CIT vs. Gulab Devi Memorial Hospital Trust (P&H High Court)

The Commissioner of Income Tax rejected the claim of the assessee to renew the exemption granted to it under Section 80G of the Act. The basis for withdrawal was that during the course of assessment proceedings in respect of Assessment Year 2006-07, the Assessing Officer had noticed that the assessee was indulging in profiteering. Surplus to the tune of 18.59% to 28.66% for the last five years was found to have been generated, which was considered substantial. The Tribunal reversed the decision of the CIT on the ground that generating of surplus was not fatal to the grant of exemption under Section 80G of the Act as such surplus was found to have been utilized by the assessee in large scale expansion of its facilities which in turn were used for charitable purposes. The Tribunal further noted that the hospital charges of the assessee, as compared to other commercial establishments, were very nominal, which further threw light on its charitable character. Before the High Court, the department relied on the judgements in Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax (2014) 362 ITR 279 (Karnataka) and Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax (2016) 384 ITR 37 (SC) and it was claimed that the permissible extent of the surplus that could be generated by the assessee to retain its charitable character was between 6% to 15%. Since the generated surplus, in the case in hand, was much beyond the above percentage, the assessee would be deemed to have deviated from its charitable objects and thus disentitled itself for the grant of exemption under Section 80G of the Act. It was submitted that only a small percentage of the amount of donations received by the assessee was spent on free treatment as for the years ending 31.03.2006, 31.03.2007 and 31.03.2008, only 3.38%, 5.56% and 4.57% respectively of the received donations were spent by the assessee on charitable activities, and therefore, it was apparent that the assessee was not fully utilizing the donations for charitable purposes resulting in accumulation of surplus. It was argued that the large amount of surplus accumulated by the assessee could not be treated as “incidental surplus”, which alone was permissible. HELD by the High Court dismissing the appeal:

(i) The registration under Section 12A and the exemption under Section 10(23C)(vi) and (via) of the Act by itself does not entitle the assessee to the grant of exemption under Section 80G of the Act though the grant of exemption under Section 10(23C) and registration under Section 12A of the Act in favour of an institution would be essential and persuasive factors for the grant of exemption under Section 80G of the Act.

(ii) In Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax (2016) 384 ITR 37 (SC), on the first issue, the Apex Court held that if the surplus accumulated over the years is ploughed back for educational purposes, the institution would continue to exist solely for educational purposes and not for the purpose of profit. However, on the second issue, on facts, the Apex Court came to the conclusion that the assessee therein was neither directly nor substantially financed by the Government and thus, not coming under the expression “wholly or substantially financed by the Government”, as appearing in Section 10(23C)(iiiab). Having not agreed with the assessee on the second issue, the appeal was dismissed (Islamic Academy of Education v. State of Karnataka – (2003) 6 SCC 697 and Queen’s Educational Society vs. Commissioner of Income Tax – (2015) 8 SCC 47 referred).

(iii) In view of the findings of the Apex Court in paragraphs 8 and 9 of its judgment in Visvesvaraya’s case (supra), as reproduced earlier, we unhesitantly conclude that even if substantial surplus is generated, but the same is found to have been ploughed back for building infrastructure/assets, which in turn are used for educational/charitable purposes, the institution would not lose its charitable character. In the case before us, it has not been disputed that the assessee is registered under Section 12A and that it has been held entitled to the grant of exemption under Section 10 (23C)(vi) of the Act as per orders of this Court passed in C.W.P. No. 6031 of 2009, upheld by the Apex Court in Civil Appeal No. 9606 of 2013. It has further come on record that the assessee was granted exemption under Section 80G of the Act from the year 1997 till the passing of the impugned order. Further, the finding of the Tribunal, that the assessee has never mis-utilized its funds, has not been assailed before us. The generated surplus having been ploughed back for expansion purposes also remains undisputed by the Revenue as no challenge to the same has been made. In fact, the utilization of surplus for large scale expansion at the behest of the assessee was also acknowledged by the Commissioner. The Tribunal had further detailed in its order the receipts, expenditure, capital expenditure, income/surplus of receipts over expenditure, income applied for the charitable purposes and percentage of the income applied in a tabulated form, which clearly depicted utilization of surplus by the assessee for only charitable purposes.