Charitable hospital exemption for treatment-package supplies defeats penalty where no actual tax evasion is found.

A charitable hospital's penalty under the Kerala VAT Act was quashed where liquid medical oxygen supplied to in-house patients formed part of the treatment package and there was no finding of actual tax evasion. The HC applied the established view that medical services to indoor patients, including consumables integral to treatment, cannot be artificially separated for levy purposes, and held that the proviso to Section 18C did not require the registration and return-filing conditions relied on by the revenue for the exemption claim. The connected writ petition seeking deferment of assessment proceedings was held infructuous after the penalty challenge succeeded.

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Issues: (i) Whether penalty orders passed under Section 47 of the Kerala Value Added Tax Act, 2003 were sustainable in respect of liquid medical oxygen supplied to in-house patients by a charitable hospital claiming exemption under Section 18C of the Kerala Value Added Tax Act, 2003; (ii) Whether the connected writ petition seeking deferment of assessment proceedings survived after the penalty orders were passed and challenged.

Issue (i): Whether penalty orders passed under Section 47 of the Kerala Value Added Tax Act, 2003 were sustainable in respect of liquid medical oxygen supplied to in-house patients by a charitable hospital claiming exemption under Section 18C of the Kerala Value Added Tax Act, 2003.

Analysis: The hospital held a registration under Section 12AA of the Income-tax Act, 1961 and had been issued exemption certificates under the State tax law. The earlier appellate orders relating to similar consignments had already found no attempt at tax evasion and had set aside the penalty. The Court applied the existing judicial view that medical services rendered to indoor patients, including supply of medicines and consumables forming part of the treatment package, could not be artificially severed for levy purposes. It also noted that the proviso to Section 18C did not require such charitable hospitals to obtain registration and file returns in the manner suggested by the revenue for the relevant exemption claim.

Conclusion: The penalty orders were unsustainable and were quashed in favour of the assessee.

Issue (ii): Whether the connected writ petition seeking deferment of assessment proceedings survived after the penalty orders were passed and challenged.

Analysis: Once the penalty orders themselves were under challenge and were subsequently quashed, the intermediate request to defer assessment proceedings no longer had an independent subsisting cause.

Conclusion: The connected writ petition had become infructuous.

Final Conclusion: The Court granted relief against the penalty orders and declined to continue the companion proceeding because no separate controversy remained alive.

Ratio Decidendi: Where a charitable hospital established exemption under the applicable value added tax regime and the impugned consignment formed part of the medical treatment package for in-house patients, penalty for alleged non-registration or tax evasion could not be sustained absent a finding of actual evasion.

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