The taxation of nursing homes and healthcare facilities has been a subject of judicial scrutiny, particularly in determining whether such entities should be taxed as businesses or professional practices under the Income Tax Act, 1961. The Kety Medicare Centre vs. ACIT CC-2, Thane ([2025] 171 taxmann.com 728) case provides a crucial precedent on this matter.
This article explores the legal principles, statutory provisions, and judicial interpretations governing the taxation of nursing homes, particularly regarding presumptive taxation under Section 44AD, the classification of income, and the evidentiary value of survey statements under Section 133A.
Understanding the Legal Framework
1. Section 44AD – Presumptive Taxation for Small Businesses
Verbatim Law:
"44AD(1): Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to 8% of the turnover or gross receipts of the assessee in the previous year on account of such business shall be deemed to be the profits and gains of such business."
"44AD(6): The provisions of this section shall not apply to – (i) a person carrying on a profession as referred to in sub-section (1) of section 44AA."
Analysis:
Section 44AD allows presumptive taxation for businesses, but explicitly excludes professions covered under Section 44AA(1).
Professions include medical practitioners, legal professionals, and consulting engineers, but not entities running nursing homes.
This distinction was pivotal in the Kety Medicare case, where the firm provided ancillary healthcare services but did not directly engage in medical practice.
2. Section 44AA – Books of Accounts for Professionals
Verbatim Law:
"44AA(1): Every person carrying on legal, medical, engineering, or other notified profession shall keep and maintain such books of account and other documents as may enable the Assessing Officer to compute his total income."
Analysis:
Only individual professionals (e.g., doctors) are required to maintain detailed accounts.
A partnership firm providing healthcare services does not automatically fall under "medical profession".
In Kety Medicare, the income from doctor’s fees was separately declared, proving that the firm itself was not in a medical profession.
3. Section 133A – Survey Proceedings and Evidentiary Value of Statements
Verbatim Law:
"133A(3)(iii): The income-tax authority may record the statement of any person which may be useful for, or relevant to, any proceeding under this Act."
"133A(3)(iv): Any statement recorded under this section shall not be considered as conclusive evidence."
Analysis:
Statements recorded during surveys are not conclusive evidence and cannot be the sole basis for additions.
This principle was established in S. Khader Khan Son v. CIT ([2008] 300 ITR 157), where the Madras High Court ruled that survey statements have no evidentiary value unless corroborated.
In Kety Medicare, the Tribunal quashed the addition of Rs. 86,25,000 as it was solely based on the partner’s statement recorded during the survey.
Judicial Precedents Supporting the Tribunal’s Ruling
1. S. Khader Khan Son v. CIT [2008] 300 ITR 157 (Madras HC), affirmed in [2013] 352 ITR 480 (SC)
Held: Statements made during a survey do not have evidentiary value unless backed by concrete proof.
Relevance: The Tribunal in Kety Medicare rightly rejected the Rs. 86,25,000 addition as it was solely based on a survey statement.
2. Anandkumar Jain v. ITO [2015] 60 taxmann.com 441 (Jaipur ITAT)
Held: A diagnostic center was engaged in a business, not a profession, and hence, eligible for Section 44AD presumptive taxation.
Relevance: Similar to Kety Medicare, which provided healthcare services but was not directly engaged in medical practice.
3. ACIT v. Dr. K. Satish Shetty [2010] 38 SOT 513 (Mumbai ITAT)
Held: A hospital run by a partnership firm is a "business", not a "profession".
Relevance: Supports the ruling that nursing homes and hospitals run as firms should be treated as businesses for taxation purposes.
4. ITO v. Radhe Developers India Ltd. [2008] 23 SOT 420 (Ahmedabad ITAT)
Held: If the profit ratio was consistently accepted in past assessments, the AO cannot arbitrarily change it.
Relevance: In Kety Medicare, the firm had a 6%-11% net profit ratio, consistently accepted in previous years.
5. Gopal Krishna Builders v. ITO [2015] 59 taxmann.com 134 (Chennai ITAT)
Held: Denial of presumptive taxation under Section 44AD without justification is legally untenable.
Relevance: The Tribunal upheld Kety Medicare’s right to Section 44AD taxation.
Key Takeaways and Legal Position
| Issue | Legal Position | Impact on Kety Medicare |
|---|---|---|
| Applicability of Section 44AD | Presumptive taxation applies only to businesses, not professions. | The nursing home is a business, not a professional entity. |
| Survey statements under Section 133A | Cannot be sole basis for additions. | The Rs. 86,25,000 addition was quashed. |
| Classification as Business vs. Profession | A firm running a nursing home is a business. | The AO wrongly treated it as professional income. |
| Profit consistency and AO’s discretion | Past profit ratios must be considered. | The firm’s 6%-11% profit ratio was consistently accepted. |
| Presumptive taxation under Section 44AD | Cannot be denied without valid justification. | The Tribunal upheld firm’s right to Section 44AD taxation. |
Conclusion
The ruling in Kety Medicare Centre vs. ACIT reaffirms key principles in tax jurisprudence:
Nursing homes and hospitals run by firms are businesses, not professional entities under Section 44AA.
Survey statements recorded under Section 133A do not constitute substantive evidence for income additions.
Presumptive taxation under Section 44AD applies to nursing homes unless strong contrary evidence exists.
This judgment sets a strong precedent for healthcare businesses, ensuring their taxation rights under Section 44AD while protecting them from arbitrary additions based on survey statements.
