Kerala High Court
Commissioner Of Income-Tax vs Pulikkal Medical Foundation Pvt. Ltd. on 5 August, 1993
Equivalent citations: [1994]210ITR299(KER)
JUDGMENT John Mathew, J.
1. Whether the assessee's hospital is existing solely for philanthropic purposes and not for purposes of profit is the important question of law involved in this reference. The assessee (Pulikkal Medical Foundation) is a private company as defined under the Companies Act, 1956. The liability of its members is limited. It was incorporated on June 23, 1976. It is running a hospital at Cochin known as "Medical Trust Hospital". The company became a deemed public company under Section 43A(1A) with effect from January 1, 1986. The word "private" in the name of the company was cancelled from that date. A fresh certificate of incorporation consequent on the change of name was given on May 12, 1988. The Medical Trust Hospital was originally run by a firm of partners. That firm was dissolved on October 15, 1976, and its business was taken over by the assessee-company giving the partners of the firm due credit.
2. 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.
3. Section 10(22A) of the Act is as follows ;
"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-
(1 to 22 omitted) (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 of profit;"
(Clauses 23 onwards omitted) It is not disputed that the hospital is an institution for the reception and treatment of persons suffering from illness or of persons requiring medical attention. Therefore, it is only necessary to examine whether the hospital is "existing solely for philanthropic purposes and not for purposes of profit".
4. The word "philanthropy" is not defined in the Income-tax Act. However, Section 2(15) defines "charitable purpose", which is as follows:
"2.(15) 'charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit."
5. Subject to the provisions of Sections 60 to 63, Section 11 of the Act provides for limited exclusion of the income from property held for charitable or religious purposes, to the extent to which such income is applied to such purposes in India.
6. The words "charitable purpose" and "not involving any activity for profit" have come up for interpretation by different High Courts and the Supreme Court. It is not necessary to consider all the authorities referred to by learned senior counsel, Sri. P.K. Ravindranatha Menon, appearing for the Revenue, and learned senior counsel, Sri K. Parasaran, appearing for the assessee. Since most of those decisions were considered in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 (SC), we may refer to that judgment alone. According to the judgment of the Supreme Court in that case, the main test to find out whether an institution is run for charitable purposes is to find out what is the dominant or primary purpose of the assessee--whether the purpose was to promote commerce and trade in art silk, etc., or the advancement of an object of general public utility. It was also held that if the primary or dominant purpose of an institution is charitable, 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 10(22A) indicate profit. . According to learned counsel, profit motive has a wider meaning than the word "profit". So much so, the further contention is that the Tribunal ought to have examined the facts of this case in greater detail without relying on Surat Art Silk Cloth Mfrs. Association's case [1980] 121 ITR 1 (SC). In this connection, learned counsel also relied on Municipal Corporation of Delhi v. Children Book Trust [1992] 3 SCC 390, in support of his contention that if the hospital is run on commercial lines, it would not be entitled to exemption under Section 10(22A) of the Income-tax Act.
7. However, learned counsel for the assessee submitted that the wording of Section 10(22) is similar to that of Section 10(22A) and, therefore, the judgments interpreting Section 10(22) have considerable relevance in interpreting Section 10(22A). Section 10(22A) was inserted by the Finance Act, 1970, with effect from April 1, 1970. The Notes on Clauses of the Bill relating to the insertion of Clause (22A) in Section 10 of the Income-tax Act was as follows (see [1970] 75 ITR (St.) 70) :
"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 and 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."
8. The Memorandum explaining the provisions in the Finance Bill, 1970, explains the provisions in that clause as follows (see [1970] 75 ITR (St.) 93) :
"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 ... 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 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. (Clauses 4(b) and 13)."
9. 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 (see [1971] 79 ITR (St.) 33), 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 (see [1971] 79 ITR (St.) 33) :
"The income of all these categories of institutions will be exempt from tax altogether, as in the case of universities and other educational institutions."
10. 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 hospitals and other medical institutions which exist solely for philanthropic purposes and not for purposes of profit will he totally exempt from tax, as in the case of universities and other educational institutions.
11. Therefore, it is useful to examine the authorities on Clause (22). Clause (22) is as follows :
"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,--
(22) any income of a University or other educational institution, existing solely for educational purposes and not for purposes of profit."
