Hospital cannot claim tax exemption on building without providing free medical relief: HC disposes off Kerala Hospital's petition

Ernakulam: Observing that the building of Lisie Hospital was not principally used for providing free medical relief, the Kerala High Court recently dismissed the hospital's appeal for tax exemption in respect of one of its buildings set up in 2013.

The matter was remanded back to the High Court by the Apex Court back in February 2023. While considering the arguments in respect of the Kerala Building Tax Act, the Kerala HC bench of Justice A.K. Jayasankaran Nambiar and Justice Mohammed Nias C.P. observed, "...it is not in dispute that the building of the appellant was not principally used for providing free medical relief as required under the statutory provision for inclusion under the definition of charitable purpose. It is also not the case of the appellant that it rendered in the said building, any of the other services that qualify as charitable purpose under Section 3 of the Act. We therefore cannot see how the appellant’s building would qualify for the exemption under Section 3 of the Act in respect of the medical relief provided in the building in question."

"We might reiterate that the view taken by us applies only in those cases where the charitable purpose sought to be established is the provision of medical relief, for it is only in relation to the said activity that the legislature stipulates that the relief provided must be “free”," the bench further clarified.

The matter concerned Lisie Hospital and specifically a building of the hospital, where medical treatment was being provided at concessional rates. The hospital was served with a notice demanding building tax under the Kerala Building Tax Act.

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According to Section 3(2) of the Act, whenever any question arises as to whether a building qualifies for exemption in terms of Section 3(1) of the Act, the said question has to be referred to the Government which is then obliged to decide the question after giving the interested parties an opportunity to present their case.

Section 3(3) of the Act makes it clear that a decision of the Government on the question referred to it under Section 3(2) shall be final and shall not be called in question in any court of law.

While considering the matter of Lisie Hospital, the Government on 17.03.2016 issued an order holding that the building constructed by the appellant in 2013 would not qualify for the exemption contemplated under Section 3(1) of the Act for "buildings used principally for religious, charitable or educational purposes" when read with Explanation 1 to the said provision which clarified that for the purposes of Section 3(1) of the Act, “charitable purpose includes relief of the poor and free medical relief”.

The Government reasoned that the appellant hospital was not providing medical relief free of cost and therefore it did not satisfy the definition of charitable purpose under the exemption provision. The Government also examined the income-expense statement of the appellant’s institution and found that the appellant expended only a nominal amount for charitable purposes and that insofar as the appellant’s hospital was providing medical relief by collecting fees, it would not qualify for the exemption.

Aggrieved by this, the hospital approached the Kerala HC. However, the plea was dismissed following the judgment of the Supreme Court in SH Medical Centre Hospital (supra).

However, when the matter reached the Supreme Court, a two-judge bench doubted the decision in SH Medical Centre Hospital (Supra) and referred to a three-judge bench. The referring bench took this view on the ground that the Explanation to the provision merely clarified that "relief to the poor and free medical relief" was only one of the factors of charitable purpose and the statutory provision actually read “charitable purpose includes relief of the poor and free medical relief”. So there could be other facets of charitable purposes as well.

In its order dated February 9, 2023, the three-judge bench referred to the Explanation 1 to Section 3(1) of the Act and found that “the Explanation goes to indicate that charitable purpose includes and is, therefore, not confined to the relief of the poor and free medical relief” and that SH Medical Centre Hospital (supra), having not noticed the use of the phraseology “includes” in the Explanation, had to be overruled to the said extent

While overruling the SH Medical Centre Case (Supra) to that extent, the top court bench remanded the matter of Lisie Hospital back to the High Court. The counsel for the hospital argued that the building of the hospital would qualify for exemption since its principal use was providing medical relief at concessional rates. It was further argued by the counsels that the Top court bench had stated in the reference that other kinds of charitable activities would also qualify as charitable purposes under the statute.

On the other hand, Government Pleader Rafiq Mohammed refuted this argument and submitted that it is only a user of the building for providing free medical relief that would qualify for the exemption.

The bench was considering the question if there could be a lesser form of medical relief than "free" medical relief that would be qualified as 'medical relief' as a 'charitable purpose' in Explanation 1 of Section 3 of the Act.

At this outset, the bench observed that the Full Bench of High Court in the case of Unity Hospital (P) Ltd v. State of Kerala (2010), held that "...hospital buildings will get exemption under the head charity only if medical service is rendered free in such hospital buildings".

Further, the HC bench observed that this position was affirmed by the Supreme Court in the case of Govt. of Kerala & Anr. v. Mother Superior Adoration Convent (2021).

Later, the Supreme Court held that where a High Court construes a local statute, ordinarily deference must be given to the High Court judgments in interpreting such a statute particularly when they have stood the test of time.

Further, the bench pointed out that the Supreme Court in the case of Wood Papers Ltd. had held that an exemption provision is like an exception and on the normal principle of construction or interpretation of statutes it is construed strictly either because of legislative intention or on economic justification of inequitable burden or progressive approach of fiscal provisions intended to augment state revenue. But once exception or exemption becomes applicable no rule or principle requires it to be construed strictly.

"When the legislative provision in the instant case indicates that it is the highest extent of relief viz. “free medical relief” that is specified in the inclusive definition for the grant of a benefit of exemption from tax, we feel that a dilution of the prescription as regards the extent of medical relief required for claiming exemption under the statute would tantamount to widening the scope and ambit of the exemption contemplated under the statutory provision at the entry stage, where it is a strict interpretation that is to be adopted," the court observed,

While dismissing the appeal by the Hospital, the Court, however, clarified :

"Before parting with this case, we might once again re-iterate that it is solely on account of the fact that the appellant’s claim for exemption was premised on the contention that it had used the building in question principally for providing medical relief that would qualify as a charitable purpose under Section 3 of the Act, that we have once again taken the view that the appellant is not entitled to the exemption therein. We are mindful that the Supreme Court had remitted this case for our consideration after setting aside the earlier judgment of a Division Bench of this Court that had arrived at the same finding of ineligibility of the appellant for the benefit of the exemption. Our finding, however, is based on an entirely different line of reasoning and hence not inconsistent with the decision of the three Judge Bench that remitted the matter to this Court."

To read the order, click on the link below:

https://medicaldialogues.in/pdf_upload/kerala-hc-order-214673.pdf

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