National Health & Education Society v. Asstt. Director Of Income Tax (Exemption ) Ii(2)Mumbai

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO.1197 OF 2014WITH WRIT PETITION NO.1198 OF 2014 National Health & Education Society....Petitioner. vs. Asstt. Director of Income Tax (Exemption ) II(2)Mumbai....Respondent. Mr. S.C. Tiwari with Ms. Natasha Mangat for the Petitioner.Ms. Padma Divakar with Mr. Tejveer Singh for the Respondent. CORAM : M. S. SANKLECHA AND N.M. JAMDAR, JJ.DATE : 25 AUGUST 2014 DATE : PC: These two petitions are directed against two impugned notices both dated 28 March 2013 issued under Section 148 of the Income Tax Act, 1961 (“the Act”) seeking to reopen the assessment for Assessment Year 2006-07 and 2008-09 respectively. 2)The impugned notice dated 28 March 2013 in respect of Assessment Year 2006-07 is beyond the period of 4 years from the end of the Assessment Year 2006-07.While the impugned notice dated 28 March 2013 for Assessment Year 2008-09 is within a period of 4-years from the end of the relevant Assessment Year. Save the above difference the facts are identical. For the purposes of this order we refer to the facts for Assessment Year 2006-07. ASN 3)For the Assessment Year 2006-07 the petitioner had filed its Return of Income on 28 October 2006 declaring a deficit of Rs.12.48 crores. This was on the basis of claiming exemption under Section 11 of the Act. At that time petitioner's application for approval under Section 10(23G)(via) of the Act was pending before the Chief Commissioner of Income Tax. The Assessing Officer on 15 December 2008 passed an Assessment order under Section 143(3) of the Act accepting the petitioner's return of income holding it to be exempt under Section 11 of the Act. 4)The reasons forwarded to the petitioner in support of the impugned notices for the Assessment Year 2006-07 and 2008-09 are identical in nature and the reasons for Assessment Year 2006-07 reads as under:- 1Section-11(4A) states that, Sub section (1) or sub section (2) of sub section (3) or sub section(3A) shall 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 or, as the case may be, institution and separate books of account are maintained by such trust or institution in respect of such business. 2.During assessment proceedings for AY 2010-11 new facts that have to come to notice that Assessee runs a pharmacy store in its hospital and it has turnover of Rs.37,29,09.641. Assessee sell drugs and medicine to the patients through this pharmacy store. It has got a surplus of Rs.12,77,07,089 on the transaction of pharmacy store. 3.Profit of pharmacy store comes at 34.24% of its turnover. Turnover of pharmacy store is around 14% of total hospital collections from inpatient and out patient charges. 4.Though assessee claims that it does not sell medicines to outside patients meaning which are not registered at hospital as patients indoor or OPD trust deed of assessee does not bar hospital from selling medicines to outsiders. Nevertheless its sells medicines to its indoor and outdoor patients. 5.It can be seen that turnover of pharmacy store is around 14% of total hospital collections. Thus seeing its turnover it cannot be said to be minor, accidental and mere accompanying activity as is expected when the words used in the law are “incidental to charitable purpose”. 6.Further profit out of this pharmacy store is not minor and is around 34% of pharmacy store turnover. 7.The nature, volume, frequency and surplus of these transactions clearly shows that it is systematic business activity of the assessee trust. Moreover, considering these facts it cannot be said to be minor, accidental and mere accompanying activity to its main objects. 5.It can be seen that turnover of pharmacy store is around 14% of total hospital collections. Thus seeing its turnover it cannot be said to be minor, accidental and mere accompanying activity as is expected when the words used in the law are “incidental to charitable purpose”. 6.Further profit out of this pharmacy store is not minor and is around 34% of pharmacy store turnover. 7.The nature, volume, frequency and surplus of these transactions clearly shows that it is systematic business activity of the assessee trust. Moreover, considering these facts it cannot be said to be minor, accidental and mere accompanying activity to its main objects. 8.Second and equally important condition to be fulfilled by assessee trust to claim exemption of this pharmacy surplus is to maintain separate books of accounts in respect of the same. However, assessee has not maintained separate books of accounts in respect of pharmacy store. Here merely maintaining some ledgers of medicines purchase and sales does not amount to maintaining separate books of accounts. Assessee has to maintain separate books of accounts for its every receipts and expenses in respect of pharmacy and submit separate balance sheet and income expenditure statement in respect of pharmacy store while filing the return of income as it does in case of its other activities. The same has not complied with by assessee trust. Thus it is clear that assessee has not maintained separate books of accounts in respect of pharmacy store and has not complied with that particular condition as required under the law. 9.In view of above detailed discussion it is clear that surplus of Rs.12,77,07,089 out of pharmacy store is liable to be treated as business income under Section 11(4A) separately and taxed accordingly. 