12. The Orissa High Court in Secondary Board of Education v. ITO [1972] 86 ITR 408 observed that there are two types of educational institutions. One class of educational institutions exist for purposes of profit, though education is imparted through those institutions. The surplus income after the expenditure is profit and is distributed among the organisers of the institution. Such surplus income is liable to income-tax as the educational institution itself does not exist solely for educational purposes but mainly for earning profits. The dominant objective of such institutions is earning profits though incidentally education is imparted through them. The other class of educational institutions exist solely for educational purposes. Those institutions cannot be run efficiently without substantial income made from different sources. The sources of income generally are collection of fees from the students, grants given by the Government and donations. Such income may, however, be insufficient to cope with the growing needs of the institution. To supplement such income those institutions may take recourse to some profit-earning business. Such profit would go to the general fund and would be appropriated towards expansion and development of educational schemes taken up by the institutions. In such a case, though incidentally profit is earned to meet the growing needs, all the same the institution exists solely for educational purposes and not for purposes of profit. Accordingly, it was held as follows (at page 416) :
"The income and expenditure of the Board is controlled and the entire expenditure is to be directed towards development and expansion of educational purposes. Even if there is some surplus it is not appropriated by others but remains as a part of the sinking fund to be 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."
13. 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 (at page 289):
"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 private or personal profit. In this connection, it is relevant to note that the Income-tax Officer has not recorded any finding, nor is it suggested in the counter-affidavit, that any surplus arising from the operations of the institution is distributed by way of profit to any individuals. Merely because certain surplus arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used for the purposes and for the promotion of the objects of the institution."
14. CIT v. Academy of General Education [1984] 150 ITR 135 (Kar) is another authority on this point. The object of the society was to run technical and commercial institutions. The assessee derived income from securities, properties and from other sources like donations. The assessee's claim for exemption under Section 10(22) of the Income-tax Act was disallowed by the Income-tax Officer, which order was confirmed up to the level of the Tribunal. However, on a reference, the Karnataka High Court held that the income of the assessee was exempt under Section 10(22) of the Act. Jagannatha Shetty J. (as the learned judge then was), speaking for the Bench of the Karnataka High Court, held as follows (at page 139) :
"For the purpose of examining the claim under Section 10(22), we must first scrutinise the objects of the academy and its activities, primary and incidental ... It will be, therefore, obvious that the income of the assessee is exempt under Section 10(22) if the assessee is an educational institution or an establishment which primarily engages itself in educational activities. The institution, however, may incidentally take other activities for the benefit of the students or in furtherance of their education. It may invest its funds in any manner, but the income generated therefrom must be utilised exclusively for educational activities. If these requirements are complied with, the assessee's income shall be exempt under Section 10(22) of the Act."
15. Sabyasachi Mukharji J. (as the learned judge then was), speaking for the Bench of the Calcutta High Court in Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445 at 454, held as follows :
"In our opinion, from the language and the context in which the expression has been used in Sub-section (22) of Section 10, it is clear that 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 purpose ... All cumulative factors will have to be taken into consideration, namely, the clause or the power enabling the institution to function, its activities in general, etc. Neither the fortuitous factor of having large surplus in any particular year, nor the solitary fact of diverting some income of the source concerned to objects charitable but not educational by itself would be decisive of the matter and in that context the facts relevant to the relevant year would be very material though not conclusive."
16. In CIT v. Bimetal Bearings Ltd. [1985] 152 ITR 85, the Madras High Court considered the scope of Section 10(22) of the Income-tax Act and held as follows (at page 92) :
"Having regard to the language used in Clause (d) that the institutions referred to therein should be treated as allied or auxiliary institutions and should be run on a commercial basis, not to earn profit, but to make themselves self-supporting, the said clause cannot be taken to be a clause providing for an activity for earning profit."
17. We are of the view that the reasoning of the authorities interpreting Section 10(22) of the Income-tax Act can be usefully adopted in interpreting Section 10(22A) of the Act also.
