Cancellation of registration of Institute registered under sec 12A without recording the cause by DIT is not valid

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “G”, NEW DELHI

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER

AND

SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

I.T.A. No. 913/Del/2012

A.Y.: -----

St. Stephen’s Hospital Society,

Tis Hazari,

Delhi – 110 054

(Appellant)

Vs.

Director of Income Tax

(Exemptions),

Plot No. 15, 3rd floor, Aaykar

Bhavan, Laxmi Nagar, District

Centre, Delhi – 92.

 (Respondent)

Assessee by: Sh. K.V.S.R. Krishna, CA

Department by: S h. K.K. Mishra, Sr. D.R.

ORDER

PER SHAMIM YAHYA: AM

This appeal by the assessee is directed against the order of the Ld. Director of Income Tax (Exemptions) dated NIL.

2. The grounds raised in the appeal read as under:-

“1.(a) The DIT (E) has erred in law and on facts and circumstances of the case in canceling the Registration u/s 12A(a) with effect from assessment year 2009-10 and onwards, discarding the fact that the Society is engaged in providing medical relief to the public at large which is a charitable purpose within the meaning of Section 2(15). The order u/s 12AA(3) is wrong and bad in law and should be withdrawn.

l.(b) The DIT (E) without bringing on record that the activities of the assessee were not genuine or were not being carried out in accordance with the objects of the assessee-society cancelled the registration with retrospective effect. The action taken by the DIT(E) does not fall within the parameters of sub-Section (3) of Section 12AA of the I.T. Act. Therefore, his action in cancelling the registration by invoking the provisions of section 12AA(3) of the I.T. Act is not sustainable and be set aside.

1. (c) Without prejudice, to the above ground, the appellant contends that the power to withdraw registration in case of Institutions registered u/s 12A has been conferred w.e.f. 1.6.2010 and therefore the order canceling the Registration w.e.f. Assessment Year 2009-10 and onwards is without jurisdiction and hence nonest in law and deserved to be cancelled.

2. The DIT(E) has failed to appreciate that the St. Stephen's Hospital came into existence on 31st October 1885 i.e. for the past 126 years the Hospital has been rendering yeoman service in the field of Health care. It was formally Registered as Society on March 24, 1969 and also registered u/s 12A of the Income Tax Act, 1961 on 18^th February, 1974. The Income Tax Department has allowed the benefit of section 11 and 12 on the basis that the activities of the Society are charitable as covered u/s 2(15) of the Income Tax Act, 1961. There is no change in the activities therefore, based on the principle of consistency, the Registration u/s 12A should be continued and benefit u/s 11 and 12 should be allowed.

3. The DIT (E) has failed to appreciate that Registration u/s 12AA(3) can be cancelled only when the activities of the Society are not genuine or not carried out in accordance with the objects of the Society. Except allegations and relying on the inferences from the Special Audit Report, DIT(E) could not establish that the activities of Society – that is running a Hospital - are not genuine. Without substantiating and establishing that the Society is carrying out the activities inconsistent with the objects of the society, cancellation of Registration is wrong and bad in law.

4.(a) The DIT (E) has alleged that the objects of the Society on the basis of which Registration has been granted has undergone change without pointing out what are the changes. The Appellant contends that the amendment dated 27th July 1985 referred to in the order is insignificant and does not alter the charitable objects. Therefore, no adverse inference can be drawn against the Appellant. A comparative statement of various changes made in the object clauses at various occasions are given in the Annexure - I. It will be observed there from that there is no change at all in the object clause or charitable nature of the activities of the society.

4.(b) The DIT(E) has failed to appreciate that upto Assessment Year 2007-08 the assessment was completed u1s 143(3) and the so called changes made in the Memorandum were accepted by the revenue authorities as 'charitable' falling u/s 2(15) of the Income Tax Act, 1961. Therefore, the department cannot now on the pretext of alleging amendment to the objects cancel 12A Registration.