10.This practice of running pharmacy store business without maintaining separate books of accounts for the same are required u/s.11(4A) is being followed by assessee continuously since long back in past. Same is true for AY 2006-07 as well. Assessee has to submitted any separate balance sheet and income and expenditure statement in respect of pharmacy store as a result of separate books of accounts if any, which has resulted into failure on the part of assessee to disclose these facts on this issue for AY 2006-07. In view of this I have reason to believe that income of more than Rs.1000.00 chargeable to be taxed as business income u/s. 11 (4A) for AY 2006-07 has escaped assessment. In view of this the approval for reopening assessee's case for AY 2006-07 on this ground is sought.” 5)The petitioner filed its objection to the reasons in support of the impugned notices for Assessment Year 2006-07 and Assessment Year 2008-09. However, the Assessing Officer rejected the objections by two orders dated 21 February 2013 for Assessment Year 2006-07 and 2008-09. 5)The petitioner filed its objection to the reasons in support of the impugned notices for Assessment Year 2006-07 and Assessment Year 2008-09. However, the Assessing Officer rejected the objections by two orders dated 21 February 2013 for Assessment Year 2006-07 and 2008-09. 6)The grievance of the petitioner is that impugned notices are without jurisdiction on the ground that the petitioner had disclosed fully and truly all material facts necessary for assessments. Besides on merits there can be no reason to believe that income chargeable to tax has escaped assessment on the activity of pharmacy carried out at the hospital as the issue stands concluded in favour of the petitioner by virtue the of decision of this Court in Baun Foundation Trust vs. Chief Commissioner of Income Tax and anr. 73 DTR (Bom) 45. The petitioner submit that pharmacy store which is run by it is utilized to serve the dominant object of the Trust i.e. running hospital and treating patients. In any event it is submitted that for Assessment Year 2009-10, the Chief Commissioner of Income Tax has granted the petitioner approval under Section 10(23)(via) of the Act by order dated 7 April 2011. At that time the Chief Commissioner of Income Tax considered the activity of the petitioner in running the pharmacy store and granted approval. In view of the above, it is the submission of the petitioner that the impugned notices are without jurisdiction and need to be set aside. 7)As against the above Mr. Tejveer Singh reiterates the reasons mentioned in the impugned notice as well as order disposing of the objection dated 21 February 2014. 8)The entire issue would require factual determination. The reasons in support of the impugned notices states that the activity of pharmacy came to the notice of the Assessing Officer only during the assessment proceedings for Assessment Year 2010-11. The petitioner were not able to point out that the revenue was aware of its above activity at the time of passing the order under Section 143(3) of the Act for Assessment Year 2006-07 or 2007-08. The reliance by the petitioner upon the approval under Section 10(23C) (via) of the Act dated 7 April 2011 for Assessment Year 2009-10 granted by the Chief Commissioner of Income Tax is of no assistance to the petitioner as it deals with an application for a subsequent assessment year and the facts to be examined are those as existing in the earlier Assessment year 2006-07 and 2008-09. The grant of approval under Section 10(23C) (via) of the Act has to be examined /evaluated independently for each Assessment Year. Besides the reliance upon the decision of this Court in Baun Foundation Trust (supra) is misplaced as it dealt with a rejection of application for approval under Section 10(23C) (via) of the Act. Besides the turnover in the above case attributable to the pharmacy/chemist shop was between 3% to 5% of total turnover as against in this case is very much higher as indicated in the reasons for reopening. Moreover, even if the activity of the pharmacy (Chemist shop) is incidental to the charitable objects of the petitioner, the petitioner would still have to satisfy the provisions of Section 11(4A) of the Act. All these issues requires factual determination which can be best done by the Assessing Officer in reassessment proceedings. Thus, it cannot be said that the impugned notices are without jurisdiction. 9)In the above view, we see no reason to entertain the present petition and injunct the Assessing Officer from proceeding further with the impugned notices. The petitioner is at liberty to raise all contentions before the Assessing Officer during the reassessment proceedings. ASN 9)In the above view, we see no reason to entertain the present petition and injunct the Assessing Officer from proceeding further with the impugned notices. The petitioner is at liberty to raise all contentions before the Assessing Officer during the reassessment proceedings. ASN 10)In respect of the petitioner's application for grant of approval under Section 10(23C)(via) of the Act for the Assessment Year 2006-07 and 2008-09 which are stated to be pending with the Chief Commissioner of Income Tax, it is made clear that it is open to the petitioner to make an application for expeditious disposal of the pending application under Section 10(23C)(via) of the Act. If made, the application for approval shall be disposed of by the Chief Commissioner of Income Tax as expeditiously as possible. However, it is made clear that there is no stay of the reassessment proceeding consequent to the impugned notices dated 28 March 2013 for reassessment for Assessment Year 2006-07 and 2008-09. 11)Both the petitions are rejected. No order as to costs. ( N. M. JAMDAR, J.) (M.S. SANKLECHA, J.)