THE BHATIA GENERAL HOSPITAL,MUMBAI vs. DY COMMISSIONER OF INCOME TAX (EXEMPTION)-2(1), MUMBAI

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 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 Chemist shop, instead of restricting the addition only to the surplus derived from the said shop. Opportunity of Hearing Not Provided Opportunity of Hearing not provided 9) 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.  Alternatively, Your Appellant prays that only the net income from the Pharmacy Division and the Chemist Shop be taxed.

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.”

The Bhatia General Hospital (2) Whether the running of the chemist shop by the assessee hospital is an incidental or ancillary to the dominant object of the assessee trust for running its hospital and the requirement of section 11(4A) are fulfilled by the assessee by maintaining separate books of account? 3. The brief facts of the case as culled out from the proceedings before the lower appellate authorities asw under:- 3.1 The assessee, Bhatia General Hospital is a public charitable trust carrying on the activities of running the hospital for philanthropic purposes. The trust came into existence vide section 12A of Income Tax Act, 1961 as a charitable organization with Commissioner of Income Tax (Exemption), Mumbai vide Registration No.TR/2763 dated 29/08/1975. The Commissioner of Income tax (Exemptions) Mumbai vide letter dated 29/03/2016 considered that the new trust deed 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.

The Bhatia General Hospital 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 require medicines and if the medicines are not provided, the result would be fatal. Also, providing medicines to patients can never be treated as business income. Further, providing medicines to OPD patient and also to others very well falls within the meaning of Charitable Object as defined under section 2(15) of the Income-tax Act, 1961. Appellant/Assessee is to supply medicine. Appellant/Assessee has necessary permission to run the chemist department. It is observed that the pharmacy income is 3 times of the total surplus of the trust and the pharmacy income is 17.99% of total hospital receipt. The Ld.AO was of the opinion that running of pharmacy is the major activity carried out by the hospital and it has made substantial profit from the pharmacy store and the Assessee-trust has not maintained separate books of account of the pharmaceutical department and due to larger income generated in pharmacy business of the hospital, it cannot be said that the pharmacy division of the assessee trust is for the philanthropic purpose. The Ld.AO was of the opinion that the net profit realized from pharmaceutical department required to be treated as business income and accordingly brought to tax. Similarly regarding the income from the Chemist division of Rs.44,49,566/-, the Ld.AO was of the opinion that the The Bhatia General Hospital nature, volume, frequency and surplus of chemist division shows that it is a systematic business activitiy of the assessee trust because the trust deed of the assessee trust does not bar hospital from selling medicines from outside. The Ld.AO, therefore, did not agree with the contention of the assessee that the income of the hospital from pharmacy and chemist division does qualify to be exempt income and is not required to be added to the total income of the assessee. 3.2 Aggrieved by the order of the Ld.AO, the assessee filed appeal before the CIT(A), who, vide impugned order, upheld the order of the Ld.AO with regard to the addition made on account 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 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 business activity of the assessee trust. Moreover considering these facts it cannot be said to be minor, accidental and mere accompanying activity to its main objects.

4.9. Second and equally important conditions to be fulfilled by assessee trust to claim exemption of this pharmacy surplus is to maintain separate books of accounts in respect of the same. However assessee trust has not maintained separate books of accounts in respect of pharmacy store. Here merely maintaining some ledgers of medicines purchase and sales does not amount to maintaining separate books of accounts. Assessee trust has to maintain separate books of accounts for its every receipt and expenses in respect of pharmacy and submit separate balance sheet and income expenditure statement in respect of pharmacy store while filing the return of income as it does in case of its other activities. The same has not complied with by assessee trust. Thus, it is clear that assessee trust has not maintained separate books of accounts in respect of pharmacy store and has not complied with that particular condition as required under the law.”

4.10. Even though assessee trust has got very good profit percentage, it may claim at appellate proceedings that it does not have any profit motive and if at all there is any surplus the same cannot be appropriated by trustees or any others. However, it may be seen that in view of amendment in definition of charitable purpose with effect from 1.4.1984; whether there is profit motive or not is not relevant. By the said amendment, the words "carrying on activity of profit" have been deleted. Further assessee trust may The Bhatia General Hospital claim that even this surplus of pharmacy store is spent on charitable purpose of medical relief. However this argument of assessee trust will not be relevant as two main conditions to be fulfilled u/s. 11(4A) are not met by assessee trust.

4.11. In view of above detailed discussion I hold that income of Rs. 15,08,18,086/- out of pharmacy store is treated as business income under section 11(4A) separately and taxed accordingly.”

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).

Appellant's argument of Principal of consistency is rejected as every AY is different and when new facts emerges assessments needs to be in line with it.

In view of the above, order of AO is upheld and the grounds are noted as dismissed.”

The Bhatia General Hospital Argument on behalf of the Parties & Analysis 6. The Ld.AR on behalf of the assessee-appellant has submitted that the Ld.AO as well as Ld.CIT(A) has committed illegality in holding that the pharmacy division of the assessee hospital is a separate and distinct activity of the hospital and since separate accounts are not maintained for the pharmacy business, provisions of section 11(4A) are attracted. It is argued that the said observation and conclusion by the Ld.CIT(A) is contrary to the law laid down by various benches of ITAT and the Hon’ble High Courts including the jurisdictional High Court of Bombay. He further argued that since the Chemists division of the assessee hospital is an integral part of the dominant purpose of the hospital, therefore, there was no requirement of maintaining a separate books of account and the assessee has maintained the accounts of the hospital including the pharmacy business, therefore, the assessee appellant was entitled to exemption of the income fom pharmacy division under section 11 of the Act.

