PAVITRA CRUZ SISTERS ASSOCIATION,AMBIKAPUR vs. INCOME TAX OFFICER, AMBIKAPUR

आयकर अऩीऱीय अधधकरण, रायऩुर न्यायऩीठ, रायऩुर IN THE INCOME TAX APPELLATE TRIBUNAL RAIPUR BENCH, RAIPUR श्री रविश सूद, न्याययक सदस्य एवं श्री अरुण खोड़वऩया, ऱेखा सदस्य के समक्ष । BEFORE SHRI RAVISH SOOD, JM & SHRI ARUN KHODPIA, AM आयकर अऩीऱ सं./ITA No.08/RPR/2018 (ननधाारण वषा / Assessment Year :2014-2015) Pavitra Cruz Sisters Association, Vs ITO, Ambikapur Holy Cross Institute, Manendragarh Road, Ambikapur (C.G.) PAN No. : AAAAP 0283 H (अऩीऱाथी /Appellant) (प्रत्यथी / Respondent) ..

ननधााररती की ओर से /Assessee by : Shri Kishore M. Deshpandey, CA राजस्व की ओर से /Revenue by : Shri G.N.Singh, Sr. DR सुनिाई की तारीख / Date of Hearing : 29/07/2022 घोषणा की तारीख/Date of Pronouncement : 17/10/2022 आदेश / O R D E R Per Arun Khodpia, AM : This appeal is filed by the assessee against the order passed by the CIT(A)-I, Raipur, dated 31.10.2017, on the following ground :- 1. On the facts and in the circumstances of the case, invoking provisions of Section 11 (4A) of the Income Tax Act, 1961, on surplus of Rs.2,80,04,600/- and treating same as business activity and mandating separate books of accounts thereof, is unjustified and unwarranted. 2. On the fact and in the circumstances of the case, the treatment of surplus on account of Medicine charges recovered and cost of medicine consumed by hospital worked out by A.O. at Rs.2,80,04,600/- as profit and gains of business incidental to attainment of objectives of Society u/s.11(4A) of the Income Tax Act, 1961, and taxing same is unjustified and unwarranted. 2. Facts in brief are that the assessee institution has been registered under Madhya Pradesh Government Society Registration Act, 1973 and also registered as a charitable institution u/s 12AA of the Act. The assessee-society is also registered under FCRA, 1961 and received

2 ITA No.08/RPR/2018 foreign grants which it claims exemption u/s 10(23BBA) of the I.T. Act, 1961. The assessee-society is engaged in catering educational, medical relief and other charitable activities of general public utility. The assessee trust runs various Schools, Hostels & Hospitals in remote areas. Assessee filed its return electronically on 27.09.2014 declaring total income at Rs. Nil in the status of Trust, a Charitable institution in Form No.ITR-7. The case of the assessee was selected for scrutiny under CASS and on issuance of statutory notices, the assessee produced books of accounts for verification. On perusal of income & expenditure account of the "Holycross Hospital", Kedarpur, (which is one of its unit engaged in medical relief), the AO found that there is purchase and sale of medicine by the Hospital. The figures of sale/purchase as given in income & expenditure for the relevant assessment year are as under:- Purchase : Rs. 3,17,35,193/- Sale : Rs. 5,97,39,793/- Profit : Rs.2,80,04,600/-

3 ITA No.08/RPR/2018 the patients who visit hospital or undergo treatment in the hospital. The AO found that no separate books of accounts are maintained for the business activity of the assessee which is one of the necessary conditions for getting exemption u/s.11 of the Act for the profit from such activity. Therefore, the AO excluded profit of Rs.2,80,04,600/- from the exempted income and brought to tax. 4. Against the assessment order, the assessee preferred appeal before the CIT(A) and the CIT(A) affirmed the view taken by the AO and dismissed the appeal of the assessee. 5. Now, being aggrieved with the order of the CIT(A), the assessee is in further appeal before the Tribunal. 6. At the outset, Ld. AR before us submitted that findings of the Ld AO and Ld CIT(A) were unjustified and unwarranted. Ld AR drew our attention to page 2 of paper book shown its memorandum having an object “(d) To care for the poor, the sick and the orphans in house and hospitals” in support of its contention that the assessee society’s activity to extend medical relief is covered by this object and thus provisions of section 11(4A) cannot be invoked in this case. No opportunity to explain was given by Ld AO before invoking provisions of section 11(4A). 7. It is further submitted by the Ld AR that with regard to question raised by the Ld AO during the assessment proceedings u/s 143(3) that the hospital is earning huge profits from the activity of purchase / sale of medicine should be treated as advancement of any other object of

4 ITA No.08/RPR/2018 general public utility and thus covered by the first proviso to section 2(15) of the I.T. Act and consequently the same becomes a non-charitable activity. In response to this question assessee had submitted its reply that the society is running a hospital under unit “Holy Cross Hospital Kedarpur” for providing medical relief to patients and is philanthropic activity, separate account also maintained for the said activity. For medical relief apart from main medical various facilities patients are provided medicines as prescribed by the Doctors without which medical relief cannot be achieved. Medicines prescribed are dispensed to patients for their treatment and separately billed to them for transparency. It is also submitted that no medicines are sold to outsiders. No medical store exists. Medicines are purchased and kept in pharmacy which can be issued and consumed against the prescription of Doctor only. Thus this activity cannot be held to be commercial and the society cannot be held to be a business undertaking as provides u/s 11(4) of the Act. It was submitted that the margin / charges which is quite below the MRP by 11% to 26%, above the cost, is kept on sale of medicine to offset handling, storing, wastages and delivering cost involved in normal course of Hospital Activity for dispensing medicines. Illustrative workings, copies of bills to patients were submitted for verification of facts. It was submission that concession were also provided to the patients. 8. Ld AR submitted that provisions of section 2(15) was also explained before the Ld AO, whereby it was clarified that as per amendment by finance Act 2015, if such activity is undertaken in the course of actual

5 ITA No.08/RPR/2018 carrying out of such advancement of any other object of public utility and the aggregate receipts from such activity during the previous year do not exceed 25% of the total receipts. It was submitted that the medicine income of the assessee does not exceed 25% of the total receipts of the institution. It was the submission that activity of issue of medicines as prescribed by doctors is not in the nature of any business, thus provisions of section 11(4A) do not apply. 9. Ld AR further submitted that LD CIT(A)’s order wherein appeal of the assessee was dismissed was mainly on the basis that purchased and sale of medicine is incidental to main activity, therefore it is mandatory to maintain separate books of accounts showing all expense related to this activity. To counter this contention Ld AR submitted before us, the principle of law laid by the Hon’ble Apex Court in the case of Aditanar Education Institution Etc. V. Addl Commissioner of Income Tax (1997) 224 ITR 310(SC) which was referred to by the coordinate bench of this tribunal Mumbai in the case of Hiranandani Foundation Vs ADIT reported in (2016) 142 ITR 0152, wherein it was held that:- 12. Regarding the argument pertaining to whether the pharmacy shop is an integral part of the hospital business, as mentioned above, we have perused the relevant paras from the jurisdictional High Court in the case of Baun Foundation Trust (supra), which was of course 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

6 ITA No.08/RPR/2018 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 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." 13. 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. 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. We noticed, 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.

7 ITA No.08/RPR/2018 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 section 11(4A) of the Act. Accordingly, grounds raised by the assessee are allowed. 10. Thus, it was the prayer of Ld AR that the order of Ld AO and Ld CIT(A) were unjustified, without proper and logical appreciation of the facts and thus deserves to be annulled. To support contentions of the assessee, Ld AR further places its reliance on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Pushpawati Singhania Research Institute For Liver, Renal And Digestive Disease, wherein the Hon’ble High Court has held as under :- Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under (Business held in trust) - Assessment year 2008-09 - Where assessee was running a hospital which was approved as a charitable institution under section 12A, its receipts from other hospitals, from outside laboratories and from a drug store within hospital premises would not disentitle it to exemption in terms of section 11(4A) when activities in question were incidental to main activity of hospital itself and were not undertaken with a profit earning motive [In favour of assessee] Where assessee was running a hospital which was approved as a charitable institution under section 12A, its receipts from other hospitals, from outside laboratories and from a drug store within hospital premises would not disentitle it to exemption in terms of section 11(4A) when activities in question were incidental to the main activity of the hospital itself and were not undertaken with a profit earning motive and Tribunal has accepted the contention of the assessee that it maintained separate ledgers for each of the sources of income and thereby fulfilled the requirement of section 11(4A).

