Profit Oriented Institutions Cannot Claim Tax Exemption U/S 10(23C)

PROFIT ORIENTED INSTITUTIONS CANNOT CLAIM TAX EXEMPTION U/S 10(23C), EDUCATION MUST BE ‘SOLE’ OBJECTIVE-SUPREME COURT

The Supreme court has provided a landmark judgement in the case of New Noble Educational Society vs Chief Commissioner of Income Tax 1 and ANR held that the educational trust or society, which seek exemption under section 10(23C) of the Income Tax Act, Should be solely with the education, or education related activities. The Apex court decided that” where the Objective of the institution appears to be Profit-Oriented, such institutions would not be subject to approval.

The court overruled its earlier judgements which interpreted the expression solely in section 10(23C) as “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 (iii ab) or sub-clause (iii ad) and which may be approved by the Principal Commissioner or Commissioner or..

The subject matter of the case is the rejection of the appellants’ claim for registration as a fund or trust or institution or any university or other educational institution (hereinafter collectively referred to as “institution / trust”) set up for the charitable purpose of education, under the Income Tax Act, 1961 (hereinafter, “IT Act”) by the Andhra Pradesh High Court. 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.

The parties had urged that such a precondition was absent in the provisos to Section 10(23C) (vi) of the IT Act. Rejecting the same, the High Court interpreted Section 10 (23C) (vi) of the IT Act in light of the previous decisions of this court, and held as follows:

In order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. (CIT v. Sorabji Nusserwanji Parekh, [1993] 201 ITR 939 (Guj)). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. (Aditanar Educational Institution, [1997] 224 ITR 310 (SC)). The emphasis in section 10(23C)(vi) is on the word “solely”. “Solely” means exclusively and not primarily. (CIT v. Gurukul Ghatkeswar Trust, (2011) 332 ITR 611 (AP); CIT v. Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). In using the said expression, the Legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities. (Oxford University Press v. CIT, [2001] 247 ITR 658 (SC)).

Assessee contended that the impugned judgment was in error of the law. She submitted that the High Court’s approach in considering the memorandum of association, rules or the constitution of the trust was no doubt correct, however the literal interpretation of the expression ‘solely’ under Section 10(23C)(vi) was not correct.

The court responded that, the expression ‘solely’ has been interpreted, as noticed previously, by other judgments as the ‘dominant / predominant /primary/ main’ object. The plain and grammatical meaning of the term ‘sole’ or ‘solely’ however, is ‘only’ or ‘exclusively’. P. Ramanath Aiyar’s Advanced Law Lexicon explains the term as, “‘Solely’ means exclusively and not primarily”. The Cambridge Dictionary defines ‘solely’ to be, “Only and not involving anyone or anything else”. The synonyms for ‘solely’ are “alone, independently, single-handed, single-handedly, singly, unaided, unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc.”

It is, therefore, clear that term ‘solely’ is not the same as ‘predominant / mainly’. The term ‘solely’ means to the exclusion of all others.

The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from charities set up or established for the object of imparting education. In the case of the latter, 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.

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.

The court concluded that,

1. 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. 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.

6. 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.

The court further opined that since the present judgment has departed from the previous rulings regarding the meaning of the term ‘solely’, in order to avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, it would be in the larger interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively.