To be eligible for exemption, educational institutions have to be solely engaged educational activities

Cause Title : M/s New Noble Educational Society Vs The Chief Commissioner Of Income Tax 1 And Anr., Supreme Court Of India, Civil Appeal No. 3795 Of 2014

Date of Judgment/Order : 19/10/2022

Corum : Uday Umesh Lalit; Cji., S. Ravindra Bhat; J., Pamidighantam Sri Narasimha; J.

Citied: 

1. T.M.A Pai Foundation v State of Karnataka, 2002 (8) SCC 481
2. Aditanar Educational Institution v. Addl. CIT, [1997] 224 ITR 310
3. Oxford University Press v. CIT, [2001] 247 ITR 658

Background

The subject matter of the appeals was the rejection of the appellants’ claim for registration as a fund or trust or institution or any university or other educational institution set up for the charitable purpose of education, under the Income Tax Act, 1961 . The Andhra Pradesh High Court, by its detailed impugned judgment, held that the appellant trusts which claimed benefit of exemption under Section 10 (23C) of the IT Act were not created ‘solely’ for the purpose of education, and that to determine that issue, the court had to consider the memorandum of association or the rules or the constitution of the concerned trust. 

Judgment

The sections referred to are Sections 2(15), 10(23C), 11(4A) of Income Tax Act, 1961

The court observed that the issues which require resolution are :-

1. 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”.
2. 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,
3. 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.

I. Institutions existing ‘solely’ for profit

48. From the above discussion, it is evident that this court has spelt out the following to be considered by the revenue, when trusts or societies apply for registration or approval on the ground that they are engaged in or involved in education:

(i) The society or trust may not directly run the school imparting education. Instead, it may be instrumental in setting up schools or colleges imparting education. As long as the sole object of the society or trust is to impart education, the fact that it does not do so itself, but its colleges or schools do so, does not result in rejection of its claim. (Aditanar (supra)).

(ii) To determine whether an institution is engaging in education or not, the court has to consider its objects (Aditanar (supra)).

(iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University (supra) where the applicant was a publisher, part of the Oxford University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc. for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India.

Examination of the term ‘solely’

The basic provision granting exemption, thus enjoins that the institution should exist ‘solely for educational purposes and not for purposes of profit’. This requirement is categorical. While construing this essential requirement, the proviso, which carves out the exception, so to say, to a limited extent, cannot be looked into.

The term ‘solely’ means to the exclusion of all others. In the case of charitable organizations set up for  the object of imparting education, the basis of exemption is Section 10(23C) (iiiab), (iiiad) and (vi). In all these provisions, the positive condition ‘solely for educational purposes’ and the negative injunction ‘and not for purposes of profit’ loom large as compulsive mandates, necessary for exemption. The expression ‘solely’ is therefore important. Thus, in the opinion of this court, a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation.

The seventh proviso to Section 10 (23C) (vi) however carves an exception to this rule, and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity - and nothing other than that - is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education).

The word 'incidental' means according to Webster's New World Dictionary:

"happening or likely to happen as a result of or in connection with something more important; being an incident; casual; hence, secondary or minor, but usually associated:"

"Something incidental to a dispute" must therefore mean something happening as a result of or; in connection with the dispute or associated with the dispute. The dispute is the fundamental thing while something incidental thereto is an adjunct to it. Something incidental, therefore, cannot cut at the root of the main thing to which it is an adjunct.”

‘Incidental’ therefore, means, in the context of the present case, something connected with the activity of education.

The conclusions of this court are summarized as follows:

• 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.
• 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.
• 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.
• 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.
• 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.
• 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 (supra) 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.
• It is held that 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.