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TMI Blog2025 (2) TMI 705X X X X Extracts X X X X X X X X Extracts X X X X ..... stration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the addition of the surplus of pharmacy division as business income, by applying the provisions of section 11(4A). 4) The Ld. CIT(A) failed to appreciate that there had never been any denial of exemption in respect of the pharmacy division in the past, thereby violating the principle of consistency. 5) Without prejudice to the foregoing, the Ld. CIT(A) erred in confirming the addition of an amount equal to the total receipts from the pharmacy division, instead of restricting the addition only to the surplus derived from the said division. Denial of exemption for the income from Chemist shop 6) The Ld. CIT(A) erred in confirming the denial of exemption by the AO under section 11 in respect of the income of the Chemist Shop. 7) The CIT(A) failed to appreciate the fact that the chemist shop was an activity incidental or ancillary to the dominant object and purpose of the Trust to run the hospital, for which separate books of account were maintained, as required by section 11(4A), and thus eligible for exemption under section 11. 8) Without prejudice to the foregoing, the Ld. CIT(A) erred in confirming the addition of an amount equal to the total receipts from the Chemis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complied to all the notices and filed details as called for from time to time through its Chartered Accountant and the same were considered by the Ld.AO, however, the Ld.AO was of the opinion that the assessee trust runs a pharmacy store in its hospital premises and therefore, required the assessee trust to show cause as why the surplus out of pharmacy store should not be treated as business income under section 11(4A) and also why the shortfall should not be disallowed and also the actual expenses in Indigent Patient Fund account should not be treated as business income. Against the said show cause the Appellant/Assessee vide letter dated 21/12/2016 has furnished a detailed submission on the alleged surplus of pharmacy and provisions of section 11(4A). The Appellant/Assessee submitted that running of the pharmacy by Appellant/Assessee is an integral part and interwoven with the activities of running of hospital. The patients, undergoing any treatment in the hospital, need medicines including life saving drugs, without which it is not possible for a hospital to treat its patients. Hence, pharmacy is a very important establishment for any hospital. Even the patients operated also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not sell drugs to outsiders but charges the amount for drugs used in the treatment for patients entirely as prescribed by treating consultants. These are charge to patient at MRP and form part of final patient bill. Pharmacy store does not sell any medicine to outside patients. In view of this the said surplus may not be taxed as business income as proposed. 4.5. Assessee trust has not submitted any further argument and supporting documents in respect of its claim and defense on this issue. 4.6. Though assessing claims that it does not sell medicines to outside patients meaning which are not registered at hospital as patients indoor or OPD, trust deed of assessee trust does not bar hospital from selling medicines to outsiders. Nevertheless it sells medicines to its indoor and outdoor patients. 4.7. It can be seen that income of pharmacy store is around 17.99% of total hospital receipt. Thus seeing its turnover it cannot be said to be minor, accidental and mere accompanying activity as is expected when the words used in the law are "incidental to charitable purpose". 4.8. The nature, volume, frequency and surplus of these transactions clearly shows that it is systematic busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's submission was carefully scrutinized by the under signed. Grounds 1& 2: It is evident from Para 4.2 and Para 4.9 of the Assessment order that the books of accounts for the Pharmacy/chemist income has not been maintained by the appellant. The appellant has neither disputed nor produced any documents or submissions in their regard. The second condition of Section 11(4A) clearly requires maintaining of separate books of accounts for claiming exemption. The case laws quoted by the appellant does not comes to the rescue of the case as the facts are clearly different and distinguishable as in the cases mentioned by the appellant separate books and accounts were maintained whereas in the present case it is not the case. Appellant has not complied with the second condition of section 11(4A) of the Income Tax Act, 1961. Appellant's argument of relief provided in Finance Act 2015 regarding restricting the income from the specified business activity restricted to 20% of total receipts of the trust also does not help as the said finance act is effective from 01.04.2015, ie for FY 2015-16 (AY 2016-17) whereas the period under consideration pertains to FY 2013-14 (AY 2014-15). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the hospital. The AO noted that the turnover of the assessee's pharmacy store was very high which was around 13.18% of the total hospital collections from inpatient and outpatient profit from the pharmacy store came at 17.18% of its turnover. The AO assessed the income from the pharmacy store as business income by way of invoking provisions of section 11(4A) of the Income Tax Act observing that the receipts from the pharmacy were separate from the charitable activity of the assessee. 8. In appeal, the Ld. CIT(A) observed that the pharmacy run by the hospital was integrally attached to the activities done by the trust/hospital of providing medical relief which term has been included in the definition of charitable purposes as defined under section 2(15) of the Income Tax Act. He, therefore, held that the AO had reached to erroneous conclusion of treating the receipts from pharmacy as separate business income of the assessee. He therefore deleted the addition made by the AO on this issue. 9. Before us, the Ld. A.R. of the assessee has explained that the hospital is not running the pharmacy separately for any outside patient, but running of pharmacy is very much integral par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hospital, hence the assessee fulfils the condition of maintaining the separate books of accounts for the integral business activity of the running of a hospital including pharmacy shop. The co-ordinate bench of the Tribunal, thus, has held that the running of pharmacy which was the necessary requirement of running a hospital and for providing timely medical aid to the patients, thus, was not only incidental but was integral part of the objects of the assessee trust and thus was not hit by the provisions of section 11(4A) of the Act. The above decisions of the Hon'ble Bombay High Court and of the co-ordinate bench of the Tribunal are squarely applicable to the case of the assessee. In view of this, we do not find any merit in the ground nos.3 & 4 raised by the Revenue." 