Calcutta High Court
Commissioner Of Income Tax vs Apeejay Medical Research & Welfare ... on 18 March, 2016
FORM NO.(J2)
IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction (income tax)
ORIGINAL SIDE
Present:
Hon'ble Justice Girish Chandra Gupta
And
Hon'ble Justice Indrajit Chatterjee
ITA NO.32 of 2001
COMMISSIONER OF INCOME TAX, CENTRAL - I, CALCUTTA
Versus
APEEJAY MEDICAL RESEARCH & WELFARE ASSOCIATION (P) LTD.
Advocate for the Appellant: Mr. S.B. Saraf, Adv.
Advocate for the respondent: Mr. S. K. Kapoor, Sr. Adv.
Mr. J. P. Khaitan, Sr. Adv.
.
Hearing concluded on: 19.02.2016 Judgement delivered on:18.03.2016.
GIRISH CHANDRA GUPTA J. The revenue has come up in appeal against a judgement and order dated 18th August, 2000 passed by the learned Income Tax Appellate Tribunal, 'E' Bench, Calcutta pertaining to the assessment year 1988-89 affirming an order of the CIT(A) allowing exemption under Section 10(22A) of the Income Tax Act (hereinafter referred to as the 'Act').
The following questions of law were formulated at the time of admission of the appeal:-
i)Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in law in granting exemption under Section 10(22A) of the Act ignoring the fact that the assessee had lent money on interest to different companies?
ii)Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the assessee fulfilled the conditions stipulated in Section 10(22A) of the Income Tax Act, 1961 and directing to allow deduction under Section 10(22A) of the Act?
The facts and circumstances of the case briefly stated are as follows:-
The asessee is a company under the Apeejay Group, controlled by Mr. Jeet Pal and Surindra Pal, which was incorporated as a public limited company on 27th March, 1984. Pursuant to a resolution and subsequent permission by the Central Government the assessee has been registered as a private limited company on 17th July, 1984. During the first accounting period relevant to the assessment year 1986-87, the paid up capital was Rs.5,040/-. Soon after incorporation as a public limited company, between 28th March, 1984 and 30th March, 1984 the assessee raised a welfare fund of Rs.4 crores from Assam Frontier Tea Limited, Singlo (India) Co. Ltd. and Empire Plantation (India) Ltd. All the aforesaid three companies also belonged to Apeejay Group of Companies and controlled by the same Mr. Jeet Pal and Mr. Surindra Pal.
The said Assam Frontier Ltd., Singlo (India) Co. Ltd. and Empire Plantation (India) Ltd. had in their respective tea gardens, health units. The aforesaid existing health units were renovated and some health units and a hospital was constructed within the area of the said tea gardens who had provided the sum of Rs.4 crores.
For the assessment year, in question, a nil return was filed, with a claim for refund of tax of Rs.4,98,664/-. It was claimed that a sum of Rs.42,14,772/-, earned by way of interest from investments, was the surplus over the expenditure and was exempt under Section 10(22A) of the Act.
The assessing officer found that during the relevant assessment year the assessee had earned a sum of Rs.4,75,673/- by way of interest on fixed deposits and a sum of Rs.49,12,312/- by way of interest from the different group of companies aggregating to a sum of Rs.53,87,985/- out of which there was an expenditure of a sum of Rs.70,247/- including a sum of Rs.9,184/- on account of depreciation. From a revised return filed by the assessee it transpired that a sum of Rs.7,05,008/- on account of medicine and hospital expenses and a sum of Rs.3,97,967/- on account of extra salary and wages had been incurred by the assessee. Upon scrutiny of the details it transpired that the aggregate sum of Rs.11,02,965/- included a sum of Rs.7,17,993/- reimbursed by the assessee to Assam Frontier Tea Ltd., Singlo (India) Co. Ltd. and Empire Plantaion (India) Ltd. The assessing officer refused to allow this expenditure and the total income of Rs.53,17,738/- was assessed to tax. Penalty proceedings were also initiated.