5. The DIT (E) has erred in placing reliance on Allahabad High Court judgment in the case of Allahabad Agricultural Institute vs. Union of India & Othrs. (2007) 291 ITR 116 (All). In this case, the objects based on which Registration was granted were totally altered i.e. on "wholesale basis" affecting the very foundation which lead to cancellation of Registration. No such change has been made by the Assessee in the objects. Hence, this case law would not apply.

6. The DIT(E) has failed to appreciate that the withdrawal of exemption from import duty for equipment imported in 1990 does not pertain to the year under consideration. However, exemption from customs duty under the customs Act has nothing to do with the Income Tax exemption which is allowed on the basis of 85% application of income for charitable purposes which has been complied by the Assessee. Further, the said matter is sub-judice and can not be used as a reason for cancellation of registration.

7. The DIT(E) has erred on facts and in law in alleging that the Assessee is involved in activity of manufacturing medicines. It is only compounding /mixing and diluting which is undertaken in any pharmacy attached to a Hospital. This is done for the benefit of the patients as these compounded/mixed/diluted formulations are substantially cheaper. The DIT(E) has wrongly presumed it as manufacturing. The Appellant contends that it has no infrastructure to manufacture medicines. Therefore, the conclusions are vitiated in law and on facts. The allegations are without any basis, there is no manufacturing activity done by the Assessee and hence, there is no violation of provisions of sec. 2(15) of the Income Tax Act, 1961.

8. The Appellant contends that the Hospital is under the supervision of the Regulatory Authorities namely Drugs & Narcotic Controller who are periodically verifying the records and are satisfied. This is evidenced by the signatures as well as stamp of the Excise Authorities in the Appellant's register. Neither the Special Auditor nor the Income Tax Authorities have any jurisdiction for making such allegations which are beyond their scope.

9. The DIT(E) has erred in alleging that the Fun Fair Fund accumulated over a period by the employees of the Hospital for payment of ex-gratia to its own ex-employees is a noncharitable activity which is factually incorrect and conclusions are based on surmises and conjectures and therefore deserves to be discarded.

10. The DIT(E) has failed to appreciate that Smile Surgery Project is a specific project funded by any International charitable organization for providing assistance to children born with cleft lip and palate around the World. There are a number of charitable hospitals in Delhi undertaking Smile Surgery Project on the same fee. The allegation that the project is a profitable activity is totally erroneous, on surmises and conjectures and has to be rejected.

11. The DIT(E) has erred on facts and in law in alleging that the sale of medicines in the pharmacy is a commercial activity and therefore, the Assessee do not qualify for exemption u/s 11 and 12. These allegations are totally wrong. The said activity is incidental to the attainment of

the objectives of the institution. In terms of section 11 (4A) of the Act, it is not a profit making activity it is just like any other department in a Hospital catering to in patients and out patients. The surplus, if any, earned from the pharmacy activity is deployed for the charitable purpose of the society

12. The DIT(E) has failed to appreciate that the pharmacy department is an integral part of the Hospital activity, the pharmacy mainly is for the in-patients and only for those patients with the prescription of the Hospital. It is not run on commercial basis. The allegations of the Special Auditors are totally baseless. The working of so-called profit is totally hypothetical and should be rejected.

13. The DIT(E) has failed to appreciate that the allegation of the Special Auditor of making 34% profit (5.59 crores) is totally misleading. Special Auditor has failed to consider the establishment cost, the fees of the doctors, other fixed over heads for making the calculation. Even if for argument sake there is surplus, it is again ploughed back for the medical relief activity and therefore, this cannot be a ground for withdrawal of Registration.

14. The DIT(E) has erred in alleging that there is violation of sec. 13 of the Income Tax Act, 1961 and the predominant intention of the Assessee Society is to benefit particular community. The allegations are without any evidence, baseless on surmises and conjectures. Any conclusion .drawn is totally perverse and should be ignored.

15. The Appellant contends that there is no violation of any of the provisions of sec. 13 of the Income Tax Act, 1961 as the income of the Trust has not been applied for any private religious purpose nor for the benefit of any particular religious community and therefore, the benefit u/s 11 and 12 as well as the Registration under sec. 12A should be allowed.

