Hospital Charging Commercial Rates Not Entitled For Registration As Charitable Organisation under Income Tax Act: ITAT

Hyderabad: The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has recently stated that a hospital charging its patients commercial rates is not entitled to registration as a charitable organization under Section 12A of the Income Tax Act.

Hyderabad ITAT issued such clarification while considering plea by a Hyderabad based Hospital that demanded registration under Section 12A. The two-member bench of Laliet Kumar (Judicial Member) and R.K. Panda (Accountant Member) denied relief to the hospital as it noted that the hospital was charging commercial rates from both indoor and outdoor patients.

Further, the bench noted that there was no explanation on the side of the hospital to justify that the fees charged by it were based on a reasonable markup on the cost.

"In our view, ld.CIT(E) was correct in holding that the assessee is charging on the basis of commercial rates from the patients, either outdoor/indoor and the assessee has failed to demonstrate that the charges / fee charged by it were on a reasonable markup on the cost. Considering the totality of the facts and circumstances of the case, we do not find any error in the decision of ld.CIT(E). Accordingly, the order of ld.CIT(E) is upheld and the appeal of the assessee in ITA No.1884/Hyd/2019 is dismissed," the ITAT bench observed in its order.

The petitioners assessee was a private limited company and on 03.08.2018 it converted the company into a Section 8 Company and changed the name to "Fernandez Hospital".

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When the assessee hospital applied for registration as a charitable hospital under section 12AA of the Income Tax Act, the Commissioner of Income Tax (Exemption) rejected the application and pointed out that the assessee was involved in activities which were in nature of trade. Further the CIT (E) claimed that the assessee hospital provides services to the patients at market rates and also violated the provision of section 13 of Income Tax Act 1961, as huge amounts were paid to the directors/ interested persons.

Further, the CIT(E) recorded that the amount charged by the assessee was far more than the amount charged by other diagnostics centers / hospitals, for similar tests/ diagnostic/ treatment.

Challenging the grant of registration by CIT(E), the assessee hospital approached the ITAT bench and claimed that the CIT(E) had wrongly rejected their application since the activities conducted by the assessee were charitable in nature. It was further submitted by the hospital that the activities of the assessee were akin to the activities of The Bill & Melinda Gates Foundation (BMGF), Tata Foundations etc. It was submitted though these are business houses yet they are involved in philanthropist work.

On the other hand, the Department submitted that from the perusal of profit and loss account of the assessee for the period ending with 31.03.2018, it was clear that the assessee had earned a profit of Rs 23.54 crores on the total revenue from operations of Rs 141.90 crore. Referring to this, the department contended that the assessee company was a profit-making company. 

While considering the matter, the ITAT bench perused all the relevant documents, perused the submissions by both the parties and referred to the Supreme Court order in the case of New Noble Educational Society, where the Apex Court had held that the CIT(E) was well within its rights to examine the audited records and other financial statements with a view to decipher the nature of activities.

"Undoubtedly, in the present case, the ld.CIT(E) has brought on record that the activities of the assessee are commercial in nature," noted the bench.

"In the present case, neither the activities nor the management nor the place of services nor the charges for treatment had changed in any manner by conversion and only the name of the assessee had changed albeit the assessee is claiming registration / approval under the Act. Earlier the assessee was known as "Fernandez Hospital Private Limited" and presently, it is known as "Fernandez Foundation". Further, we are in agreement with the argument of ld.DR that the assessee can do charity by either bringing down its profit by providing services at reasonable rate or by utilizing the surplus for helping medical aid / facilities to the poor / needy persons at free of cost. Nothing of this nature, if at all done by the assessee, has been brought to our notice," further noted the tribunal.

Therefore, upholding the CIT(E) order, the bench dismissed the application by the assessee hospital.

To read the order, click on the link below:

https://medicaldialogues.in/pdf_upload/itat-order-193620.pdf

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