The assessing officer refused to allow the exemption under Section 10(22A) of the act on the following grounds:-
(a)The employees of the aforesaid three tea gardens at the aforesaid health units and or the hospital have mainly been getting their ailments treated as per prevailing State-laws.
(b)During the assessment year 1986-87 a sum of Rs.3,80,55,000/- out of the aforesaid corpus of Rs.4 crores was lent on interest to different companies of the Apeejay Groups. During the assessment year 1987-88 a sum of Rs.3,10,20,000/- was lent on interest to different tea companies of the Apeejay Groups and in the relevant assessment year 1988-89 a sum of Rs.1,51,15,000/-
was lent on interest to different companies of the Apeejay Groups.
On the aforesaid basis he was of the opinion that the major portion of the corpus was utilized for the purpose of earning interest and not for any "philantrophic purposes and medical welfare as claimed." The assessing officer went on to hold that the assessee "was an investment company engaged in money lending business."
The CIT(A) reversed the order of the assessing officer refusing exemption under Section 10(22A) of the Act on the following grounds:-
(A)The premise that the corpus had been lent to the companies of the Apeejay Group could not lead to the conclusion that the assessee was an investment company nor could that premise lead to the conclusion that the assessee existed only for profit and not to serve any philantrophic purpose.
(B) To qualify for the exemption what is needed is existence of a hospital or other institution solely for philantrophic purposes.
(C )The assessee is also entitled to exemption for the relevant assessment year on the basis of the order dated 9th December, 1992 passed by the learned Tribunal for the assessment years 1986-87 and 1987-88, inter alia, because the "basic facts relevant for the assessment year under appeal are essentially the same as were considered by the Tribunal in relation to the appeals for preceding two assessment years."
(D)As regards the ground assigned by the assessing officer that the benefits of the alleged philantrophic activities were derived, according to the State-laws by the employees of the tea gardens. The CIT(A) opined as follows:-
"The A.O. made no attempt to sort out facts and marshall evidence to establish the accuracy of his observation. Even otherwise this cannot, in my opinion, be a reason for withholding the exemption claimed U/s.10(22A). It cannot probably be said that for purposes of Section 10(22A), the benefit should, in fact, be aimed at or available to the public as a whole. The test should be whether the activities pursued conform to the object declared. Record is clear that despite objection to deficiency in the object as laid down in the memorandum, the Assessing Officer had nothing to state as regards contravention of the declared object."
In an appeal preferred by the revenue the learned Tribunal dismissed the appeal holding as follows:-
"We find that for the present assessment year the A.O. denied exemption to the assessee following his earlier years orders. This issue came up before the Tribunal for the earlier years i.e. 1986- 87 and 1987-88 where the Tribunal upheld the finding recorded by the CIT(A) by which the exemption was allowed to the assessee. Considering those facts in the present year, the CIT(A) has allowed similar exemption and further held that primary object and final activities of the assessee company conforming to the declared objects which governed the eligibility u/s.10(22A) of the Act. The funds were raised by the assessee company for philanthropic purposes. Considering the aforesaid circumstances, in our opinion, the issue is now covered by the aforesaid decisions of the Tribunal."
Mr. Saraf, learned advocate appearing for the appellant submitted that the assessee is an investment company engaged in money lending business as rightly held by the assessing officer. The income earned by the assessee has nothing to do with any hospital. The memorandum of association of the company suggests that the assessee is a commercial house. The alleged philanthropic purposes adverted to in the memorandum of association is a cover to conceal the real object which would be apparent from the activity actually undertaken by the assessee. He submitted that the income of the assessee is not exempt under Section 10(22A) of the Income Tax Act.
Mr. Kapoor, learned senior advocate, on the other hand contended that the assessee exists solely for the philanthropic purposes and not for any purpose of profit. The commercial activities envisaged in the memorandum of association are not the real objects of the company. There are the powers which can be exercised for the purpose of feeding the philanthropic purposes. He submitted that it has been clearly recorded in the memorandum of association that the profits are not to be distributed by way of dividend among the members.
