2016 (7) TMI 260 - AT - Income Tax

Denial of exemption u/s 11 - Violation of provisions of section 11(4A) - non maintaining separate books of account for pharmacy, which is part of hospital run by the assessee trust - Held that - The 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, the Hon ble 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. We noticed, 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. Therefore, we find that 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 menaing of section 11(4A) of the Act. - Decided in favour of assessee

Summary

Issues Involved:

1. Violation of provisions of Section 11(4A) by not maintaining separate books of account for the pharmacy.
2. Estimation of income from pharmacy medicines and denial of exemption under Section 11.

Issue-wise Detailed Analysis:

1. Violation of Provisions of Section 11(4A) by Not Maintaining Separate Books of Account for the Pharmacy:

The primary issue revolves around whether the assessee violated Section 11(4A) by not maintaining separate books of account for the pharmacy, which is part of the hospital run by the assessee trust. The assessee argued that the pharmacy is an integral part of the hospital business, and thus, maintaining separate books for the hospital, which includes the pharmacy, satisfies the requirement of Section 11(4A). The Revenue contended that the pharmacy constitutes an independent business requiring separate books of account.

The Tribunal examined the relevant provisions and case laws. It referred to the judgment of the Hon’ble High Court in Baun Foundation Trust vs. CCIT, which held that the activity of a chemist's shop is incidental or ancillary to the dominant object of running a hospital. The Tribunal found that maintaining a pharmacy is necessary for running a hospital and thus, it is an integral part of the hospital business. The Tribunal concluded that the pharmacy business does not require separate books of account as it is part of the hospital business, and therefore, there is no violation of Section 11(4A).

2. Estimation of Income from Pharmacy Medicines and Denial of Exemption under Section 11:

The second issue concerns the estimation of income from pharmacy medicines and the denial of exemption under Section 11. The Assessing Officer had segregated the profits from the pharmacy business and taxed them as business income, denying the exemption under Section 11 due to the alleged non-compliance with Section 11(4A).

The Tribunal noted that the pharmacy's turnover was included in the hospital's overall turnover, and the medicines were sold to patients at MRP. The Tribunal reiterated that the pharmacy is an integral part of the hospital business. It referred to the jurisdictional High Court's judgment in Baun Foundation Trust, which emphasized that a hospital must have a pharmacy as part of its operations. The Tribunal found that the pharmacy's profits were used for the hospital's purposes and thus, met the requirements for exemption under Section 11.

The Tribunal concluded that the pharmacy business is ancillary to the hospital's objectives, and maintaining consolidated books of account for the hospital, including the pharmacy, fulfills the conditions of Section 11(4A). Therefore, the profits from the pharmacy are entitled to exemption under Section 11.

Conclusion:

The Tribunal allowed the appeals for all the assessment years (2006-07 to 2009-10), holding that the pharmacy is an integral part of the hospital business and does not require separate books of account. The profits from the pharmacy are eligible for exemption under Section 11, and the assessee did not violate Section 11(4A). The Tribunal's decision was pronounced in the open court on 27th May 2016.