18. CIT v. Economic and Entrepreneurship Development Foundation [1991] 188 ITR 540 (Cal) was the only case brought to our notice under Section 10(22A) of the Income-tax Act. In that case, the Calcutta High Court considered whether a company engaged in running a health centre for the benefit of persons requiring medical attention was entitled to the benefit of that clause. The assessee therein was registered under Section 25 of the Companies Act. The contention urged by the Revenue was 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 was drawn up. There was no separate balance-sheet for the health centre. The earnings made by the assessee in the health centre were utilised for the construction of another health centre. The court held as follows (page 543) :
"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. If 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 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."
19. 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 [19801 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 out of the primary purpose of the institution, then the means of achieving that object were not material and that would not alter the character of the object as an activity for purposes of profit. According to that judgment, the exclusion clause did not require that the activity must be carried on in such a manner that it did not result in any profit.
20. 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'."
21. 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)"
22. This meaning is taken from the judgment of Stirling J., in Re Macduff. [1896] 2 Ch 451 (CA).
23. Shorter Oxford English Dictionary, 3rd edition, "philanthropic" :
"Characterized by philanthropy ; benevolent, humane."
24. 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 common 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 benefit 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."
25. Thus on an understanding of the meaning of the words "philanthropic purposes", it is clear that the establishment and running of a hospital by the assessee is a philanthropic purpose. However, the main question is whether the hospital exists solely for philanthropic purposes and not for purposes of profit.
26. 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 its activities." (see para 15 of the assessment order)
27. 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). In para 21 of the order, the Income-tax Officer observed as follows :
"However, in fairness to the assessee, it should be admitted that the managing director or any other directors do not seem to have drawn any salary or remuneration from the company except for the use of car and telephone facilities."
28. Learned counsel for the Revenue placed considerable reliance on the following passage in Municipal Corporation of Delhi v. Children Booh Trust [1992] 5 SCC 390, where the Supreme Court observed as follows (page 409 para 68) :
"68. Therefore, an element of public benefit or philanthropy has to be present. The reason why we stress on this aspect of the matter is if education is run on commercial lines, merely because it is a school, it does not mean it would be entitled to the exemption under Section 115(4) of the Act."
29. In that case, the scope of Section 115(4)(a) of the Delhi Municipal Corporation Act was considered by a two-judge Bench of the Supreme Court. That clause is as follows (page 405, para 49) :
"(4) Save as otherwise provided in this Act, the general tax shall be levied in respect of all lands and buildings in Delhi except-
(a) lands and buildings or portions of lands and buildings exclusively occupied and used for public worship or by a society or body for a charitable purpose :
Provided that such society or body is supported wholly or in part by voluntary contributions, applies its profits, if any, or other income in promoting its objects and does not pay any dividend or bonus to its members.
Explanation.--'Charitable purpose' includes relief of the poor, education and medical relief but does not include a purpose which relates exclusively to religious teaching."
30. Therefore, the observations in para 68 are to be understood in that context. Sri K. Parasaran, learned counsel appearing for the assessee, submitted that the Supreme Court was only referring to Commissioners for Special Purposes of the Income-tax v. John Frederick Pemsel [1891] 3 TC 53 (HL), in paras 65 to 68 of the judgment and thereafter in para 69 proceeded to consider another judgment. It was also submitted that the discussion of the points in issue starts only in a latter part of the judgment. In any view of the case the five-judge Bench in Surat Art Silk Cloth Mfrs. Association's case [1980] 121 ITR 1 (SC), considered this aspect and held as follows (page 25 of the report) :
"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 an unsound principle of management."
31. 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 carry on any activity for profit. The profit should be re-deployed in the same institution or in another similar institution (see CIT v. Economic and Entrepreneurship Development Foundation [1991] 188 ITR 540 (Cal)).
