2021 (11) TMI 1070 - AT - Income Tax

Exemption u/s 11 - Addition on account of income from Pharmacy Unit - Proof of charitable activity u/s 2(15) - assessee is carrying on activities of the nature of Charitable as defined under section 2(15) and, therefore, is eligible for exemption as per the provisions contained in sections 11, 12 and 13 - whether pharmacy business is not an independent business activity so far as the assessee is concerned? - HELD THAT - As the assessee has undisputedly maintained the books of account for the hospital separately, the assessee fulfils the condition of maintaining the separate books of account for the integral business activity for all integral business activities of running of a hospital i.e pharmacy shop as well. Therefore, there is no violation of the twin conditions specified in section 11(4A) of the Act. From the comparison of the language of the two provisions of section 11(4A) and section 10(23C) we find, the language used in the provisions are comparable and, therefore, the common purpose is easily decipherable by the above provisions appearing in to different sections from the Act. Therefore, we agree with the relevant argument propounded by the Ld Counsel for the assessee. Running of a pharmacy is a necessary requirement for running of a hospital. It is impossibility from medical point of view that the hospital can run without pharmacy shop in the premises of the hospital. Considering the same in BAUN FOUNDATION TRUST 2012 (4) TMI 172 - BOMBAY HIGH COURT has held that maintenance of a pharmacy shop is ancillary to the dominant object of running of a hospital and thus, it is an integral part of the hospital. Actually the pharmacy shop is being maintained by the hospital itself and not by any private contractor. Drawing the medicine from such pharmacy shop by the Doctors in respect of the patients is also evident from the records, commonly maintained in their medical reports. It is not the case of the revenue that the profits earned on pharmacy was not spent for the objects of trust. Pharmacy is an integral part of the hospital business or not. Considering the above, we are of the opinion, the conditions of maintenance of books of account in respect of the business activity of trading of medicines, which is an integral part of the hospital activities, is not the requirement of the law on the facts of this case. Thus, we affirm the assessee s contention that the pharmacy shop is an integral part of the hospital business and the same is not hit adversely by the conditions specified in the provisions of section 11(4A) of the Act. Therefore, so long as the transactions of such pharmacy which ancillary/ incidental for the business of a hospital and objects of the trust, the conditions relating to maintenance of separate books of accounts are met within the meaning of section 11(4A) of the Act. Accordingly, grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) was correct in directing the AO to delete the addition under Section 11(4A) of the Income Tax Act, 1961, made on account of income from the Pharmacy Unit.
2. Whether the assessee was required to maintain separate books of accounts for the Pharmacy Unit.
3. Whether the activities carried out by the assessee with respect to the Pharmacy Unit are in the nature of business, thereby attracting the provisions of Section 11(4A).

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 11(4A):
The Revenue contended that the CIT(A) incorrectly directed the deletion of the addition under Section 11(4A) made by the AO on account of income from the Pharmacy Unit. The AO had computed a net surplus from the Pharmacy Unit and considered it separately under Section 11(4A), stating that the assessee was running it as a business venture rather than a charitable entity. The CIT(A) observed that the Pharmacy Unit was not a separate entity but part of Chinmaya Mission Hospital, maintained with the objective of providing medical relief, which is one of the trust’s charitable objectives. The CIT(A) relied on the Supreme Court judgment in Aditanar Educational Institute, which held that if the predominant object is charitable, the organization does not lose its charitable character merely because some surplus arises from the activity.

2. Requirement to Maintain Separate Books of Accounts:
The Revenue argued that the assessee did not maintain separate books of accounts for the Pharmacy Unit, as required under Section 11(4A). The CIT(A) found that the Pharmacy Unit was an integral part of the hospital and not a separate business entity. The assessee maintained records of purchases, sales, and inventory for the Pharmacy Unit and paid VAT to the government, which was considered sufficient. The Tribunal agreed with the CIT(A) that the Pharmacy Unit was ancillary to the hospital’s operations and that maintaining separate books of accounts for the Pharmacy Unit was not necessary under the circumstances.

3. Nature of Activities of the Pharmacy Unit:
The Revenue asserted that the Pharmacy Unit’s activities were in the nature of business, thus attracting the provisions of Section 11(4A). The CIT(A) and the Tribunal held that the Pharmacy Unit’s operations were incidental to the hospital’s charitable objective of providing medical relief. The Tribunal noted that the pharmacy was essential for the hospital’s functioning, as it provided medicines to inpatients and outpatients. The Tribunal also referenced the Bombay High Court’s decision in Baun Foundation Trust, which supported the view that a pharmacy within a hospital is an ancillary activity and integral to the hospital’s operations.

Conclusion:
The Tribunal dismissed the Revenue’s appeals, affirming that the Pharmacy Unit was an integral part of the hospital’s charitable activities and that the assessee was not required to maintain separate books of accounts for the Pharmacy Unit under Section 11(4A). The Tribunal upheld the CIT(A)’s decision to delete the addition made by the AO, concluding that the Pharmacy Unit’s operations did not constitute a separate business but were incidental to the hospital’s charitable purpose. Consequently, the Tribunal also dismissed the cross-objections filed by the assessee.