Sh Medical Center Hospital Vs State of Kerala

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C.A. @ SLP (C) No. 13735 of 2009

Non-Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 665 OF 2014

(Arising out of SLP(C) NO. 13735 OF 2009)

SH MEDICAL CENTRE HOSPITAL ……….APPELLANT Versus

STATE OF KERALA & ORS. ………RESPONDENTS

J U D G M E N T

V.Gopala Gowda, J.

Leave granted.

2. The present appeal arises out of the judgment and

order dated 13th March, 2009 passed by the High Court

of Kerala at Ernakulam in W.A. No. 362 of 2007 whereby

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C.A.(@) SLP(C)No.13735 of 2009

the High Court dismissed the writ appeal of the

appellant holding that the appellant-hospital is not

entitled to building tax exemption relying on the

judgment of the Kerala High Court in Medical Trust

Hospital v. State of Kerala1. The appellant had filed

writ petition No.605 of 2007 before the High Court of

Kerala which dismissed the same by order dated

23.01.2007 on the ground that the building of the

appellant is not used principally for charitable

purposes, pursuant to which the above said writ appeal

was filed which was also dismissed. Hence, this

appeal.

3. The facts of the case in brief are stated

hereunder:

SH Medical Centre is a charitable institution

registered under the Travancore Cochin Literary,

Scientific and Charitable Societies Registration Act,

1955. This institution manages the appellant hospital

which is managed by nuns of the Christian religious 1 2004 (2) KLT 139

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C.A.(@) SLP(C)No.13735 of 2009

faith who have renounced their worldly existence to

serve humanity to render charitable services like free

treatment to patients belonging to the lower strata of

the society and charges nominal amount for treatment

from those who can afford such treatment.

4. The Memorandum of the SH Medical Center states that

the object of the institution is purely philanthropic

purposes and not profit. It states that the members of

the society are not entitled to any share in the net

proceeds of the society and in case the society is

wound up the assets of the society shall not go to any

of the members and shall go to any other charitable

trust, society or institution with similar objects or

to the Government.

5. The appellant started constructing buildings to

house the hospital. Several buildings were constructed

from 1987-1988 to 2002-2003 for the functioning of the

hospital. On 16.10.1995 the respondent passed an order

exempting the appellant from assessment of building

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C.A.(@) SLP(C)No.13735 of 2009

tax. The said exemption was in connection with the

main building of the hospital.

6. On 16.07.2003, the then Tehsildar, Kottayam called

the representatives of the appellant to ascertain as

to whether exemption is available to the appellant

under the Kerala Building Tax Act, 1975 (hereinafter

referred to as “the Act”). A person from the office of

the Tehsildar, Kottayam visited the appellant hospital

and stated that the appellant is liable to pay

building tax.

7. Thereafter, the appellant filed a detailed

representation stating that since it is a charitable

institution engaged in charitable activities, the

appellant has to be exempted from paying building tax.

8. On 27.02.2004, the appellant received a demand

notice purportedly issued by the Assessing Authority

by which the appellant was assessed to building tax

under Sections 9(2) and 9(4) of the Act wherein

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C.A.(@) SLP(C)No.13735 of 2009

building tax was assessed at an amount of 24,77,700/-

for a plinth area of 14826.63 Sq. meters to be paid by

the appellant.

9. Aggrieved by the aforesaid orders dated 27.02.2004,

the appellant filed Writ Petition(C)No. 9968 of 2004

before the High Court of Kerala.

By an order dated 02.04.2004, the learned single

Judge of the High Court disposed of the writ petition

directing the Tehsildar to reconsider the assessment

in the light of the judgments of the High Court but

rejected the request of the appellant to refer the

issue relating to exemption to the Government under

Section 3(2) of the Act. Against this rejection order

the appellant filed a Writ Appeal No. 875 of 2004

before the High Court. The Division Bench of the High

Court disposed of the writ appeal with a direction to

the Tehsildar, Kottayam to refer the matter to the

Government for deciding as to whether the building is

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C.A.(@) SLP(C)No.13735 of 2009

entitled to get exemption from payment of building tax

under Section 3(1) (b) of the Act.

10. By an order dated 01.11.2006, the Government of

Kerala rejected the contention of the appellant that

they are entitled to exemption under the Act as free

medical service is given only in the plinth area of

448.40 Sq. mtrs. in the third floor of the main

building and therefore only the said portion is exempt

from paying building tax.

