By TIOL News Service

KOLKATA, MAR 28, 2016: THE issue is - Whether reimbursement of medical expenses by donor of welfare fund for own employees is to be treated as an act beneficial to humanity at large for purpose of Sec 10(22A) benefits. NO is the answer.

Facts of the case

The assessee is a company under the Apeejay Group, which was incorporated as a public limited company on 27th March, 1984. Pursuant to a resolution and subsequent permission by the Central Government the assessee was registered as a private limited company on 17th July, 1984. During the A.Y 1986-87, the paid up capital was Rs.5,040/-. Between the period of conversion, the assessee raised a welfare fund of Rs.4 crores from Assam Frontier Tea Limited, Singlo (India) Co. Ltd. and Empire Plantation (India) Ltd., who also belonged to Apeejay Group of Companies. For the A.Y in question, a nil return was filed with a claim for refund of tax of Rs.4,98,664/-. It was claimed that a sum of Rs.42,14,772/-, earned by way of interest from investments, was the surplus over the expenditure and was exempt u/s 10(22A). During assessment, the AO found that the assessee had earned a sum of Rs.4,75,673/- by way of interest on fixed deposits and a sum of Rs.49,12,312/- by way of interest from the different group of companies aggregating to a sum of Rs.53,87,985/- out of which there was an expenditure of a sum of Rs.70,247/- including a sum of Rs.9,184/- on account of depreciation. From a revised return filed by the assessee, it transpired that a sum of Rs.7,05,008/- on account of medicine and hospital expenses and a sum of Rs.3,97,967/- on account of extra salary and wages had been incurred by the assessee. Upon scrutiny of the details, it transpired that the aggregate sum of Rs.11,02,965/- included a sum of Rs.7,17,993/- reimbursed by the assessee to Assam Frontier Tea Ltd., Singlo (India) Co. Ltd. and Empire Plantaion (India) Ltd. The AO accordingly refused to allow this expenditure and the total income of Rs.53,17,738/- was assessed to tax along with initiation of penalty proceedings. The AO refused the same because he was of the opinion that the major portion of the corpus was utilized for the purpose of earning interest and not for any "philantrophic purposes and medical welfare as claimed." The AO went on to hold that the assessee "was an investment company engaged in money lending business." On appeal, the CIT(A) reversed the order of AO refusing exemption u/s 10(22A).

Having heard the parties, the High Court held that,

++ it is clear that any income of a hospital or an institution for rendering assistance in one or more of the five ways outlined above, to the human beings in general or to the fellow human beings belonging to a well defined bond of religion, race, social or economic unity, purely as a matter of charity or goodwill or benevolence and not for profit is entitled to exemption. There is one more condition that such a hospital or institution should exist solely for the aforesaid purposes which can only be achieved if the hospital or institution is actually engaged in any one or more of the aforesaid five activities. The assessee has not undertaken any of the aforesaid activities. The claim for exemption is based on (a) the objects contained in the MoA and (b) the reimbursement of medical expenses to the aforesaid three companies incurred by them in advancing medical facilities to assessee's employees. It is not disputed that the assessee was incorporated with the idea of tax planning by the Apeejay group and the assessee has merely been sub-serving that purpose. Originally the return was filed showing net surplus of Rs.42,14,772/- and the expenditure incurred in reimbursing the medical costs to the three group of companies was not shown. By a revised return, it was clarified that total income arising out of interest was Rs.53,87,985/- out of which Rs.11,02,965/- was spent in reimbursing the medical cost of the three companies and a sum of Rs.70,247/- was incurred by way of expenditure. Thus the surplus was Rs.42,14,772/-. Reimbursement of medical expenses incurred by the donors of the welfare fund, in advancing medical facility to their employees is neither an act beneficial to the humanity at large nor is the same beneficial to a well defined class or community, who are joined together by common bonds of religion, race, social or economic unity. This at best is for the benefit of a group persons employed by the donors of the welfare fund;

++ in the light of the aforesaid discussion we find that the CIT(A), in the reason assigned by him, though he held that "to qualify for the exemption what is needed is existence of a hospital or other institution solely for philanthropic purposes" but omitted to notice that there was in fact no hospital or other institution for philanthropic purposes. The hospital and health units were in the tea gardens of the three tea companies who had provided the welfare fund of Rs.4 crores. The assessee had merely reimbursed a sum of Rs.11,02,965/- to those companies incurred in providing medical facilities to their employees. The predominant objective of the activity undertaken in the relevant year was to earn profit and not to render any act of philanthropy. Therefore, the reason assigned by the CIT(A) is also wrong. Going by the test laid down by a Division Bench of this Court in the case of Economic & Enterpreneurship Development Foundation, it cannot in any event be said that the assessee existed in the relevant year for philanthropic purposes because the assessee admittedly accumulated its income. It is true that the expression used in the section is "any income of a hospital or institution". But there has to be a nexus between the income and the hospital before any claim for exemption can be made. The nexus is altogether missing. Therefore the income is not an income of any hospital or an institution engaged in any one of the five activities mentioned under the said provision.

(See 2016-TIOL-589-HC-KOL-IT)