32. In Incorporated Council of Law Reporting for England and Wales v. Attorney-General [1971] 3 All ER 1029, the Court of Appeal held that the fact that in publishing the law reports the council was carrying on a business, did not prevent its purposes from being charitable since the profits, if any, could not be distributed to the members of the council but could only be applied in the further pursuit of the council's objects. In CIT v. South Arcot District Co-op. Marketing Society Ltd. [1989] 176 ITR 117, the Supreme Court held that even though the respondent-co-operative society let out its godowns and earned rent, that was only incidental to the essential responsibility under the agreement with the Government and, therefore, the society was entitled to exemption under Section 14(3)(iv) of the Income-tax Act in regard to their entire income. In Malankara Orthodox Syrian Church Medical Mission Hospital Kolencherry v. Executive Officer, Aiharanad Panchayat Office (Original Petition No. 255 of 1974), this court, while considering whether the petitioner-hospital was liable to pay building tax, held that the burden to establish that the hospital was not a charitable institution was on the local authority. It was also held that from the mere fact that money was collected from patients by a hospital, the hospital will not cease to be a charitable one. One of us, John Mathew J., in St. Gregorios Medical Mission v. State of Kerala (Original Petition No. 1622 of 1987) considered whether the petitioner who was running a hospital was entitled to exemption from payment of tax under the Kerala Building Tax Act, 1975. One of the objects of the petitioner was to give free medical and general health services to the less privileged and poor, irrespective of community or caste according to the availability of funds. There was also the further provision that on no account the petitioner shall operate for profit. In that case it was held that the only question to be examined was whether the buildings of the petitioner were used principally for religious, charitable or educational purposes so that the exemption under Section 3(1)(b) of the Kerala Building Tax Act may 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.
33. 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 portion of the expenditure debited as free treatment represents discounts allowed by the management. According to the Income-tax Officer, there is no element of "philanthropy" in granting such discounts. We appreciate the care with which the Income-tax Officer has gone into the accounts and fairly conceded the points in favour of the assessee. However, free treatment to the poor and needy cannot be the sole philanthropic activity of a hospital. However, we hasten to add that it is one of the clear and apparent forms of philanthropic activity which a hospital can perform and that it should be the aim of any hospital claiming to be a philanthropic institution to render free treatment to the needy and the poor, for which it may set out some specific principles. The assessee has not so far formulated or practised any such principles or procedure. The assessee should make proper remedial measures in this regard, especially because in Clause IIIA of the memorandum, one of the objects is to render free medical aid to poor patients. However, the meaning of the words "philanthropic purposes" includes activities promoting goodwill to mankind or activities beneficial to humanity at large as opposed to activities solely for the benefit of a few individuals. Eleemosynary is not one of the essential ingredients of philanthropy. Acquiring costly machines for investigation and examination of patients, providing the services of highly qualified doctors for consultation, expansion of the hospital by including rare super specialities, will all be philanthropic activities. We do not agree with the opinion of the Officer that the employees of the institution should also be guided, by philanthropic motives in order that the institution can claim to be a philanthropic institution. Highly specialised doctors and technicians can be employed by the institution only if salary commensurate with their qualifications is paid to them. It has to be kept in mind that the present enquiry is only whether the assessee is a philanthropic institution or not. We cannot expect every employee of that institution to work without wages or work on a low salary. It may not be correct to hold against the assessee on a consideration of the salary and other incentives given to the doctors and technicians employed by the assessee. The assessee will be the sole judge as to whom it should employ in order that the best services may be rendered to the patients.
34. 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 entitled to the benefits under Section 10(22A) during the assessment years in question, the Revenue will be precluded from examining that aspect in future years, it is not necessary to examine that question in this case. As at present advised, we think that the Revenue will not be helpless if any violations of law are found out in future years.
35. At this stage we may refer to the relevant clauses in the memorandum and articles of the assessee-company. The memorandum consists of the following clauses also :
"III. A. The main objects to be pursued by the company on its incorporation are :
To organise and set up or acquire and run hospitals and nursing homes and/or to take up either directly or in association with other institutions the management of hospitals and nursing homes set up 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, purely for philanthropic purposes of rendering service to the public, and not for purposes of profit, and also to render free medical aid to the poor patients, the members of the company not being entitled to participate in the profits/dividends of the company, in any form whatsoever.
B. The objects incidental or ancillary to the attainment of the main objects are :
(1) to (5) omitted.
(6) To provide for the welfare of persons in the employment of the company or formerly engaged in any business acquired by the company and the wives, widows and families of such persons, by giving them medical treatment and other medical facilities, free of cost or at any reduced rates as the company may deem fit, or by grants of money, pensions or otherwise, and to contribute towards the premia of insurance payable on any lives of such employees and to charge the amount of all such medical facilities, subscriptions, donations, contributions, premia or payments which may be made under this and the immediately preceding sub-clause to the working expenses of the company.
