IT APPEAL NOS. 560 TO 563 (MUM.) OF 2016
[ASSESSMENT YEARS 2006-07 TO 2009-10]

D. KARUNAKARA RAO, ACCOUNTANT MEMBER 
AND AMARJIT SINGH, JUDICIAL MEMBER

Chetan A. Karia for the Appellant. 
A.N. Sontakke, DR for the Respondent.

ORDER

D. Karunakara Rao, Accountant Member - There are four appeals under consideration. All these appeals are filed by the assessee involving the assessment years 2006-07 to 2009-2010. Since, the issues raised in all these appeals are identical and also considering the connectivity of these appeals, they are clubbed, heard together and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.
ITA No. 561/M/2016 (AY 2006-2007)

2. This appeal filed by the assessee on 5.2.2016 is against the order of the CIT (A) - I, Mumbai for the assessment year 2006-2007. In this appeal, assessee raised the following grounds which read as under:—

3. Briefly stated relevant facts of the case are that the assessee is a registered charitable trust and engaged in running schools and hospitals. The assessee was established vide trust deed dated 14.12.1983 with the objects of education, medical relief to the poor. Assessee runs a multispecialty hospital at Hiranandani Gardens, Powai and a basic secondary level care hospital at Thane. Assessee filed the return of income declaring the total income at Rs. NIL. The assessment was originally completed u/s 143(3) of the Act on 13.3.2008 for AY 2006-07 and the assessed income was determined at Rs. NIL in the said assessment. Subsequently, the assessment was reopened u/s 148 of the Act vide the notice dated 30.10.2006 and the reassessment was completed on 24.3.2014 u/s 143(3) r.w.s 147 of the Act. In the reassessment, the Assessing Officer segregated the profits earned out of the "pharmacy business" of the said hospital and sum of Rs. 36,20,520/- was taxed as a business income of the assessee raising the demand of Rs. 23,03,223/- for the AY 2006-2007. Assessing Officer is of the opinion that the said profits are not eligible for exemption in view of non compliance to the provision of section 11 (4A) of the Act. Similar demands were raised for similar reasons for the AYs 2007-08; 2008-09 and 2009-2010 and the tax demands raised by the Assessing Officer in all the four AYs are as under:—

The main reason for making the above additions revolves around the condition specified in sub-section 4A of section 11 of the Act i.e. assessee's failure to maintain the separate books of accounts for the business of pharmacy.

4. Relevant facts in this regard include that the assessee runs a pharmacy store in its hospital and the overall turnover of the hospital is above Rs. 4 Crs. The pharmacy turnover is part of it. Assessee buys the medicine and sells the same to the patients at MRP. This pharmacy is located within the premises of the hospital. Before the AO, assessee made elaborate submissions stating that the pharmacy business is "integral" part of the hospital business and the books of accounts since maintained separately for the business of hospital, there exist separate accounts for the pharmacy business as well. As the twin conditions specified in sub-section 4A of section 11 of the Act i.e. (i) incidental to the attainment of the objectives of the Trust and (ii) separate books of account are maintained by such trust or institution in respect of such business are met by the assessee, therefore, the profits of the pharmacy business is entitled for exemption u/s 11(4A) of the Act. In support of the above, assessee relied on a couple of decisions i.e. (i) the judgment of the Hon'ble High Court in the case of Baun Foundation Trust v. Chief CIT [2013] 33 taxmann.com 677 (Bom.) and the decision of the Mumbai Bench of the Tribunal in the case of Saifee Hospital Trust v. Department of Income-tax [IT Appeal No. 5686 (Mum.) of 2011]. The above said decisions are relevant for the proposition that maintaining of pharmacy is incident to the hospital business, which is entitled for exemption u/s 11 of the Act. Once the pharmacy business is incident to the running of a hospital, a consolidated books of account maintained by the hospital business, it meets the requirements of the condition relating to 'maintain the separate books of account' by the Trust.

5. On the other hand, the case of the Revenue is that the assessee cannot claim exemption in relation to any income of the trust (being profits and gains of the business) unless, the business is incidental to the business is incidental to the attainment of the objectives of the Trust and (ii) separate books of account are maintained by such trust or institution in respect of such business. As per the Revenue, hospital business, in any case, requires maintaining the books of accounts for claiming of exemption, about which there is no dispute. In addition, the "pharmacy business" also requires maintaining of the separate books of account in the pharmacy business, if the benefit of exemption is claimed in respect of income from the business of pharmacy. Revenue dismissed the reliance of the assessee on the above cited judgment/orders on the ground that the said decisions were delivered in the context of applying the provisions of section 10(23C) of the Act. Of course, there is no dispute on the fact that the language used in the proviso to section 10(23C) and sub-section 4A of section 11 of the Act is identical. There is no clarity on if the said decisions were delivered on the fact that if the said trust maintained separate books of accounts for the business of pharmacy. Otherwise, for the assessment year 2006-2007, it was observed that assessee purchased medicine to the tune of Rs. 2.4 Crs (rounded of) (para 6.1 of the impugned order) and the said medicines were sold at the rate as exists in the open market. AO noticed that the net profit margin varies from 15-25% of the cost price. AO considered only 15% as the net profit rate and calculated profit @ 15% of the said 2.4 Crs and the income determined as relatable to the pharmacy business at Rs. 36,20,250/-. The said amount was taxed as taxable income of the assessee u/s 11(4A) of the Act.

