The division bench of Delhi High Court ruled that, a Charitable institution which is duly registered under the Indian Societies Act, is entitled in law to the claim the exemption of its income, unser section 10(22A) of the Income Tax Act, 1961 even if the the Managing Trustee is participating in the profits of the income of the Trust.
The appellant M/S Skin Institute and Public Services Charitable Trust is a society established by late Dr. P.N. Behl. Upon the establishment of the society, the hospital set up by Dr. Behl was made over to it to be run for entirely charitable purposes.
The Institution is granting medical services to the general public is an essential charitable object. A certificate under Section 12A of the Income Tax Act, 1961 was granted to the assessee on 28.11.1973. The Memorandum of Association was duly registered subsequently on 21.10.1976. The assessee was also granted exemption certificate from inception i.e. first being on 01.08.1973. The assessee’s hospital treats those suffering from illness and also provides convalescence to those requiring medical attention and rehabilitation.
The Assessing Officer (AO) formed the opinion that the society was disentitled to the benefit under Section 10(22A) of the Income Ta Act. He did so based upon the fact that Dr. Behl, the settler, had received ` 3,09,370/- for that assessment year.
The assessee had contended that this receipt, could not in any manner undermine the charitable nature and functioning of the institution, and rather the patients/ clients from whom the assessee benefited had brought in much larger amounts of which only a percentage was given to Dr. Behl. By way of comparison, amounts paid to certain other consultants/ doctors, was also shown, to say that they received a much higher proportions of such fees given to the hospital.
While allowing the petition, the bench comprising of Justice S.Ravindra Bhat and Najmi Waziri observed that, “a plain reading of section 13 of the Income Tax Act, which sets out rules of exclusion, as it were (from the entitlement or eligibility of certain income the immunity of taxation) opens with the exception “Nothing contained in section 11 (or section 12) shall operate”. What is immediately apparent is that the exclusion of amounts received by virtue of section 10(22A) is not the subject matter of section 13(1) of the Income Tax Act or any of its further conditions. In other words, the disqualification which attaches in absolute terms by virtue of provisions of section 13(1) especially through section 13(3) to the income out of which some benefit flows to a settler/ founder, does not per se apply to institutions covered by section 10(22A) of the Income Tax Act”.
“There is no window for the tax administrator to import disqualifications applicable to categories of income that may otherwise be eligible to exemption, into these amounts which are per se entitled to be treated as not forming part of the total income”.
While setting aside the ITAT decision, the court also observed that, “the fundamental error led the Tribunal to hold that since Dr. Behl received significant amounts, the entire charitable basis of the assessee stood undermined by reason of Section 13 of the Income Tax Act. This error persisted for the three assessment years in question. Having regard to the specific nature of the income which till 31.03.1999 could not be included as part of the total income, which the Parliament later subsumed through sections 10(23C) and 12A of the Income Tax Act by deleting section 10(22A), in the present case there was no question of confusion the amount received by Dr. Behl as benefits that could debar the assessee to the eligibility it fundamentally had under section 10(22A) of the Income Tax Act.
Read the full text of the Judgment below.