Charitable Hospital Cannot Be Denied Income Tax Exemption For Charging Patients, Making Surplus: Bombay High Court

The Bombay High Court has ruled that a hospital seeking income tax exemption on philanthropic grounds cannot be denied the benefit merely because it earns a surplus, charges patients for treatment, or collects professional fees on behalf of consultant doctors.

The question is whether its actual activities and use of funds establish that it exists solely for philanthropic purposes and not for profit.

A division bench of Justice B.P. Colabawalla and Justice Farhan P. Dubash set aside orders passed by the Chief Commissioner of Income-tax rejecting Breach Candy Hospital Trust's applications for approval under Section 10(23C)(via) of the Income-tax Act, 1961. The provision excludes qualifying income received on behalf of a hospital from its total income, provided the hospital exists solely for philanthropic purposes and not for profit and obtains approval from the prescribed authority.

“The words 'not for purposes of profit' that are contained in sub-clause (via) of section 10(23C) require an examination of the purpose and actual conduct of the institution,” the court observed.

It clarified that the provision does not require a hospital's receipts and expenditure to balance exactly at the end of every financial year. The court explained:

“The section itself contemplates income being applied or accumulated for the institution's objects, subject to the statutory safeguards. A surplus can nevertheless be evidence of a profit purpose, particularly where the pattern of receipts, charges, expenditure and deployment supports that inference. Its existence is relevant, but not conclusive.”

The court applied this test to the Hospital's activities, financial arrangements and use of income, holding that a surplus alone could not establish that it operated for profit.

The dispute arose after the Chief Commissioner of Income-tax rejected the Hospital's applications for Assessment Years 2002-03 to 2010-11 by an order dated April 15, 2010, and for Assessment Year 2011-12 onwards by an order dated September 28, 2012.

The authorities relied on the Hospital's surpluses, the proportion of expenditure on free and concessional treatment for poor patients, its arrangements for collecting consultants' fees, and the charges for consultation rooms provided to specialists.

The Hospital argued that it had been established solely for philanthropic purposes and used its income to provide medical care, acquire equipment, and improve its facilities. It maintained that the existence of a surplus did not alter the character of its activities when its income was deployed towards its stated objects.

The court accepted that the Hospital's objects, actual activities and use of funds demonstrated that it existed solely for philanthropic purposes and not for profit. It noted that its income was applied towards medical care and improvements to hospital facilities. The impugned orders did not find that the Hospital's funds had been diverted for private benefit or used for unrelated commercial activities.

The court observed that hospitals need to invest in infrastructure and medical equipment to provide healthcare services. Acquiring advanced equipment or improving facilities does not, by itself, establish a profit-making purpose. Nor can the prospect of increased receipts from improved facilities, where the expenditure serves the hospital's medical and philanthropic purposes, by itself justify refusing approval.

The court held that the surplus had to be assessed alongside the Hospital's purpose, actual activities and use of funds, rather than treated as conclusive proof of a profit motive. It concluded that the surplus remaining in a particular year did not, on the facts of the case, disqualify the Hospital from approval.

The court also rejected the objections to the Hospital's arrangements for collecting professional fees from consultant doctors. The Hospital collected fees from patients on behalf of consultants, retained 10% towards its facilities and services, and remitted the balance to the doctors.

The court observed that payments to consultants for their services could not be treated as a distribution of the Hospital's profits merely because the fees were collected through the Hospital. The impugned orders did not identify any payment unrelated to services rendered or any diversion of funds for private benefit. The absence of a ceiling on consultants' fees also did not establish that the Hospital existed for profit.

The court further held that although the extent and genuineness of free or concessional treatment may be relevant, Section 10(23C)(via) does not prescribe a minimum ratio of such expenditure to gross receipts. The percentage spent on free or concessional treatment, by itself, could not determine whether the Hospital satisfied the statutory requirements.

It considered the Hospital's compliance with a charitable hospital scheme approved by the High Court on August 17, 2006, under Section 41AA of the Bombay Public Trusts Act, 1950. The scheme requires 10% of operational beds to be reserved for indigent patients receiving free treatment and a further 10% for patients from weaker sections receiving concessional treatment. It also requires an Indigent Patients Fund, a contribution of 2% of gross billing as prescribed by the scheme, specified services without charge and periodic reporting to the Charity Commissioner.

The court noted that the Revenue had identified no discrepancy in the Hospital's details of free and concessional treatment or the material submitted to demonstrate compliance with the scheme.

It also clarified that philanthropy is not confined to providing treatment free of charge. The court observed that specialist medical care, modern equipment, and skilled staff may also serve philanthropic purposes. Charging patients for treatment does not, by itself, deprive a hospital of its philanthropic character.

The court ultimately concluded that the Hospital's objects, activities, compliance with the applicable scheme and use of funds established its eligibility for approval under Section 10(23C)(via).

It quashed both orders and directed the income tax authorities, or the authority presently competent to grant approval, to approve the Hospital's applications for Assessment Years 2002-03 to 2010-11 and Assessment Years 2011-12 to 2021-22. The approvals must be issued within eight weeks of the judgment being uploaded on the High Court's website.

The court made the rule absolute in both petitions and ordered that there would be no order as to costs.

For Hospital: Senior Advocate Jehangir D. Mistri, along with Advocates Fenil Bhatt and Danish Qureshi, instructed by Mahimtura & Co.,

For Revenue: Advocate Suresh Kumar appeared for the Revenue.