11. Aggrieved by the aforesaid order, the appellant

filed a Writ Petition (C) No. 605 of 2007 before the

High Court praying to quash the orders dated

01.11.2006 and 27.02.2004 and to declare the appellant

to be a charitable institution under the Act. In the

petition the appellant had annexed the audited income

and expenditure account of the hospital as well as

balance sheet for the years 2002 to 2005.

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C.A.(@) SLP(C)No.13735 of 2009

12. The learned single Judge of the High Court

dismissed the writ petition on the ground that the

building of the appellant is not used principally for

charitable purposes. To arrive at the said conclusion

the learned single Judge took into account the gross

income of the appellant and compared the gross income

vis-a-vis the amount spent on free medical aid and

social work. Aggrieved by the aforesaid order the

appellant filed a Writ Appeal No. 362 of 2007 before

the Division Bench of the High Court. By an order

dated 13.03.2009, the Division Bench of the High Court

dismissed the writ appeal by relying on two Division

Bench decisions of the High Court in (1) Medical Trust

Hospital (supra) and (2) Thirurangadi Muslim Orphanage Committee v. The Government of Kerala [W.P. (C) No.

4426 of 2009(B)] and held that as long as the

appellant is a hospital run on chargeable basis it is

not entitled to exemption.

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C.A.(@) SLP(C)No.13735 of 2009

13. Both the single Judge as well as the Division

Bench of the High Court interpreted the ‘Explanation’

Clause of Section 3(1) of the Act to hold that the

buildings were not used principally for a charitable

purpose as the medical services were not rendered free

of charge to all patients, but only to those who could

not afford it. The rest were charged a nominal fee for

services at the Hospital. The explanation to Section 3

of the Act reads as under :

“For the purposes of this sub-section, “charitable purpose” includes relief of the poor and free medical aid.”

The High Court, mainly relying on the Medical Trust

case (supra) has held that since it has already been

held by the Kerala High Court that charitable purpose

means rendering medical relief ‘free of charge’ as per

the Explanation clause to Section 3(1)(a) of the Act,

the appellant was not entitled to exemption from

paying building tax as they were charging nominal

charges from patients who could afford it and was

giving free services to those who could not.

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C.A.(@) SLP(C)No.13735 of 2009

14. The matter is in appeal before us. The learned

counsel for the appellant, Mr. Bechu Kurian has

contended that the Division Bench has erred in relying

upon the judgments in the Medical Trust case and the

Thirurangadi Muslim Orphanage Committee case (supra)

as the said judgments were rendered in the facts of

those cases and no proposition of law has been laid

down in the said decisions that if a hospital is run

on chargeable basis it is not entitled to exemption.

Further, it was contended that in the case of State of

Kerala v. Gregorious Medical Mission2, it was held that

the fact that some amount is collected from the

patients will not be sufficient reason to hold that

the building can be excluded from the beneficial

provisions contained in Section 3 of the Act if the

hospital is intended for the relief of the sick

without any motive for making profit. It was submitted

that a perusal of the Memorandum of Association as

well as the Rules and Regulations of the appellant 2 (1992) 1 KLT 230

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hospital clearly shows that it has been set up solely

for philanthropic purposes without any profit motive,

and it also clearly states that in case the society

running the hospital is wound up, the assets of the

hospital shall go to any other charitable society

having similar objects or to the Government. The

counsel for the appellant has urged before us to

consider that for any hospital to be able to provide

free medical relief to poor patients, some income

would have to be generated and it would otherwise be

virtually impossible for any hospital to undertake

free medical service. The counsel then went on to

refer to the Income and Expenditure Account of the

appellant hospital which shows that for the years

2002-03,2003-04 and 2004-05, the appellant has spent

75.12 lakhs, 78.39 lakhs and 88.33 lakhs respectively

for providing free medical services and for charity.

For the said years, the net income of the appellant

hospital has been 4.2 lakhs, 5.37 lakhs and 8.33

lakhs respectively and it was submitted that the High

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Court ought to have compared the amount spent for free

medical services vis-a-vis net income and not gross

income which was what was done to hold that the

buildings were not ‘used principally’ for the

charitable purpose as required under Section 3(1)(b)

of the Act. By doing this, it was contended that the

various expenses for running the hospital were

ignored.