8. Against the order of the co-ordinate bench in ITA No.6853/Mum/2014, the revenue filed appeal before the Hon'ble High Court in ITA No.1920/2017 (supra) and the Hon'ble High Court has dismissed the appeal and confirmed the order of the co-ordinate bench. The findings of the Hon'ble High Court in paras 5&6 are extracted below:- "5. As regards the second issue, i.e., Pharmacy/Chemist Shop run in the Hospital premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 11(4A) are attracted. 12. In rebuttal to the contentions of the Ld.DR, the Ld.AR has taken us to the case of Hon'ble jurisdictional High Court in Pr.CIT(E), Mumbai v. National Health and Education Society (supra) and has submitted that the findings from paras 14 to 21 of the Hon'ble High Court are relevant wherein similar issue has been dealt with and decided in favour of the assessee. To appreciate the arguments of the Ld.AR, the findings of the Hon'ble High Court from paras 14 to 21 are extracted below:- "14. In appeal, the first appellate authority noted that respondent was granted approval under Section 10(23 C) (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 port 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 au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10(23C)(via) of the Act was in question, this Court referred to the decision of the Supreme Court in Aditanar Educational Institution (supra)and held that 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 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 members of the general public are not prohibited from using the facility, the crucial question to determine is whether the establishment of the chemist shop is incidental or ancillary to the dominant object and purpose which is to set up and conduct a hospital for philanthropic purposes'? In the facts of that case it was held that running of the chemist shop was not the dominant object or purpose of the trust. 20. Applying the legal principles set out by the judicial pronouncements as above in the context of the statutory provisions to the facts of the present case, we are of the view that the pharmacy store of the respondent was ancillary to the main object of running the hospital. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring medical attention or rehabilitation, existing solely for philantyhropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by the *Principal Commissioner or Commissioner+;" 15. During arguments, the Ld.AR has submitted written brief submissions dated 13/01/2025, which are extracted as under:- "1. Section 10(23C) also has a proviso [fifth proviso to Explanation 5 of the Third proviso to section 10(23C)] which is similar to section 11 (4A). Thus, there is no difference with respect to the requirements contained therein. Accordingly, though the decision of the Hon'ble Bombay High Court in the case of PCIT (E) v. National Health & Education Society reported in [2023] 154 taxmann.com 636, was rendered in context of section 10(23C), however, the findings thereof that the pharmacy division is an integral part of the hospital would also be applicable to an assessee claiming exemption under section 11. 2. In any event, there are decisions rendered and submitted before Your Honors' dealing with the exemption claimed under section 11 wherein the decision remains the same that the pharmac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act, which is as under:- 10(23C) "10(23C) any income received by any person on behalf of - (ii) to (vi)xxxxxxxxxxxxxxxxxxxxxxxx (via) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philantyhropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by the [Principal Commissioner or Commissioner]; Provided ...................... Provided further............... Provided also ..................... Explanation 1 to 4xxxxxxxxxxxx Explanation 5. Notwithstanding anything contained in Explanation 4, where due to circumstances beyond the control of the person in receipt of the income invested or deposited in accordance with the provisions of clause (b) of Explanation 3 cannot be applied for the purpose of which it was accumulated or set apart, the Assessing Officer may, on an application made to him in this behalf, allow such person to apply such income for such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the judgement of the co-ordinate bench in the case of Asst.Director of Income Tax (Exemption)-II(1), Mumbai vs M/s Jaslok Hospital & Research Centre in ITA No.6853/Mum/2014 order dated 15/06/2016 (supra). 20. With regard to the income from the Chemist division, we would like to refer the judgement of the co-ordinate bench "H", Mumbai in ITA No.912/Mum/2023 for A.Y. 2017-18 wherein similar issue for income from pharmacy division has been dealt with and decided in favour of the assessee and the relevant paragraphs 7.3 to 7.8 are extracted below:- "7.3 In CBDT Circular No. 11/2008 dated 19.12.2008 (Point No. 2.1) as relied upon by the Ld. Commissioner, it has been clarified that the proviso to section 2(15) of the Act will not apply to medical relief etc. and where the purpose of a trust or institution is relief of the poor, education or medical relief, it will constitute 'charitable purpose' even if it incidentally involves the carrying on of commercial activities. For clarity relevant clarification reads as under: "The newly inserted proviso to section 2(15) will not apply in respect of the first three limbs of section 2(15), i.e., relief of the poor, education or medical r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d purpose to run a hospital and thus the Assessee has complied with first condition of section 11(4A) of the Act. 7.6 Coming to the second condition of section 11(4A) of the Act, as to whether the Assessee is maintaining separate books of account in respect of such business/chemist shop. We observe that the Ld. Commissioner has given categorical findings that the Assessee is maintaining separate books of accounts and financial statements for pharmacy store, hence the Assessee also complied with 2nd condition of section 11(4A) of the Act. 7.7 Thus we are in concurrence with the conclusion of the ld. Commissioner that the Assessee-trust has complied with the twin conditions, as set out in section 11(4A) of the Act, therefore, the income accrued from Pharmacy store is incidental to the dominant object of running Hospital by the Assessee, hence, the action of the AO is not justified in treating the Pharmacy store of the Assessee as separate business entity and the profits therein as taxable income. 7.8. Resultantly the impugned order, do not requires any interference, as the same does not suffers from any perversity, improprietary and/or illegality." 21. We have noticed that it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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