2022 (5) TMI 1405 - AT - Income Tax

Exemption u/s.11 - Treatment of pharmacy income as income of charitable trust - assessee challenged the action of the A.O. before the CIT(A) contending that the assessee is running the pharmacy in the hospital premises itself, and therefore, it cannot be treated as business activity - as per AO assessee is not maintaining separate set of books though he was able to identify the pharmacy business related details from the ledger accounts maintained by the assessee - AO has also stated that the assessee is able to generate gross profit out of running the pharmacy and hence justified treatment of the same as business income - HELD THAT - As running the pharmacy is very much an integral part of running the hospital as per the objects of the trust and 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 the case. When running of the pharmacy is part and parcel of the main activity of running the hospital, the incidental sale of medicines to outside public cannot be considered as the criteria for the denial of exemption and such distinction of to whom the medicines are sold is of no relevance. In any case the assessee is maintaining separate ledger accounts from where the profits are clearly identifiable and given that the transactions of pharmacy is incidental to the business of the hospital and the objects of the Trust, the conditions relating to maintenance of separate books of account are met within the meaning of section 11(4A) of the Act. We respectfully follow the decision of Karnataka Chinmaya Trust 2021 (11) TMI 1070 - ITAT BANGALORE and the principle laid down by the Hon ble Chennai Bench in M/s.Franciscan Sisters of St.Joseph Society 2014 (1) TMI 1754 - ITAT CHENNAI and hold that the income from running the pharmacy which is integral part of the hospital is eligible for exemption u/s.11 and hence the AO is directed to delete the addition made in this regard. The appeal is allowed in favour of the assessee.

Summary

Issues Involved:
1. Treatment of income from pharmacy attached to the hospital as business income.
2. Calculation of 15% accumulation on gross receipts instead of net receipts.

Issue 1: Treatment of Income from Pharmacy Attached to the Hospital as Business Income

The Hon'ble High Court of Karnataka remanded the issue of treatment of income from the pharmacy attached to the hospital as business income to the Tribunal. The assessee, a charitable and educational trust, operates a pharmacy within the hospital premises. The Assessing Officer (AO) treated the pharmacy income as business income, denying exemption under section 11 of the Income Tax Act due to the lack of separate books of account for the pharmacy. The CIT(A) upheld the AO's decision, emphasizing the absence of evidence regarding the breakup of medicines sold to different categories of patients.

The Tribunal, however, had previously ruled in favor of the assessee, holding that the pharmacy income should not be treated as business income merely because separate books were not maintained. The Tribunal relied on the decision in the case of M/s. Franciscan Sisters of St. Joseph Society, where it was held that the pharmacy is an integral part of the hospital and not a separate business entity.

Upon remand, the Tribunal reiterated that the pharmacy is incidental to the hospital's operations and thus integral to the trust's objectives. The Tribunal noted that the assessee maintained separate ledger accounts for the pharmacy, which sufficed for identifying the pharmacy-related transactions. The Tribunal also referenced its earlier decision in the case of Karnataka Chinmaya Trust, affirming that running a pharmacy is essential for hospital operations and does not constitute an independent business activity. Therefore, the conditions of section 11(4A) regarding the maintenance of separate books were deemed met, and the pharmacy income was held eligible for exemption under section 11.

Issue 2: Calculation of 15% Accumulation on Gross Receipts Instead of Net Receipts

The Hon'ble Karnataka High Court had already ruled in favor of the assessee on this issue, allowing the calculation of 15% accumulation on gross receipts. This issue was not remanded back to the Tribunal and thus was not further deliberated in this judgment.

Conclusion:

The Tribunal concluded that the income from the pharmacy, being an integral part of the hospital operations and incidental to the trust's objectives, is eligible for exemption under section 11. The appeal filed by the assessee was allowed, and the AO was directed to delete the addition made in this regard. The judgment emphasized that the incidental sale of medicines to the public does not change the nature of the pharmacy's operations as part of the hospital.