16. The above grounds are independent and without prejudice to each other.

17. The Assessee may be allowed to add, amend, alter or forgo any of the grounds at the time of hearing.”

3. M/s St. Stephen Hospital Society is a Society registered  under Societies Registration Act, 1860 of India. It was granted registration u/s. 12A of the Income Tax Act, 1961 on 18.2.1974. One of the major objects of the society is to run a hospital in the name and style of St. Stephen’s Hospital. A show cause notice u/s. 12AA(3) dated 18.10.2011 was issued to the assessee by the Ld. DIT(E). After considering the replies furnished by the assessee regarding the points raised in the show cause notice, Ld. DIT(E) consider the same as follows:-

“Contributions to churches

It was found from the accounts that assessee society has contributed /paid donation to churches of North India in the name of advertisement. In this regard, assessee society was asked to justify the expenditure incurred on charitable purposes. In response, it was submitted that advertisement

referred only to the assessee hospital, and the various facilities available in the said hospital alongwith the details of timings for general OPD , Free OPD, Emergency services etc. The reply was considered. The assessee's contention that the quantum of expenditure is not material considering the size of assessee's organization, cannot be accepted as there is admitted violation of provision of the Act, though the extent of such violation may not be much. As per general principle of law, the intention is more important than the volume of the activities under taken by the assessee and it is important to ascertain whether such activities are within the spirit of law. As evident and the manner the entire donations for advertisement is made, it was found that such activities were meant for promotion of religious activities of a particular community. Therefore, in my opinion, the predominant intention of the assessee Society is evident and a particular community benefited for the acts of the society and hence, this is in clear contravention of section 11 and 12A of the Act read with section 13(1) of the Act. Further, on going through the submissions it is very clear thatthe advertisements were made only in religious institutions directory/brochures. This is not clear why the advertisements didn't find place in any other general magazine. If the advertisements are made only in religious institutions directory/brochures then it is very well clear that it will cater to the need of some particular section of the society. Thus this doesn't serve any public purpose as common public at large doesn't read the abovementioned directory/brochures. Sale of medicines in the pharmacy The Special Auditor in its report has arrived at the conclusion that assessee society has been involved in commercial sale of various types of medicines in the hospital and pharmacy to out patients and general public. As a result of such activities, the society has earned huge profits on account of sale of medicines from hospital premises. In response, the assessee society submitted certain details with respect to 'expenses incurred and contended that Auditors have not considered such expenses before working out profit margin and profit of Rs. 5.26 crores is apparently fallacious. The assessee has contended that the profit from the activities can be determined and therefore no adverse inference regarding maintenance of accounts can be drawn.

After considering the assessee's contentions, the remarks of the Special Auditors and considering the fact that the Pharmacy Department is showing substantial profit, it is held that there is conclusive proof that the medicines are sold at huge profits. Even as per details provided by the assessee only medicines worth Rs.82.03 lacs have been stated to be sold at a price lesser than MRP out of the total sales of Rs.15.55 crores. Further, the assessee also failed to place on record any explanation on the matter of high cost medicines being given to Staff and differential cost being charged from various persons at very lower side.

As detailed vide page no. 5, Part C of SAR, total sales of medicines were Rs,15.55 crores against total cost of Rs. 10.29 crores, thus the Gross Profit from Pharmacy Department had been calculated at Rs.5.26 crores i.e. 34%. At the same page, it has been further explained that even after apportioning the administrative cost of the Pharmacy Department, the Net Profit remains at Rs.4.82 crores i.e. 31%. The activities of sale of medicines by no stretch of imagination can be treated as charitable as no prudent person is expected to earn such huge profit from such activities.

The assessee's failure to place on record, the required reconciliation in support of their contentions that the activities were either not commercial in nature or the differential cost being recovered was used for charitable purposes based upon certain preset charity norms further strengthens the finding that the above activity was not charitable.

