Section 10(23C)(vi) provides for grant of income tax exemption to any university, other educational institution existing solely for educational purpose and not for purpose of profit.

In an important judgment related to grant of approval under section 10(3C)(vi), the Supreme Court has held that

1. At the stage of initial approval, the conditions of monitoring requirements as mentioned in the third proviso do not come into play.
2. The compliance of the terms and conditions stipulated by the Prescribed Authority (PA) would be a matter of decision at the time of assessment
3. There is a difference between stipulation of conditions and compliance thereof.
4. The location of the University is not relevant as long as imparting of education in India.
5. That object would not lose its character merely because some profit arises from the activity.
6. The income can be applied anywhere in the World and not limited to India

Here, question before the Court was as to what was   the scope of enquiry by the Prescribed Authority under Section 10(23C)(vi) read with the third proviso thereto which was inserted by Finance Act, 1998 w.e.f. 1.4.1999. which provides for the application or accumulation of the income or permissible mode of investment for university, other educational institution.

Facts of the case:
Civil Appeal No. 3468 of 2008, American Hotel & Lodging Association Educational Institute vs CBDT (301) ITR 86 SC

In the instant case, the appellant Institute was a USA based non-profit organization and enjoyed there tax exemption as an educational institute. Appellant had a branch office in India which provided a central focal point in India for Indian missions to avail of its educational courses. The branch collected data from educational institutions/persons wishing to take the courses offered in the field of Hospitality and fees for the required course material which was thereafter remitted to USA. After collection of data and fees, the Head Office (“HO”) sends course materials, examination papers etc. to the branch in India for onward transmission to the actual user.The appellant claimed that the Indian branch is the small office in which administrative work is done. Few employees attend to this work. The costs of running the branch office is met by deducting the same from the amounts remitted to the HO.

National Council of Hostel Management and Catering Technology , the apex Indian body overseeing hostel management and catering education under the Ministry of Tourism, signed a MoU with the appellant under which approval was granted to use courses, resources and expertise of the appellant in India with a view to improve the quality of hospitality education and training in India. Consequently, the appellant opened a liaison office in Mumbai with due permissions which was later upgraded to a branch with due permissions.

In accordance with the terms of the said MoU, the appellant was responsible, inter alia, for providing a full and complete curriculum, recognized throughout the worldwide, for all hospitality educational programmes in India, making available text books, course materials and software programmes utilized in the appellant’s Hospitality Management Diploma, offering a comprehensive certification and registration programme for Indians desiring to avail of education in the hospitality field in India. Under Clause 1(h) of the MoU, appellant was required to offer to the National Council in India, which is the apex body for hospitality management in India, lowest possible prices for its products/services to be utilized for Schools under the umbrella of GoI. Under Clause 2(b) of the said MoU, the National Council of Hospitality is obliged to utilize the appellant’s courses in its current and future Hospitality Management Schools.

The appellant (Educational Institute) got exemption under Section 10(22) of the Income Tax Act, 1961. T he Prescribed Authority granting the said exemption held, after reviewing the objects and Agreements with GoI, that the appellant was entitled to exemption from tax under Section 10(22) of the 1961 Act. It was held that the appellant was an educational institution in terms of Section 10(22) of the 1961 Act.

Immediately after the Section 10(22) was omitted the institute on 07-04-199 made an application in prescribed form 56D read with rule 2CA to CBDT (the Prescribed Authority) for approval in terms of the first proviso to Section 10(23C)(vi) of the 1961 Act. CBDT did not pass an order on the application but for few queries which were replied. In particular the institute clarified its position regarding the type of accounts required and maintained by its branch in India under which excess of receipts over payments was not treated as income/profit/surplus as appropriate costs incurred by the HO had

not been taken into account therein because the purpose for which the accounts of the branch office were required to be made was only to establish how much money was owned to the HO and not to ascertain its income or surplus. However on 12-10-2004 the CBDT rejected appellant’s application holding that there was a surplus repatriated outside India and, therefore, appellant has not applied its income for the purpose of education in India. On Appeal Delhi High Court upheld the decision of the CBDT.

In the apex court, the counsel for the institute submitted that the object of introducing Section 10(23C)(vi) of the 1961 Act was explained by CBDT in its Circular No.772 dated 23.12.98. It was argued that the second proviso clarifies what is required to be seen by CBDT at the stage of approval is the nature and genuineness of the activities of the applicant and the provisos of the said section sets out conditions which must be adhered to by the Institution, and compliance therewith can never be tested at the stage of approval, since they require consideration of acts and events which will take place in the future.

The Supreme Court held in favour of the appellant and set aside the order of the Delhi High Court and remitted the matter to CBDT for fresh consideration with following clarification,

“We may clarify that, in this case, appellant has fulfilled the threshold pre-condition of actual existence of an educational institution under section 10(23C)(vi) and, therefore, on that count CBDT will not reject the approval application dated 7.4.1999.”

The important excerpts of the judgment are as under:

“…… that test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit.”

“If after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes. In other words, existence of surplus from the activity will not mean absence of educational purpose.”

“location of the University is not relevant, what is relevant is – whether there is imparting of education in India.”

“there is a difference between stipulation of conditions and compliance thereof. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval.”

“Moreover, it is important to note that, even after the Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words “application of income” to the objects for which the Institution is established. The third proviso does not use the words “in India” in the matter of application or accumulation of income though in several other sections like Sections 10(20A), 10(22B) and 11(1)(a) etc., Parliament has used the words “in India”. Therefore, for this one more reason, we cannot read in the words “in India” into the third proviso. As stated, Parliament in its wisdom has stated in the third proviso that the educational institution has to apply its income wholly and exclusively to the objects for which it is established. Therefore, the plain words of the third proviso do not require application of income to be in India. Our judgment should not be understood to mean that the applicant has not to impart educational activities in India. If the applicant wants exemption under Section 10(23C)(vi) it has to impart education in India and only then it would be entitled to claim initial approval under that section……….. Our conclusion is that impartation of education must be in India if applicant desires exemption under Section 10 (23C)(vi) and that excess/deficit of income over expenditure will not decide whether the applicant exists for profit or not.”

“For the sake of clarity, we may reiterate that items such as application of income or accumulation of income or investment in specified assets indicated in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. As stated, however, there is a difference between application/utilization of income and outward remittance of income out of India. As discussed above, with the insertion of the provisos in Section 10(23C)(vi) of the 1961 Act, it is open to the PA to stipulate, while granting approval, that the approval is being given subject to utilization/application of certain percentage of income, in the accounting sense, towards impartation of education in India. Such exercise would be based on estimation.”

“There is a difference between ‘accounting income’ and ‘taxable income’. At the stage of Section 10, we are concerned with the accounting income.”

“The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes and not for profit.”

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