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Facts
The assessee, a charitable trust running a hospital, operated a pharmacy within its premises. The Assessing Officer (AO) treated the surplus from the pharmacy as business income and taxed it separately, denying exemption. The AO also disallowed deductions for provisions related to employee benefits and a "Indigent & Weaker Section Patient Fund".
Held
The Tribunal held that the pharmacy's operations were integral to the hospital's charitable activities and not a separate business. Previous High Court and ITAT decisions supported this view. The Tribunal also found that the claim for a 15% set apart under Section 11(1)(a) was a statutory claim and correctly applied.
Key Issues
Whether the surplus generated from a pharmacy run by a charitable hospital is to be treated as business income, and whether the 15% set apart for accumulation is allowable.
Sections Cited
Section 11(4A) of the Income Tax Act, 1961, Section 11(1)(a) of the Income Tax Act, 1961, Section 2(15) of the Income Tax Act, 1961, Section 10(23C)(via) of the Income Tax Act, 1961
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Instant appeals of the revenue and the cross objections file by the assessee related to assessment years 2006-07, 2008-09, 2013-14, 2015-16 an 2016-17 challenging the orders of the Learned Commissioner of Income-tax (Appeals)-50, Mumbai *in short, ‘Ld.CIT(A)+, orders passed under section 250 of the Income-tax Act, 1961, (in brevity the “Act”) date of order 23/02/2024 for A.Y. 2013-14, 2016- 17 & 2015-16 and date of order 06/02/2024 for A.Ys 2008-09 and 2006-07, respectively. The impugned orders are emanated from the order of the Learned Assistant Commissioner of Income-tax (Exemption)-11(2) (in brevity the ‘ld. AO”) order passed under section 143(3) / 147 of the Act, date of order 28/03/2014 for A.Ys. 2006-07 & 2008-09, the Ld.ACIT (Exemption), Circle-1(1), Mumbai, order passed under section 143(3) dated 30/03/2016 for A.Y. 2013-14, ld. DCIT(Exemption)-1(1), Mumbai, order passed under section 143(3), date of order 18/12/2017 for A.Y. 2015-16 and ld. ACIT(Exemption), Circle-1, Mumbai, order passed under section 143(3), date of order 24/12/2018 for A.Y. 2016-17.
2. All the appeals have same nature of facts and have common issue. Therefore, we heard all the appeals together and are disposed of by this common order.The appeal of revenueITA No.2462/Mum/2024 for AY 2006-07 is taken as lead case. The revenue has raised the following grounds of appeal: - – Appeal by Revenue – A.Y. 2006-07 “1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is correct in not treating surplus of Rs.1,60,49,150/- arising out of pharmacy store in the assessee hospital, to be business income u/s 11(4A) of the Income Tax Ac, & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 1961.
2. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) has not erred in holding that running a pharmacy was not incidental to the main objects of running a hospital and Research centre.”
C.O. No.164/Mum/2024 – C.O. by Assessee – A.Y. 2006-07 Grounds of Cross Objection “1. The Learned Commissioner of Income-tax (Appeals) erred in upholding the reopening of assessment u/s 147 of Act and rejecting the submission of the Appellant that the jurisdictional conditions containing u/s 147 and 151 of Act are not fulfilled before issuing the notice u/s 148 of the Act.
The Learned Commissioner of Income-tax (Appeals) erred in not appreciating that the reassessment proceedings were initiated beyond 4 years from the end of the Assessment Year and there was no failure on the part of the appellant in disclosing the faces that were necessary for completion of the assessment u/s 143(3) of Act, and hence the reassessment proceedings were void-ab-initio
3. The Learned Commissioner of Income-tax (Appeals) erred in not appreciating that no new facts or tangible material have come to the knowledge of the assessing officer reopening of the assessment.
The Appellant craves leave to add to, alter, amend and/or delete in all the foregoing grounds of appeal.”
.Mum/2024 - Appeal by Revenue – A.Y. 2013-14 “1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is correct in not treating surplus of Rs.4,79,04,067/- arising out of pharmacy store in the assessee hospital, to be business income u/s 11(4A) of the Income Tax Act, 961?”
2. 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?”
3. 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?”
& 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 4. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is correct in allowing Rs.3,53,43,430/- to be debited under the Indigent & Weaker Section Patient Fund (‘I&WS Patient Fund’) by the assessee, when the said amount was not utilized by the assessee during the year?”
5. 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.