Considering the continuity, magnitude and quantum of the activities read in conjoint with the organized manner in which the same are being conducted, it is apparent that the same are being conducted with an intention to make profits in the garb of charitable activities. Their intention is further substantiated by the fact that irrespective of the continuity and explicit motive thereof, assessee has not maintained separate books of account as envisaged by the specific provisions of section 11(4) and (4A) of the Act, so that such activities be covered under the blanket of Charitable activities. Thus, such revenue as is earned out of such activities, by no stretch of imagination, can be regarded as charitable in view of provisions of section 2(15) of the Act read with section 11 and 12 of the Act.

Smile Surgery Project:

The assessing officer found that under the Smile Surgery Project, society is charging excess money from the patients for treatment against billed amount. In reply, it was stated that The Smile Surgery project is funded by a charitable international organization and its objective is to provide assistance to children born with cleft lip and palate around the world.

In this regard, the assessee has not given any specific and satisfactory reply to the point raised in the show cause, rather it has repeated the same arguments which were put up during the course of assessment proceedings before the AO. Further, it has not provided any supporting documentary evidence in respect of the actual expenditure incurred on individual smile surgery. Though the object of smile surgery is charitable but the manner in which the activities are being carried out under Smile surgery makes it profitable in nature.

Fun Fair fund

The assessee society is showing opening income amounting to Rs. 40.95 lakhs under Fun Fair Fund through lucky draw. The fund was accumulated through its activity where employees of the hospital were involved and participated in that fair which was exclusively organized by the hospital for them. The society has submitted that this fund has been generated in the earlier year for ex-gratia payment to the retiring employees.

On going through the details/documents, it IS clear that assessee is conducting fair every year for its employee and assessee society also holds lucky draw. The money collected through this fair is later on utilized for its employees only. Thus, the event is being organized exclusively for the employees and not for general public. The nature of activity does not show participation of general public and benefit of such activity is not passing on to common masses. Further, assessee society has contended that the income generated from A.Y. 2000-2001 to 2007-2008 has been reflected in its account, however, no such details for subsequent years have been provided. The assessee society has failed to justify the charitable nature of its activity under the head Fun and Fair and its relation to its aims and objects. The income as generated through such fairs cannot be incidental to the attainment of its aims and objects rather it is one of the modes to generate income to meet out its liability towards its employee.

On going through the records it seems that no documents are available for creation of such fund and the opening balance received in earlier years has been shown as liability during the year. The treatment of it as income in the year of receipt remains unverified. Thus, the nature of this fund remained ambiguous and apparently it seems, as the name suggests, it has been established for some non-charitable purposes for which no separate books of account were found maintained by the assessee.

Manufacturing of medicines:

In the Special Audit report, the auditors have also established that society is involved the manufacturing of different types of medicines/drugs without any proper License or authority and such manufacturing is done with the sole aim to earn profit. In its reply during the current proceedings, the assessee society has contended that as regards manufacturing of medicines, it has not been undertaking any manufacturing activity and the pharmacy undertakes only compounding, mixing and diluting the medicines which are already available with the assessee. There is no violation of the Delhi Narcotic Drug Rules, 1985 as per Rule Book where compounding/mixing and diluting is permitted in any pharmacy specially those attached to large hospitals. The reply furnished has been considered and found untenable, as the manufacturing of medicines claimed to be compounding by assessee falls within the ambit of manufacturing of drugs as per Drug Control Act and related laws. Also, even the term "manufacturing" has been used by them in their financial records and on the documents signed by Chief Pharmacist of the Society who has been awarded many awards in the field, as mentioned in the annual report, and seems to be an expert of the matter. The assessee society purchases different types of drugs in bulk and refills the same in small bottles after making some changes or diluting the same. Also, on examination it was found that apart from fixing the price, various processes were involved such as mixing of ingredients, boiling, refilling, labeling etc, which is nothing but manufacturing. It appears that to avoid legal consequences, the act of manufacturing was sought to be presented under the nomenclature of compounding/diluting etc. It is also noted that medicines so manufactured were given or sold to patients of Private OPD by the hospital. Had it been the case of compounding/mixing/diluting, the hospital would not have sold these medicines to Private OPD, but such is not the case here, as the manufactured drugs bear Batch No, expiry date and cost of the medicines. It clearly indicates that assessee society is actually manufacturing drugs under the veil of diluting/compounding/mixing. Thus, a distinct activity of manufacturing was systematically carried out by the assessee, which can in no way be classified as a charitable activity and which essentially amounted to business activity.

