February 27, 2024

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Hospital charging market rates, ineligible for ‘tax-exempt’ registration: ITAT

Income Tax Appellate Tribunal (ITAT) has held that hospitals charging market rates are ineligible for ‘tax-exempt’ registration.

The appellant, Hyderabad-based Fernandez Foundation, moved the ITAT bench after its plea for exemption was rejected by the Commissioner of Income Tax (Exemption). Reasons given included non-est(non-existant) status due to ambiguity with regard to the name of assessee company and also list of directors. Further it was pointed out that the assessee is involved in activities which are in the nature of trade and provides services at market rates. It was also mentioned that the assessee had also violated the provision of section 13 of Income Tax Act, as huge amounts were paid to the directors/ interested persons. The section makes it clear that if the income is not used for the benefit of the public, then it will not be treated as part of income from the property held under a trust for private religious purposes.

After going through all the facts and arguments, Hyderabad bench of ITAT observed that 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 claiming registration/approval under the Act. Earlier the assessee was known as “Fernandez Hospital Private Limited” and presently, it is known as “Fernandez Foundation”.

No charity involved

Further, the bench agreed with the submission of Income Tax Department that the assessee can do charity by either bringing down its profit by providing services at reasonable rate or by utilising the surplus for helping medical aid/facilities to the poor/needy persons at free of cost. “Nothing of this nature, is at all done by the assessee,” it said.

It noted that the assessee had only provided the treatment to 65 indoor patients for an amount of over ₹84 lakh and 5,569 outdoor patients for over ₹39 lakh on concessional rates and the said amount is a meagre amount when compared to its total revenue collection of the assessee i.e., ₹141.90 crore for the period under consideration. By that standard alone the activities of the assessee cannot be said to be charitable activities.

The bench quoted ruling by the Supreme Court which mandated that all private hospitals that had acquired land at cheaper rates must reserve 10 per cent of their in-patient department capacity and 25 per cent OPD for free treatment of poor patients. Though the said decision was rendered in the context of cheap allotment of land but nonetheless, “we are of the view that some percentage of free treatment or treatment at concessional rate should be provided by the assessee. However, in the instant case, the free treatment/concessional rate was less than 1 per cent of the revenue of the assessee.”

The ITAT bench said the Income Tax Commissioner 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. Accordingly, it ruled rejection of exemption application was correct.