by the assessee-appellant and the said grounds have been adjudicated in favour of assessee and the appeal The Bhatia General Hospital 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 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 part of the activity of medical treatment. He has further submitted that providing drugs to the patients is an indispensible part of the objective of providing medical relief to the patients. The activity of timely providing/making available life saving drugs by the hospital to the patients is in furtherance of its objects of medical relief which otherwise also contributes in saving the life of patients by making available the treatment and medicines without loss of time. The Ld. A.R. has further brought our attention to the recent decision of the Hon’ble Bombay High Court in the case of “Baun Foundation Trust vs. Chief Commissioner of Income Tax” (2013) 33 taxmann.com 677 (Bombay), wherein, the Hon’ble Bombay High Court has held that the activity of a chemist shop is an activity which is incidental or ancillary to the dominant object and purpose which is to run a hospital. This is a facility which is intended to be used predominantly by the patients and their relatives. The Hon’ble Bombay High Court (supra) observed that where the running of a chemist shop was not the dominant object or purpose of the trust and where the surplus, which was earned from the operation of a chemist shop in the hospital, was utilized for the purpose of hospital and the establishment of a chemist shop in the hospital is incidental or ancillary to the The Bhatia General Hospital dominant purpose of the trust/hospital, then, under such circumstances, exemption on this ground cannot be denied to a charitable trust under the provisions of section 10(23C)(via) of the Income Tax Act. The Ld. A.R. has further invited our attention to a recent decision of the co- ordinate bench of the Tribunal in the case of “Hiranandani Foundation vs. ACIT (E), Mumbai” wherein the Tribunal has discussed the identical issue. The AO in the said case (supra) had made additions invoking provision of sub section (4A) of section 11 and observing that the assessee hospital had failed to maintain the separate books of accounts 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 Revenue.”

“5. As regards the second issue, i.e., Pharmacy/Chemist Shop run in the Hospital premises of the Respondent -Assessee, the Tribunal had followed the decision of this Court in case of Baun Foundation Trust vs. Chief Commissioner of Income-tax - [2013] 33 taxmann.com 677 (Bombay). The Tribunal has also referred to other decisions of the coordinate benches of the Tribunal. The Division Bench of this Court has taken a view that if on the analysis of fact, it is found that running of Pharmacy/Chemist Shop is not a predominant activity of the Trust and is incidental to dominant object, the Pharmacy cannot be considered as an independent unit. On The Bhatia General Hospital factual position is concerned, the finding of fact has been rendered by the Commissioner of Income Tax (Appeals), the Pharmacy run by the Hospital - Assessee was integrally attached to the activities of the Respondent - Assessee which finding of fact has been confirmed by the Tribunal. Nothing is shown to us how this finding recorded is perverse. Thus, the question sought to be urged cannot be considered as a substantial question of law.

The Bhatia General Hospital 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 authority held the addition and taxability of the surplus out of the pharmacy store to be erroneous and accordingly the same was directed to be deleted.

15. When the Revenue preferred appeal before the Tribunal, Tribunal relied upon its decision in the case of Hiranandani Foundation(suprak) which in turn had relied upon the decision of the Supreme Court in Aditanar Educational Institution v . Addl. CIT[1997] 90 Taxman 528/224 ITR 310 and a decision of this Court in Baun Foundation Trust v. Chief CIT [2012] 73 DTR 45 and dismissed the appeal of the Revenue by affirming the order of the first appellate authority.

16. In the case of Hiranandani Foundation, (supra) Tribunal held that running of a pharmacy is a necessary requirement for running of a hospital. It is impossible The Bhatia General Hospital from a medical pojnt of view that a hospital can run without a pharmacy. Maintenance of a pharmacy is ancillary to the dominant object of running of a hospital and thus, it is an integral part of the hospital.

17. In the present case, Chief Commissioner of Income Tax, Mumbai had passed an order dated 07.04.2011 granting approval to the respondent for the purpose of section 10(23C)(via) of the Act for the assessment year 2009-10 and onwards subject to the conditions mentioned therein. When the Chief Commissioner of Income Tax had granted approval to the respondent under the aforesaid provision, it is not understood as to how the assessing officer could have invoked the provisions of section 11(4A) of the Act to construe the activity of the pharmacy as a separate business activity and thereafter to tax the income accrued therefrom.

18. In Aditanar Educational Institution (supra), Supreme Court was considering exemption granted to an educational institution under section 10(22) of the Act. As per section 10(22) of the Act, any income of an university or other educational institution existing solely for educational purposes and not for purposes of profit is not to be included 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.

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. Therefore, income accrued therefrom was incidental to the dominant object of the respondent i.e. running of the hospital. Thus, the assessing office was not justified in treating the pharmacy store of the respondent as a separate business entity and to hold the surplus amount accrued therefrom as business income under section 1l(4A) of the Act. The lower appellate authorities have rightly interfered with such decision of the assessing officer. We do not find any error or infirmity in the view taken by the first appellate authority as affirmed by the Tribunal.”

21. Consequently, the appeal fails and is accordingly dismissed.”

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+;

The Bhatia General Hospital Provided also that …………….. Provided also that …………….. Provided also that nothing contained in sub-clause (iv) or sub-clause (v) [or sub- clause (vi) or sub clause (via) shall apply in relation to any income of the fund or trust or institution [or any university or other educational institution r any hospital or other medical institution], being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business.”

The Bhatia General 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 order dated 15/06/2016 (supra).

“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.”

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 The Bhatia General Hospital 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 conduct a 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 ld. Commissioner that the Assessee-trust has complied with the twin conditions, as set out in section 11(4A) of the The Bhatia General Hospital 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.”

by the assessee are accordingly allowed.

7. In the result, the appeal filed by the assessee bearing /Mum/2024 is allowed, in the above terms.