Profit Earned by Pharmacy Shop in the Hospital cannot be Taxed, rules ITAT [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal has ruled that, profit earned by pharmacy shop in the hospital run by a Trust cannot be taxed.

The assessee association of persons (Trust) was assessed u/s 143(3) at Rs.16,73,87,860/- after certain adjustments / disallowances as against returned deficit of Rs.17,60,14,128/- filed by the assessee on 24/09/2012. The Trust was registered u/s 12A with DIT (Exemptions) and also registered with Charity Commissioner Bombay. Accordingly, it claimed exemption under Section 11 of the Income Tax Act, 1961.

During Assessment proceedings, it was noted that the assessee trust was running a pharmacy shop in the hospital and achieved turnover of Rs.42.83 Crores with net surplus of Rs.16.73 Crores which translated into profit rate of 39.07%. The turnover of the shop constituted about 12.82% of total hospital collections. The income from the shop, in the opinion of Ld. AO, constituted business income of the assessee in terms of Section 11(4A).

The assessee defended the same on the ground that drugs were supplied only to in-patients upon consultant’s prescription and the charges of the drugs formed part of final patient bill. However, Ld. AO noted that the Trust Deed did not bar the hospital from selling medicines to outsiders and the activity of pharmacy shop was systematic business activity. The Ld. AO further noted that the trust was not maintaining separate books of accounts for the shop. Finally, the net surplus of Rs.16.73 Crores earned from the shop was assessed as business income against which exemption u/s 11 was denied to the assessee on the premises that the shop was not incidental to attainment of objectives of the trust and the assessee failed to maintain separate books of accounts for the same.

The ITAT bench comprising of Judicial Member Joginder Singh and Accountant Member Manoj Kumar Aggarwal observed that the issue under litigation was already decided in favour of the trust by the CIT (appeals) in the preceding two years. The ITAT also relied on an earlier order passed by the Bombay high court and the tax tribunal in case of other taxpayers. These judicial orders had held that maintenance of a pharmacy is ancillary to the dominant object of running a hospital and is an integral part of the hospital. Thus, the requirement of having separate books of accounts for trading of medicines was also not required.