2020 (3) TMI 178 - HC - Income Tax

Exemption u/s 11 - Charitable activity - running pharmacy store in the hospital and was selling drugs and medicines to the patients through this pharmacy store. - HELD THAT - In the instant case, as already noticed above, assessing officer had carried out the exercise under Section 11(4A) of the Act and taking the view that considering the nature, volume, frequency and surplus of transactions of the pharmacy store, held the same to be a systematic business activity of the respondent and declined to consider it to be incidental to the charitable activity of the respondent trust. Besides, respondent had not maintained separate books of accounts in respect of the pharmacy store. It is in these circumstances that assessing officer held that the conditions prescribed under Section 11(4A) of the Act were not satisfied by the respondent Trust and accordingly he treated the surplus amount accruing out of the pharmacy store as business income under Section 11(4A) and brought the same within the taxable amount. In appeal, the first appellate authority noted that respondent was granted approval under Section 10(23C)(via) of the Act with effect from the assessment year 2009-10 on the satisfaction that respondent was existing solely for philanthropic purposes and not for purposes of profit. Therefore, the first appellate authority held that there was no basis to treat the running of pharmacy as a business venture. Running of pharmacy was part of philanthropic activity of running the hospital. No materials were brought on record by the assessing officer to justify the adverse view taken. Application of Section 11(4A) was not called for. Consequently, the first appellate authority held the addition and taxability of the surplus out of the pharmacy store to be erroneous and accordingly the same was directed to be deleted. We are of the view that the pharmacy store of the respondent was ancillary to the main object of running the hospital. Therefore, income accrued there from was incidental to the dominant object of the respondent i.e., running of the hospital. Thus, the assessing officer was not justified in treating the pharmacy store of the respondent as a separate business entity and to hold the surplus amount accrued there from as business income under Section 11(4A) of the Act. The lower appellate authorities have rightly interfered with such decision of the assessing officer. We do not find any error or infirmity in the view taken by the first appellate authority as affirmed by the Tribunal.

Summary

Issues:
Interpretation of Section 11(4A) of the Income Tax Act, 1961 for a trust running a hospital with a pharmacy store.

Analysis:
The High Court of Bombay heard an appeal by the Revenue against an order passed by the Income Tax Appellate Tribunal concerning the assessment year 2010-11. The respondent, a Trust running a hospital with a pharmacy store, had declared total income at nil. The assessing officer treated the surplus amount from the pharmacy store as business income, not covered under Section 11(4A) of the Act. The first appellate authority overturned this decision, stating that the pharmacy was not a business activity but part of the hospital's philanthropic operations. The Tribunal upheld this decision, leading to the Revenue's appeal.

The assessing officer invoked Section 11(4A) due to the pharmacy's nature, volume, and surplus transactions, deeming it a systematic business activity. However, the first appellate authority found no basis to treat the pharmacy as a business venture, especially since the respondent had approval under Section 10(23C)(via) for philanthropic purposes. The Tribunal's decision was influenced by the Hiranandani Foundation case, emphasizing the pharmacy's necessity for hospital operations.

The Court analyzed relevant sections of the Act, noting that the pharmacy was ancillary to the hospital's main objective, making the income incidental to running the hospital. Citing legal precedents, including Aditanar Educational Institution and Baun Foundation Trust cases, the Court concluded that the pharmacy's income was not separate business income under Section 11(4A). The assessing officer's decision was deemed unjustified, and the lower authorities' intervention was upheld. The appeal was dismissed, affirming the Tribunal's decision in favor of the respondent Trust.