8 ITA No.08/RPR/2018 11. The ld. Sr. DR relied on the orders of both the authorities and reiterated their findings Ld DR submitted that both the authorities have appreciated the facts of the case very thoughtfully, passed very well explained and reasoned orders, thus order of the Ld CIT(A) confirming addition made by Ld AO deserves to be upheld. 12. We have heard rival submissions and perused the record carefully as well as the case laws cited by the Ld AR. 13. Apropos, the question raised by the revenue and challenged by the assessee that the activity of purchase and sale of medicine by the assessee society falls within the definition of section 11(4A). To understand the applicability of the provision of section 11(4A) the same is extracted as under:- 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 or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.

9 ITA No.08/RPR/2018 15. To decide this issue, first we need to perceive the literal meaning of words used in section 11(4A) that “shall not apply in relation to any income of a trust or an institution, being profit and gains of business, unless is incidental to the attainment of the objective of the trust”. In the present case purchase and sale of medicine, as contented by the assessee are to be covered by the main charitable activity of the assessee society i.e. “Medical Relief”. Admittedly, running of Hospital by the society was considered by the revenue as an activity for which exemption u/s 11 was granted, but the activity of purchase and sale of medicine was considered as business. Ld CIT(A) has further strengthen the observation of Ld AO by mentioning that from impugned activity the assessee society has earned substantial profits, turnover was also in excess of Rs. 25 Lac thus proviso to section 2(15) will attracted and deduction u/s 11 will not be allowable to the assessee. 16. In view of the facts and circumstances of the present case and on perusal of the legal precedents available, the activity of the purchase and sale of medicine by the assessee society cannot be said to be an activity of business. This activity is ancillary to the main and dominant object of running an hospital under one of the object as prescribed by section 2(15) i.e. “medical relief”, the same cannot be treated or covered under the residuary limb of provisions of section 2(15) as an activity for advancement of any other object of general public utility moreover carrying on of an activity in the nature of trade, commerce or business. Thus, as suggested by the language of provisions of section 11(4A) that

10 ITA No.08/RPR/2018 “shall not apply in relation to any income of a trust or an institution, being profit and gains of business, unless is incidental to the attainment of the objective of the trust”, applied by ld AO on an activity incidental to attainment of the main object of the assessee society, was a bad application of law. After thoughtful deliberation, since, It has been culminated arrived at that the impugned activity is not a business activity, it is an activity ancillary to the main and predominant charitable object of the assessee society, the condition that separate books of accounts should have been maintained for the impugned activity considering the same as a business activity was also a incorrect finding. We are of the considered view that the legal principle laid down under the judgments referred to (supra) are squarely applicable in the present case. Accordingly, the finding of the Ld AO was erroneous, order of Ld CIT(A) confirming the addition was based on improper appreciation of the facts and law, thus deserves to be quashed. Consequently the sole ground of appeal of assessee bifurcated in 2 grounds under this appeal is allowed in terms of our aforesaid observations. 17. In the result, the appeal of assessee is allowed. Order pronounced in pursuance to Rule 34(4) of ITAT Rules, 1963 on 17/10/ 2022. Sd/- Sd/- (RAVISH SOOD) (ARUN KHODPIA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER रायऩुर/Raipur; ददनाांक Dated 17/10/2022 Prakash Kumar Mishra, Sr.P.S

11 ITA No.08/RPR/2018 आदेश की प्रनतलऱपऩ अग्रेपषत/Copy of the Order forwarded to : अऩीऱाथी / The Appellant- 1. 2. प्रत्यथी / The Respondent- आयकर आयुक्त(अऩीऱ) / The CIT(A), 3. आयकर आयुक्त / CIT 4. विभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, रायऩुर/ DR, ITAT, 5. Raipur आदेशानुसार/ BY ORDER, गार्ड पाईऱ / Guard file. 6. सत्यावऩत प्रयत //True Copy// (Assistant Registrar) आयकर अऩीऱीय अधधकरण, रायऩुर/ITAT, Raipur