Pharmacy Vital For Hospital, Its Profits Can't Be Taxed

Pharmacy Vital For Hospital, Its Profits Can't Be Taxed

MUMBAI, 15 JAN 2018: Running a pharmacy is necessary for a hospital to function, reiterated the income-tax appellate tribunal (ITAT), which adjudicates tax disputes. Thus, the income from the pharmacy cannot be treated as ‘business income’ and taxed in the hands of a charitable hospital. In other words, the entire income of the hospital, including the profits from the pharmacy, will continue to be exempt.


This ITAT order was pronounced on January 10, in the case of National Health and Education Society, which operates PD Hinduja National Hospital in Mahim. Large hospitals typically have in-house pharmacies and this order will help mitigate litigation.


In this case, the society (trust) was duly registered under Section 12A of the I-T Act, with the director of I-T (exemptions). Registration under this section is required by entities carrying out charitable activities like medical relief who seek I-T exemption under Section 11. It was also registered with the charity commissioner, Mumbai.


However, during I-T assessment proceedings for the financial year 2011-12, the I-T official noted that the trust was running a pharmacy in the hospital. The sales from this shop were ₹ 42.83 crore with a net surplus of ₹ 16.73 crore.


The trust explained to the I-T official that the drugs were supplied only to in-patients based on doctor’s prescriptions and these charges formed part of the final bill. However, the I-T official pointed out that the trust deed did not debar the hospital from selling medicines to outsiders and the activity of the pharmacy was a systematic business activity. He also pointed out that the trust was not maintaining separate books of accounts for the shop. Thus, the net surplus of ₹ 16.73 crore was treated by him as taxable business income.


The ITAT bench 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.ET Health World