Benefit of section 10(23C)(v) cannot be denied merely because there are profits

S. 10(23C)(vi) provides that the income of any university or other educational institution existing solely for educational purposes and not for purposes of profit shall be exempt. The assessee was running a school solely for educational purposes and claimed exemption u/s 10 (23C) (vi).

The exemption was denied/ withdrawn on the ground that as the assessee had earned substantial profits year after year and had not made efforts to lower its fees, the profits were not incidental and the assessee existed for profits. On a writ petition filed by the assessee, HELD allowing the challenge:

(i) To decide whether an institution exists solely for education and not to earn profit the predominant object of the activity has to be seen. The mere fact that an educational institution generates surplus after meeting the expenditure over a period of time does not mean that it ceases to exist ‘solely’ for educational. The test to be applied is whether the predominant object of the activity is to sub-serve the educational purpose or to earn profit. It should be seen whether profit-making is the predominant object of the activity or whether profit is incidental to the carrying of the activity. There is no requirement that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. (Surat Art Silk Cloth Manufacturers Association 121 ITR 1 (SC) andAditanar Educational Institution vs Addl.Commissioner of Income Tax 224 ITR 310 (SC) applied);

(ii) In computing the total income, capital expenditure incurred for the attainment of the objects of the society has to be deducted under the third proviso to s. 10(23C). There is no bar to doing so unlike the provisions of ss. 37 and 36 (1)(xii). This is also supported by clause 11 of Form 56D which has to be filed as per Rule 2CA and the case law on s. 11 which provide that capital expenditure constitutes “application of income”;

(iii) In Children’s Book Trust AIR 1992 SC 1456, the Supreme Court had observed in the context of the Delhi Municipal Corporation Act, 1957 that where a society was making systematic profits it could not claim exemption even if the profit was utilised only for charitable purposes. The observations were made in the context of an Act which is not pari materia to s. 10 (23C). Also the judgement cannot be applied because the scheme of s. 10(23C)(vi) permits the retention of 15% of the profits and the application of 85% thereof. Queens Educational Society 319 ITR 160 (Utt) dissented from;

(iv) The action of the CIT in withdrawing exemption u/s 10 (23C) (vi) will discourage and frustrate the object of the Govt to promote education by allowing private parties to set up educational institutions. If the stand of the Revenue is accepted no educational institution can be said to be existing solely for educational purposes as in every case there is bound to be a profit. S. 10(23C)(vi) would then be rendered otiose;

(v) The contention of the Revenue that exemption u/s 10 (23C) (vi) could only be given to a university or educational institution and not to a society registered under the 1860 Act is not acceptable because such a society constitutes ‘other educational institutions’. Aditanar Educational Institution 224 ITR 310 followed.

(vi) On facts, as the society’s application of income (after considering the capital expenditure) was more than 100%, it could by no stretch of imagination be held to be an educational institution existing for the purposes of making profit so as to be not entitled to exemption in view of the provisions of s. 10(23C) (vi).