ITXA1772_17.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1772 OF 2017 Pr. Commissioner of Income Tax-(Exemption), Mumbai Appellant Vs. 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 appellant and Mr. Tiwari a/w. Ms Pawar, learned counsel for respondent - assessee. 2. This appeal has been preferred by Revenue under Section 260-A of Income Tax Act, 1961 (the Act for short) against order dated 17.08.2016 passed by Income Tax Appellate Tribunal, Mumbai Bench B, Mumbai (briefly Tribunal hereinafter) in I.T.A.No.87/ Mum/2015 for assessment year 2010-11. 3. Assessee is Trust running hospital. 4. For assessment year under consideration, respondent had filed return of income declaring total income at nil. Following scrutiny assessment, assessing officer noted that respondent runs pharmacy store in hospital and was selling drugs and medicines to patients through this pharmacy store. In process, it had turnover of Rs.37,29,09,641.00 and surplus of Rs.12,77,07,089.00. Taking view that Section 11(4A) of Act would not be applicable, assessing officer vide assessment order dated 30.03.2013 treated surplus 1/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc amount on account of pharmacy store as business income liable to be taxed. 5. Aggrieved by above, respondent preferred appeal before Commissioner of Income Tax (Appeals) - 1, Mumbai i.e., first appellate authority. By appellate order dated 30.10.2014, first appellate authority held that running of pharmacy was not business activity of respondent and therefore, application of Section 11(4-A) of Act was not called for. Consequently, addition and taxability of surplus amount from pharmacy store was deleted. 6. Against above decision of first appellate authority, Revenue preferred appeal before Tribunal. Tribunal noted that case of respondent was fully covered by its own order dated 27.05.2016 in case of Hiranandani Foundation in I.T.A. No.561/ Mum/2016 for assessment year 2006-07 and following said decision, upheld order of first appellate authority by dismissing appeal of Revenue. 7. Hence, appeal by Revenue before us. 8. In support of his contention, Mr. Walve has referred to provisions of Section 11 of Act, more particularly sub-section (4A) thereof and submits that assessing officer took view that pharmacy was property held under Trust and business undertaking; therefore, excess income of such undertaking was rightly held to be for purposes other than charitable. Accordingly, assessing officer had added said amount as business income of respondent. 9. On other hand, learned counsel for respondent at outset submits that Chief Commissioner of Income Tax, Mumbai had passed order dated 07.04.2011 granting approval under Section 10(23C)(via) of 2/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc Act for assessment year 2009-10 and onwards in respect of respondent. When Chief Commissioner had granted approval under Section 10(23C)(via), it is beyond comprehension as to how assessing officer could have treated income earned through pharmacy store as business income. 9.1. Learned counsel has also referred to stand of respondent before first appellate authority and contends that respondent is not carrying on any business activity. It does not sell drugs to outsiders but only charges for drugs used in treatment directly from pharmacy. admitted patient does not buy any drug. It is essentially part of treatment process. pharmacy is for in-house / captive consumption of hospital and not for over counter sale in general. It is not independent in nature. 10. Submissions made by learned counsel for parties have been considered. Also perused materials on record. 11. Section 10 of Act deals with incomes not included in total income. It says that in computing total income of previous year of any person, any income falling within any of clauses mentioned thereunder shall not be included. Sub-section (23C)(via) mentions any income received by any person on behalf of any hospital or other institution for reception and treatment of persons suffering from illness or mental defectiveness or for reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit. Though there are several provisos to said clause, those may not be relevant for purpose of present appeal. 12. Before we advert to orders passed by revenue authorities and case laws, we may also deal with Section 11(4A) of Act. 3/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc 12.1. Section 11 mentions categories of income which are not to be included in total income of previous year of person in receipt of income from property held for charitable or religious purposes. As per sub-section (4), for purposes of Section 11, property held under trust includes business undertaking so held and where claim is made that income of any such undertaking shall not be included in total income of persons in receipt thereof, assessing officer shall have power to determine income of such undertaking in accordance with provisions of Act relating to assessment and where any income so determined is in excess of income as shown in accounts of undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. 12.2. Sub-section (4A) provides that provisions of sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of trust or institution, being profits and gains of business, unless business is incidental to attainment of objectives of trust or institution and separate books of account are maintained by such trust or institution in respect of such business. 