Pharmacy income treatment for hospital trust under section 11(1) denied; tribunal restores exemption and deletes addition.

Denial of exemption under section 11(1) was overturned by ITAT, which held that operation of an in house pharmacy is integral to the hospital's dominant charitable purpose and fulfils requirements for running a chemist division; therefore pharmacy receipts are not business income from a separate independent activity. The tribunal applied the dominant purpose and integral activity reasoning to conclude the hospital remained entitled to exemption, directed deletion of the addition, and allowed the assessee's appeal.

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Issues: Whether the surplus/income of the hospital's pharmacy/chemist division is taxable as business income because separate books of account were not maintained as required under section 11(4A) of the Income-tax Act, 1961, and whether the pharmacy/chemist division is incidental or ancillary to the dominant charitable object of running the hospital for medical relief.

Analysis: Applicable provisions include Section 11(4A) (separate books of account for business activities incidental to charitable purpose), Section 11(1) (exemption of income applied to charitable trusts), and Section 12A (registration/recognition of the trust). The Tribunal examined whether the pharmacy/chemist activity is incidental or ancillary to the dominant object of providing medical relief and whether separate books of account were maintained for the pharmacy division as required by Section 11(4A) of the Income-tax Act, 1961. The Tribunal followed co-ordinate-bench precedent and CBDT guidance recognizing that pharmacies/chemist shops supplying medicines to in-house and out-patients can be incidental to the hospital's dominant charitable purpose, and also noted findings that separate books of account were maintained for the pharmacy division, satisfying the twin conditions of Section 11(4A).

Conclusion: The surplus/income of the pharmacy/chemist division is incidental to the dominant charitable object of the hospital and the assessee satisfies the requirements of Section 11(4A); therefore the addition treating pharmacy income as business income is deleted and the appeals are allowed in favour of the assessee.

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