We shall examine the rival contentions in our judgment and shall have occasion to advert to the submissions of the learned counsel during discussion to be made hereafter.
Section 10(22A) of the Act at the relevant time was as follows:-
"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 of profit."
From the aforesaid Section the following deductions can be made:-
(a) any income of a hospital or other institution for the reception and treatment of persons suffering from illness or;
(b) any income of a hospital or other institution for the reception and treatment of persons suffering from mental defectiveness or;
(c) any income of a hospital or other institution for the reception and treatment of persons during convalescence or;
(d) any income of a hospital or other institution for the reception and treatment of persons requiring medical attention or;
(e) any income of a hospital or other institution for the reception of persons requiring rehabilitation;
is entitled to come within the provision of Section 10(22A) provided the same exists:-
(1) Solely for philantrophic purposes and (2) nor for purposes of profit.
According to Concise Oxford English Dictionary the word 'Persons' means 'People'.
The word 'People' according to Concise Oxford English Dictionary means as follows:-
"people pl. n.1 human beings in general or considered collectively. (the people) the mass of citizens in a country;
the populace. 2. (pl. peoples) [treated as sing. or pl.] a particular nation, community, or ethnic group: the natives peoples of Canada 3. (one's people) one's employees or supporters. 4. (one's people) dated one's parents or relatives.
v. 1 (of a particular group of people) inhabit.
fill or be present in.2 fill (an area or place) with a particular group of inhabitants."
The word 'Persons' therefore appears to mean human beings in general. A hospital or an institution falling in any one of the five categories mentioned above can come within the cover of Section 10(22A) of the Act provided:
'The beneficiaries are human beings in general'.
In the case of CIT -Vs- Pulikkal Medical Foundation Pvt. Ltd. reported in (2010) ITR 299, cited by Mr. kapoor in a compilation, in ascertaining the purport of the expression philantrophic purposes, the Division Bench took assistance of Law Lexicons and Dictionaries which provide the meaning of the word 'philantrophic purposes' as follows:-
"Now, we may advert to the meaning of the words "philanthropic purposes". Black's Law Dictionary, sixth edition - "charitable":
"The word 'charitable', in a legal sense includes every gift for a general public use, to be applied consistent with existing laws, for benefit of an indefinite number of persons, and designed to benefit them from an educational, religious, moral, physical or social standpoint. This term is synonymous with 'beneficent', 'benevolent'. And 'eleemosynary'."
Ramanatha Aiyar's Law Lexicon, 1987 edition, explains the meaning of the word 'philanthropic' as follows:
"...an act cannot be said to be philanthropic unless it indicates goodwill to mankind at large. Still, it seems to me that 'philanthropic' is wide enough to comprise purposes not technically charitable. (Stroud 1479)."
This meaning is taken from the judgement of Stirling J., in Re Macduff. [1896] 2 Ch 451 (CA).
Shorter Oxford English Dictionary, 3rd edition, "philanthropic":
"Characterized by philanthropy ; benevolent, humane." Law Lexicon Cum Digest, Vol. III, by N. M. Mulchandani, "Philanthropic purpose";
"It is not always necessary that a 'philanthropic use' must be such as may be beneficial to the humanity at large but it could be limited to the welfare or benefit of fellow human beings belonging to a well defined class or community, who are joined together by comon bonds of religion, race, social, or economic unity. After all, the purpose which is beneficial to a section of the public, is in the larger context beneficial to the human society, but an act solely for the bvenefit of a few individuals or group of persons would not fall within the purview of charitable or philanthropic use."
Chambers' Dictionary. - "Philanthropy - love of mankind esp. as shown in services to general welfare.
'Philanthropic' - doing good to others, benevolent."
