Income Tax Assessment issues of Private Hospitals, Nursing Homes etc.
Auditing Requirement for Private Hospitals, Nursing Homes etc
- When an entity’s total income for the previous year exceeded the maximum amount not chargeable to income tax in respect of the following entities (without taking into account the exemptions available under the provisions referred to against such entity), the entity must have its accounts audited in Form 10BB.
- Section 10(23C) refers to hospitals and other medical institutions (except than those completely or substantially sponsored by the government or those with annual earnings of less than one crore) (via).
- These entities must receive a report in Form 10BB from a Chartered Accountant, using the format of the audit report stipulated in Form No. 10BB under rule 16CC.
- The audit report must be filed online. It is a legal requirement to file a tax return. [Proviso to rule 12(2)]
- Hospitals and other medical institutions covered by section 10(23C)(via) will be obliged to file their income tax returns.
Running & Maintaining a chemist’s shop within a hospital
- The Chief Commissioner of Income Tax has acknowledged that the excess obtained through the operation of a pharmacist store is used for the purposes of the hospital, thus the application for permission under section 10(23C)(via) could not be denied on the basis of running a chemist shop in the hospital. The operation of a chemist store is a secondary or accessory activity to the primary mission and purpose of running a hospital. In this scenario, the primary goal of the trust is not to run a chemist store. [Baun Foundation Trust v. Chief CIT and Others, 2012 (Bombay)]
Payments paid to hospitals by assessee for medical services supplied by hospitals were subject to TDS under section 194J because the assessee-trust served as a nodal agency for the State of Andhra Pradesh in providing health care coverage to persons.
- The assessee was a trust established by the State of Andhra Pradesh to serve as an independent nodal agency of the state government in providing health care coverage to citizens through a medical insurance plan.
- For the purpose of managing the plan, the assessee paid direct payments to various hospitals in accordance with MOUs it had signed with them. The Assessing Officer used section 194J to hold the assesses liable for withholding tax at source while making payments to hospitals under section 194J.
- The order of the Assessing Officer was affirmed by the Commissioner (Appeals). Due to the provisions of section 194J, both the assessee and the hospitals to which payments had been made clearly constituted a ‘person’ as defined under section 2(31), and the services rendered by hospitals, being medical services, also fell within the scope of professional services as defined under section 194-J.
- As a result, there should be no doubt about the assessee’s need to deduct tax at source when making payments to hospitals. However, only the fee for professional services component of each payment made by the assessee to hospitals was covered by section 194J, not the parts of payment for bed costs, medications, follow-up services, outpatient services, transportation expenses, and other similar payments. [Partially in the assessee’s favour] [Arogya Sri Health Care Trust v. ITO (TDS) (ITAT Hyderabad)]
The assessee-hospital employed some doctors on a set monthly remuneration basis, and the doctors were subject to the assessee-service hospital’s rules; the remuneration given was taxable as “salaries” and subject to tax deduction under section 192.
- On the basis that doctors were appointed as consultants and there was no employer-employee connection, the assessee-hospital was deducting TDS from payments paid to them under section 194J. However, it was obvious from appointment orders issued to doctors that they were paid a fixed compensation that had nothing to do with money earned from patients treated by them, and that they were subject to assessee service norms.
- Furthermore, it was stated in the appointment order that it was a contract for work and that doctors were required to retire at the age of 58. Doctors’ remuneration was taxed under the heading’salaries,’ and was subject to tax deductions under section 192, rather than the provisions of section 194J. [DCIT v. Wockhardt Hospitals Ltd. (2013) (ITAT Hyderabad)]
CBDT Circular No. 5 States that any claim for expenses incurred in offering freebees to medical practitioners in contravention of the Indian Medical Council (Professional Conduct, Etiquette, and Ethics) Regulations, 2002 is inadmissible. (Circular No. 5 of 2012, issued 01.08.2012)
- The Medical Council of India, acting under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, prohibited any medical practitioner or their professional associates from accepting any gift, travel facility, hospitality, cash or monetary grant from any pharmaceutical or allied health sector industry.
- This is a really beneficial legislation that is in the best interests of both patients and the general public. Section 37(1) kicks in after the Medical Council has used its authority to prevent this.
- Any expenditure incurred by an assessee for any purpose prohibited by law shall not be regarded to have been incurred for the purpose of business or profession, according to the Explanation to section 37(1).
