Exemption u/s 10(22A) 10(23C)(iiiac)-Nexus between activities of hospital/institution and the income is essential for claim

In a recent judgment, Calcutta High Court has held that to claim exemption under section 10(22A), existence of a nexus between the hospital or an institution engaged in any one of the five activities, and the income is essential.

Kindly note that the said section 10(22A) has since been omitted wef 01/04/1999 and re-enacted in section 10(23C)(iiiac). However ingredients of the new sections are more or less the same as per the old section.

Case Details:
ITA NO.32 of 2001

CIT, Central-I Vs. Apeejay Medical Research & Welfare Association (P) Ltd
Date of Judgment: 18/03/2016

Facts of the Case:
The asessee was a public limited company which pursuant to a resolution and subsequent permission by the Central Government got registered as a private limited company under section 25 of the Companie Act, 1956.

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 belonged to Apeejay Group of Companies and controlled by the same persons.

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 1988-89 the company filed a nil return claiming exemption under Section 10(22A) of the Income Tax Act, 1961. The assessee claimed Rs.7,05,008/- on account of medicine and hospital expenses and Rs.3,97,967/- on account of extra salary and wages. However, on scrutiny, the Assessing Officer (AO) observed that the said expenses included Rs.7,17,993/- reimbursed by the assessee to Assam Frontier Tea Ltd., Singlo (India) Co. Ltd. and Empire Plantaion (India) Ltd. The AO refused to allow this expenditure. Penalty proceedings were also initiated.

Further, The AO 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 held that the assessee “was an investment company engaged in money lending business.”

On apeal, The CIT(A) reversed the order of the assessing officer refusing exemption under Section 10(22A) holding that to qualify for the exemption what was needed was existence of a hospital or other institution solely for philantrophic purposes. He also relied on the order of the Tribunal for the assessment years 1986-87 and 1987-88 in the assessee’s case decided n favour of the assessee. ITAT also dismissed the Revenue’s appeal.

The ITAT obseved that the section 10(22A) at the relevant time talked about the five activities:
(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;

Excerpts from High Court Judgment:

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 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 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.

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.

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