The Supreme Court (SC), in its latest judgment reiterated its earlier stand that an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes u/s 10(23C)(iiad) or becomes an institution for the purpose of making profit.

Details of the Case:
Civil Appeal No. 5167/2008
M/s. Queen’s educational society …appellant vs commissioner of income tax …respondent
Coram: R.F.Nariman, J., T. S. Thakur, J.
Date of the Order: 16-03-2015

Case Law Referred:
CIT v. Surat Art Silk Cloth Manufacturers' Assn., (1980) 121 ITR 1, SC
Aditanar Educational Institution v. Additional Commissioner of Income Tax, (1997) 224 ITR 310
American Hotel & Lodging Assn. Educational Institute v. CBDT, (2008) 301 ITR 86

Facts of the Case
The appellant filed its return for assessment years 2000-2001 and 2001-2002 showing a net surplus of Rs.6,58,862/- and Rs.7,82,632/- respectively. Since the appellant was established with the sole object of imparting education, it claimed exemption under Section 10(23C) (iiiad) of the Income Tax Act, 1961. The Assessing Officer vide its order dated 20th February, 2003 rejected the exemption claimed by the appellant on the ground that due to large surplus, it ceases to exist solely for educational purposes and becomes a profit making enterprise. The CIT (Appeals) by its order dated 28th March, 2003 allowed the appellant’s appeal, and the ITAT, Delhi, by its judgment dated 7th July, 2006 passed an order dismissing the appeal preferred by the revenue. In a reference to the Uttarakhand High Court under Section 260A of the Income Tax Act, the High Court vide the impugned judgment set aside the judgment of the ITAT and affirmed the order of the Assessing Officer.

The Apex Court dismissed the High Court Order and summed up the law common to section 10(23C)(iiiad) and (iv) as under:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.

(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.

(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.

(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons

The Supreme Court pointed out that the High Court while quoting the Supreme Court Judgment in Aditanar Educational Institution v. CIT, mixed the reasoning of the Assessing Officer.

“the impugned judgment goes on to quote Aditanar Educational Institution v. CIT. as follows:-

“After meeting the expenditure, if any surplus result incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purpose since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction difference between the corpus, the objects and powers of the concerned entity.

If one looks at the object clause, there are other noble and pious objects but assessee society has done nothing to achieve the other objects except pursuing main object of providing education and earning profit. Further, with profit earned the society has strengthened or enhanced its capacity to earn more rather than to fulfill other noble objects for the cause of poor and needy people or advancement of religious purpose.

Therefore, the law laid down by the Apex Court has rightly been applied and exemption has also rightly been refused by the Assessing Officer in the facts and circumstances of the case.”

“It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar followed by a paragraph of faulty reasoning by the Assessing Officer and the said faulty reasoning of the Assessing Officer has been wrongly said to be the law laid down by the Apex Court”

The Court emphasised that tests which have been laid down in three Supreme Court judgments namely, Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging, would apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit.

Also the Court emphasised on the importance of 13 ^th Proviso to section 10(23C) as under:

In addition, we hasten to add that the 13 ^th  proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act.”

Download the Full  Judgment Click Here >>