15. The respondents, on the other hand, through

learned senior counsel, Mr. C.S. Rajan, have

contended that the appellant is not entitled for

exemption from paying building tax as the hospital is

making profit and hence cannot be considered a

charitable institution. It was submitted that from the

perusal of the accounts of the hospital, it is evident

that the hospital authorities are not rendering any

medical service free of cost and are making profit and

is not running under ’no loss no profit’ basis as

claimed. The purpose for which the building is used is

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the only relevant fact for determining whether the

appellant is exempt from paying building tax and

simply because the income derived from it is used for

charitable purpose, it cannot be exempted from paying

building tax. The counsel for the respondents relied

on the Medical Trust case (supra) in order to show

that charitable purpose means free medical relief as

held in that case, and since the appellant is not

providing free medical relief for all and is instead

charging a nominal fee for those who can afford it, it

cannot claim exemption from building tax.

16. We have heard the learned counsel for both the

parties and perused the evidence on record and

examined the rival legal and factual contentions. The

following questions would arise for consideration :

i. Whether the application of income derived from a building for charitable purpose is sufficient to hold that a building is used ‘principally’ for ‘charitable purpose’ as per Section 3(1)(b) of the Act in order to hold it exempt from paying building tax?

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ii. Whether the Kerala High Court has correctly interpreted the ‘Explanation’ clause to Section 3(1) in the cases referred (supra) to hold that charitable purpose means solely ‘relief of the poor and free medical relief’?

iii. What order?

17. Answer to Question Nos. i & ii:

In our considered view, the High Court was correct in

holding that the application of income derived from a

building for charitable purposes does not amount to the

building being ‘principally used’ for charitable

purpose. In the present case, if we have to rule against

the High Court’s judgment, it will be necessary to have

more evidence with respect to details such as what the

nominal charges are for patients who can afford it and

the number of patients offered free medical care vis-a-

vis the number of patients who pay for the services. The

argument that the income is applied for charitable

purposes can be accepted only if it is known what

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portion of the income goes into charity i.e. free

medical services. Does the percentage of patients

receiving free medical services increase every year? If

we hold that the income derived from a building is

applied for charitable purposes then that has to be

clearly proved, and the fact that the institution is set

up for charitable purposes as stated in its Memorandum

of Association cannot be enough to hold that income is

necessarily applied for charitable purposes, especially

in the light of the fact that the patients who can

afford to pay for it are being charged for medical

services.

18. Now we will examine the question of what ‘charitable

purpose’ means. The Oxford English Dictionary defines

‘charitable’ as “of or relating to the assistance of

those in need”. In the present case, it can be argued

that all medical services relate to the assistance of

those in need. This is a valid interpretation but cannot

be accepted for the purposes of tax. If these medical

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services in the present case were being offered free to

a majority of the patients rather than a minority of

patients, then the conclusion could have been reached

that the buildings are principally used for charitable

purposes. Further, an amount of approximately

28,00,000/- of the expenses are towards ‘social work and

charities’ as per the income and Expenditure Accounts

provided, whereas ‘free medical aid’ is around

60,00,000/- for the years 2004-05. It is not clearly

mentioned what ‘social work and charities’ is.

Furthermore, an exemption is provided for that area in

which free medical aid is provided by the appellant-

hospital. The appellant has not produced cogent material

evidence before the competent authority or the State

government or before the High Court to show that the

entire building has been used for charitable purpose by

rendering free medical aid to the needy, poor people of

society. The fact is that the details furnished in the

documents produced would go to show that the appellant

hospital is earning money by charging from patients and

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therefore the claim of the appellant that the entire

area taxed is used for charitable purpose is not

reflected in the documents produced. Hence, we are not

inclined to interfere with the impugned orders. The High

Court has correctly interpreted the ‘Explanation’ clause

to Section 3(1) of the Act to hold that ‘charitable

purpose’ means ‘relief of the poor and free medical

relief’.

19. The tax herein is on the ‘building’. The society

already has income tax exemption and the question here

is whether the building is used principally for

‘charitable purpose’. Only the building utilized for

providing free medical aid can be said to be used

principally for charitable purpose and it will go

against the letter of the law to grant building tax

exemption for all the buildings of the hospital

irrespective of what it is used for simply on the ground

that the overall object of the hospital is charity

although it is being predominantly run on a chargeable

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basis. In this case, the building used for providing

free medical aid must be exempted from paying building

tax.

20. In view of the foregoing, we uphold the judgment of

the High Court and dismiss the appeal of the appellant-

hospital, but without costs. The order dated 16.7.2009

of this Court granting stay shall stand vacated.

………………………………………………………………………J. [SUDHANSU JYOTI MUKHOPADHAYA]

………………………………………………………………………J. [V. GOPALA GOWDA]

New Delhi, January 16, 2014.

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