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Facts
The assessee, a hospital, filed nil income for AY 2013-14. The case was reopened under Section 147 as the assessee had not maintained separate books of account for the pharmacy income, which was Rs. 13,45,51,417/-. The AO treated this as business income and taxed it separately, a view upheld by the CIT(A). Similar issues arose for AY 2016-17 and 2017-18.
Held
The Tribunal held that running of the chemist shop is not only essential but also incidental or ancillary to the dominant object and purpose of running a hospital. The assessee complied with the conditions of Section 11(4A) by maintaining separate books of account. Therefore, the income from the pharmacy store is incidental to the dominant object of running the hospital, and the action of the AO in treating it as a separate business entity was not justified.
Key Issues
Whether the income from the hospital's pharmacy division, which is integral to its operations, can be treated as business income and denied exemption under Section 11, despite the assessee fulfilling the conditions of Section 11(4A).
Sections Cited
11, 11(4A), 147, 250
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Before: SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL & SMT. RENU JAUHRI
Assessee by : Shri Viral Shah Revenue by : Ms. Monika H. Pande Date of Hearing 18.12.2024 Date of Pronouncement 27.02.2025 आदेश / O R D E R PER BENCH :- These appeals are filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2013-14, 2016-17 & 2017-18.
4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General Hospital 2. The assessee has raised the following grounds of appeal: for AY 2013-14 “Validity of reassessment 1) The Ld. CIT(A) failed to appreciate that the reassessment order passed was illegal and bad in law on account of the fact that: It was not based on any new tangible material, but on the basis of material already available on record It was due to a mere change of opinion on the same set of facts considered in the original assessment proceedings It amounted to review of the original assessment order, which is impermissible in law. Denial of exemption under section 11 in respect of income of the Pharmacy Division 2) The Ld. CIT(A) erred in confirming the denial of exemption by the AO under section 11 in respect of the surplus of the Pharmacy division of the Hospital. 3) 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 4) 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). 5) 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. Opportunity of Hearing Not Provided 6) Without prejudice to the foregoing, the Ld. CIT(A) erred in not granting an opportunity of being heard through video conferencing, as mandated under the Faceless Scheme of Appeals, also violating the principles of natural justice. Relief Sought: Your Appellant prays that exemption be granted to the Appellant in respect of surplus of the Pharmacy division of the Hospital under section 11. Your Appellant craves leave to add to, alter, delete or modify all or any the above grounds at or before the time of hearing.” for AY 2016-17 Denial of exemption under section 11 in respect of income of the Pharmacy Division 1) The Ld. CIT(A) erred in confirming the denial of exemption by the AO under section 11 in respect of the surplus of the Pharmacy division of the Hospital. 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 4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General 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. Denial of exemption for the income from Chemist shop 5) 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. 6) 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. Opportunity of Hearing not provided 7) The Ld. CIT(A) erred in not granting an opportunity of being heard through video conferencing, as mandated under the Faceless Scheme of Appeals, also violating the principles of natural justice. Relief Sought: Your Appellant prays that the exemption be granted to the Appellant in respect of the income from the Pharmacy division and the Chemist shop of the Appellant Hospital under section 11. Your Appellant craves leave to add to, alter, delete or modify all or any the above grounds at the time of or before the hearing.”
AY 2017-18 “Denial of exemption under section 11 in respect of income of the Pharmacy Division 1) The Ld. CIT(A) erred in confirming the denial of exemption by the AO under section 11 in respect of the surplus of the Pharmacy division of the Hospital. 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. Denial of exemption for the income from Chemist shop 5) 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. 6) 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.
4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General Hospital Opportunity of Hearing not provided 7) The Ld. CIT(A) erred in not granting an opportunity of being heard through video conferencing, as mandated under the Faceless Scheme of Appeals, also violating the principles of natural justice. Relief Sought: Your Appellant prays that the exemption be granted to the Appellant in respect of the income from the Pharmacy division and the Chemist shop of the Appellant Hospital under section 11. Your Appellant craves leave to add to, alter, delete or modify all or any of the above grounds at the time of or before the hearing.”