13. In instant case, as already noticed above, assessing officer had carried out exercise under Section 11(4A) of Act and taking view that considering nature, volume, frequency and surplus of transactions of pharmacy store, held same to be systematic business activity of respondent and declined to consider it to be incidental to charitable activity of respondent trust. Besides, respondent had not maintained separate books of accounts in respect of pharmacy store. It is in these circumstances that assessing officer held that conditions prescribed under Section 11(4A) of Act were not satisfied by respondent Trust and accordingly he treated surplus amount accruing out of pharmacy store as business income under Section 11(4A) and brought same within taxable amount. 4/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc 14. In appeal, first appellate authority noted that respondent was granted approval under Section 10(23C)(via) of Act with effect from assessment year 2009-10 on satisfaction that respondent was existing solely for philanthropic purposes and not for purposes of profit. Therefore, first appellate authority held that there was no basis to treat running of pharmacy as business venture. Running of pharmacy was part of philanthropic activity of running hospital. No materials were brought on record by assessing officer to justify adverse view taken. Application of Section 11(4A) was not called for. Consequently, first appellate authority held addition and taxability of surplus out of pharmacy store to be erroneous and accordingly same was directed to be deleted. 15. When Revenue preferred appeal before Tribunal, Tribunal relied upon its decision in case of Hiranandani Foundation which in turn had relied upon decision of Supreme Court in Aditanar Educational Institution Vs. Additional Commissioner of Income Tax, (1997) 224 ITR 310 and decision of this Court in Baun Foundation Trust Vs. Chief Commissioner of Income Tax, 2012 (73) DTR 45 and dismissed appeal of Revenue by affirming order of first appellate authority. 16. In case of Hiranandani Foundation, Tribunal held that running of pharmacy is necessary requirement for running of hospital. It is impossible from medical point of view that hospital can run without pharmacy. Maintenance of pharmacy is ancillary to dominant object of running of hospital and thus, it is integral part of hospital. 17. In present case, Chief Commissioner of Income Tax, Mumbai had passed order dated 07.04.2011 granting approval to respondent for purpose of Section 10(23C)(via) of Act for assessment year 2009-10 and onwards subject to conditions 5/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc mentioned therein. When Chief Commissioner of Income Tax had granted approval to respondent under aforesaid provision, it is not understood as to how assessing officer could have invoked provisions of Section 11(4A) of Act to construe activity of pharmacy as separate business activity and thereafter to tax income accrued therefrom. 18. In Aditanar Educational Institution (supra), Supreme Court was considering exemption granted to educational institution under Section 10(22) of Act. As per Section 10(22) of Act, any income of university or other educational institution existing solely for educational purposes and not for purposes of profit is not to be included in total income of previous year of any person. In facts of that case, Supreme Court held that after meeting expenditure, if any surplus results incidentally from activity lawfully carried on by educational institution, it will not cease to be one existing solely for educational purposes since object is not one to make profit. 19. In Baun Foundation Trust (supra) where exemption under Section 10(23C)(via) of Act was in question, this Court referred to decision of Supreme Court in Aditanar Educational Institution (supra) and held that hospital must of necessity have section or department where medicines can be dispensed and it is not uncommon for medical hospital which exists for philanthropic purposes to have chemist shop where pharmaceutical products are sold. This is facility which is intended to be used predominantly by patients and their relatives. Though members of general public are not prohibited from using facility, crucial question to determine is whether establishment of chemist shop is incidental or ancillary to dominant object and purpose which is to set up and conduct hospital for philanthropic purposes. In facts of that case it was held that running of chemist shop was not dominant object or purpose of trust. 6/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 ITXA1772_17.doc 20. Applying legal principles set out by judicial pronouncements as above in context of statutory provisions to facts of present case, we are of view that pharmacy store of respondent was ancillary to main object of running hospital. Therefore, income accrued therefrom was incidental to dominant object of respondent i.e., running of hospital. Thus, assessing officer was not justified in treating pharmacy store of respondent as separate business entity and to hold surplus amount accrued therefrom as business income under Section 11(4A) of Act. lower appellate authorities have rightly interfered with such decision of assessing officer. We do not find any error or infirmity in view taken by first appellate authority as affirmed by Tribunal. 21. Consequently, appeal fails and is accordingly dismissed. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) Minal Parab 7/7 Uploaded on - 28/02/2020 Downloaded on - 03/03/2020 14:24:32 Pr. Commissioner of Income-tax (Exemption), Mumbai v. National Health And Education Society