2021 (11) TMI 1070 - AT - Income Tax

Hospital's Pharmacy Unit Integral to Charitable Activities, Tribunal Upholds Decision

The Dy. Commissioner of Income tax (Exemption), Circle-1, Bengaluru Versus M/s Karnataka ChinmayaSeva Trust

The Dy. Commissioner of Income tax (Exemption), Circle-1, Bengaluru Versus M/s Karnataka ChinmayaSeva Trust - TMI Issues Involved:1. Whether the CIT(A) was correct in directing the AO to delete the addition under Section 11(4A) of the Income Tax Act, 1961, made on account of income from the Pharmacy Unit.2. Whether the assessee was required to maintain separate books of accounts for the Pharmacy Unit.3. Whether the activities carried out by the assessee with respect to the Pharmacy Unit are in the nature of business, thereby attracting the provisions of Section 11(4A).Issue-wise Detailed Analysis:1. Deletion of Addition under Section 11(4A):The Revenue contended that the CIT(A) incorrectly directed the deletion of the addition under Section 11(4A) made by the AO on account of income from the Pharmacy Unit. The AO had computed a net surplus from the Pharmacy Unit and considered it separately under Section 11(4A), stating that the assessee was running it as a business venture rather than a charitable entity. The CIT(A) observed that the Pharmacy Unit was not a separate entity but part of Chinmaya Mission Hospital, maintained with the objective of providing medical relief, which is one of the trust’s charitable objectives. The CIT(A) relied on the Supreme Court judgment in Aditanar Educational Institute, which held that if the predominant object is charitable, the organization does not lose its charitable character merely because some surplus arises from the activity.2. Requirement to Maintain Separate Books of Accounts:The Revenue argued that the assessee did not maintain separate books of accounts for the Pharmacy Unit, as required under Section 11(4A). The CIT(A) found that the Pharmacy Unit was an integral part of the hospital and not a separate business entity. The assessee maintained records of purchases, sales, and inventory for the Pharmacy Unit and paid VAT to the government, which was considered sufficient. The Tribunal agreed with the CIT(A) that the Pharmacy Unit was ancillary to the hospital’s operations and that maintaining separate books of accounts for the Pharmacy Unit was not necessary under the circumstances.3. Nature of Activities of the Pharmacy Unit:The Revenue asserted that the Pharmacy Unit’s activities were in the nature of business, thus attracting the provisions of Section 11(4A). The CIT(A) and the Tribunal held that the Pharmacy Unit’s operations were incidental to the hospital’s charitable objective of providing medical relief. The Tribunal noted that the pharmacy was essential for the hospital’s functioning, as it provided medicines to inpatients and outpatients. The Tribunal also referenced the Bombay High Court’s decision in Baun Foundation Trust, which supported the view that a pharmacy within a hospital is an ancillary activity and integral to the hospital’s operations.Conclusion:The Tribunal dismissed the Revenue’s appeals, affirming that the Pharmacy Unit was an integral part of the hospital’s charitable activities and that the assessee was not required to maintain separate books of accounts for the Pharmacy Unit under Section 11(4A). The Tribunal upheld the CIT(A)’s decision to delete the addition made by the AO, concluding that the Pharmacy Unit’s operations did not constitute a separate business but were incidental to the hospital’s charitable purpose. Consequently, the Tribunal also dismissed the cross-objections filed by the assessee.