However, no separate books of accounts as required u/.s. 11(4A) read with section 11(4) have been maintained. This itself constitutes a ground for non application of Section 11 /12 in this case.

Thus, the assessee society has indulged in activity of manufacturing of medicines which was not permitted to a charitable institution within the provisions of section 2( 15) of the Act.

Withdrawal of exemption from Import- Duty:

It was noted in Special Audit Report that Customs Authorities have withdrawn the exemption given for import of equipment in the year 1990 from Japan with certain conditions to be fulfilled by the society. The assessee society has mentioned that the transaction does not pertain to the relevant year and such exemption was withdrawn due to non-compliance of conditions imposed by the customs authorities and the matter is sub-judice.

The submission of the assessee society is not tenable, as the assessee society was found to be involved in violation of the conditions for getting customs duty exemption. The Customs' department in its notification No. 64/88 stated that hospital was certified by the Ministry of Health and Family Welfare, in each case to be run for providing medical, surgical or diagnostic treatment not only without any distinction of caste, creed, race, religion or language but also free on an average, to at least 40% of their outdoor patients, and free to all indoor patients belonging to families with an income of less than Rs. 500/- per month, and keeping for this purpose at least 10% of all the hospital beds reserved for such patients; and at reasonable charges, either on the basis of the income of the patients concerned or otherwise, to patients other than those specified in. clauses (a) and (b). The customs exemption was withdrawn for non-compliance of conditions as laid down in the said Notification. The hospital has not provided free treatment to indoor and outdoor patients as per the conditions prescribed under the said Notification.

The above observations clearly indicate the intentions of assessee society despite getting exemptions from the authority, it was not providing relief benefit for which exemption was granted to it. Further, the claim that the matter is still sub-judice for a long time itself does not exonerate the assessee from the liability of wilful violation of conditions envisaged in the above said notification. Thus, assessee society was found to be involved in non- fulfillment of promises for providing medical benefit to poor and other deserving patients. This weakens the assessee claim that all its activities were charitable in nature.

Alteration in MOA vis-a-vis communication with revenue authorities

As per the record, the assessee has obtained registration u/s 12A(a) of the Income Tax Act, 1961 vide registration No. 1- 138/73-74 dated 18.02.1974 whereas the Memorandum of the assessee's Society have been amended by the Society's minute no. 1(b) dated 27.07.1985 and confirmed by the its minutes no. 4 dated 07.09.1985 as per the Memorandum provided by the assessee. This clearly shows that the registration of the assessee u/s 12A has been granted on the basis of earlier Memorandum and no registration thereafter granted subsequent to the amendment in the Memorandum. It is mandatory on the part of the assessee that whenever some alterations are made to the specific clauses of the Memorandum or Bye Laws, it is the duty of the assessee to communicate such changes to the authorities. The rationale behind it is that the authorities at the time of granting exemption U/S 12A has considered the objects then existing which have been changed or altered later on. In other words, for such changed objects, the Society has not obtained any registration U/S 12A and consequently such objects are not considered in earlier registration u/s 12A of the Act. The reasons of not informing the department show that assessee society has not bothered to comply with the mandatory duties to inform and changed the objects as convenient to it from time to time. Thus) the failure on the part of assessee society to inform the department for alteration/change in the objects itself render the society for withdrawal of registration U/s 12A. The above view finds further strength from the decision of Hon'ble Allahabad High Court in the case of Allahabad Agriculture Institute vs. UOI & Others (2007) 291 ITR 116 (All.) wherein the Hon'ble Court after due deliberation formed following conclusion:

Registration is granted by the commissioner to charitable trusts under section 12A of the Income Tax Act, 1961. The words of that statutory provision show that it applies where the objects of the trust or institution remain the same. However, where the objects of the trust or institution, which were the basis of grant of registration, are altered after such grant of registration the very foundation of the registration having been removed by the voluntary act of the assessee, the registration would not survive.

