S. 10(23C)(v) & (vi): Mere surplus does not mean institution is existing for making profit. The predominant object test must be applied. The AO must verify the activities of the institution from year to year
The Supreme Court had to consider appeals arising from the judgements of the Uttarakhand High Court in Queens Equcational Society 319 ITR 160 and the Punjab and Haryana High Court in Pine Grove International Charitable Trust v. Union of India (2010) 327 ITR 273 concerning the interpretation of s.10(23C) (iiiad) and (vi) of the Income-tax Act. HELD by the Supreme Court reversing Queens Equcational Society and affirming Pine Grove International Charitable Trust v. Union of India:
(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.
(6) The correct tests which have been culled out in the three Supreme Court judgments, namely, Surat Art Silk Cloth 121 ITR 1 (SC), Aditanar 224 ITR 310 (SC), and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit.
(7) In addition, we hasten to add that the 13th 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.
The Supreme Court had to consider appeals arising from the judgements of the Uttarakhand High Court in Queens Equcational Society 319 ITR 160 and the Punjab and Haryana High Court in Pine Grove International Charitable Trust v. Union of India (2010) 327 ITR 273 concerning the interpretation of s.10(23C) (iiiad) and (vi) of the Income-tax Act. HELD by the Supreme Court reversing Queens Equcational Society and affirming Pine Grove International Charitable Trust v. Union of India:
(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.
(6) The correct tests which have been culled out in the three Supreme Court judgments, namely, Surat Art Silk Cloth 121 ITR 1 (SC), Aditanar 224 ITR 310 (SC), and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit.
(7) In addition, we hasten to add that the 13th 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.
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