Itxa1772_17.Doc v. Assessee Is A Trust Running A Hospital

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL (IT) NO.1772 OF 2017 Pr. Commissioner of Income Tax-(Exemption), Mumbai…AppellantVs.The National Health and Education Society …Respondent Mr. Sham Walve a/w. Mr. P. Chatterji for Appellant.Mr. S. C. Tiwari a/w. Ms Rutuju Pawar for Respondent. CORAM : UJJAL BHUYAN,MILIND N. JADHAV, JJ.DATE :FEBRUARY 05, 2020 P.C.: Heard Mr. Walve, learned standing counsel Revenue for theappellant and Mr. Tiwari a/w. Ms Pawar, learned counsel for therespondent - assessee. 2.This appeal has been preferred by the Revenue under Section 260-A of the Income Tax Act, 1961 (‘the Act’ for short) against the orderdated 17.08.2016 passed by the Income Tax Appellate Tribunal, MumbaiBench ‘B’, Mumbai (briefly ‘the Tribunal’ hereinafter) in I.T.A.No.87/Mum/2015 for the assessment year 2010-11. 3.Assessee is a Trust running a hospital. 4.For the assessment year under consideration, respondent had filedreturn of income declaring total income at nil. Following scrutinyassessment, assessing officer noted that respondent runs a pharmacystore in the hospital and was selling drugs and medicines to the patientsthrough this pharmacy store. In the process, it had turnover ofRs.37,29,09,641.00 and surplus of Rs.12,77,07,089.00. Taking the viewthat Section 11(4A) of the Act would not be applicable, the assessingofficer vide the assessment order dated 30.03.2013 treated the surplus amount on account of the pharmacy store as business income liable to betaxed. 5.Aggrieved by the above, respondent preferred appeal before theCommissioner of Income Tax (Appeals) - 1, Mumbai i.e., the firstappellate authority. By the appellate order dated 30.10.2014, the firstappellate authority held that running of the pharmacy was not a businessactivity of the respondent and therefore, application of Section 11(4-A)of the Act was not called for. Consequently, addition and taxability ofthe surplus amount from the pharmacy store was deleted. 6.Against the above decision of the first appellate authority,Revenue preferred appeal before the Tribunal. Tribunal noted that thecase of the respondent was fully covered by its own order dated27.05.2016 in the case of Hiranandani Foundation in I.T.A. No.561/Mum/2016 for the assessment year 2006-07 and following the saiddecision, upheld the order of the first appellate authority by dismissingthe appeal of the Revenue. 7.Hence, the appeal by the Revenue before us. 8.In support of his contention, Mr. Walve has referred to theprovisions of Section 11 of the Act, more particularly sub-section (4A)thereof and submits that assessing officer took the view that thepharmacy was a property held under the Trust and a businessundertaking; therefore, the excess income of such undertaking wasrightly held to be for purposes other than charitable. Accordingly,assessing officer had added the said amount as business income of therespondent. 9.On the other hand, learned counsel for the respondent at the outsetsubmits that Chief Commissioner of Income Tax, Mumbai had passed anorder dated 07.04.2011 granting approval under Section 10(23C)(via) of the Act for the assessment year 2009-10 and onwards in respect of therespondent. When the Chief Commissioner had granted approval underSection 10(23C)(via), it is beyond comprehension as to how theassessing officer could have treated the income earned through thepharmacy store as business income. 9.On the other hand, learned counsel for the respondent at the outsetsubmits that Chief Commissioner of Income Tax, Mumbai had passed anorder dated 07.04.2011 granting approval under Section 10(23C)(via) of the Act for the assessment year 2009-10 and onwards in respect of therespondent. When the Chief Commissioner had granted approval underSection 10(23C)(via), it is beyond comprehension as to how theassessing officer could have treated the income earned through thepharmacy store as business income. 9.1.Learned counsel has also referred to the stand of the respondentbefore the first appellate authority and contends that respondent is notcarrying on any business activity. It does not sell drugs to outsiders butonly charges for the drugs used in the treatment directly from thepharmacy. The admitted patient does not buy any drug. It is essentiallypart of the treatment process. The pharmacy is for in-house / captiveconsumption of the hospital and not for over the counter sale in general.It is not independent in nature. 