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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Smt.Beena Pillai, JM & Ms.Padmavathy S, AM
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Smt.Beena Pillai, JM & Ms.Padmavathy S, AM ITA No.1224/Bang/2015 : Asst.Year 2011-2012 M/s.Moogambigai Charitable and The Additional Director of Educational Trust v. Income-tax (Exemptions) RR College of Management Range – 17 Studies, Ramahalli Cross Bangalore. Kumblagode Bangalore – 560 060. PAN : AAATM1102H. (Appellant) (Respondent) Appellant by : Sri.Ravishankar, Advocate Respondent by : Sri.Sumer Singh Meena, CIT-DR Date of Pronouncement : 29.04.2022 Date of Hearing : 13.04.2022 O R D E R Per Padmavathy S, AM This appeal is in pursuance to the directions of the Hon’ble High Court of Karnataka in ITA No.1 of 2017 dated 9th March, 2021 where the Hon’ble High Court has remanded the issue of treatment of income from Pharmacy attached to the hospital as business income.
The assessee is a charitable and educational trust, established in the year 1992 by trust deed dated 20.05.1992. The assessee was granted registration u/s 12A of the I.T.Act (`the Act’) vide order dated 16.09.1992. The assessee was also granted approval u/s 10(23C) of the Act by the Chief Commissioner of Income-tax, Banglaore-1, vide order dated 26.03.2009. The assessee filed its return of income on 11.07.2021 for the assessment year under consideration admitting `nil’ income after claiming revenue expenses including depreciation. The Assessing Officer while framing the assessment u/s 143(3) of the Act on 27.03.2014, assessed the total income
2 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust of the assessee at Rs.7,63,80,700. The Assessing Officer made various disallowances which were confirmed by the CIT(A). On further appeal before the coordinate bench of the Tribunal, the assessee got substantial relief. The revenue preferred an appeal before the Hon’ble Karnataka High Court on the following question of law
“1. “whether on the facts and the in the circumstances of the case, the Tribunal is right in law in treating the pharmacy income as income of charitable trust inspite of the same is rightly considered as business income as the assessee does not maintain separate books of account and even when the Tribunal has not given finding about the medicines sold to the public is negligible or not.
Whether on the facts and the in the circumstances of the case, the Tribunal is rightin calculating 15% for accumulation on gross receipts instead of net receipts by relying on the decision in the case of Franciscan Sisters of St.Joseph Society of Chennai ITAT Bench where nature of receipts in the case of assessee is not identical with that case”
The Hon’ble Karnataka High Court allowed the second question of law in favour of the assessee and remanded the first issue of treatment of pharmacy income to this Tribunal by observing as under
“**** Thus, from perusal of the order passed by the Tribunal, it is evident that the Tribunal has not recorded any reasons whether or not the assessee has complied with the twin conditions mentioned in sub- section 4A of section 11 of the Act. The order passed by the Tribunal is cryptic and suffers from the vice of non-application of mind. Therefore, the finding of the Tribunal insofar as it pertains to the first substantial question of law cannot be sustained. 9. Accordingly, the order of the Tribunal dated 13.07.2016 insofar as it records the finding with regard to the first substantial question of law is hereby quashed. Therefore, it is not necessary to answer the same. The matter is remitted to the Tribunal for recording the
3 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust finding on the aforesaid substantial question of law bearing in mind the mandate contained in Section 11(4A) of the Act.” 4. Facts to be considered for considering the issue remanded by Hon’ble High Court are as under:-
The assessee runs pharmacy for the purpose of medical college and hospital attached to the medical college. During the course of assessment the AO called for the books of accounts of the pharmacy business to which the assessee submitted that it does not maintain separate books of account for pharmacy and that the transactions pertaining to it are recorded in the books of account maintained in the name of the college and hospital. However the assessee is maintaining separate ledger account for the pharmacy business and these ledgers were submitted before the AO. The AO stated that twin conditions of section 11(4A), i.e. the income from business or profession being incidental to the attainment of the objects of the trust and maintenance of separate set of books are not met by the assessee and accordingly treated the said income as business income of the assessee from pharmacy denying the exemption u/s.11.