Thus, the registration on objects already obtained have since been altered therefore, the registration is liable to be acted upon in the manner as suggested by the Hon'ble Court. In light of the facts and circumstances mentioned above and also keeping in view of provisions of Section 2(15) of the Income Tax Act, 1961, it is held that the activity of the society does not fall within the meaning of Charitable activity, as the assessee society has been found to be involved in activities which would not be called charitable as per the provisions of section 2(15). It is established beyond reasonable doubt that certain activities of the society are not charitable in nature and thus the society does not qualify for registration u/s 12A. Accordingly, registration granted u/s 12A to the assessee society is cancelled from A.Y. 2009-10 onwards.”

4. Against the above order of the Ld. DIT(E), assessee is in appeal before us.

5. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. counsel of the assessee has submitted the point-wise rebuttal of the observations of the ld. DIT(E) made in his order. The same read as under:-

“Contribution to Churches

Details of RS.22,500 I-which has been given to 8 Institutions also reported by SAR for advertisement is only information relating to assessee Hospital of the various facilities available along with timings for general OPD, free OPD, emergency services. Since these institutions approached the assessee, the advertisements were given to them. It is only the cost of advertisement and no benefit accrues to the particular religious community. Submission to DIT(E) vide letter dated 31st October 2011 paper book page 5 to 28 (Vol. 1) relevant page 12 and 13  and details in paper book page 205 to 243 (Vol.lI).

Advertisement copy at page 209.

Sale of medicines in the Pharmacy:

-Activity of pharmacy is an integral part of the Hospital running activity which is not a commercial activity.

- The assessee dispenses medicines only to patients who are treated by Hospital doctors and who are having prescription of the Hospital and do not sell to outsiders.

-Pharmacy sale of medicines is not the predominant objective of the assessee, it is only incidental.

- The income is plough back for Hospital activity.

Without prejudice the working of SAR showing 50% margin is without considering salaries of pharmacy department, doctor's salary, contract employees payment, administrative over heads like electricity, maintenance, other utilities, depreciation etc. The income only come to 9.15% as given to DIT(E) vide letter dated 16 Nov. 2011 at page no.468 (Volume III) of the paperNbook. Even this amount is ploughed back for the charitable activities of the Society. Submission to DIT(E) vide letter dated 31^st October 2011 paper book page 5 to 28 (Volume I) relevant page 14 to 16.

Smile Surgery Projects:

It is not a commercial activity. Smile Surgery Project is an International Charitable. Organization providing assistance to the children born cleft lips and platelet. The organization reimburses to the assessee sum of Rs. 8,OOO/- per patient for the surgery done which was increased to Rs.10,OOO/-. The Hospital doesn't charge the patients under this project. The cost incurred may be less than the amount reimbursed by the Smile Project or it may be more which has to be borne by the Hospital. There is no commercial or business element as alleged.

The Smile Project is duly supported by Agreement enclosed at paper book page no. 275 to 293 (Volume II) as well as copies of bills reflecting the total amount of expenditure on the patient is enclosed at paper book 294 to 376 (Volume II).

Fun Fair Fund:

Details of Fun Fair Fund right from 1999-00 is enclosed at page 377 (Volume II) of the paper-book. The Fair is conducted by the employees of the Society wherein the employees of the Hospital participate and hold lucky draw. The amount collected is used to make ex-gratia payment to the exNemployees on retirement, exigencies. The income is reflected in the statement of total income of the respective years which can be verified from the records of the Department. Assessee fails to understand how this activity is labeled as commercial activity / business activity. The employees are part and parcel of the society. Any activity undertaken to help them cannot be considered as non-charitable. This fund was appearing as opening balance of 40.95 lacs and there are no receipt during the year.

Manufacturing of Medicines:

Assessee does not manufacture any medicines. The pharmacy undertakes only compounding, mixing and diluting the medicines already available with the assessee. This is done for reducing the strength of the medicine, making it cost effective when smaller doses are required or in case medicines are available in large proportions in the market it is made into smaller portions for patients. There is neither violation of any licensing authority nor any prohibition. The Drug Control Department gives permission to sell, stock or exhibit drugs as well as running the pharmacy.

