), 10(3), 10(4), 10A, 10B and so on. These
provisions operate in a sui generis manner, so to speak. There is no window
for the tax administrator to import disqualifications applicable to categories
of income that may otherwise be eligible to exemption, into these amounts
which are per se entitled to be treated as not forming part of the total
income.
15. In this Court's opinion this fundamental error led the Tribunal to hold
that since Dr. Behl received significant amounts, the entire charitable basis
of the assessee stood undermined by reason of Section 13 of the Act. This
error persisted for the three assessment years in question. Having regard to
the specific nature of the income which till 31.03.1999 could not be included
as part of the total income, which the Parliament later subsumed through
sections 10(23C) and 12A of the Act (subject to conditions) by deleting
ITA 454-04, 455-04 & 417-05 Page 8 of 9
section 10(22A), in the present case there was no question of confusion the
amount received by Dr. Behl as benefits that could debar the assessee to the
eligibility it fundamentally had under section 10(22A) of the Act.
16. For these reasons, the question of law framed is answered against the
Revenue and in favour of the assessee for all the three years. The appeals
are, consequently, allowed.
S. RAVINDRA BHAT, J.
NAJMI WAZIRI, J.
JANUARY 02, 2017/kk
ITA 454-04, 455-04 & 417-05 Page 9 of 9
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