The assessee challenged the action of the A.O. before the CIT(A) contending that the assessee is running the pharmacy in the hospital premises itself, and therefore, it cannot be treated as business activity. The assessee also contended that running the pharmacy is incidental to the running of the hospital and would constitute an integral part of the hospital run by the assessee. The assessee, submitted that it is incidental to the objects of the trust and that the sales of the pharmacy is duly considered for the purpose of application of income. The CIT(A) dismissed the contentions of the assessee on the basis that the assessee has not furnished any evidence regarding the breakup of the medicines purchased from the pharmacy by different categories of the patients i.e. those using the hospital services and
4 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust outside public. Accordingly, the CIT(A) has confirmed the action of the A.O.
The Co-ordinate Bench of the Tribunal allowed the appeal in favour of the assessee by holding that the entire income from pharmacy business cannot be treated as business income merely because the assessee is unable to provide details of sales made to indoor/outdoor patients and the outside public when the pharmacy is within the premises of the hospital and attached to the hospital. The Hon’ble Tribunal in this regard placed reliance on the decision of the Chennai Bench of the Tribunal in the case of M/s.Franciscan Sisters of St.Joseph Society No.VIII v. JCIT in ITA No.1897/Mds/2013 (order dated 6th January, 2014).
Before us, in the remand proceedings the learned AR submitted that the assesee is running a pharmacy from the hospital attached to the medical college, the fact of which has not been disputed by the A.O. The reason for the addition made by the A.O. is that no separate books of account were maintained by the assessee. The learned AR submitted that the assessee though not maintaining separate set of books is having a separate trading account for the pharmacy, wherein all the charges and sales are duly accounted for and a separate stock register was also maintained. Once the pharmacy attached to the medical college / hospital is not a business undertaking, the provisions of section 11(4) and 11(4A) of the Act are not applicable. The learned AR drew out attention to page 16 of the paper book and submitted that though separate books are not maintained, separate accounts are maintained in respect of the pharmacy.
The learned Departmental Representative, on the other hand, submitted that the activity of the pharmacy is business in nature, hence, supported the decisions of the lower authorities.
5 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust
We heard the rival submissions and perused the material on record. It is worthwhile to look into the provisions of section 11(4A) of the Act, which is reproduced below:-
“(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 or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.”
From the provision extracted above it is clear that the twin conditions of the business income being incidental to objects of the trust and maintenance of separate set of books need to be met in order claim exemptions u/s.11 of such income. In assessee’s case there is no dispute that running the pharmacy is incidental to the objects of the Trust i.e. running the hospital and medical college. The second condition of maintenance of separate set of books is where the issue in this appeal is arising. We notice that the assessee has produced before the AO the separate ledger accounts maintained for the pharmacy business from which the AO could draw a trading account.
The ground on which the AO denied the exemption is that the assessee is not maintaining separate set of books though he was able to identify the pharmacy business related details from the ledger accounts maintained by the assessee. The AO has also stated that the assessee is able to generate gross profit out of running the pharmacy and hence justified treatment of the same as business income. The CIT(A) upheld the AO’s views stating that if reliance placed by the assessee in the case of M/s.Franciscan Sisters of St.Joseph Society (supra) needs to be accepted, then there should be clear breakup of medicines purchased by different
6 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust categories of patients i.e. indoor, outdoor and outside public. However from the perusal of the records there is no evidence to show that the CIT(A) called for the breakup and that the assessee could not produce the same from the ledger accounts.