In the case of ACIT -Vs- Surat Art Silk Cloth Manufacturers Association reported in (1980) 121 ITR 1 (SC) their Lordships were considering the meaning of the expression "not involving the carrying on any activity for profit" appearing in Section 2(15) of the Act and their Lordships laid down the following test:-
"...The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity 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 unsound principle of management. We, therefore, agree with Beg, J., when he said in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 :
(1975) 101 ITR 234] that:
"if the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity".
The learned Judge also added that the restrictive condition "that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object" (emphasis supplied). We wholly endorse these observations.
The application of this test may be illustrated by taking a simple example. Suppose the Gandhi Peace Foundation which has been established for propagation of Gandhian thought and philosophy, which would admittedly be an object of general public utility, undertakes publication of a monthly journal for the purpose of carrying out this charitable object and charges a small price which is more than the cost of the publication and leaves a little profit, would it deprive the Gandhi Peace Foundation of its charitable character? The pricing of the monthly journal would undoubtedly be made in such a manner that it leaves some profit for the Gandhi Peace Foundation, as, indeed, would be done by any prudent and wise management, but that cannot have the effect of polluting the charitable character of the purpose, because the predominant object of the activity of publication of the monthly journal would be to carry out the charitable purpose by propagating Gandhian thought and philosophy and not to make profit or in other words, profit making would not be the driving force behind this activity. But it is possible that in a given case the degree or extent of profit making may be of such a nature as to reasonably lead to the inference that the real object of the activity is profit making and not serving the charitable purpose. If, for example, in the illustration given by us, it is found that the publication of the monthly journal is carried on wholly on commercial lines and the pricing of the monthly journal is made on the same basis on which it would be made by a commercial organisation leaving a large margin of profit, it might be difficult to resist the inference that the activity of publication of the journal is carried on for profit and the purpose is non- charitable. We may take by way of illustration another example given by Krishna Iyer, J., in the Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] where a blood bank collects blood on payment and supplies blood for a higher price on commercial basis. Undoubtedly, in such a case, the blood bank would be serving an object of general public utility but since it advances the charitable object by sale of blood as an activity carried on with the object of making profit, it would be difficult to call its purpose charitable. Ordinarily there should be no difficulty in determining whether the predominant object of an activity is advancement of a charitable purpose or profit making. But cases are bound to arise in practice which may be on the borderline and in such cases the solution of the problem whether the purpose is charitable or not may involve much refinement and present real difficulty.
There is, however, one comment which is necessary to be made whilst we are on this point and that arises out of certain observations made by this Court in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234] as well as Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] . It was said by Khanna, J. in Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 :
1976 SCC (Tax) 14 : (1975) 101 ITR 234] :
"[I]f the activity of a trust consists of carrying on a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit."
And to the same effect, observed Krishna Iyer, J. in the Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796] when he said:
"An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negative .... A pragmatic condition, written or unwritten, proved by a prescription of profits or by long years, of invariable practice or spelt from some strong surrounding circumstances indicative of anti-profit motivation -- such a condition will qualify for charitable purpose."
Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be drawn, in the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We do not think the Court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost."
With the help of the aforesaid authorities we arrive at the following conclusion as regards the meaning and purport of Section 10(22A) of the Act.
Any income of a hospital or an institution for rendering assistance in one or more of the five ways outlined above, to the human beings in general or to the fellow human beings belonging to a well defined bond of religion, race, social or economic unity, purely as a matter of charity or goodwill or benevolence and not for profit is entitled to exemption.
There is one more condition that such a hospital or institution should exist solely for the aforesaid purposes which can only be achieved if the hospital or institution is actually engaged in any one or more of the aforesaid five activities.
The assessee has not undertaken any of the aforesaid five activities. The claim for exemption is based on (a) the objects contained in the memorandum of association and (b) the reimbursement of medical expenses to the aforesaid three companies incurred by them in advancing medical facilities to their employees.