The sole substantive issue involved in all three appeals relates to the denial of exemption u/s 11 on the ground that separate books of account for the pharmacy division have not been maintained as required u/s 11(4A) of the Act. for AY 2013-14 4. Brief facts of the case are that the assessee filed its return for AY 2013-14 on 25.09.2013 declaring nil income. The case was reopened u/s 147 of the Act on the ground that the assessee had not maintained separate books of account for the pharmacy income, and therefore, the income of Rs. 13,45,51,417/- from the pharmacy was taxable, being business income of the assessee. During the course of assessment proceedings, Ld. AO observed that the gross pharmacy income is 17.90% of the total receipts of the hospital, and therefore, it is one of the major activities carried out by the hospital. The following figures of income from the pharmacy business and hospital-related activities have been declared: Particulars Receipts (in Rs.) Surplus (in Rs.) Hospital and related activity (A) 75,16,25,817/- 4,19,29,194/- Pharmacy (B) 13,45,51,417/- 88,99,169/- Percentage B/Ax100 17.90% 21.22% 4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General Hospital 5. Ld. AO held that surplus from the pharmacy has to be taxed as business income separately in view of the provisions of section 11(4A) of the Act.
Aggrieved with the order of Ld. AO, the assessee preferred an appeal before Ld. CIT(A). Vide order dated 27.10.2023, Ld. CIT(A) upheld the order of Ld. AO. Aggrieved with the order of Ld. CIT(A), the assessee is in appeal before the Tribunal and has taken as many as four grounds.
At the outset, it was submitted by the Ld. AR that the issue under consideration is identical to the appeal for AY 2014-15 which has already been heard and decided. The co-ordinate bench has decided the same issue in for AY 2014-15 vide order dated 17.02.2025 with the following observations: “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).
With regard to the income from the Chemist division, we would like to refer the judgement of the co-ordinate bench "H", Mumbai in 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 relief. Consequently, 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."
4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General Hospital 7.4 No doubt, the Hon'ble High Court in CIT(E), Mumbai Vs. National Health and Education Society (supra) as relied upon by the Ld. DR, dealt with the situation wherein the Pharmacy was used for in-house/captive consumption of the Hospital and not for over the counter sale in general, however, the Hon'ble High Court in the case of Baun Foundation had taken into consideration the situation, wherein the general public were also using the facility/chemist shop and the Hon'ble High Court clearly held that this is a facility which is intended to be used predominantly by patients and their relatives. Though the general public is not prohibited from using the facility, the crucial question to ask or the test to answer whether the establishment of chemist shop shall be incidental or ancillary to the dominant object and purpose, which is set up and conducta Hospital for philanthropic purpose. 7.5 Medicines are one of the most common healthcare interventions and play a significant role in patients' health management. Pharmaceuticals are an integral part of patient care. Admittedly the Assessee is running a Hospital and also having in-house patient's facilities, therefore, the medicines are essentials for the treatment of in-house patients especially. The Assessee is also giving treatment to out-patients, and therefore out-patients and even outsiders as well, are at their liberty/option to purchase the medicines from the Assessee's Pharmacy store, as there cannot be any restriction. The Assessee may be on commercial basis but in fact, directly-indirectly providing medical relief by selling medicines to the in-house patients and outpatients and outsiders as well and therefore protected by CBDT Circular (supra) as well. 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 Id. 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."
We have noticed that 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. Similarly, the 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 4665 & 4664/Mum/2023, A.Y. 2013-14, 2016-17 & 2017-18 The Bhatia General Hospital 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 of the assessee trust. We, therefore, are of the considered opinion that the facts and circumstances of the assessee's case are fully covered by the judgement of the co-ordinate benches cited supra.
In view of the above discussion, we find that the appellant / assessee fulfills all the requirements which necessitates the running of pharmacy and chemist division in the hospital to achieve the dominant purpose of the trust for which the revenue authority have given approval under section 12A of the Act to the assessee hospital and, therefore, the assessee hospital is entitled for the benefit under section 11(1) of the Act and the income from the pharmacy and chemist division of the assessee cannot be treated as business income from a separate and independent activity carried out by the assessee. Thus, on the basis of summarized grounds the points of determination enumerated in the beginning of the order are accordingly decided in the affirmative and in favour of the assessee. We accordingly direct the Assessing Officer to delete the addition. So the grounds raised
by the assessee are accordingly allowed.”
8. As the issue involved is identical in this year also, respectfully following the order of the co-ordinate bench, we, hereby, delete the addition made on account of pharmacy income of Rs. 3,45,41,417/-. Accordingly, the appeal of the assessee is allowed. for AY 2016- AY 2017-18 9. The issue involved in these two appeals is also identical, therefore, the above order will apply mutatis mutandis for both these years and the addition on account of pharmacy income is deleted.
In the result, the appeals of the assessee are allowed. Order pronounced in the open court on 27.02.2025.