HIFZUR REHMAN ANSARI,MUMBAI vs. ITO 20(1)(5), MUMBAI

Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in holding that running a pharmacy was incidental to the main objects of running a Hospital and Research Centre and hence would not be hit by the provisions of Section 11(4A) of the Income Tax Act, 1961?”

Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is correct in allowing an amount of Rs.12,09,120/- on account of provision for employees compensated absences and Rs.3,27,69,040/- on account of provision for post retirement medical benefits while those were mere provisions made by the assessee?”

Whether on the facts and in the circumstances of the case, the Ld.CIT(A) was correct in allowing the deduction of 15% from the gross receipts u/s 11(1)(a) of the Income Tax Act, 1961, when there was no surplus available during the year for accommodation?”

The brief facts of the case are that the assessee is a charitable trust established solely for the purpose of establishing, running, and managing hospitals for medical relief and medical research centre. The object of the institution is to run solely for delivering treatment to persons suffering from illness of mental defectiveness and to attend persons requiring medical help. The hospital is run by the assessee trust, fulfills its objects of giving needy and medial help without considering the caste and creed of the people. The assessee is running a medical shop within the hospital to serve the patients for quick support of the medicine. Other than the patients admitted in the hospital, outsiders are not getting the service from medical shop. During the assessment proceedings, the ld.AO has taken the surplus of this medical shop as a business activity which is not covering the object of the trust.The surplus amount of Rs. 1,60,49,150/- arisingout of pharmacy store which was ploughed back by the appellant trust to carry out thecharitable activity of the hospital was treated by the ld. AO as business income u/s. 11(4A) the Act and taxing it separately as business income. So, the entire surplus of medical shop amount of Rs. 1,60,49,150/- was added back and the deduction claimed U/s 11 of the Act was denied. Further, the ld.AO rejected the benefit under section 11(1)(a) for A.Y. 2013-14 where there was no surplus available during the year for accumulation. The ld.AO further added back & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre the provision for employees compensated absence amount of Rs. 12,09,120/-, on account of provision for post-retirementmedical benefits amount to Rs. 3,27,69,040/- and the addition of fund related to ‘Indigent & Weaker Section Fund’ (I&WS Patient Fund) amount to Rs. 3,53,43,430/- when the said amount was not utilized during the impugned financial year. All the grievanceswere moved towards ld. CIT(A) for adjudication. The ld. CIT(A) after considering the submission of the assessee allowed the appeal of the assessee and rejected the addition made in impugned assessment order. Being aggrieved on the appeal order, the revenue filed an appeal before us on merit and the assessee filed cross objection by challenging the legal ground before us.

The ld.AR vehemently argued and filed a written submission which is kept in the record. The ld.AR argued that the medicine shop is an integral part of the hospital which provides the medicine to the admitted patients and not the outsiders. The activity of maintaining the medical shop is not a separate activity and the provisions of section 11(4A) of the Act has no role to play.So, implementation of section 11(4A) for maintaining a separate book of accountis & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre contrary to the provision. The ld.AR respectfully relied on the order of co- ordinate bench of ITAT, Mumbai and the order of the Hon’ble High Court of Bombay in assessee’s own case. He further stated that the ld.CIT(A) has passed the order relying on the order of the co-ordinate bench of ITAT and the order of the Hon’ble Bombay High Court. For ready reference, paragraphs 5.2 to 5.4 are extracted below: - “5.2 The AO held that the assessee has not maintained separate books of accounts for the pharmacy store which is a cardinal requirement u/s 11(4A) of the IT Act for the income from incidental business to be claimed as exempt. Running pharmacy store is business incidental to the appellant’s activity. The section 11(4A) specifically state that the separate books of account have to be maintained for the business incidental to the main activity. However, the appellant has failed to maintain the separate books of account and hence the income derived from this incidental business activity cannot be considered as exempt income. Therefore, the surplus income from the pharmacy store as Rs.1,60,49150 is treated as business income and accordingly exemption on this is denied. 5.3 During the appeal proceedings, the appellant has contended that this issue is already decided in favour of the appellant by the ITAT Mumbai for AY 2010-11. I have gone through the submission of the appellant. I find that the Hon’ble Mumbai ITAT J-Bench in the appellant’s case for AY 2010-11(ITA NO.6583/M/2014) has decided this issue as under: - & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre “Ground Nos.3 & 4 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.

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.