Moreover, the Hospital is running for the past 125 years and the Drug Controller conducts regular inspection of the Hospital. It may be stated that the Special Audit Report has exceeded his jurisdiction in alleging that the assessee is undertaking manufacturing activity which is not his forte. In any case the income resulting from medicines given to patients is again utilized for the Hospital activity. Withdrawal of exemption from Import Duty The import of medical equipment had taken place in 1990 and does not pertain to the period under discussion. The duty exemption was withdrawn citing certain non compliance assessee has filed appeal before CEST AT challenging the order of withdrawal and that the assessee has complied with all the terms for exemption. The matter is subjudice before the said Tribunal. However, the machineries imported are used by the Hospital namely remote control X-ray system and whole body C.T. Scan. The copy of the appeal filed by the assessee with CESTAT is at paper book at page No.445 to 463 (Volume III). The exemption is with respect to duty under Customs Act and does not make the assessee non-charitable. It continues to render medical relief.

Alteration in MOA vis-a-vis Communication with Revenue authorities There is no specific reference in the notice dated 18.10.2011 from the DIT (E) on this ground. However, chart depicting the minor amendments carried out by the assessee is enclosed in paper book page 75 and 76 (Volume I). Perusal of the same it can be seen that the change does not alter the basic object of medical relief. The object of the assessee would remain the same before the amendment as well as after the amendment.

Therefore, no adverse inference can be drawn against the assessee.

The case law relied upon by the DIT (E) is entirely altogether on different facts. In this case the assessee changed the objects of the trust or institution on a wholesale basis after the grant of registration without informing the change to the Commissioner. The court held at relevant page 120 that:

“to sum up, we are unable to exercise our discretion to enable the assessee to continue to utilize and enjoy the registration despite the wholesale change in the objects without giving its immediate intimation to the Commissioner."

In the assessee's case the amendment is insignificant and does not alter the basic object of the Society.”

6. In view of the above, ld. counsel of the assessee submitted that the activities of the assessee are genuine, as per the Income and Expenditure Account as on 31.3.2008 the total application of income for the purpose of running of the Hospital namely St. Stephen’s Hospital comes to ` 68.56 crores which has been accepted by the Ld. DIT(E). The so-called income from commercial activities are also ploughed back into the Society for charitable activity. The assessments in the past has been done u/s. 143(3) from A.Y. 1994-95 onwards granting benefit u/s. 11. Therefore, ld. counsel of the assessee pleaded that order of Ld. DIT(E) for cancellation of registration u/s. 12AA(3) may be set aside.

6.1 Ld. Departmental Representative on other hand relied upon the order of the Ld. DIT(E).

6.2 We find that assessee has cogently rebutted all the charges leveled against it by the DIT(E).

6.3 As regards allegation relating to Contribution to Churches. It has been submitted by the assessee that merely a sum of RS. 22,500 was incurred in this regard. The same was given to 8 Institutions for advertisement. It is only information relating to assessee Hospital of the various facilities available along with timings for general OPD, free OPD, emergency services. Since these institutions approached the assessee, the advertisements were given to them. It is only the cost of advertisement and no benefit accrues to the particular religious community. Thus, we agree with the contention of the assessee that the amount involved was very meager and it cannot be said that amount was meant for benefit of any particular community.

6.4 As regards the allegation of Sale of medicines in the Pharmacy, assessee has submitted that the activity of pharmacy is an integral part of the Hospital running activity which is not a commercial activity. It has been submitted that assessee dispenses medicines only to patients who are treated by Hospital doctors and who are having prescription of the Hospital and do not sell to outsiders. It has further been submitted that Pharmacy sale of medicines is not the predominant objective of the assessee, it is only incidental. The income is ploughed back for Hospital activity. It has been further been submitted that 50% margin is without considering salaries of pharmacy department, doctor's salary, contract employees payment, administrative over heads like electricity, maintenance, other utilities, depreciation etc. It has been claimed that only income come to 9.15% as given to DIT(E) vide letter dated 16 Nov. 2011. Even this amount is ploughed back for the charitable activities of the Society. Thus, we find that sale of medicine in the pharmacy is certainly a charitable activity.