(7) and (8) omitted.
C. The other objects for which the company is established are : (omitted) (IV) to (IX) omitted.
(X) If upon a winding-up or dissolution of the company, there remains, after the satisfaction of all the debts and liabilities, any property whatsoever, the same shall not be distributed amongst 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."
36. The articles of association of the assesses 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 of association."
37. The memorandum of association of a company is the constitution or charter of the company defining its objects. Its purpose is to enable the shareholders, creditors and those dealing with the company to know what is the company's permitted range of enterprise (See Cotman v. Brougham [1918-19] All ER 265 ; [1918] AC 514 (HL). However, it cannot be said that the objects clause conclusively proves the activities of the company (see Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 (SC) and Bengal and Assam, Investors Ltd. v. CIT [1966] 59 ITR 547 (SC). Section 13 of the Companies Act requires the company to specify clearly the main objects of the company to be pursued by the company and objects incidental or ancillary to the attainment of the main objects as well as other objects not included as main objects or incidental or ancillary objects. Incidental or ancillary objects are those which have a reasonably proximate connection with the main objects (see Dr. A. Lakshmanaswami Mudaliar v. LIC of India [1963] 33 Comp Cas 420 (SC) ; 1 Comp LJ 248 (SC) ; AIR 1963 SC 1185).
38. It was also settled by this judgment that only where the terms of the memorandum are ambiguous or silent, it has to be read along with the articles and that the articles cannot override the memorandum or extend its scope. In this case, there is no conflict between the memorandum and articles.
39. It may be observed that the assessee-company was originally registered as a private limited company. However, the company became a deemed public company under Section 43A(1A) of the Companies Act with effect from January 1, 1986. So much so, the provisions of the Companies Act regulating public companies are applicable to the assessee.
40. One of the contentions raised by learned counsel for the Revenue is that Clause IIIB (6) of the memorandum can be used by the company for paying money to the existing directors or shareholders of the company and their, relatives on the ground that they were formerly engaged in the business acquired by the company. A reading of that clause shows that the clause is intended to provide for the persons, their wives, widows and families who were engaged in any business acquired by the company. Clause IIIA specifically prohibits payment of profits or dividends to the members of the company. Reading these clauses together it is clear 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 of Delhi v. Children Book Trust [1992] 3 SCC 390 para 25. From a reading of the last sentence in para 25 and a reading of the previous and subsequent paragraphs of the judgment, it would appear that the statements in that paragraph were submissions made by counsel who argued the case. In any view of the case, in Surat Art Silk Cloth Mfrs. Association's case [1980] 121 ITR 1 (SC) it was held by a five-judge Bench of the Supreme Court that though the objects specified in some clauses of the memorandum of association of the Surat Art Silk Cloth Manufacturers Association would benefit the members of the assessee, the benefit would be incidental to the carrying out of the main or primary purpose and that if the primary purpose of the assessee was charitable, the subsidiary objects set out in those clauses would not militate against its charitable character. On page 11 of the report the Supreme Court held as follows :
"But if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity."
41. In that judgment, the Supreme Court considered East India Industries' case [1967] 65 ITR 611 (SC) as well as CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) and other decisions and held that the test that is to be applied is whether the object which is said to be non-charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable. The Supreme Court was unable to accept the views expressed in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) and Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC). However, the observations of Beg. J., in Loka Shikshana Trust's case [1975] 101 ITR 234 (SC), were approved by the Supreme Court. Under these circumstances we cannot accept the contention of learned counsel for the Revenue that the Calcutta High Court in Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445 wrongly applied the judgment of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1.
42. The real nature of Sub-clause (6) also has to be examined, viz., whether it is an object of the company or a power. In CIT v. Cherupushpam, 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.