10.Submissions made by learned counsel for the parties have beenconsidered. Also perused the materials on record. 11.Section 10 of the Act deals with incomes not included in totalincome. It says that in computing the total income of a previous year ofany person, any income falling within any of the clauses mentionedthereunder shall not be included. Sub-section (23C)(via) mentions anyincome received by any person on behalf of any hospital or otherinstitution for the reception and treatment of persons suffering fromillness or mental defectiveness or for the reception and treatment ofpersons during convalescence or of persons requiring medical attentionor rehabilitation, existing solely for philanthropic purposes and not forpurposes of profit. Though there are several provisos to the said clause,those may not be relevant for the purpose of the present appeal. 12.Before we advert to the orders passed by the revenue authoritiesand the case laws, we may also deal with Section 11(4A) of the Act. 12.1. Section 11 mentions the categories of income which are not to beincluded in the total income of the previous year of the person in receiptof income from property held for charitable or religious purposes. As persub-section (4), for the purposes of Section 11, “property held undertrust” includes a business undertaking so held and where a claim is madethat the income of any such undertaking shall not be included in the totalincome of the persons in receipt thereof, the assessing officer shall havethe power to determine the income of such undertaking in accordancewith the provisions of the Act relating to assessment and where anyincome so determined is in excess of the income as shown in theaccounts of the undertaking, such excess shall be deemed to be appliedto purposes other than charitable or religious purposes. 12.2. Sub-section (4A) provides that provisions of sub-section (1) orsub-section (2) or sub-section (3) or sub-section (3A) shall not apply inrelation to any income of a trust or an institution, being profits and gainsof business, unless the business is incidental to the attainment of theobjectives of the trust or the institution and separate books of accountare maintained by such trust or institution in respect of such business. 12.2. Sub-section (4A) provides that provisions of sub-section (1) orsub-section (2) or sub-section (3) or sub-section (3A) shall not apply inrelation to any income of a trust or an institution, being profits and gainsof business, unless the business is incidental to the attainment of theobjectives of the trust or the institution and separate books of accountare maintained by such trust or institution in respect of such business. 13.In the instant case, as already noticed above, assessing officer hadcarried out the exercise under Section 11(4A) of the Act and taking theview that considering the nature, volume, frequency and surplus oftransactions of the pharmacy store, held the same to be a systematicbusiness activity of the respondent and declined to consider it to beincidental to the charitable activity of the respondent trust. Besides,respondent had not maintained separate books of accounts in respect ofthe pharmacy store. It is in these circumstances that assessing officerheld that the conditions prescribed under Section 11(4A) of the Act werenot satisfied by the respondent Trust and accordingly he treated thesurplus amount accruing out of the pharmacy store as business incomeunder Section 11(4A) and brought the same within the taxable amount. 14.In appeal, the first appellate authority noted that respondent wasgranted approval under Section 10(23C)(via) of the Act with effect fromthe assessment year 2009-10 on the satisfaction that respondent wasexisting solely for philanthropic purposes and not for purposes of profit.Therefore, the first appellate authority held that there was no basis totreat the running of pharmacy as a business venture. Running ofpharmacy was part of philanthropic activity of running the hospital. Nomaterials were brought on record by the assessing officer to justify theadverse view taken. Application of Section 11(4A) was not called for.Consequently, the first appellate authority held the addition andtaxability of the surplus out of the pharmacy store to be erroneous andaccordingly the same was directed to be deleted. 