The income did not arise from any of the aforesaid five activities. The income is an income arising out of interest which, Mr. Kapoor submitted, is to be applied in future to the objects to be found in the memorandum of association. Activity of the assessee during the relevant year is an important factor to be taken into account according to the judgement in the case of Surat Art Silk Cloth Manufacturers Association (supra). The predominant object of the activity in the relevant year was not to carry out any act of charity or goodwill or bvenevolence. It was on the contrary to earn interest.
In the case of Birla Vidya Bihar Trust -Vs- CIT reported in (1982) 136 ITR 445, the question was whether the income arising out of the two schools run by the trust was exempt under Section 10(22) of the Act. In deciding that question a Division Bench of this Court also noticed the object behind Section 10(22A) and the corresponding circulars issued by the CBDT which are as follows:-
"...We may get some light on this aspect in respect of the intention of the Legislature in introducing sub-s. (22A) which also speaks of any income of a hospital or institution for the reception and treatment of persons. Sub-section (22A) along with sub-s. (20A) was introduced by the Finance Act of 1970, and in cl. (4), which sought to amend s. 10 of the I.T. Act, it was explained in the memo of the Finance-Bill, 1970, as follows:
"Sub-clause (a) seeks to insert a new clause (20A) in section 10 of the Income-tax Act retrospectively from the 1st April, 1962, i.e., the date of commencement of the Income-tax Act. The effect of the proposed amendment is that income of the Housing Boards or other statutory authorities set up for the purpose of dealing with or satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages will be exempt from income-tax.
Sub-clause (b) seeks to insert a new clause (22A) in section 10 of the Income-tax Act. The effect of the proposed amendment will be that the income of hospitals or other medical institutions will be completely exempt from tax, notwithstanding that such income is not fully spent during the year in which it is earned."
(See in this connection [1970] 75 ITR Statutes Section p. 70).
Reference may also be made to the memorandum explaining the provisions in the Finance Bill, 1970, wherein it was observed as follows [(p. 93 of 75 ITR (St.)]:
"34. Exemption from tax of the income of hospitals and other medical institutions.--At present, universities and other educational institutions existing solely for educational purposes and not for purposes of profit enjoy complete exemption from tax on their incomes. However, in the case of hospitals and similar other institutions for treatment of illness, there is no specific exemption from tax unlike in the case of universities. Medical institutions come under the category of charitable institutions and have to satisfy the conditions relating to application of not less than 75 per cent. of their current incomes to their objects in the same year in order to, qualify for exemption from tax on the remainder which is accumulated. In the context of the modifications proposed in the provisions relating to the exemption from tax of the income of charitable and religious trusts and institutions (vide paragraphs 18.1 to 18.5 of this Memorandum), it is proposed to make a specific provision for exempting from tax the income of hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit. The provision, as proposed, will cover also institutions for treatment of mental defectiveness as also those for treatment of persons during convalescence or of persons requiring medical attention or rehabilitation. The income of all these categories of institutions will be exempt from tax altogether, as in the case of universities and other educational institutions at present."
We may also refer to the Circular of the Central Board of Direct Taxes being Circular No. F. No. 194/16-17II (AI), which stated as follows:
"A number of instances have come to the notice of the Board where action to assess educational institutions and hospitals have been taken on the ground that they are making profit and, therefore, the exemption u/ss. 10(22) and 10(22A) is not available to them.
2. U/s. 10(20) income of an university or other educational institutions existing solely for educational purposes and not for purposes of profit is exempt. U/s. 10(22A) income of a hospital or other institution referred to therein which exists solely for philanthropic purposes and not for purposes of profit is also exempt.
3. The question for consideration is whether an educational institution existing solely for educational purposes but which shows some surplus at the end of the year is eligible for this exemption. If the profit of the educational institution can be diverted for the personal use of the proprietor thereof, then the income of the educational institution will be subject to tax. However, there may be cases where the educational institutions may be owned by the trusts or societies to whom the provisions of section 11 may be applicable. Where all the objects of these trusts are educational, and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption u/s. 10(22). But, in such cases, the applicability of section 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt u/s. 11.
4. What has been stated in respect of educational institutions will equally apply to hospitals and other institutions referred to in section 10(22A). In the case of hospitals and similar institutions, if the surplus is used for philanthropic purposes, the income of the institution will be eligible for exemption u/s. 10(22A). It is not necessary that the surplus should be used for medical purposes only."
In the case of CIT -Vs- Economic and Entrepreneurship Development Foundation reported in (1991) 188 ITR 540 (Cal) the assesee was running a health centre. The surplus of the health certre had been utilized for purchasing a piece of land and medical equipment and the land was intended to be used for setting up another health centre. The question arose whether exemption under Section 10(22A) of the Act was permissible.
The Division Bench of this Court held as follows:-
"...The contention urged by the Revenue is that the assessee was doing business in contract work and the income from the health centre was mixed up with the income of contract business and a common income and expenditure account had been drawn up. There was no separate balance-sheet for the health centre even though a separate income and expenditure account had been drawn up for the health centre showing a surplus of Rs. 3,70,279. As a matter of fact, the assessee spent a sum of Rs. 12 lakhs for purchasing land and another sum of Rs. 59,646 had been spent for purchasing medical equipment. These expenses were incurred exclusively for the health centre and they completely offset the overall surplus of Rs. 3,70,279 for the year under consideration. It is not disputed that the health centre run by the assessee is an institution for reception and treatment of persons suffering from illness or requiring medical attention. A separate account has also been made out for the health centre which was filed before the Income-tax Officer. It is true that the surplus shown is included in the overall surplus of the combined accounts and has been adjusted in that combined account against the deficits brought forward from the earlier years. But the assessee, as we said, spent a substantial amount of Rs. 12,59,646 for another health centre. The earning made by the assessee in the health centre was utilised for the construction of another health centre. It cannot be said that the health centre did not exist for philanthropic purposes, as the surplus has not been accumulated. The surplus of one health centre has been utilised for philanthropic objects by establishing another health centre. This has been done in furtherance of the philanthropic objects. It is 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 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. On the facts of this case, we are of the view that the Tribunal was right in holding that although the assessee did not accumulate the income derived from the health centre, it was utilised in the construction or in the establishment of another health centre which comes within the purview of section 10(22A) of the Act."
(Emphasis has been supplied by us.) In the case of CIT -Vs- Pulikkal Medical Foundation Pvt. Ltd. reported in (1994) 210 ITR 299 (Kerala) submitted in a compilation by Mr. Kapoor the following views were expressed:-
"In case a hospital exists solely for philanthropic purposes, even if incidentally profit is earned, the hospital is entitled to the benefit under section 10(22A) of the Act. In order to achieve the main philanthropic objects, the hospital may do some profit earning business provided such profit is appropriated towards the expansion and development of the hospital or to start another institution with the same philanthropic objectives. The real test to be applied is what is the dominant or primary purpose of the institution. If the primary purpose is philanthropic, the inclusion of some objects for earning profits for the implementation of the primary object would not alter the character of that primary object. In other words, this will not be a ground for holding that the hospital is not existing solely for philanthropic purposes. All cumulative factors will have to be taken into consideration in order to decide whether the institution exists for philanthropic purposes and not for purposes of profit. Neither the fortuitous factor of having a large surplus in any particular year, nor the fact of diverting some income to objects which are not philanthropic in itself would be decisive of the matter." (Emphasis supplied by us.) Our attention has also been drawn by Mr. Kapoor to a judgement in the case of CIT -Vs- Sri Narayanan Chandra Trust reported in (1995) 212 ITR 456 wherein the following views were expressed:-
"We now pass on to the next question as to whether the income derived by the trust as a partner of the firms in which it had made some "investments for the purpose of augmenting the resources available for the hospital is exempt under section 10(22A). In this connection, it must be mentioned that if there is an integral unity between the trust and the hospital for purposes of section 10(22A), as held above, the amount invested belongs to the hospital and the income derived on such investment is also b. that of the hospital. A hospital is not merely the building in which it is housed. or the equipment that is contained in it, but something more. It is an institution, and that institution belongs to the trust. In dealing with the question whether the income is that of the hospital, the significance of the expression "any income of a hospital" in section 10(22A) has to be noted. In our opinion. both the words "any" and "of" carry a meaning. It is not income from a hospital that is exempt but any income of a hospital". If the word had been "from". the position would have been that the income should have been derived from the actual running of the hospital itself. What appears to be relevant is that the income should reach the hospital to be utilised by it for philanthropic purposes and not for purposes of profit. The stress appears to be on the recipient of the income. If that is the hospital, that is the trust running it, section 10(22A) must apply." (Emphasis supplied by us.) The aforesaid views were expressed in the light of the following facts of the aforesaid case:-
"The works related to the hospital of the assessee were started in the year 1973 though it became functional as a hospital only on April 25, 1978. All the activities in the meanwhile were geared to the establishment of the institution and its functioning as a hospital and, therefore, we are of the view that the income derived during the period was also the income of the hospital entitled to exemption. We may note that adoption of any other view of the matter will be to syphon off the income required for the starting of a hospital by way of tax, thereby depleting the resources available to the institution, defeating the very object behind section 10(22A)."
Applying the test laid down in Pulikkal Medical Foundation (supra) one has to ask the question as to what is dominant or primary purpose of the institution. The answer according to us is that the assessee was incorporated with the idea of tax planning by the Apeejay group. The assessee has merely been sub-serving that purpose. Originally the return was filed showing net surplus of Rs.42,14,772/-. The expenditure incurred in reimbursing the medical costs to the three group of companies was not shown. By a revised return it was clarified that total income arising out of interest was Rs.53,87,985/- out of which Rs.11,02,965/- was spent in reimbursing the medical cost of the three companies and a sum of Rs.70,247/- was incurred by way of expenditure. Thus the surplus was Rs.42,14,772/- (53,87,985/- - 11,02,965/- = 42,85,020/- - 70,247/-).
The judgement in the case of Narayan Chandra Trust (supra) has no manner of application because the assessee does not run any hospital nor is the assessee engaged in any one of five activities outlined above for philanthropic or any other purpose. Reimbursement of the medical expenses incurred by the donors of the welfare fund, in advancing medical facility to their employees is neither an act beneficial to the humanity at large nor is the same beneficial to a well defined class or community, who are joined together by common bonds of religion, race, social or economic unity. This at best is for the benefit of a group persons employed by the donors of the welfare fund.
In the light of the aforesaid discussion we find that the CIT(A), in the second reason assigned by him, though he held that "to qualify for the exemption what is needed is existence of a hospital or other institution solely for philanthropic purposes" but omitted to notice that there was in fact no hospital or other institution for philanthropic purposes. The hospital and health units were in the tea gardens of the three tea companies who had provided the welfare fund of Rs.4 crores. The assessee had merely reimbursed a sum of Rs.11,02,965/- to those companies incurred in providing medical facilities to their employees.
The predominant objective of the activity undertaken in the relevant year was to earn profit and not to render any act of philanthropy. Therefore, the first reason, quoted above by us, assigned by the CIT(A) is also wrong.
The third reason given by the CIT(A), quoted above, is equally unsound because during that period the learned Tribunal was under the impression, on the basis of evidence adduced, that the assessee had rendered benevolent medical services to the inhabitants of the area besides providing medical assistance to the employees of the tea gardens.
The fourth ground assigned by the CIT(A) that "it cannot probably be said that for the purpose of Section 10(22A) the benefit should, in fact, be aimed at or available to the public as a whole" is not a correct statement of law. We already have expressed our views in that regard which need not be reiterated.
The learned Tribunal was wrong in proceeding on the basis that the facts and circumstances in the relevant assessment year were the same as in the assessment years 1986-87 and 1987-88. During the aforesaid period of two years the learned Tribunal in its judgement dated 5th July, 1995 CIT -Vs- Apeejay Medical Research & Welfare Association (P) Ltd. had granted benefit of exemption on the following basis:-
"The main objects of the assessee which are clearly brought out in Memorandum of Association are all solely for philanthropic purposes and not for profit. The assessee has also not violated its objects. The exemption also cannot be denied to the assessee on the basis of incidental or ancillary objects of the institution as they are not against the main object and rather supports it. The certificate from the Assistant Labour Commissioner -cum- Deputy Chief Inspector of Plantation, Tinsukia and Medical Inspector of Plantation, Tinsukia, which is in page-30 of the Paper Book also clearly states that the assessee is maintaining and conducting free medical and hospital facilities for both the tea garden labourers and their families as well as for the inhabitants of surrounding areas since 1985. Therefore, considering the totality of facts and circumstances, we hold that authorities were not justified in denying exemption to the assessee u/s.10(22A) of the I.T. Act for both the years, and accordingly we would direct them to grant exemption."
The learned Tribunal in deciding the matter for the relevant year altogether ignored the evidence discussed by the assessing officer. Going by the test laid down by a Division Bench of this Court in the case of Economic & Enterpreneurship Development Foundation (supra) it cannot in any event be said that the assessee existed in the relevant year for philanthropic purposes because the assessee admittedly accumulated its income.
It is true that the expression used in the section is "any income of a hospital or institution". But there has to be a nexus between the income and the hospital before any claim for exemption can be made. The nexus is altogether missing. The dominant or primary purpose of the institution should be to render any one or more of the five activities indicated above. Such a purpose cannot be said to exist in this case because neither of the five activities has been undertaken by the assessee. The income admittedly has no nexus with any one of the aforesaid five activities. Therefore the income is not an income of any hospital or an institution engaged in any one of the five activities.
In the case of CIT -Vs- Kamakhaya Narayan Singh & Ors. reported in AIR 1949 PC 1 question arose whether income arising out of interest on arrear rent was an agricultural income. The definition of agricultural income permitted rent derived from land which is used for agricultural purpose to be treated as an agricultural income.
To be precise the definition of agricultural income was as follows:-
(I) 'agricultural income' means:-
"(a) any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in British India or subject to a local rate assessed and collected by officers of the Crown as such."
Their Lordships answered the question as follows:-
"The interest clearly is not rent. Rent is a technical conception, its leading characteristic being that it is a payment in money or in kind by one person to another in respect of the grant of a right to use land. Interest payable by statute on rent in arrear is not such a payment. It is not part of the rent, nor is it an accretion, to it, though it is received in respect of it.
Equally clearly the interest on rent is revenue, but in their Lordships' opinion it is not revenue derived from land. It is no doubt true that without the obligation to pay rent - and rent is obviously derived from land - there could be no arrears of rent and without arrears of rent there would be no interest. But the affirmative proposition that interest is derived from land does not emerge from this series of facts. All that emerges is that as regards the interest, land rent and non-payment of rent stand together as causa sine quibus non. The source from which the interest is derived has not thereby been ascertained.
The word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non payment. And rent is not land within the meaning of the definition.
There is no commercial connection between the interest and the rented land and an effective source - not land--has become apparent.
These considerations supply a negative answer to the question posed, subject to an entirely different point taken by the respondents."
It is true that the statute does not provide that the income should have been derived from hospital or any of aforesaid five activities outlined above in order to qualify for exemption. But the statute does not provide that the income should have accrued to a hospital or an institution engaged in any one of the five activities. Therefore existence of a nexus between the hospital or an institution engaged in any one of the five activities, and the income is essential. This nexus is missing in this case. This is in addition to the other reasons discussed above why is the assessee not entitled to exemption.
For the aforesaid reasons both the questions are answered in the negative and in favour of the revenue.
The appeal is thus allowed.
(GIRISH CHANDRA GUPTA, J.)
I agree. (INDRAJIT CHATTERJEE, J.)