We notice that the Hon’ble Chennai Bench of the ITAT in the case of M/s.Franciscan Sisters of St.Joseph Society (supra), held that
The first item so considered by the assessing authority is the receipts from pharmacy section. It is to be seen that assessee is running a full- fledged general hospital at St. Thomas Mount. The assessing authority has, no doubt, accepted the charitable nature of activities carried on by the assessee-society in respect of that hospital. The assessee is also running a dispensary. Number of patients are visiting the hospital and dispensary on a daily basis. Patients are admitted as in-patients and they are also treated as out-patients. For all the in-patients undergoing treatment in the hospital, medicines are delivered from the pharmacy run by the assessee-society. In respect of out-patients also, most of the patients purchase medicine from the pharmacy run by the assessee. A few of the out-patients might purchase medicines from outside. Likewise, few from the public living nearby to the hospital may purchase medicines from the pharmacy run by the assessee-society. The purchase of medicines by the public is absolutely negligible. That negligible amount of sales, if any, cannot decide the nature of activities carried on by the assessee in running the pharmacy in its hospital premises. The pharmacy is not situated in any commercial area or outside the hospital compound with the intention to invite the public at large to purchase medicines from the pharmacy run by the assessee-society. The assesseesociety is running the pharmacy within the premises of the hospital and as part of the hospital itself. It is clear that the pharmacy is run by the assessee-society only for the purpose of running the hospital. The hospital cannot be run without a pharmacy attached to it. If an assessee wants to run a hospital, running of the pharmacy is also a must. Therefore, running of the pharmacy by the assessee-society is not an activity carried on by the assessee incidental to the running of the hospital; but, on the other hand, it is an integral part of the hospital run by the assessee.
7 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust
In these circumstances, the assessing authority has erred both on facts and in law in holding that the pharmacy run by the assessee-society is a separate unit, running as a business. The Assessing Officer has observed that the assessee-society has maintained separate accounts for the pharmacy section. Maintaining accounts separately for pharmacy section does not decide the nature of the activities carried on by the assessee through running of the pharmacy. Separate accounts are maintained by the assessee for the purpose of proper accounting and internal control. Even in the case of charitable hospital, it is not possible to provide medicines to every patient, free of cost. It is only in very deserving cases, a charitable institution could provide medicines free of cost. Therefore, running of a pharmacy set up as part of the hospital, involves purchase and sale of medicines. Therefore, not much discussion is necessary to come to a conclusion that in the case of a full-fledged hospital, pharmacy is an essential part thereof and as such, the pharmacy is run as part of the hospital establishment.
In the facts and circumstances, we find that the collection received by the assessee from its pharmacy section cannot be excluded from computing the income eligible for exemption under Section 11 of the Income-tax Act, 1961. The pharmacy collection also forms part of the collections accounted by the assessee from its charitable activities. Therefore, Assessing Officer is directed to give exemption under Section 11 in respect of the pharmacy collection as well
From the above it becomes clear that the decision of treating the pharmacy income as eligible for exemption u/s.11 is taken on the basis that the running of the pharmacy within the hospital premises is an integral part of running the hospital which is the main object of the trust. The Hon’ble Tribunal had even said that the maintenance of books is not a criteria for deciding the nature of activity. In assessee’s case is very much similar and hence the principles laid down in the case of M/s.Franciscan Sisters of St.Joseph Society (supra) is squarely applicable to the assessee.
8 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust 14. We also notice that the Co-ordinate Bench of the Tribunal in the case of DCIT (Exemption) v. Karnataka Chinmaya Trust in ITA Nos.1667 & 1668/Bang/2019 (order dated 02.11.2021) has considered the same issue and held as follows:- “23. The case of the Revenue is that the pharmacy shop constitutes an independent business that requires maintenance of the books of account separately in addition to the books of account maintained for the purpose of business of the hospital run by the assessee. When, such separate books of accounts are not maintained for pharmacy, there is a violation of provisions of section 11(4A) of the Act resulting in denial of exemption in respect of profits relatable to the said pharmacy shop.
