Profit Oriented Educational Trusts Can't Claim Income Tax Exemption; Education Must Be Sole Objective : Supreme Court

The Supreme Court held that educational trust or societies, which seek exemption under Section 10 (23C) of Income Tax Act, should solely be concerned with education, or education related activities.

Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval , the bench of CJI Uday Umesh Lalit, Justices S. Ravindra Bhat and P S Narasimha observed.

The court overruled its earlier judgments which interpreted the expression 'solely' in Section 10(23C) as the 'dominant / predominant /primary/ main' object.  However, it clarified that the law declared in the present judgment shall operate only prospectively.

Section 10 of the IT Act exempts from the field of taxation certain classes of income. Section 10 (23C), at the relevant time (2012) reads as follows:  In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or…

Several Educational Trusts had approached the Apex Court against the judgment of the Andhra Pradesh High Court which held that these trusts which claimed benefit of exemption under Section 10 (23C) of the IT Act were not created 'solely' for the purpose of education and therefore rejected their 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.

While dismissing their appeals, the bench made the following conclusions:

1. 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
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.

Before concluding, the Court observed :

"In a knowledge based, information driven society, true wealth is education – and access to it. Every social order accommodates, and even cherishes, charitable endeavour, since it is impelled by the desire to give back, what one has taken or benefitted from society. Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade, nor commerce, has been declared by one of the most authoritative pronouncements of this court in T.M.A Pai Foundation (supra). The interpretation of education being the 'sole' object of every trust or organization which seeks to propagate it, through this decision, accords with the constitutional understanding and, what is more, maintains its pristine and unsullied nature"

Case details

New Noble Educational Society vs Chief Commissioner of Income Tax 1 | 2022 LiveLaw (SC) 859 | CA 3795 OF 2014 | 19 October 2022 | CJI Uday Umesh Lalit, Justices S. Ravindra Bhat and P S Narasimha

Counsel: Adv Prabha Swami for appellants, ASG N. Venkataraman for respondents

Headnotes

Income Tax Act, 1961 ; Section 10(23C) -  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 - 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. (Para 60, 76-a,b)

Income Tax Act, 1961 ; Section 10(23C) - 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.). (Para 73,76-g)

Words and expressions - 'Solely' - The term 'solely' is not the same as 'predominant / mainly', it means 'to the exclusion of all others'. (Para 49)

Interpretation of Statutes - If the language is unambiguous and capable of one meaning, that alone should be applied and not any other, based under surmise that the Parliament or the legislature intended it to be so. In other words, it is only in cases of ambiguity that the court can use other aids to discern the true meaning. Where the statute is clear and the words plain, the legislation has to be given effect in its own terms - It is only when the application of literal interpretation gives rise to an absurdity, should the interpretation be expansive. (Para 52-54)

Interpretation of Statutes - The object of a proviso is to except from the main provision something enacted in the substantive clause. It cannot however, by itself be read as a substantive provision - The scope of a proviso - Referred toS. Sundaram Pillai v. V.R. Pattabiraman, 1985 (1) SCC 591. (Para 55-58)

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