Similar calculations were done for the other assessment years a well. During the first appellate proceedings, similar contentions were submitted by the assessee and pleaded for relief. Further, assessee submitted that it does not sell medicine to the outside patients but only for the indoor patient or OPD. The contents of para 5.2 constitutes an operational para, where the CIT (A) eventually confirmed the decision of the AO. In this paragraphs, CIT (A) discussed that the pharmacy business constitutes a separate business independent of the hospital business and confirmed the AO's decision in making the said decision for want of separate books of account for pharmacy stores. CIT (A) also discussed the fact of assessee earning 17.18% as a GP rate and dismissed the assessee's contention that it does not have a profit margin. He further mentioned that when such business of pharmacy constitutes an independent business, the pharmacy business of the foundation should nowhere be exempted from the said provisions of section 11 of the Act. Aggrieved with the above decision of the CIT (A), assessee is in appeal before us with the above extracted grounds.

6. During the proceedings before us, Shri Chetan Karia appeared for the assessee. Brining our attention to the facts of the case, Ld Counsel for the assessee mentioned that the issue raised in the grounds stands covered in favour of the assessee. He reiterated the arguments that the "pharmacy business" is an integral part of the hospital business as there cannot be any hospital without a pharmacy store. Pharmacy store is an integral part of the hospital business. Therefore, the assessee maintained a separate books of account for the hospital business including the transactions relating to the pharmacy business. The provisions of sub-section 4A of section 11 mandate the maintenance of separate books of account for all streams of income of the hospital business. He fairly submitted that as such no separate books of accounts are maintained by the Trust exclusively for the pharmacy business. Further, Ld Counsel for the assessee brought our attention to the judgment of the Hon'ble jurisdictional High Court in the case of Baun Foundation Trust (supra) for the proposition that "the activity of chemist's shop is an activity which is incidental or ancillary or incidental to dominant object of running a hospital". Para 4 of the said judgment is relevant. Further, it is also mentioned in the said judgment that 'a hospital must of necessity have a section or department where medicines can be dispensed and it is not uncommon for a medical hospital to have a chemist shop where pharmaceutical products are sold'. Ld Counsel for the assessee is of the view that running of a pharmacy store is a ancillary activity of running of hospital, which is for philanthropic purposes and therefore, assessee is entitled for exemption u/s 11 of the Act.

7. On the other hand, Ld DR for the Revenue relied heavily on the order of the AO and the CIT (A) and the provisions of section 11(4A) of the Act. Reading the provisions of sub-section 4A of section 11 of the Act, Ld DR mentioned that the assessee never intended to claim exemption u/s 11(4A) of the Act with a support of an argument that revolves around the integral business operations of the pharmacy shop with the hospital business. Ld DR argued that the trust has business of running a hospital, business of running schools and also business of running a pharmacy shop. The requirement of maintaining the separate books of account for pharmacy shop to become eligible for exemption u/s 11 of the Act was not met by the assessee. When a pharmacy shop in the open market maintains separate books of account, why should the assessee fail to do so and resort to include trading transaction of medicine in the hospital business. He also dismissed the assessee's argument that the medicines / drugs are not sold, the way they are sold in the open market. Earlier, Ld Counsel for the assessee submitted that the medicines were charged in the comprehensive bill raised in a client's case which also includes the other charges i.e. Doctor fees, theatre charges etc. Considering the intricate linkage of the medicine to the patient through the direct intervention of the Doctors, maintaining the books of account is not as easy as the one maintained by the pharmacy shops in the open market. These things were dismissed by the Ld DR for the Revenue who mentioned that the pharmacy is an independent business activity so far as maintenance of books of accounts is concerned. He also distinguished the other judgments by stating that the same were delivered in favour of the respective assessee in the factual matrix of the maintenance of the books of accounts for the pharmacy stores by the respective assessees. Further, he mentioned that the said decisions were not delivered in the context of 11(4A) of the Act, about which there is no dispute. Further, he brought our attention to the reported decision of the Tribunal in the case of Indian Machine Tools Mfrs. Association v.Asstt. DIT [1999] 70 ITD 304 (Mum.) and submitted that the said assessee was not granted exemption u/s 11 in respect of the certain receipts earned by them when books of accounts were not maintained. Further, relying on the judgment of the Hon'ble Supreme Court in the case of Asstt. CIT v. Thanthi Trust [2001] 247 ITR 785/115 Taxman 126 (SC), Ld DR submitted that books of accounts have to be maintained. During rebuttal time, Ld Counsel for the assessee brought our attention to the said judgment in the case of Thanti Trust (supra) and mentioned that in case of any ambiguity in the language/law, the benefit should be given in favour of the assessee.

8. We have heard both the parties and perused the orders of the Revenue Authorities as well as the decisions cited by both the Ld Representatives and also the relevant material placed before us. 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.

9. On the contrary, the case of the assessee is that the running of a hospital includes a run 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.

10. 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 "

Further, as cited by the assessee, we have also examined the relevant proviso to section 10(23C) of the Act and the relevant portions are extracted as under:—

"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 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;"

11. 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 assessee on the applicability of the cited judgements.

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 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. 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.

14. Considering the commonality of the issue raised in all the other appeals for the AYs 2007-08; 2008-09 and 2009-2010, the decision given by us in the above paragraphs of this order while adjudicating the appeal for the AY 2006-07 squarely applies to the said three appeals too. Accordingly, grounds raised by the assessee in its appeals for the AYs 2007-08; 2008-09 and 2009-2010 are allowed.

15. In the result, all the four appeals of the assessee are allowed.