, A.Y. 2006-07- Ground- 1 & 2 4. The ld.DR vehemently argued and fully relied on the impugned assessment order. The paragraph 5. ii. of impugned assessment order is reproduced below for ready reference: -
“5. The above submission of the assessee is considered but the same cannot be accepted because of the following reasons: - i ……………………………………….. ii. The assessee submits that pharmacy is located within the pros the hospital and has no normal entry or exit point. A patient requiring medical relief no doubt needs to take those medicines to get relief from his ailment. Dispensing of medicines is part and parcel of providing medical relief and is a separate activity independent of & 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre hospital. For the assessee trust providing medical relief and is not separate activity independent of hospital. For the assessee trust running of pharmacy is part of its activity of running of hospital and is not a separate and distinct activity. Further for inpatients, the medicines administered to them is separately charged in the overall bill raised and is considered as sale from pharmacy. By submitting this, the assessee reiterates that running pharmacy is part and parcel of its activity. Further, it also submits that the medicines administered to the patients is separately charged in the overall hill raised and is considered as sale from pharmacy. In this regard, when bill of medicine is separately charged in the overall bill rained and the same is considered as sale of pharmacy then the assessee could not suffice that why the assessee is not in a position to separate books of accounts for the income of pharmacy. This proves that the assessee by not maintaining the separate books of accounts and not providing the department the separate income and expenditure account, just tends to avoid the payment of tax.”
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 further stated that the surplus of the pharmacy store amount to Rs.1,60,49,150/- is added back with the total income by rejecting deduction under section 11 is contrary to the order passed by the co-ordinate bench of the ITAT. Further mentioned that the ld. CIT(A) made typographical mistake in the ITA number. In the order it is mentioned instead of ITA No. 6853/M/2014.So, the surplus is an integral part of the activities of the trust; so, the rejection of exemption U/s 11 is not justified.
AY-2013-14- Ground-5 6. The ld.DR agitated ground 5 related claiming of deduction @15% on the gross receipts amount to Rs. 28,35,72,839/- under section 11(1)(a) of the Act as set apart. During computation the assessee claimed net deficit amount to Rs. 30,20,97,738/- including book deficit amount to Rs. 1,85,24,900/-. The Ld.DR argued vehemently and fully relied on the order of impugned assessment year. The ld. DR further stated that the assessee has actual deficit 1.85 crore as per claim of expenses but pursuing provision U/s 11(1)(a) of the Act claimed compulsory set apart amount of Rs. 28.35 crore and consequently claimed deficit amount to Rs. 30.20 crore is not justified. The deduction should be allowed only to the extent of Rs. 15,60,02,346/-.
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;"
& 2676 /Mum/2024 CO Nos 163 & 164/Mum/2024 Jaslok Hospital and Research Centre 4. Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations, the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twentyfive per cent there out. It is unclear on what basis the revenue contended that it was entitled to accumulate only twenty-five per cent of Rs. 87,010.” 10.4.3 As per the above decision of Hon’ble Apex Court, accumulation of 15 % of Income derived from property held under the trust is allowed. Hence the action of A.O in denying the accumulation of 15% on income derived is incorrect. Respectfully following the decision of Hon’ble S.C as mentioned above, the appeal on this ground is ALLOWED.” The Ld.AR stated that in Explanation 5 to section 11(1)(a) of the Act. Here,for ready reference is mentioned below: - “Explanation 5. —For the purposes of this sub-section, it is hereby clarified that the calculation of income required to be applied or accumulated during the previous year shall be made without any set off or deduction or allowance of any excess application of any of the year preceding the previous year.” It is clearly stated that claim of set apart @15% of gross income is statutory claim and he respectfully followed the order of the Hon’ble Supreme Court.
AY-2013-14- Grounds 3 & 4: 8. The ld. AR stated before the bench In relation to provision for Indigent & Weaker Section Patient Fund, the provision for medical benefit of retirement employees and provision for employees compensated absencehave no contribution in taxation, should they be decided against the assessee. The ld. AR invited our attention in impugned assessment order paragraph-7 which is reproduced as below. “7. Subject to the above remarks the total income of the assessee is computed as under '' Rs. Rs. I INCOMEFROMPROPERTYOFTRUST TotalReceipts (As per Income & ExpenditureAccount) 1,89,04,85,591 Expenditure (as claimed) Less: 1,90,90,10,490 Less:1. DepreciationonCapitalAssets(asdiscussed) 15,31.09,722 2:Provisionsforcompensatedabsences/gratuity 3,39,78,160 And post-retirementmedicalbenefits(asdiscussed) 3.Claimofexpenses onaccount ofIndigent 3,53,43,430 1,68,65,79,178 Patients (as discussed) 20,3906 413 Less: IncomeFromPharmacyStoresconsideredasBusiness Income 4,79,04,067 1 (as discussed) - ' 15,60,02346 Less: Deductionu/s.11(1)(a) 15,60,02,346 @15%onreceiptsexcludingpharmacyreceiptsofRs.1,60,14,25,61 0/- i.e.Rs.24,02,13,842/- restricted toincome available I (1,89,04,85,591-28,90,59,981=1,60,14,25,610)' I INCOMEFROMPROPERTYOFTRUST NIL
II INCOMEFROMBUSINESSi.e. PharmacyStores(asdiscussed) 4,79,04,067 ' TOTALINCOME 4.79.04,067 TOTALINCOME(Roundedoffto) 479,04,070
9. 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 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 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.
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 & 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.