- The circular’s sum and substance are also the same. If the assessing authorities do not comprehend the circular, each individual assessee has the right to file an appeal under the Income Tax Act, but the circular, which is completely compliant with section 37(1), cannot be deemed to be illegal. – [CBDT v. Confederation of Indian Pharmaceutical Industry (SSI) (2013)]
Deduction for expenses related to a specific firm [Section 35 AD]
- Section 35AD was first introduced in the Finance Act 2009, with effect from April 1, 2010, to offer incentives on investments in certain defined sectors (including the healthcare sector).
- An assessee is entitled to a deduction for the entirety of any capital expenditure incurred, solely and exclusively, for the purposes of any designated business carried on by him during the prior year in which such expenditure was incurred: Provided, however, that expenditures incurred solely for the purposes of any defined business shall be allowed as a deduction at the stated rate for the previous year in which he begins operations of his specified business, if –
- The expenditure is incurred before the assessee begins operations; and
- The amount is capitalised in the assessee’s books of account on the date the assessee begins operations.
- This provision is applicable to designated businesses in the nature of constructing and operating a hospital with at least 100 beds for patients anywhere in India.
- In addition, capital expenditures do not cover the purchase of land, goodwill, or financial instruments.
Allow ability of certain commercial or professional expenses [Section 37]
- Any expenditure laid out or expended entirely and exclusively for the purposes of the business or profession (not being expenditure of the sort indicated in sections 30 to 36 and not being capital expenditure or personal costs of the assessee) shall be permitted in computing the income taxable under the head “Profit and gains of business or profession.” Furthermore, any expenditure incurred by an assessee for any purpose that is an offence or that is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession, and no deduction or allowance shall be made in respect of such expenditure, according to the explanation given below section 37.
- Section 37 of the Internal Revenue Code establishes the following conditions for claiming a general deduction: Expenses covered by Sections 30 to 36 of the Income Tax Act are not allowed to be claimed U/s 37 – According to this section
- if an expense is covered by Sections 30 to 36 of the Income Tax Act, it is not allowed to be claimed under Section 37.
- Capital expenditures are not permitted — For the purposes of this section, capital expenditures are expenses incurred in the acquisition, improvement, or extension of the life of a fixed asset, whereas revenue expenditures are expenses incurred in the ordinary course of business.
- Personal costs are not deductible – This section expressly precludes the deduction of any personal expenses. Personal expenses are defined as any spending that meets one’s personal needs and is unrelated to one’s career or business.
- Such expenditure should have been paid or accumulated in the previous year – In order to claim the deduction, such spending must have been paid or accrued in the previous year, and the assessee must be able to demonstrate that such expenditure was incurred in the previous year or that anything occurred in the previous year that resulted in a liability for the assessee. Expenditure should be made solely or primarily for the purpose of business or profession.
- The primary requirement for claiming a deduction under Section 37 is that the expenditure be completely and exclusively for the purpose of business or profession. The assessee may incur expenditures freely and without need, but they must be for the purpose of his business or profession. The expenditure should be for the assessee’s business or profession.
- In order to claim a deduction under this Section, the expenditure must have been incurred for the assessee’s commercial or professional purpose in the preceding year.
- Illegal expenditure is not allowed – An assessee’s expenditure for purposes that are offensive in nature or banned by law is not considered to have been expended for business or profession and is not recognised as a deduction under Section 37.
Disqualification Under Section 40(a)(ia)
- According to income tax section 40(a)(ia), any sum payable to a resident that is subject to tax deduction at source is liable to a 30% disallowance if it is paid without tax deduction at source or if tax is deducted but not deposited with the Central Government before the due date of filing the return.
- Any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has been paid, shall not be deducted in computing the income from the business in the case of any assessee.
If the assessee’s payment or aggregate of payments to a person in a day, other than through account payee cheque issued on a bank or account payee bank draught, exceeds Rs. 20,000, no deduction will be granted. [Section 40 A(3)]
A payment or aggregate of payments made to a person in a day, other than by account payee cheque drawn on bank or account payee bank draught or use of electronic clearing system through a bank account, that exceeds Rs 20,000 is disallowed under Section 40A(3) of the Income Tax Act 1961.
What does “philanthropic purpose” mean?
For this reason, the term “philanthropic purpose” refers to actions that promote goodwill toward mankind or are useful to humanity as a whole, as opposed to activities that benefit only a few individuals. Philanthropy is not limited to providing free care to the poorest of the poor, but also includes providing treatment at a reduced cost to people who are not impoverished but cannot pay the full cost. Furthermore, there is no prohibition on giving employees preferential treatment – [Breach Candy Hospital Trust v. Chief CIT (2010)] The claim for exemption cannot be denied on this basis
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