2014 (1) TMI 1754 - AT - Income Tax

Exemption u/s 11 - whether pharmacy run by the assessee-society is a separate unit running as a business? - whether certain activities pointed out by the assessing authority are in fact carried out in the nature of business/commercial activities? - Held that - The pharmacy is not situated in any commercial area or outside the hospital compound with the intention to invite the public at large to purchase medicines from the pharmacy run by the assessee-society. The assesseesociety is running the pharmacy within the premises of the hospital and as part of the hospital itself. It is clear that the pharmacy is run by the assessee-society only for the purpose of running the hospital. The hospital cannot be run without a pharmacy attached to it. If an assessee wants to run a hospital running of the pharmacy is also a must. Therefore running of the pharmacy by the assessee-society is not an activity carried on by the assessee incidental to the running of the hospital; but on the other hand it is an integral part of the hospital run by the assessee. The Assessing Officer has observed that the assessee-society has maintained separate accounts for the pharmacy section. Maintaining accounts separately for pharmacy section does not decide the nature of the activities carried on by the assessee through running of the pharmacy. Separate accounts are maintained by the assessee for the purpose of proper accounting and internal control. Even in the case of charitable hospital it is not possible to provide medicines to every patient free of cost. It is only in very deserving cases a charitable institution could provide medicines free of cost. Therefore running of a pharmacy set up as part of the hospital involves purchase and sale of medicines. Therefore not much discussion is necessary to come to a conclusion that in the case of a full-fledged hospital pharmacy is an essential part thereof and as such the pharmacy is run as part of the hospital establishment. Thus the collection received by the assessee from its pharmacy section cannot be excluded from computing the income eligible for exemption under Section 11 of the Income-tax Act 1961. The pharmacy collection also forms part of the collections accounted by the assessee from its charitable activities. Therefore Assessing Officer is directed to give exemption under Section 11 in respect of the pharmacy collection as well. - Decided in favour of assessee.

Summary

Issues:
Assessment of charitable activities as business activities under Section 2(15) of the Income-tax Act, 1961.

Analysis:
The judgment pertains to an appeal filed by an assessee-society for the assessment year 2009-10 against the order of the Commissioner of Income Tax (Appeals)-VII at Chennai. The assessing authority had observed that certain activities conducted by the assessee-society, such as pharmacy, typewriting institute, working women's hostel, and cr`eche, were commercial in nature. The Assessing Officer denied exemption under Section 11 of the Income-tax Act, 1961, for these activities, considering them as business activities. However, activities like running a hospital, schools, etc., were granted the benefit of Section 11. The CIT(Appeals) confirmed the assessing authority's order, leading to the second appeal before the Tribunal.

The crucial issue in the appeal was whether the activities identified by the assessing authority were indeed commercial in nature. The Tribunal analyzed each activity in detail. Regarding the pharmacy section, the Tribunal noted that it was an integral part of the hospital run by the assessee-society. The pharmacy operated within the hospital premises and was essential for the hospital's functioning. Therefore, the pharmacy's collections were considered part of the charitable activities and eligible for exemption under Section 11.

Additionally, the Tribunal found that the total collections from the typewriting institute, working women's hostel, and cr`eche amounted to less than Rs. 10 lakhs. As per the law, activities below this threshold were excluded from denying exemption under Section 11. Consequently, the Tribunal directed the Assessing Officer to grant exemption under Section 11 for these activities as well.

Ultimately, the Tribunal ruled in favor of the assessee, allowing the appeal and directing the Assessing Officer to redo the assessment considering the findings. The judgment emphasized that it was based on the specific facts of the case and should not be considered a binding precedent for similar cases without a thorough examination of the facts involved.

In conclusion, the Tribunal's decision clarified the classification of activities as charitable or commercial, ensuring that the assessee's income was entitled to the exemption under Section 11 of the Income-tax Act, 1961.