43. Whether the exemption under Section 10(22A) is to be construed strictly or liberally may now be examined. One view is that being an exemption given in a fiscal statute the exemption is to be strictly construed (see Municipal Corporation of Delhi v. Children Book Trust [1992] 3 SCC 390 and Deputy Commissioner of Sales Tax v. Carmel Book Stall [1989] 74 STC 89 (Ker). It is well recognised that the hardship of the assessee is not a factor to be considered in examining whether the exemption is applicable or not. However, it would appear that the present trend is that a liberal interpretation has to be given to such exemption Clauses (see Collector of Central Excise v. Parle Exports (P.) Ltd., AIR 1989 SC 644 (para 17) ; Rohit Pulp and Paper Mills Ltd. v. Collector of Central Excise, AIR 1991 SC 754 para 13 ; CIT v. South Arcot Dist. Co-operative Marketing Society Ltd. [1989] 176 ITR 117 (SC) ; CIT v. Pondicherry Co-operative, Housing Society Ltd. [1991] 188 ITR 671 (Mad); Meenachil Rubber Marketing and Processing Co-operative Society Ltd. v. CIT [1992] 193 ITR 108 (Ker) and CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149 (SC). However, here the controversy is not whether the exemption is to be construed strictly or liberally. What is important is whether the assessee satisfies all the ingredients in Section 10(22A) so as to be entitled to the exemption.
44. Thus our main conclusions are as follows :
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.
45. 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 supports this view. We are, therefore, of the opinion that the decision of the Tribunal was correct.
46. The questions referred to us are the following ;
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that it cannot be said that profit motive is involved in the activities of the assessee-company ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the observations of the lower authorities that since the institution is running on commercial lines it is not entitled to exemption under Section 10(22A), is irrelevant ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee-company is entitled to exemption under Section 10(22A) of the Income-tax Act ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in finding that-
(i) the hospital is existing for philanthropic and charitable purposes ?
(ii) the requirement of public control and accountability is satisfied ?
(iii) the hospital is not run on commercial lines in the sense that the object is to make profit ?
(iv) so long as there is no such private gain in the year of account, the assessee is entitled to exemption under Section 10(22A) ?"
47. Accordingly, we answer questions Nos. 1 to 4 in the affirmative and in favour of the assessee. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
Narayana Kurup J.
48. I have had the benefit of perusing the opinion rendered by learned brother John Mathew J., and I am in complete agreement with the conclusion as well as the reasoning given by him in support of the judgment. But having regard to the importance of the questions raised, I venture to add a few words of my own.
49. Before the commencement of the Finance Act, 1970 (19 of 1970), universities and other educational institutions existing solely for educational purposes and not for purposes of profit were enjoying complete exemption from tax on their incomes. However, in the case of hospitals and other institutions of like nature there has been no specific exemption from tax. In case such institutions wanted to claim exemption, they had to put forward such claim as charitable institutions after 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.
50. 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 10(22A) of the Income-tax Act. In fact, in In re Macduff: Macduff v. Macduff [1896] 2 Ch 451 (CA), the argument of the Attorney-General that the word "philanthropic" is synonymous with "charitable" was turned down by Lopes L. J. According to his Lordship, an object may be philanthropic, but at the same time would not be charitable and the said view of Lopes L. J., was shared by Rigby L. J., who went a step further and pointed out after adverting to the hypothetical case of a bequest for advancing the happiness and the position in life of those who are not really objects of charity, but who may be made happier and in some sense better than they now are-that the word "philanthropy" may include cases wide and numerous which would be within the popular meaning of philanthropy and "would have nothing to do with charity". According to Lindley L. J., there may be purposes which might be philanthropic and at the same time not charitable purposes indicating goodwill to rich men to the exclusion of poor men. According to his Lordship, such purposes, though not charitable, would nevertheless be philanthropic indicating goodwill towards mankind or a great portion of them. His Lordship proceeds to observe that a trust may be charitable even though it is not confined to the poor, but doubts the charitable nature of a trust which excludes the poor.
51. No doubt, the basic concept of philanthropy has changed from that of caring for the physical needs of the destitute to meet the physical as well as social and mental well being--which is what health is, as defined by the World Health Organisation--of one's fellow being so that the emphasis is now on securing a better, happier or healthier world for all ; and the focus has shifted from the relief of immediate want to long-term planning that will prevent or mitigate misery and hardship (see in this connection International Encyclopedia of the Social Sciences under the heading "Philanthropy").
52. Viewed in the above perspective, I have no doubt in my mind that the assessee is entitled to succeed even if it is found that the beneficial fall out of the philanthropic activity carried on by it is not confined to the poor alone. I, therefore, answer questions Nos. 1 to 4 in the affirmative and in favour of the assessee.