For exemption 10(23C), educational institutions cannot have objects unrelated to education – SC

For exemption 10(23C), educational institutions cannot have objects unrelated to education. All objects must relate to imparting education – Supreme Court

ABCAUS Case Law Citation
ABCAUS 3615 (2022) (10) SC

Important Case Laws relied upon by parties
American Hotel and Lodging Association vs. Central Board of Direct Taxes (2008)10 SCC 509

Queen’s Education Society vs Commissioner of Income Tax (2015) 8 SCC 47
Oxford University

Under the Income Tax Act, 1961 (the Act) the absolute exemptions from tax is available to a University or an educational institution under the following provisions:

Section  Basic Condition Secondary Condition
Section 10(23C)(iiiab) Where said institution is existing solely for educational purpose and not for the purpose of profit If such institution is wholly or substantially financed by the Government
Section 10(23C)(iiiad) Where such institution is existing solely for educational purpose and not for the purpose of profit No registration under IT Act or approval from Commissioner required if aggregate annual receipt does not exceed five crores rupees
Section 10(23C)(vi) Where such institution is not covered under two above category and is existing solely for educational purpose and not for the purpose of profit Registration/Approval of Commissioner required

The instant judgment the Apex Court has held that for claiming exemption under section 10(23C), educational institutions cannot have objects unrelated to education. All objects must relate to imparting education. The judgment touches down all the above three categories of assessees.

In the instant case, the appellant(s) trust’s claim for benefit of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 (the Act) was denied on the ground that they were not registered under the State Charities Act.

The main argument from the appellants was that there was no bar or restriction imposed by law on trusts involved or engaged in activities other than education, from claiming exemption under Section 10(23C)(vi), provided  their  motive  was not-for-profit. It was submitted that in the present case, the assesses had other objects apart from education which were charitable. Consequently, the denial of registration by the Commissioner was contrary to law.

It was further argued that literal interpretation of the expression ‘solely’ under Section 10(23C)(vi) was not correct. It was urged that there was no bar or restriction imposed by law on trusts involved or engaged in activities other than education, from claiming exemption under Section 10(23C)(vi), provided  their  motive  was not-for-profit.

It was submitted that in the present case, the assesses had other objects apart from education which were charitable. Consequently, the denial of registration by the Commissioner and confirmed by High Court was contrary to law.

It was argued that the High Court’s approach in  considering the memorandum of  association, rules or  the constitution  of  the  trust  was  no  doubt correct, however  the literal interpretation of  the  expression ‘solely’ under  Section 10(23C)(vi) was not correct. That the appellant had other objects did not mean that it ceased to be an institution existing ‘solely’ for educational purposes. The emphasis of the word ‘solely’ was in relation to the institution’s motive to not operate for the purposes of making profit; it ought not to be interpreted in relation to the objects of the institution.

Thus the issues before the Hon’ble Supreme Court were firstly, the correct meaning of the term ‘solely’ in Section 10(23C)(vi) which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit”. Secondly, the  proper manner in considering  any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of  assessment, and  thirdly, in addition to the claim  of  a  given  institution  to  exemption  on  the  ground  that  it  actually  exists  to impart education, in law, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws.

for claiming exemption 10(23C), educational institutions cannot have objects unrelated to education.

The Full Bench held the following:

(a) It is held that the requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.

(b) Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C) of the IT Act.  At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.

(c) The seventh proviso to Section 10(23C), as well as Section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.

(d) The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A) merely means that the profits of business which is ‘incidental’ to educational activity as explained in the earlier part of the judgment i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.

(e) The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression ‘solely’ are hereby disapproved. The judgments are accordingly overruled to that extent.

(f) While considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution.  To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment.  Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is not confined to newly set up trusts –it also applies to existing ones.  The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.

(g) Wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section   10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc.  This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from 01.04.2021.

It has been further clarified that claim for approval or registration would have to be considered in the light of subsequent events, if any, disclosed in fresh applications made in that regard.

Further, Since the Hon’ble Supreme Court departed from the previous rulings regarding the meaning of the term ‘solely’, in order to avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, their Lordships directed that the law declared in this judgment shall operate prospectively.

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