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2016 (7) TMI 260 - ITAT MUMBAI

2016 (7) TMI 260 - ITAT MUMBAI - TMI - Denial of exemption u/s 11 - Violation of provisions of section 11(4A) - non maintaining separate books of account for pharmacy, which is part of hospital run by the assessee trust - Held 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 th .....

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as not spent for the objects of trust. - Therefore, we find that 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( .....

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MEMBER For The Assessee : Shri Chetan A. Karia For The Revenue : Shri A.N. Sontakke, DR ORDER PER D. KARUNAKARA RAO, AM: 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 fol .....

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ssee trust. 2. The Ld CIT (A) erred in confirming action of the AO in estimating income from pharma medicines at ₹ 36,20,520/- and assessing the same as taxable income denying the exemption u/s 11 to the said income. 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 r .....

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(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 ₹ 36,20,520/- was taxed as a business income of the assessee raising the demand of ₹ 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 reason .....

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harmacy. 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 ₹ 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 .....

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of the above, assessee relied on a couple of decisions ie (i) the judgment of the Hon ble High Court in the case of Baun Foundation Trust vs. CCIT (251 CTR 237) and the decision of the Mumbai Bench of the Tribunal in the case of Saifee Hospital Trust vs. Department of Income Tax in ITA No.5686/Mum/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 b .....

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f 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 dismis .....

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ess of pharmacy. Otherwise, for the assessment year 2006-2007, it was observed that assessee purchased medicine to the tune of ₹ 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 .....

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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 const .....

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he 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 o .....

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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 .....

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siness 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 .....

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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 i .....

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1] (247 ITR 785), 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 m .....

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rmacy 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 .....

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hall 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 subclause (vi) or sub-clause (via)] shall apply in relation to an .....

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ose 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 .....

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ncidentally 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 t .....

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ich 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 philanthr .....

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uld 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 run .....

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