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M/s Skin Institute And Public Services Charitable Trust Vs. Commissioner Of Income Tax (Exemption)
January, 16th 2017
$~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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