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TMI Blog2016 (7) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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 - I.T.A. No.560/M/2016, I.T.A. No.561/M/2016, I.T.A. No.562/M/2016, I.T.A. No.563/M/2016 - - - Dated:- 27-5-2016 - SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER For The Assessee : Shri Chetan A. Karia For The Revenue : Shri A.N. Sontakke, DR ORDER PER D. KARUNAKARA RAO, AM: There are four appeals under consideration. All these appeals are filed by the assessee involving the assessment years 2006-07 to 2009-2010. Since, the issues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal No. Demand Raised 2006-07 561/M/2016 23,03,223/- 2007-08 563/M/2016 36,39,246/- 2008-09 562/M/2016 30,83,957/- 2009-10 560/M/2016 37,18,242/- The main reason for making the above additions revolves around the condition specified in sub-section 4A of section 11 of the Act ie assessee s failure to maintain the separate books of accounts for the business of pharmacy. 4. Relevant facts in this regard include that the assessee runs a pharmacy store in its hospital and the overall turnover of the hospital is above ₹ 4 Crs. The pharmacy turnover is part of it. Assessee buys the medicine and sells the same to the patients at MRP. This pharmacy is located within the premises of the hospital. Before the AO, assessee made elaborate submissions stating that the pharmacy business is integral part of the hospital business and the books of accounts since maintained separately for the business of hospital, there exist s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d separate books of accounts for the business of pharmacy. Otherwise, for the assessment year 2006-2007, it was observed that assessee purchased medicine to the tune of ₹ 2.4 Crs (rounded of) (para 6.1 of the impugned order) and the said medicines were sold at the rate as exists in the open market. AO noticed that the net profit margin varies from 15-25% of the cost price. AO considered only 15% as the net profit rate and calculated profit @ 15% of the said 2.4 Crs and the income determined as relatable to the pharmacy business at ₹ 36,20,250/-. The said amount was taxed as taxable income of the assessee u/s 11(4A) of the Act. Similar calculations were done for the other assessment years a well. During the first appellate proceedings, similar contentions were submitted by the assessee and pleaded for relief. Further, assessee submitted that it does not sell medicine to the outside patients but only for the indoor patient or OPD. The contents of para 5.2 constitutes an operational para, where the CIT (A) eventually confirmed the decision of the AO. In this paragraphs, CIT (A) discussed that the pharmacy business constitutes a separate business independent of the hospi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, Ld DR for the Revenue relied heavily on the order of the AO and the CIT (A) and the provisions of section 11(4A) of the Act. Reading the provisions of sub-section 4A of section 11 of the Act, Ld DR mentioned that the assessee never intended to claim exemption u/s 11(4A) of the Act with a support of an argument that revolves around the integral business operations of the pharmacy shop with the hospital business. Ld DR argued that the trust has business of running a hospital, business of running schools and also business of running a pharmacy shop. The requirement of maintaining the separate books of account for pharmacy shop to become eligible for exemption u/s 11 of the Act was not met by the assessee. When a pharmacy shop in the open market maintains separate books of account, why should the assessee fail to do so and resort to include trading transaction of medicine in the hospital business. He also dismissed the assessee s argument that the medicines / drugs are not sold, the way they are sold in the open market. Earlier, Ld Counsel for the assessee submitted that the medicines were charged in the comprehensive bill raised in a client s case which also includes the other c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pharmacy business is not an independent business activity so far as the assessee is concerned. In fact, the same constitutes an integral part of the business of running of a hospital. For this proposition, assessee relied on various decisions, which were already cited above. 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 ie pharmacy shop as well. Therefore, there is no violation of the twin conditions specified in section 11(4A) of the Act. 10. We have perused the relevant provisions of section 11(4A) of the Act and the same reads as under:- Sec:11(4A) sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust ....... Further, as cited by the assessee, we have also examined the relevant proviso to section 10(23C) of the Act and the relevant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. The Chief Commissioner has accepted that the surplus which is earned from the operation of a chemist shop is utilized .for the purposes of the hospital. A hospital must of necessity have a section or department where medicines can be dispensed and it is not uncommon for a medical hospital which exists even for philanthropic purposes to have a chemist shop where pharmaceutical products are sold. This is a facility which is intended to be used predominantly by patients and their relatives. Though the members of the general public are not prohibited from using the facility, the crucial question to ask or the test to answer is whether the establishment of a chemist shop is incidental or ancillary to the dominant object and purpose which is to set up and conduct a hospital for philanthropic purposes. As a matter of fact, Section 10(23C) permits the accumulation of income upto a certain stipulated amount over a stipulated period. In our view, the Chief Commissioner of Income Tax has clearly misapplied himself in law by having regard to a clearly ancillary or incidental activity and elevating it to the status of the dominant purpose for which the hospital has been established. Running ..... X X X X Extracts X X X X X X X X Extracts X X X X
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