6.5 As regards allegation of Smile Surgery Projects, it has been submitted that it is not a commercial activity. Smile Surgery Project is an International Charitable. Organization providing assistance to the children born cleft lips and platelet. The organization reimburses to the assessee sum of Rs. 8,OOO/- per patient for the surgery done which was increased to Rs.10,OOO. The Hospital doesn't charge the patients under this project. The cost incurred may be less than the amount reimbursed by the Smile Project or it may be more which has to be borne by the Hospital. There is no commercial or business element as alleged. We find that submission of the assessee in this regard is quite cogent enough and the Smile Project cannot be said to be commercial activity.

6.6 As regards allegation of Fun Fair Fund, assessee has submitted that the Fair is conducted by the employees of the Society wherein the employees of the Hospital participate and hold lucky draw. The amount collected is used to make ex-gratia payment to the exNemployees on retirement, exigencies. The income is reflected in the statement of total income of the respective years. Thus, this activity cannot said to be commercial/business activity. The employees are part and parcel of the society. Any activity undertaken to help them cannot be considered as non-charitable.

6.7 As regards allegation of Manufacturing of Medicines, assessee has submitted that assessee does not manufacture any medicines. The pharmacy undertakes only compounding, mixing and diluting the medicines already available with the assessee. This is done for reducing the strength of the medicine, making it cost effective when smaller doses are required or in case medicines are available in large proportions in the market it is made into smaller portions for patients.

There is neither violation of any licensing authority nor any prohibition. The Drug Control Department gives permission to sell, stock or exhibit drugs as well as running the pharmacy. It has been claimed that the Hospital is running for the past 125 years and the Drug Controller conducts regular inspection of the Hospital. In any case, it has further been submitted that the income resulting from medicines given to patients is again utilized for the Hospital activity. On the facts and circumstances of the case, it cannot be said that assessee is indulging in the manufacturing activity of the medicines.

6.8 As regards allegation of Withdrawal of exemption from Import Duty, it has been submitted that import of medical equipment had taken place in 1990 and does not pertain to the period under discussion. The duty exemption was withdrawn citing certain noncompliance, assessee has filed appeal before CESTAT challenging the order of withdrawal and that the assessee has complied with all the terms for exemption. The matter is subjudice before the said Tribunal.

However, the machineries imported are used by the Hospital namely remote control X-ray system and whole body C.T. Scan. The exemption is with respect to duty under Customs Act and does not make the assessee non-charitable. It continues to render medical relief.

6.9 As regards allegation of relating to Alteration in MOA vis-à-vis Communication with Revenue authorities. In this regard, it has been submitted that there is no specific reference in the notice dated 18.10.2011 from the DIT(E) on this ground. However, chart depicting the minor amendments carried out by the assessee has been submitted. Perusal of the same it can be seen that the change does not alter the basic object of medical relief. The object of the assessee would remain the same before the amendment as well as after the amendment. Therefore, no adverse inference can be drawn against the assessee. Further the case relied upon by the DIT(E) has been found to be not applicable to the facts of the present case.

7. In view of the aforesaid discussions and observations, we find that objection raised by the DIT(E) have been cogently rebutted by the ld. counsel of the assessee. Under the circumstances, in our considered opinion, there is no reason for cancellation of registration u/s. 12AA(3) of the Act. Hence, we hold that the cancellation of the registration u/s. 12AA(3) by the Ld. DIT(E) is liable to be set aside and is accordingly set aside.

8. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 11/5/2012.

                                                      Sd/-                                   Sd/-

                                              [I.P. BANSAL]           [SHAMIM YAHYA]

                                        JUDICIAL MEMBER  ACCOUNTANT MEMBER

Date 11/5/2012

“SRBHATNAGAR”

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

TRUE COPY

By Order,

Assistant Registrar,

ITAT, Delhi Benches