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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 ..... of exemption by the AO under section 11 in respect of the income of the Pharmacy division. 2) The Ld. CIT(A) failed to appreciate the fact that the pharmacy division of the Trust was an integral part of the Hospital itself, the revenues being that portion of the hospital bill of in-house patients representing value of medicines used for their treatment while admitted in the hospital. 3) The Ld. CIT(A) erred in confirming 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessee-Hospital which was amended on 15/03/2004 has been taken on record and also stated that the registration certificate u/s 12A No.TR 2763 dated 29/08/1975 shall continue to be valid. The case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act was duly served upon the Appellant dated 31.08.2015. Further, notice u/s 142(1) dated 20.06.2016 was issued to the Assessee-Hospital. Assessee-Hospital 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 Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of pharmacy and chemist division income. Aggrieved by the impugned order, the assessee is in appeal before us. 4. We have heard the Ld.AR as well as the Ld.DR on behalf of the parties and also examined the record. The Assessing Officer has dealt with the issue of pharmacy and chemist division income in para 4.4 to 4.11 of his order and the same are extracted below:- "4.4. Assessee trust has contended that it does 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harmacy store is treated as business income under section 11(4A) separately and taxed accordingly." 5. During appeal proceedings before the CIT(A), the assessee has raised these issues as grounds 1 & 2 and the same have been adjudicated by Ld.CIT(A) in para 9, which is extracted as below:- "9. Decision on Grounds of Appeal: During the appellate proceedings, Statement of facts, Grounds of appeal, Assessment Order and appellant'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 seco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant and the said grounds have been adjudicated in favour of assessee and the appeal of the revenue was dismissed and the findings of the co-ordinate bench on these grounds in paras 7 to 9 are relevant and extracted as under:- "7. The brief facts relating to the issues raised vide ground Nos.3 & 4 are that the assessee hospital which is registered as a charitable trust under section 12 of the Act also runs a pharmacy store 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts for the business of pharmacy. The Tribunal, after considering the relevant submissions of both the parties, observed from the language used in section 11(4A) and section 10(23C) that since the pharmacy business run by the hospital was not an independent business activity and in fact the same constitutes an integral part of the running of hospital and the assessee has undisputedly maintained the books of accounts for the 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, while supporting the decision of the Ld.CIT(A) has submitted that the Chemist shop can be considered as an integral part of the hospital but running of the pharmacy, in all probabilities, is a separate & independent business activity carried on by the hospital and cannot be considered as an integral part of the assessee hospital and since the separate accounts have not been maintained, therefore, the provisions of section 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 purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded in the total income of the previous year of any person. In the facts of that case, Supreme Court held that after meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. 19. In Baun Foundation Trust (supra)where exemption under Section 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 philanth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account are maintained by such trust or institution in respect of such business." Section 10(23C)(via) "10(23C) any income received by any person on behalf of - (i) 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+;" 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 5 of the Third Prviso to section10(23C) is similar to section 11(4A) and, therefore, the ratio of the judgment of ITA 1920 of 2017 referred (supra) is available and applicable in the case of the assessee as the facts and circumstances of the assessee case are also similar and fully covered by the judgement of the Hon'ble High Court. We have examined the 5th Proviso to Explanation 5 of 3rd Proviso to section 10(23C) 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 Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case there is any violation of registration under section 12A of the Act 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. 19. On the basis of the above discussion, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell. It is also not the case here that the Assessee has established Chemist/Pharmacy store exclusively for outpatients/outsiders and has utilized surplus from the operation of a chemist shop, for other objects than the prescribed objects. Hence on the aforesaid analyazations, we don't have any hesitation to hold that running of the chemist shop is not only essential but also incidental or ancillary to the dominant object and 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 st ..... 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