2025 (2) TMI 705 - AT - Income Tax

Exemption u/s 11 - Whether the Pharmacy Division of the assessee hospital is an integral part of the dominant purpose of hospital itself ? - HELD THAT - We have noticed that the case of the Ld.AO as well as the CIT(A) hinges around the belief that the provisions of section 11(4A) were attracted in case of the assessee and since the separate books of account are not maintained the assessee is not entitled for benefit of exemption u/s 11(1) because the the pharmacy business is not integral and dominant part of philanthropic activity of the hospital. DR has made a submission that the assessee has not brought on record any documents/material to show that the surplus of the pharmacy business income has been spent for the philanthropic purpose of the trust. For this once again AR submitted that the assessee hospital had always been spending this surplus income from the pharmacy division for the philanthropic purpose of the trust. Moreover in case there is any violation of registration u/s 12A by the Trust the revenue authorities are always at liberty to take action as permitted by law in case it is found that the assessee is not spending the surplus funds for philanthropic purpose of the trust/hospital. We are of the considered opinion that the case of the assessee hospital is very well covered by the judgement of the co-ordinate bench in the case of M/s Jaslok Hospital Research Centre 2016 (6) TMI 1486 - ITAT MUMBAI . Income from the Chemist division for A.Y. 2017-18 wherein similar issue for income from pharmacy division has been dealt with and decided in favour of the assessee. It is not in dispute that the assessee is running a hospital and is also having in-house patients. Medicines are essential for the treatment of the patients. Assessee is also giving treatment to the OPD patients who are at liberty to purchase the medicines from the chemist shop of hospital. It has been vehemently argued on behalf of the assessee by the Ld.AR that for saving the life and proper treatment of the in-house patients running of pharmacy division is the most essential requirement for running the assessee hospital and for fulfillment of the dominant purpose of the assessee trust. We therefore are of the considered opinion that the facts and circumstances of the assessee s case are fully covered by the judgement of the co-ordinate benches cited supra. We find that the appellant/assessee fulfills all the requirements which necessitates the running of pharmacy and chemist division in the hospital to achieve the dominant purpose of the trust for which the revenue authority have given approval u/s 12A to the assessee hospital and therefore the assessee hospital is entitled for the benefit u/s 11(1) of the Act and the income from the pharmacy and chemist division of the assessee cannot be treated as business income from a separate and independent activity carried out by the assessee. Thus on the basis of summarized grounds the points of determination enumerated in the beginning of the order are accordingly decided in the affirmative and in favour of the assessee. We accordingly direct the AO to delete the addition.

ISSUES PRESENTED and CONSIDERED

(1) Whether the Pharmacy Division of the assessee hospital is an integral part of the dominant purpose of the hospital itself and the provisions of section 11(4A) are not attracted.

(2) Whether the running of the chemist shop by the assessee hospital is incidental or ancillary to the dominant object of the assessee trust for running its hospital and whether the requirements of section 11(4A) are fulfilled by the assessee by maintaining separate books of account.

ISSUE-WISE DETAILED ANALYSIS

1. Pharmacy Division as an Integral Part of Hospital

Relevant legal framework and precedents: Section 11(4A) of the Income-tax Act, 1961, requires that the business must be incidental to the attainment of the objectives of the trust and that separate books of account be maintained. The court considered precedents including the Bombay High Court decision in Baun Foundation Trust vs. Chief Commissioner of Income Tax.

Court's interpretation and reasoning: The Tribunal found that the pharmacy division was integral to the hospital's operations, as it provided essential medicines to patients, which is crucial for medical treatment. The court referenced similar cases where pharmacy operations were considered incidental to the hospital's primary purpose.

Key evidence and findings: The pharmacy income was a substantial part of the hospital's total receipts, but the Tribunal noted that this did not detract from its integral role in hospital operations.

Application of law to facts: The Tribunal applied section 11(4A) and determined that the pharmacy's operations were indeed incidental to the hospital's charitable purposes, thus not requiring separate books of accounts as per the precedents.

Treatment of competing arguments: The Tribunal rejected the argument that the pharmacy was a separate business activity, citing the necessity of the pharmacy for hospital operations.

Conclusions: The Tribunal concluded that the pharmacy division was not a separate business and was integral to the hospital's charitable activities, thus qualifying for exemption under section 11.

2. Chemist Shop as Incidental to Hospital Operations

Relevant legal framework and precedents: Similar to the pharmacy division, the chemist shop's operations were considered under section 11(4A) and relevant case law.

Court's interpretation and reasoning: The Tribunal viewed the chemist shop as ancillary to the hospital's primary objective of providing medical relief, as it served the patients' needs.

Key evidence and findings: The chemist shop's operations were found to be consistent with the hospital's charitable objectives, and separate books of account were maintained.

Application of law to facts: The Tribunal applied section 11(4A) and found that the chemist shop met the conditions for exemption, as it was incidental to the hospital's operations and separate accounts were maintained.

Treatment of competing arguments: The Tribunal dismissed the view that the chemist shop was an independent business, emphasizing its role in supporting the hospital's charitable mission.

Conclusions: The Tribunal held that the chemist shop was an incidental activity to the hospital's operations and qualified for exemption under section 11.

3. Opportunity of Hearing Not Provided

Relevant legal framework and precedents: The principles of natural justice require that parties be given an opportunity to be heard.

Court's interpretation and reasoning: The Tribunal noted the lack of opportunity for a hearing via video conferencing, which was a procedural lapse.

Conclusions: The Tribunal acknowledged the procedural lapse but focused on the substantive issues of the case.

SIGNIFICANT HOLDINGS

The Tribunal held that both the pharmacy division and the chemist shop were integral parts of the hospital's operations and were incidental to its charitable purpose. Therefore, they were not separate business activities and qualified for exemption under section 11 of the Income-tax Act, 1961. The Tribunal directed the Assessing Officer to delete the additions made to the income on account of the pharmacy and chemist shop operations.

Core principles established: The integration of pharmacy and chemist operations within a hospital's charitable activities can qualify for tax exemption under section 11 if they are incidental to the hospital's primary purpose and separate books of accounts are maintained where required.

Final determinations on each issue: The Tribunal allowed the appeal, granting the exemption sought by the assessee for the pharmacy and chemist shop income, and directed the deletion of the additions made by the Assessing Officer.

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