On the contrary, the case of the assessee is that the running of a hospital includes a running of pharmacy as well. Therefore, the 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 i.e pharmacy shop as well. Therefore, there is no violation of the twin conditions specified in section 11(4A) of the Act. 7
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 .......” “ We have also examined the relevant proviso to section 10(23C) of the Act and the relevant portions are extracted as under:
9 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust “Provided also that nothing contained in sub-clause (iv) or subclause (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 or 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;”
From the comparison of the language of the two provisions extracted above, we find, the language used in the provisions are comparable and, therefore, the common purpose is easily decipherable by the above provisions appearing in to different sections from the Act. Therefore, we agree with the relevant argument propounded by the Ld Counsel for the assesse. 27. Regarding the argument pertaining to whether the pharmacy shop is an integral part of the hospital business, as mentioned above, we find that the High Court of Bombay in the case of Baun Foundation Trust Vs. CCIT (73 DTR 45), which was delivered in the context of the provisions of section 10(23C) of the Act and find relevant to extract the relevant para which is as follows:- “4. In Aditanar Education Institute Etc. v. Additional Commissioner of Income Tax (1997) 224 ITR 310 (SC), the Supreme Court has observed, while construing the provisions of Section 10(22) that the decisive or acid test is whether on an overall view of the matter the object is to make a profit. If after meeting the expenditure any surplus results incidentally from the activity lawfully carried on by the institution, it will not cease to be one existing solely for the statutorily stipulated purpose so long as the object is not to make a profit. Again, it is a wel1 settled position in law that the dominant nature of the purpose for which the trust exists has to be considered. The Chief Commissioner has not doubted the genuineness of the trust or the fact that it is conducting a hospital. Even if the figures which are taken into account by the Chief Commissioner are to be had regard to, it is evident that the activity of a chemist shop is an activity
10 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust which is incidental or ancillary to the dominant object and purpose which is to run a hospital. 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 the chemist shop in the present case is not the dominant object or purpose of the trust. Nor would the figure as disclosed indicate that the nature of the activity has assumed such a dominating or overwhelming importance so as to cast doubt on the true nature and character of the hospital which is conducted by the Petitioner. The Chief Commissioner has acted contrary to the judgments of the Supreme Court which hold the field consequent upon which the impugned order would have to be set aside.”
From the above, it is clear that the running of a pharmacy is a necessary requirement for running of a hospital. It is impossibility from medical point of view that the hospital can run without “pharmacy shop” in the premises of the hospital.
11 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust Considering the same, the Hon’ble High Court has held that maintenance of a pharmacy shop is ancillary to the dominant object of running of a hospital and thus, it is an integral part of the hospital. Actually the pharmacy shop is being maintained by the hospital itself and not by any private contractor. Drawing the medicine from such pharmacy shop by the Doctors in respect of the patients is also evident from the records, commonly maintained in their medical reports. It is not the case of the revenue that the profits earned on pharmacy was not spent for the objects of trust. Therefore, we find, that the cited judgments (supra) are applicable squarely to the facts of the case so far as the argument relating to if the pharmacy is an integral part of the hospital business or not. Considering the above, we are of the opinion, the conditions of maintenance of books of account 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 meaning of section11(4A) of the Act. Accordingly, grounds raised by the Revenue are dismissed.
In the result, this ground in both the Revenue’s appeals are dismissed.”
The coordinate bench of the Tribunal also laid out that running the pharmacy is very much an integral part of running the hospital as per the objects of the trust and the conditions of maintenance of books of account 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 the case. When running of the pharmacy is part and parcel of
12 ITA No.1224/Bang/2015 M/s.Moogambigai Charitable and Educational Trust the main activity of running the hospital, the incidental sale of medicines to outside public cannot be considered as the criteria for the denial of exemption and such distinction of to whom the medicines are sold is of no relevance. In any case the assessee is maintaining separate ledger accounts from where the profits are clearly identifiable and given that the transactions of pharmacy is incidental to the business of the hospital and the objects of the Trust, the conditions relating to maintenance of separate books of account are met within the meaning of section 11(4A) of the Act.
We respectfully follow the decision of the coordinate bench of the Tribunal in Karnataka Chinmaya Trust (supra) and the principle laid down by the Hon’ble Chennai Bench in M/s.Franciscan Sisters of St.Joseph Society (supra) and hold that the income from running the pharmacy which is integral part of the hospital is eligible for exemption u/s.11 and hence the AO is directed to delete the addition made in this regard. The appeal is allowed in favour of the assessee.
In the result, the appeal filed by the assessee is allowed. Order pronounced on this 29th day of April, 2022.
Sd/- Sd/- (Beena Pillai) (Padmavathy S) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore; Dated : 29th April, 2022. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-14, Bangalore. 4. The Director of Income-tax (Exemptions), Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore