Delhi High Court has ruled that any activity reasonably incidental to the objects of a charitable trust would not be ultra vires and proportion of the receipts from main and such incidental activities are immaterial. The Court also ruled that unless the claim of an Assessee is found to be devoid of any basis or plainly contrary to law, it would not be open for the AO to take a view contrary to the position which has been accepted by the Revenue in earlier years and has been permitted to sustain for a significant period of time. The Court, answering the question of law also clarified that an assessee would not be entitled to exemption under Section 11 of the Act if its activities are outside the scope of its objects, even if its activities are charitable in nature.

Case Number: ITA-141/2013
Parties: Mool Chand Khairati Ram Trust (Appellant) vs. Director of Income tax (Exemptions) (Respondent)
Judgment Date: 27-07-2015
Case Laws referred:
Lakshmanaswami Mudaliar v. Life Insurance Corporation: AIR 1963 SC 1185
Assistant Commissioner of Income Tax v. Surat City Gymkhana: (2008) 300 ITR 214 (SC)
Radhasoami Satsang v. CIT:(1992) 193 ITR 321 (SC)
Commissioner of Income Tax v. Excel Industries Ltd.: (2013) 358 ITR 295 (SC)
Parashuram Pottery Works Co. Ltd. v. ITO: (1977) 106 ITR 1 SC
Krishak Bharati Cooperative Ltd. V. Deputy Commissioner of Income Tax: (2013) 350 ITR 24 (Delhi)

Facts of the Case:
The assessee was a Charitable Trust registered under section 12A of Income tax Act, 1961. The Assessee had been running a hospital and Ayurvedic Research Institute since 1958. There had been no significant change in the nature of the activities undertaken by the Assessee since 1958. One of the object clause of the assessee trust was

“devising means for imparting education in and improving the Ayurvedic system of Medicine and preaching the same. In order to gain objects No.2 it is not prohibited to take help from the English or Yunani or any other system of medicine and according to need one or more than one Ayurvedic Hospital may be opened”.

However, the Assessing Officer (AO) in respect of AY 2006-07 denied the exemption u/s 11 on the ground that the activities of the Assessee were not in accordance with its objects. The AO noted that during FY 2005-06, the Assessee had received a total sum of Rs.18,97,65,365/- out of which the receipts pertaining to Ayurvedic Research Institute were only Rs.55,41,423/-. The AO further found that total expenditure shown by the Assessee for the said financial year was Rs.27,96,97,610/- out of which only an amount of Rs.53,30,595/- was spent on operating expenses pertaining to the Ayurvedic Research Institute. In the circumstances, the AO held that the primary activity of the Assessee was running an Allopathic hospital. According to the AO, this was not in accordance with the object of the trust. This view was also supported by the tribunal.

Extracts from the Judgment of Delhi High Court:
The assertion made by the Assessee that it provides treatment under the Ayurvedic system at the hospital in question and is involved in the advancement of the Ayurvedic medicine is not disputed by the AO. It is also not disputed that the hospital run by the Assessee is an integrated hospital offering treatments under the Ayurvedic system of medicine as well as under the Allopathic system of medicine. The Revenue also does not dispute the Assessee’s contention that the treatment under the Ayurvedic system of medicine draws significantly from investigation techniques used under modern medicine system. In the circumstances, the limited issue to be addressed is whether running of such hospitals which provides Allopathic as well as Ayurvedic treatment and includes investigation techniques of modern medicine would be contrary to the object of the Assessee Trust.

A plain reading of the objects indicates that it includes “devising means for imparting education and improving Ayurvedic system of medicine and preaching the same”. It is also expressly clarified that the Assessee is not prohibited to take help from the English, Unani or any other system of medicine for its object. …....The Assessee’s endeavour of running a hospital providing modern techniques and treatment which would also be a source for improving Ayurvedic system of medicine would, plainly, be an activity towards the objects as specified. Merely because, running of an Allopathic hospital is not specifically mentioned, it does not necessarily mean that the same would be ultra vires the objects, as establishment of an Allopathic hospital does assist the Assessee in its object of improving the Ayurvedic system and taking assistance from the Allopathic system of medicine. Any activity reasonably incidental to the object would not be ultra vires the objects. As explained by the Assessee, the modern investigation techniques are equally utilized for treatment under Ayurvedic system.

Thus, in our view, the AO and the Tribunal erred in concluding that the Assessee’s activities were in excess of its objects. Running an integrated hospital would clearly be conducive to the objects of the Assessee. The trustees have carried out the activities of the trust bonafide and in a manner, which according to them best subserved the charitable objects and the intent of the Settlor. Thus the activities of the Assessee cannot be held to be ultra vires its objects. The AO and the Tribunal were unduly influenced by the proportion of the receipts pertaining to the Ayurvedic Research Institute and the hospital. In our view, the fact that the proportion of receipts pertaining to the Ayurvedic Research Institute is significantly lower than that pertaining to the hospital would, in the facts of the present case, not be material. Undisputedly, significant activities are carried out by the Assessee for advancement and improvement of the Ayurvedic system of medicine in the institution established by the Assessee and though the receipts from the Allopathic treatment are larger, the same does not militate against the object for which the institution has been set up and run.

The next issue to be addressed is whether it was open for the AO to take a view different from the one that has been accepted by the Revenue for the past several decades. It is well established that each year is a separate assessment unit and the principles of res judicata are not applicable. However, in this case, it would be appropriate to note that the activities carried out by the Assessee have been accepted as being amenable to exemption under Section 11 of the Act for the past several decades. In the past period, the Assessee has been granted exemption under Section 11 of the Act and also under Section 10(22)/10(22A) or Section 10(23C) of the Act. Concededly, the exemptions granted to the Assessee for past several decades would not be available if the activities of the Assessee were considered by the concerned AOs/Authorities to be ultra vires its objects

In Radhasoami Satsang (supra), the Supreme Court observed as under:-

“….each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year..”

In Krishak Bharati Co-operative Ltd. (supra), a Division Bench of this Court struck a note of caution that the rule of consistency is not of a wide application and a blind adherence to this rule would lead to anomalous results. Thus, in the circumstances, where the views are mistaken and apparently erroneous, it would not be apposite to compel the Revenue to follow the same on the principle of estoppel or of consistency. However, in cases, where two views are plausible, it would be, plainly, whimsical to frame an assessment contrary to the position accepted in earlier years. This would render the exercise of assessment highly subjective; clearly, an Assessee cannot be subjected to such vagaries.………… unless the claim of an Assessee is found to be devoid of any basis or plainly contrary to law, it would not be open for the AO to take a view contrary to the position which has been accepted by the Revenue in earlier years and has been permitted to sustain for a significant period of time.

In the facts of the present case, it is not possible to accept that grant of exemption to the Assessee for the past several decades was palpably erroneous and successive AOs were wrong in accepting that the activities of the Assessee were in furtherance of its charitable objects, entitling the Assessee to escape the levy of income tax.

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