Those selling products at market rate can’t claim charitable status: ITAT

Those charging market rates for their products cannot be treated as charitable entities, according to a recent ruling by the income tax appellate tribunal (ITAT).

Hyderabad ITAT dismissed an appeal by Fernandez Hospital to declare as void an order by the commissioner of income tax (exemptions), or CIT (E), to reject its status as a non-profitable company.

The assessee was a private limited company till August 2, 2018 and the next day it converted into a non-profitable company under Section 8 of the Companies Act.

Fernandez Hospital said CIT (E) was carried away by its accounts before its conversion into a charitable company. The CIT (E) was entitled to look into financial affairs of the assessee from date of conversion to date of application, it said.

CIT (E) found that the assessee had earned a profit of Rs.23.54 crore out of the total revenue of Rs 141.90 crore for period ended March 31, 2018 and it had not reduced the charges/ fee for giving the treatment at a subsidised rate after its conversion from a private company into a Section 8 charitable company.

CIT (E) said that no evidence has been produced by the assessee to prove that lower fee/no fee was charged after its conversion. It failed to demonstrate that the charges / fee charged by it were on a reasonable markup on the cost.

The tax tribunal pointed out that the application for registration as a charitable company requires the assessee to file various documents, including accounts and balance sheet for the preceding three years. CIT (E) was correct in relying upon financials for the last three years, it said.

It said the assessee had failed to bring on record any comparative chart of diagnostic charges, procedure charges, test charges prior to the conversion of the assessee into Section 8 company and thereafter, to show that there was a major reduction in fee or charges charged by the assessee.

The tribunal said if the assessee’s argument of considering only financials post-conversion is taken into account, despite the fact that it being a profit earning private company prior thereto, “then it will be a handy tool for an otherwise profit-making company to conveniently convert into a so-called charitable company and avoid payment of due taxes to a welfare state.

The ruling is in line with a recent Supreme Court decision that if a non-profit organisation engages in commercial activities and changes prices that are above and beyond what is reasonable, the tax exemption given for charitable institutions will not be allowed despite the receipt from such activities is within the permissible threshold limit, said O M Rajpurohit, director (corporate & international) at AMRG & Associates.