TaxTMI 
TaxTMI 
2022 (5) TMI 1405
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....er claiming revenue expenses including depreciation. The Assessing Officer while framing the assessment u/s 143(3) of the Act on 27.03.2014, assessed the total income of the assessee at Rs.7,63,80,700. The Assessing Officer made various disallowances which were confirmed by the CIT(A). On further appeal before the coordinate bench of the Tribunal, the assessee got substantial relief. The revenue preferred an appeal before the Hon'ble Karnataka High Court on the following question of law "1. "whether on the facts and the in the circumstances of the case, the Tribunal is right in law in treating the pharmacy income as income of charitable trust inspite of the same is rightly considered as business income as the assessee does not maintain separate books of account and even when the Tribunal has not given finding about the medicines sold to the public is negligible or not. 2. Whether on the facts and the in the circumstances of the case, the Tribunal is rightin calculating 15% for accumulation on gross receipts instead of net receipts by relying on the decision in the case of Franciscan Sisters of St.Joseph Society of Chennai ITAT Bench where nature of receipts in the case of asse....
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....al to the running of the hospital and would constitute an integral part of the hospital run by the assessee. The assessee, submitted that it is incidental to the objects of the trust and that the sales of the pharmacy is duly considered for the purpose of application of income. The CIT(A) dismissed the contentions of the assessee on the basis that the assessee has not furnished any evidence regarding the breakup of the medicines purchased from the pharmacy by different categories of the patients i.e. those using the hospital services and outside public. Accordingly, the CIT(A) has confirmed the action of the A.O. 6. The Co-ordinate Bench of the Tribunal allowed the appeal in favour of the assessee by holding that the entire income from pharmacy business cannot be treated as business income merely because the assessee is unable to provide details of sales made to indoor/outdoor patients and the outside public when the pharmacy is within the premises of the hospital and attached to the hospital. The Hon'ble Tribunal in this regard placed reliance on the decision of the Chennai Bench of the Tribunal in the case of M/s.Franciscan Sisters of St.Joseph Society No.VIII v. JCIT in ITA No.....
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.... draw a trading account. 11. The ground on which the AO denied the exemption is that the assessee is not maintaining separate set of books though he was able to identify the pharmacy business related details from the ledger accounts maintained by the assessee. The AO has also stated that the assessee is able to generate gross profit out of running the pharmacy and hence justified treatment of the same as business income. The CIT(A) upheld the AO's views stating that if reliance placed by the assessee in the case of M/s.Franciscan Sisters of St.Joseph Society (supra) needs to be accepted, then there should be clear breakup of medicines purchased by different categories of patients i.e. indoor, outdoor and outside public. However from the perusal of the records there is no evidence to show that the CIT(A) called for the breakup and that the assessee could not produce the same from the ledger accounts. 12. We notice that the Hon'ble Chennai Bench of the ITAT in the case of M/s.Franciscan Sisters of St.Joseph Society (supra), held that 12. The first item so considered by the assessing authority is the receipts from pharmacy section. It is to be seen that assessee is running a fullf....
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....accounting and internal control. Even in the case of charitable hospital, it is not possible to provide medicines to every patient, free of cost. It is only in very deserving cases, a charitable institution could provide medicines free of cost. Therefore, running of a pharmacy set up as part of the hospital, involves purchase and sale of medicines. Therefore, not much discussion is necessary to come to a conclusion that in the case of a full-fledged hospital, pharmacy is an essential part thereof and as such, the pharmacy is run as part of the hospital establishment. 14. In the facts and circumstances, we find that the collection received by the assessee from its pharmacy section cannot be excluded from computing the income eligible for exemption under Section 11 of the Income-tax Act, 1961. The pharmacy collection also forms part of the collections accounted by the assessee from its charitable activities. Therefore, Assessing Officer is directed to give exemption under Section 11 in respect of the pharmacy collection as well 13. From the above it becomes clear that the decision of treating the pharmacy income as eligible for exemption u/s.11 is taken on the basis that the run....
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....levant 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 subclause (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;" 26. 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 assesse. 27. Regarding the argument pertaining to whether the pharmacy shop is an integral part of the hospital business, as mentioned above, we find that the High Court of Bombay in the case of Baun Foundation Trust Vs. CCIT (73 DTR 45), which was delivered in the ....
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....n 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." 28. 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. 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 repor....