Hospital Charging Commercial Rates Not Entitled For Registration As Charitable Organisation: ITAT

The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has held that the assessee hospital is charging on the basis of commercial rates from the patients and is not entitled to registration as a charitable organization under Section 12A of the Income Tax Act.

The two-member bench of Laliet Kumar (Judicial Member) and R.K. Panda (Accountant Member) has observed that the assessee is charging on the basis of commercial rates from the patients, either outdoor or indoor, and the assessee has failed to demonstrate that the charges or fee charged by it were based on a reasonable markup on the cost.

The ITAT relied on the decision of the Supreme Court in the case of New Noble Educational Society Versus The Chief Commissioner of Income Tax in which it was held that the CIT(E) was well within his right to examine the audited records/other financial statements with a view to deciphering the nature of the activities. The Supreme Court has held that where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C) of the Income Tax Act

The assessee was a private limited company, and on August 3, 2018, the assessee converted the company into a Section 8 company and changed the name to "Fernandez Hospital."

The assessee-hospital applied for registration under Section 12AA of the Income Tax Act. However, the CIT (E) rejected the application filed by the assessee on the grounds that the assessee is involved in activities that are in the nature of trade and provides services at market rates. The CIT(E) also stated that the assessee had violated Section 13 of the Income Tax Act of 1961 by paying large sums to directors and other interested parties.

The CIT(E) recorded that the amount charged by the assessee was far more than the amount charged by other diagnostic centers or hospitals for similar tests, diagnoses, or treatments.

The assessee submitted that the activities conducted by the assessee are charitable in nature, and CIT(E) has wrongly rejected the assessee's application for grant of registration under Section 12AA. The order passed by CIT(E) was not in accordance with the law. The activities of the assessee are akin to the activities of the Bill & Melinda Gates Foundation (BMGF), Tata Foundations, etc. Though these are business houses, they are also involved in philanthropic work.

The department contended that from the perusal of the profit and loss account of the assessee, it is clear that the assessee had earned a profit of Rs. 23.54 crores on total revenue from operations of Rs. 141.90 crores. It indicates that the assessee company is a profit-making company.

The tribunal noted that no evidence was shown by the assessee that the assessee had been charging a lesser fee or no fee at all after its conversion or that it was extending free medical facilities to the poor and downtrodden.

The tribunal determined that the assessee did not qualify for registration or approval under Sections 10(23C) or 12A of the Income Tax Act.

Case Title: Fernandez Foundation Versus Commissioner of Income Tax (Exemption)

Citation: ITA No.1884 & 1885/Hyd/2019 and ITA No.299/Hyd/2020

Date: 08.12.2022

Counsel For Appellant: Advocate S. Ravi

Counsel For Respondent: CIT-DR Rajendra Kumar

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