15.When the Revenue preferred appeal before the Tribunal, Tribunalrelied upon its decision in the case of Hiranandani Foundation which inturn had relied upon the decision of the Supreme Court in AditanarEducational Institution Vs. Additional Commissioner of Income Tax,(1997) 224 ITR 310 and a decision of this Court in Baun FoundationTrust Vs. Chief Commissioner of Income Tax, 2012 (73) DTR 45 anddismissed the appeal of the Revenue by affirming the order of the firstappellate authority. 16.In the case of Hiranandani Foundation, Tribunal held thatrunning of a pharmacy is a necessary requirement for running of ahospital. It is impossible from a medical point of view that a hospital canrun without a pharmacy. Maintenance of a pharmacy is ancillary to thedominant object of running of a hospital and thus, it is an integral part ofthe hospital. 17.In the present case, Chief Commissioner of Income Tax, Mumbaihad passed an order dated 07.04.2011 granting approval to therespondent for the purpose of Section 10(23C)(via) of the Act for theassessment year 2009-10 and onwards subject to the conditions mentioned therein. When the Chief Commissioner of Income Tax hadgranted approval to the respondent under the aforesaid provision, it isnot understood as to how the assessing officer could have invoked theprovisions of Section 11(4A) of the Act to construe the activity of thepharmacy as a separate business activity and thereafter to tax the incomeaccrued therefrom. 17.In the present case, Chief Commissioner of Income Tax, Mumbaihad passed an order dated 07.04.2011 granting approval to therespondent for the purpose of Section 10(23C)(via) of the Act for theassessment year 2009-10 and onwards subject to the conditions mentioned therein. When the Chief Commissioner of Income Tax hadgranted approval to the respondent under the aforesaid provision, it isnot understood as to how the assessing officer could have invoked theprovisions of Section 11(4A) of the Act to construe the activity of thepharmacy as a separate business activity and thereafter to tax the incomeaccrued therefrom. 18.In Aditanar Educational Institution (supra), Supreme Court wasconsidering exemption granted to an educational institution underSection 10(22) of the Act. As per Section 10(22) of the Act, any incomeof an university or other educational institution existing solely foreducational purposes and not for purposes of profit is not to be includedin the total income of the previous year of any person. In the facts of thatcase, Supreme Court held that after meeting the expenditure, if anysurplus results incidentally from the activity lawfully carried on by theeducational institution, it will not cease to be one existing solely foreducational purposes since the object is not one to make profit. 19.In Baun Foundation Trust (supra) where exemption under Section10(23C)(via) of the Act was in question, this Court referred to thedecision of the Supreme Court in Aditanar Educational Institution(supra) and held that a hospital must of necessity have a section ordepartment where medicines can be dispensed and it is not uncommonfor a medical hospital which exists for philanthropic purposes to have achemist shop where pharmaceutical products are sold. This is a facilitywhich is intended to be used predominantly by patients and theirrelatives. Though members of the general public are not prohibited fromusing the facility, the crucial question to determine is whether theestablishment of the chemist shop is incidental or ancillary to thedominant object and purpose which is to set up and conduct a hospitalfor philanthropic purposes. In the facts of that case it was held thatrunning of the chemist shop was not the dominant object or purpose ofthe trust. 20.Applying the legal principles set out by the judicialpronouncements as above in the context of the statutory provisions to thefacts of the present case, we are of the view that the pharmacy store ofthe respondent was ancillary to the main object of running the hospital.Therefore, income accrued therefrom was incidental to the dominantobject of the respondent i.e., running of the hospital. Thus, the assessingofficer was not justified in treating the pharmacy store of the respondentas a separate business entity and to hold the surplus amount accruedtherefrom as business income under Section 11(4A) of the Act. Thelower appellate authorities have rightly interfered with such decision ofthe assessing officer. We do not find any error or infirmity in the viewtaken by the first appellate authority as affirmed by the Tribunal. 21.Consequently, the appeal fails and is accordingly dismissed. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) Minal Parab