In a recent judgment, Delhi High Court has quashed the order of ADIT(E) holding that objectives of “Hamdard” are charitable and no alleged violation of the terms of the exemption order has occurred.

Dispute before the Court:
The present dispute was concerning the charitable status of Hamdard under Section 10(23C)(iv) of the Income Tax Act, 1961 contesting order of the Director General of Income Tax (Exemptions) DGIT(E) retrospectively withdrawing exemption granted.

Case Details:
WP(C) 3599/2012, WP(C) 5715/2013, WP(C) 5716/2013, WP(C) 5718/2013, WP(C) 5729/2013 & CM NO.7569/2012
Hamdard Laboratories India (Hamdard) and Anr (Petitioners) vs Assistant Director of Income Tax (Exemption)  
Judgment Pronounced on: 18-09-2015

Facts of the Case(s):
Hamdard originally was governed by a partnership deed dated 28.08.1948 which dedicated “Hamdard Dawakhana” to charity. Hamdard generates income from the manufacture and sale of Unani medicines and other allied products. To carry out its charitable activities, Hamdard created a special purpose vehicle, a registered society for philanthropic purposes, i.e Hamdard National Foundation (HNF) on 12.05.1964. Both Hamdard and HNF are registered under Section 12A read with 12AA of the Act. In Additional Commissioner of Income Tax v. Hamdard Dawakhana (Wakf), (1986) 157 ITR 639, Delhi High Court examined Hamdard‟s objects and activities and held them to be charitable. Hamdard have been enjoying exemption under Section 10(23C)(iv) of the Income Tax Act, 1961 since AY 1984- 85.

On 14.01.2009, the DGIT(E) issued a show cause notice to Hamdard for rescinding the exemption order dated 28.12.2007 on the alleged violation of the terms of the exemption order. Later on Rejecting the submissions made by Hamdard, on 22.02.2012, the DGIT(E) passed an order withdrawing the exemption granted to Hamdard under Section 10(23C)(iv) of the Act. Relying on this order, on 19.04.2012, the Assessing Officer (“AO”) raised a demand of ` 112 crores against Hamdard for AYs 2006-2007 to 2009-2010 and re-opened the assessment proceedings for the AY 2005-2006. Hamdard challenged the order before Delhi HC. The Court quashed the order and remanded the matter to the DGIT(E) to decide the issue afresh. Thereafter, Hamdard made detailed written submissions before the DGIT(E) on the issue of exemption under Section 10(23C)(iv) of the Act. The DGIT(E), vide its order dated 21.08.2013, again held that Hamdard was not entitled to exemption under the said provision and withdrew it with effect from AY 2004-05.

On 21.03.2007, an order of assessment was passed u/s 143(3) for AY 2005-2006holding Hamdard’s surplus from manufacture and sale of unani medicines as exempt under Section 11. On 27.03.2012, the Revenue issued a notice to Hamdard under Section 148 of the Act, seeking to re-open its assessment proceedings for AY 2005-2006. The said letter highlighted the sales and expenditure figures of Hamdard and based on such figures, concluded that Hamdard‟s activities were commercial in nature. It further stated that Hamdard had made huge surpluses and had made accumulations over the years for expansion of manufacturing units. Though Hamdard‟s objects are charitable, its activities were held to be not charitable in nature. Revenue also stated that Hamdard had violated Section 11(4A) of the Act by not maintaining separate books of accounts for incidental business activities, had not utilised the accumulations made during the relevant assessment year (AY 2005-06) in line with its objects and that it was giving donations to HNF, which was not in furtherance of its charitable.

Contentions of the Revenue:
Hamdard is carrying on the business of manufacturing and sale of medicine on commercial scale and donating a part of its surplus to its sister organization HNF.

Hamdard has enjoyed huge profit margins year after year and generates huge surplus. Therefore, by no stretch of imagination, it contends, can this activity be equated with any charitable organisation.

Hamdard has not invested its surplus in accordance with the provisions of Section 11(5) of the Act, as the said provision does not permit investment in business activities.

Hamdard has not been maintaining separate books of accounts for its income applied to charitable activities. Hence, there is a blatant violation of condition (c) imposed in the order of exemption as well seventh proviso to Section 10(23C), which disentitles it for the exemption.

Main Contentions of the Hamdard
Hamdard is an established public charity enjoying exemption from tax for the last six decades; including under the 1922 Act. The nature of its activities has remained unchanged since its inception. Hamdard is a business held under trust for charitable purposes, which business is only the corpus of the trust and its source of income and not its object. It has not effected any change in its avowed activities and objects and has not violated any condition of the grant of exemption. The Revenue only seeks to take a different view on the same set of facts. The manufacture and sale of unani medicines is the Hamdard‟s business since its inception and this pre-existing business was dedicated to the cause of public charity by the founder in 1948 and comparing it with a commercial private pharmaceutical company is ill-founded and perverse as in the case of commercial companies the profits and gains are free for distribution amongst shareholders and there is no obligation to apply the same for charitable objects. On the other hand, no part of its income is distributed or is capable of distribution for the private benefit of the founders.

It was contended that since 1964, Hamdard has been carrying out its charitable activities through HNF. Instruction No. 1132 dated 05.01.1978, issued by the CBDT states that a charitable trust will not lose exemption under the Act if it passes a sum of money to another charitable trust for utilization by the donee trust towards its charitable purposes.

Hamdard utilizes the income generated from the manufacture and sale of Unani and Ayurvedic medicines for the attainment of the charitable objects. The details of accumulation and purpose thereof are a part of the return of income. Accumulation of income for the capital expansion of the asset is indispensable and incidental to put into effect the charitable purpose. A genuine, unintentional inability to spend the accumulated amount in a particular assessment year, for reasons beyond its control, cannot result in a permanent and retrospective withdrawal of the approval under Section 10(23C)(iv) of the Act.

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