Court rules pharmacy income integral to hospital exempt from business tax

The High Court of Karnataka remanded the issue of treating income from a pharmacy attached to a hospital as business income to the Tribunal. The Tribunal ruled in favor of the assessee, holding that the pharmacy income should not be treated as business income due to its integral nature to the hospital's operations. The Tribunal emphasized that maintaining separate ledger accounts for the pharmacy sufficed for identification of transactions, meeting the conditions for exemption under section 11. The court allowed the appeal, directing the deletion of the addition made by the Assessing Officer and confirming the eligibility of pharmacy income for exemption.

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Issues Involved:
1. Treatment of income from pharmacy attached to the hospital as business income.
2. Calculation of 15% accumulation on gross receipts instead of net receipts.

Issue 1: Treatment of Income from Pharmacy Attached to the Hospital as Business Income

The Hon'ble High Court of Karnataka remanded the issue of treatment of income from the pharmacy attached to the hospital as business income to the Tribunal. The assessee, a charitable and educational trust, operates a pharmacy within the hospital premises. The Assessing Officer (AO) treated the pharmacy income as business income, denying exemption under section 11 of the Income Tax Act due to the lack of separate books of account for the pharmacy. The CIT(A) upheld the AO's decision, emphasizing the absence of evidence regarding the breakup of medicines sold to different categories of patients.

The Tribunal, however, had previously ruled in favor of the assessee, holding that the pharmacy income should not be treated as business income merely because separate books were not maintained. The Tribunal relied on the decision in the case of M/s. Franciscan Sisters of St. Joseph Society, where it was held that the pharmacy is an integral part of the hospital and not a separate business entity.

Upon remand, the Tribunal reiterated that the pharmacy is incidental to the hospital's operations and thus integral to the trust's objectives. The Tribunal noted that the assessee maintained separate ledger accounts for the pharmacy, which sufficed for identifying the pharmacy-related transactions. The Tribunal also referenced its earlier decision in the case of Karnataka Chinmaya Trust, affirming that running a pharmacy is essential for hospital operations and does not constitute an independent business activity. Therefore, the conditions of section 11(4A) regarding the maintenance of separate books were deemed met, and the pharmacy income was held eligible for exemption under section 11.

Issue 2: Calculation of 15% Accumulation on Gross Receipts Instead of Net Receipts

The Hon'ble Karnataka High Court had already ruled in favor of the assessee on this issue, allowing the calculation of 15% accumulation on gross receipts. This issue was not remanded back to the Tribunal and thus was not further deliberated in this judgment.

Conclusion:

The Tribunal concluded that the income from the pharmacy, being an integral part of the hospital operations and incidental to the trust's objectives, is eligible for exemption under section 11. The appeal filed by the assessee was allowed, and the AO was directed to delete the addition made in this regard. The judgment emphasized that the incidental sale of medicines to the public does not change the nature of the pharmacy's operations as part of the hospital.

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