2015 (3) TMI 459 - HC - Income Tax

Rejection of Section 10(23C)(via) Approval Confirmed Due to Profit Generation and Lack of Purely Philanthropic Purpose

The HC upheld the rejection of approval under section 10(23C)(via), finding the petitioner did not fulfill the primary requirement of being established ... Grant of approval u/s 10 (23C) (via) rejected - whether primary requirement of section 10 (23C) that the petitioner is established for philanthropic purposes is not fulfilled by the petitioner as found evident from the creation of capital assets from the surplus funds? - main object of the petitioner in its Memorandum and Articles of Association is to relieve persons suffering from disease or illhealth or requiring medical aid by establishing, constructing and maintaining or assisting Charitable Dispensaries, Hospitals, Convalescent Homes, Sanitoria and Maternity Homes etc. - Held that:- The fact that surplus was generated is not disputed by the petitioner. This surplus revenue was utilized for acquisition of assets which in the opinion of respondent no.1 was capable of generating more income. In the Assessment years 200607, 200708, 200809 and 200910, the percentage of transfer of gross surplus to the development fund was at 19.12 % 28.37 % 73.17 % and 12.12 % respectively. Accompanied with this, there was a huge increase in fixed assets from ₹ 63,75,577/in A.Y.2006-07 to ₹ 8,02,75,706/in Assessment year 2009-10 which was approximately an increase of ₹ 7.50 crores within four years. Petitioner's cash and bank balances also increased from ₹ 1,42,420/to ₹ 1,74,15,757/during the same period which was an increase of about ₹ 1.30 crores. The petitioner had purchased land admeasuring 8,350 sq.meters for an amount of ₹ 363.63 lacs. All these figures are borne out by the details as submitted by the petitioner before respondent no.1. The reasoning as given by respondent no.1 that all these figures go to show that there was a systematic generation of profits from the activities of the petitioner coupled with the increase in assets which would generate more income / profits cannot be said to be without any basis, arbitrary or perverse. Hence, it was not improper for the respondent no.1 to draw a reasonable inference that the petitioner is not existing solely for philanthropic purpose and for profits, in our opinion cannot be faulted. On the basis of the details as submitted by the petitioner the respondent no,.1 has rightly come to a conclusion that the concessional treatment as given by the petitioner for the above assessment years being meagre 3.56 %, 6.45% and 4.45% respectively, definitely does not speak of the existence of the petitioner for philanthropic purposes.If the petitioner was to solely exist for philanthropic purposes and was to conduct the hospital to achieve that object by providing treatment to the weaker sections of the society, it could not have been possible for the petitioner to achieve such a huge surplus and the consequent enabling of the petitioner to utilize such surplus funds to generate assets. In our opinion, the material as placed on record do not show that the application of the petitioner under section 10 (23C) (via) of the Act is inappropriately and arbitrarily rejected by the respondent no.1 so as to warrant our interference in exercise of jurisdiction under Article 226 of the Constitution of India. - Decided against assessee. Issues Involved:1. Rejection of approval under section 10(23C)(via) of the Income Tax Act, 1961.2. Determination of whether the petitioner exists solely for philanthropic purposes.3. Examination of surplus generation and asset acquisition.4. Consideration of past exemptions granted under different provisions.5. Analysis of concessional treatment provided to poor patients.6. Adequacy of procedural fairness and adherence to natural justice principles.Detailed Analysis:1. Rejection of Approval under Section 10(23C)(via) of the Income Tax Act, 1961:The petition under Article 226 of the Constitution of India challenges the order dated 27.9.2010, which rejected the petitioner's application for approval under section 10(23C)(via) for A.Y. 2009-10. The rejection was based on the grounds that the petitioner did not fulfill the primary requirement of being established solely for philanthropic purposes, as evidenced by the creation of capital assets from surplus funds.2. Determination of Whether the Petitioner Exists Solely for Philanthropic Purposes:The petitioner, a registered Public Trust, claimed that its main objective was to relieve persons suffering from disease or ill-health by maintaining charitable medical facilities. However, respondent no.1 found that the petitioner's activities, including the generation of surplus and the acquisition of assets, indicated a profit motive rather than a purely philanthropic purpose.3. Examination of Surplus Generation and Asset Acquisition:Respondent no.1 noted significant increases in the petitioner's fixed assets and cash/bank balances over several years, suggesting systematic profit generation. For instance, the fixed assets increased from Rs. 63.75 lakhs in A.Y. 2006-07 to Rs. 8.02 crores in A.Y. 2009-10. Similarly, cash and bank balances rose from Rs. 1.42 lakhs to Rs. 1.74 crores. The petitioner's surplus was used for acquiring land and other assets, which respondent no.1 interpreted as enhancing the capacity to generate more income, thus contradicting the claim of existence solely for philanthropic purposes.4. Consideration of Past Exemptions Granted Under Different Provisions:The petitioner had previously been granted exemptions under section 10(22A) and section 10(23C)(iiiae) for various assessment years. However, respondent no.1 emphasized that each application for exemption must be independently assessed based on current facts and compliance with the specific provisions of section 10(23C)(via). Past exemptions do not automatically entitle the petitioner to future exemptions.5. Analysis of Concessional Treatment Provided to Poor Patients:Respondent no.1 scrutinized the petitioner's records of concessional treatment to poor patients and found the amounts spent to be meager. For example, the percentage of net concessional treatment to total receipts was 3.56% for A.Y. 2007-08, 6.45% for A.Y. 2008-09, and 4.45% for A.Y. 2009-10. These figures were deemed insufficient to establish that the petitioner existed solely for philanthropic purposes.6. Adequacy of Procedural Fairness and Adherence to Natural Justice Principles:The petitioner argued that the rejection of their application was procedurally unfair, citing the non-furnishing of the Director of Income Tax (Exemption)'s report and inadequate consideration of their submissions. However, the court found that respondent no.1 had provided ample opportunities for the petitioner to present their case and had issued a detailed show cause notice. The court concluded that there was no breach of natural justice principles.Conclusion:The court upheld the rejection of the petitioner's application for approval under section 10(23C)(via), finding that the petitioner did not meet the statutory requirements of existing solely for philanthropic purposes and not for profit. The court emphasized that surplus generation and asset acquisition indicated a profit motive, and the concessional treatment provided to poor patients was insufficient. The court dismissed the writ petition, affirming that respondent no.1 had acted within legal bounds and adhered to procedural fairness.