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 & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 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 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 & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 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.” 5.3.2 Further, the department challenged this order of ITAT before the Bombay High Court. The Hon’ble Bombay High Court vide order dated 09.06.2022 has decided the appeal filed by the department as under: - “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 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 & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 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.” 5.4 The Hon’ble ITAT Mumbai has decided the issue of surplus derived from the pharmacy store and held that the running of pharmacy was the necessary requirement in running the hospital and for providing timely medical aid to the patient, thus, the activity was not only incidental but was part of the objects of the assessee trust and thus was not hit by the provision of section 11(4A) of the IT Act. This decision of the Hon’ble Tribunal has been affirmed by the Hon’ble Bombay High Court. Thus, this issue is covered by the above two decisions in the appellants own cases. Respectfully, following the decision of Hon’ble Mumbai ITAT and Hon’ble Bombay High Court, the addition made by the AO of Rs.1,60,49,150/- is hereby deleted. Accordingly, appeal on ground no 2, 3 and 4 is ALLOWED.”

The Ld.AR argued and relied on the impugned appeal order, paragraph 10.4.2& 10.4.3. which is reproduced as below: - “10.4.2 I have considered the appellant’s submission and decisions relied upon. The Hon’ble Supreme Court in the case of CIT vs. Programme for community Organisation (116 taxman 608) has held as under-. “Section 11(1)(a) reads thus: "11. Income from property held for charitable or religious purposes.— (1)(a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property;"

We heard the rival submission and considered the documents available in the record. We find that the claim of deduction U/s 11 on surplus of medical store is duly covered by the judicial decision. The activity of medical facility and & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre hospital are achieving the object of medical relief. The ld. AO treated the activity of the pharmacy store is nature of business. The separate books of accounts arecardinal requirement for running pharmacist store u/s 11(4A) of the Act. The ld.AO mention in argument that the maintenance of medical shop is incidental towards activity of the assessee. The pharmacy store is only serving to the admitted patient not the outsider. The issue is squarely covered and already decided in assessee’s own case by the order of the co-ordinate bench of ITAT, Mumbai in ITA No 6853/Mum/2014 date of pronouncement 15/06/2016 and the order of the Hon’ble jurisdictional High Court in assessee’s own case bearing ITANo 1920 of 2017 dated 09/06/2022. Further, the medical store is an integral part of the assessee’s activities. In relation to claim of deduction U/s 11(1)(a) of the Act, the ld. AO restricted the claim amount to Rs. 15.60 crore as there is no surplus. The book deficit of the assessee was 1.85 crore in impugned assessment year. During computation of income the assessee claimed set apart @15% on gross receipt punched with book deficit which comes to Rs. 30.20 crore. We note that the claim of set apart on gross receipt is duly covered by the order of the Hon’ble Apex Court in Programme for community Organisation (supra) which respectfully followed in the impugned appeal order. We further note that the @15% of income on gross receipt of trust is to be set apart and not on the surplus or deficit. The section 11(1)(a) has not imposed any condition for claiming set apart on surplus or deposit. The view taken by the ld. CIT(A) is justified and we do not find any reason to interfere in this issue. Since the decision rendered by ld. CIT(A) is in accordance with the above cited & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre decisions, we do not find any infirmity in the appeal orders passed on these issues. Accordingly, we uphold the impugned appeal orders. 10 Accordingly, appeals of revenue in ground nos. 1 & 2 of ITA No. 2462/Mum/2024 and ground no. 5 of ITA No. 2677/Mum/2024 are dismissed.

In relation to provision for Indigent Indigent & Weaker Section Patient Fund, the provision for medical benefit of retirement employees and provision for employees compensated absence, as we appreciate the matter on recordas raised in ground nos-3 & 4 for AY 2013-14 are in favour of the assessee as per impugned appeal orderand the ld. AR indicated that if the issues are hold against assessee has no fiscal benefit for the revenue. The ld. DR has not alleged the submission of the ld. AR. We find that the rest of the issues are in academic interest and need no separate adjudication. The said issues are kept open for adjudication in appropriate forum.

Accordingly, the appeal of the revenue in ground nos. 3 & 4 of are dismissed. 13. The ld.AR categorically stated that if the appeal of the revenue is dismissed, so the cross objections do not require any adjudication. Here, the appeals of the revenue are not succeededso the cross objections of assessee are dismissed as withdrawn. 14. The facts and circumstances in appeals ITA No.2462 & 2677/Mum/2024 are identical to the appeals decided above, therefore, the decision arrived at therein, shall apply mutatis mutandis to these appeals listed above.

In the result, the appeals of the revenue bearing 2657, 2676 & 2677/Mum/2024 are dismissed and the Cross Objections of the assessee bearing C.O Nos. 163 & 164/Mum/2024 are dismissed.