CPC & issues in processing of Section 10(23C)(iiiad) exemption

Charitable Trusts having multiple educational institutions are facing many issues especially of exemptions u/s 10(23C)(iiiad) of the Income Tax Act, 1961, in processing of returns by CPC and in assessments. Following is an analysis of the section and the legal precedents.

1. The law

Section 10(23C)(iiiad) reads as under –

Incomes not included in total income.

10. 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—

(23C) any income received by any person on behalf of—

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed;

The limits are prescribed in Rule 23BC (1) which reads as under –

Amount of annual receipts for the purposes of sub-clauses (iiiad) and (iiiae) of clause (23C) of section 10.

2BC. (1) For the purposes of sub-clause (iiiad) of clause (23C) of section 10, the amount of annual receipts on or after the 1st day of April, 1998, of any university or other educational institution, existing solely for educational purposes and not for purposes of profit, shall be one crore rupees.

(2) For the purposes of sub-clause (iiiae) of clause (23C) of section 10, the amount of annual receipts on or after the 1st day of April, 1998, of any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, shall be one crore rupees.

The law exempts the institutions existing solely for educational purposes and not for purposes of profit, if aggregate annual receipts do not exceed the prescribed limit of Rs.one crore.

The trusts are filing returns claiming the exemption u/s 10(23C)(iiiad). But, in the processing CPC is treating them defective returns or adding the amount claimed as exempt as taxable and raising false tax demands. On pointing out the mistakes, the returns are transferred to the AO where the returns are not processed and no corrections made in the demand even after following up vigorously. In many cases even refunds are not granted due to these false demands. Faceless assessments are sure to add to the confusions further.

The intention in bringing these exemptions to statute book is that education is opened to private sector as it is impossible for the Govt. to reach out to the extent expected. The approach of CPC and the Revenue in creating litigations are contrary to the intentions and the law.

The fault may be at two levels, one – either the officers are not fully aware of the complex provisions and its nuances; and two – proper instructions to CPC are not given for suitable provisions in the processing programs. Consequently, the CPC and its programmers also may not be fully aware of the same. Ultimately the trusts are harassed.

My purpose is focused on the processing by CPC ignoring the settled law. It is necessary for the law makers and its administrators to instruct CPC suitably to include in the software those exemption principles approved by various judges or to explicitly include in the law itself, so that CPC and its programmers can make suitable changes in the processing system. This would also alleviate unwarranted litigations. Would somebody take initiative and make the necessary changes?

2. Method of calculating the prescribed limit of Rs. one crore

2.1 The amount of annual receipts

The section as well as the rule uses the words “annual receipts” which should not exceed the limit of Rs.1 crore. However, the words “annual receipts” are not defined anywhere in the law.

Dictionary meaning of “annual” is – Occurring or payable every year.

Thus it means the receipts which the institution receives every year. Normally this is fees or subscriptions.

This also means all other receipts or incomes which are not received annually shall not be included in computing the amount of annual receipts for the purpose of exemption u/s 10(23C)(iiiad).

2.2 In computing total income of any person, any income falling within any clauses-

The above heading is followed by the words “any university or educational institution”.

The law is very clear that the income of any university or any institution is not to be included. The clause does not use the words “total income” in respect of the institution, but it is only annual receipts. Hence, the reference is to the educational institution and not the assessee as a whole.

3. The legal precedents for computing the prescribed limit u/s 10(23C)(iiiad)

3.1 Jat Education Society vs DCIT – (2011) 141 TTJ 0316 (Delhi), dt. 11-2-2011, AY 2003-04, 2004-05

For the purpose of s.10(23C)(iiiad), the annual gross receipts of three educational institutions being run separately by the assessee society cannot be clubbed together for examining the fulfilment of the conditions of receipt being less than the prescribed limit of annual gross receipts. If the annual gross receipts of three educational institutions are considered separately, the same is below Rs. 1 crore in each year for each of these educational institutions. As per the provisions of sub-cl. (iiiad) of cl. (23C) of s. 10, the term “aggregate annual receipts” of each educational institution is relevant and if any assessee is having more than one educational institution then the aggregate annual receipt of each of such educational institution has to be considered separately because this sub-cl. (iiiad) of cl. (23C) of s. 10 does not say that if an assessee is having more than one educational institution then the gross annual receipt of all of them should be considered together.

(Followed – Pinegrove International Charitable Trust & Ors. vs. UoI & Ors. (2010) 230 CTR (P&H) 477, dt.29-1-2010 AY- 2000-01 to 2007-08 which has held that, capital expenditure has to be deducted from the gross income of the educational institution in determining whether 85 per cent of the income has been applied for its objects.)

3.2 Param Hans Swami Uma Bharti Mission vs. ACIT, (2013) 154 TTJ 0531 (Del) dt. 31-08-2012- AY-2006-07

From the plain reading of section 10(23C) (iiiad), it emerges that legislature had in its mind annual receipts of school or university as the case may be for consideration of exemption limit and not that of total income of society running that school or university.

The present case is of a society running a school. The society besides income from running of a school is having other sources of income also. In the present case, the income from interest on FDRs is an additional income of society and it cannot be considered to be part of annual receipts of the school. Therefore, in our considered opinion assessee was eligible for exemption u/s 10(23)(iiiad) as annual school receipts did not exceed Rs. One crore.

In view of the above, the appeal filed by the assessee is allowed.

Followed CIT vs. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) wherein the Hon’ble Supreme Court observed that if the Court finds that language of a taxing provision is ambiguous or capable of more meanings then the Court has to adopt that interpretation which favours the assessee.

3.3 CIT vs. Children’s Education Society, (2013) 358 ITR 0373 (Karn), dt.18-3-2013. AY 1999-2000, 2000-01

The trust was running 28 educational institutions located in various places and received fees and corpus donations. The AO clubbed all of them and taxed being more than Rs.1 crore. There were multiple disallowances including donations, grants, expenditures. The CIT(A) allowed the exemption and ITAT allowed all the claims. Hon. High Court also allowed the same. Amongst various points on the computation of limit of Rs.1 crore important observations of Hon. High Court are as under-

21. Firstly, if the word “aggregate annual receipts” of other educational institution is to be under stood as clubbing of annual receipts of all educational institutions run by an assessee society, then it will also include the annual receipts of an educational institution which is wholly or substantially financed by the Government. If that was intention of the Legislature, they would not have introduced separate sub-clauses as (iii)(ab) and (iii)(ad). If such interpretation is placed, sub-clause (iii)(ab) becomes otiose. Therefore, it is not possible to place such an interpretation. If an assessee society is running several educational institutions, if some of them are wholly or substantially financed by the Government in terms of sub-clause (iii)(ab), the income on behalf of such educational institution received by the assessee is exempted from being computed the total income of the assessee. If the assessee is running other educational institutions which are not wholly or substantially financed by the Government, then the benefit of that exemption is also extended to the income derived from such educational institutions and received by the assessee under sub-clause (iii)(ad) reading with sub-clause (iii)(ad) along with Rule2BC. It was contended, the Legislature used the word “aggregate annual receipt” and “amount of annual receipts” and therefore, the provisions are not one and the same.

The word “aggregate” has been defined in Chambers 21st Century Dictionary as under:

“aggregate – noun = a collection of separate units brought together, a total taken altogether,

bring together.”

In Wharton’s Law Lexicon, it is defined as thus:

“a collocation of individuals, units or things in order to form a whole”

22. Similarly relying on the judgment of the Apex Court in the case of Aditanar Educational Institution vs. Addl. CIT, it was contended the word “other educational institution’ refers to the assessee society and not to the individual educational institution. If the intention of the Legislature was to club the annual receipts of all educational institutions run by the assessee society, they could have said so in clear terms. On contrary what is stated in the said Section is the aggregate annual receipts of such University or such educational institution referring to other educational institution. Other educational institution is to be understood with the context of the first word i.e., the University. Both in the University end any educational institutions, education is imparted. The University is a statutory body. But there are a number of educational institutions which are not run by a statutory authority which are imparting education, the word “other educational institution” has to be understood in the context of other than any University. If so understood, all that it means is every educational institution existing solely for educational purpose and not for the purpose of profit, if the aggregate annual receipts of such educational institution exceeds Rs. l crore, then the income from such educational institution received by the assessee is excluded from his total income. In an educational institution the amounts are calculated periodically. It may be calculated under different heads. All such amount received constituted receipts and those receipts may be received throughout the year. Therefore, the word “annual” has been inserted. But to be eligible for exemption, aggregate of annual receipts should not exceed Rs. 1 crore i.e. the total annual receipts of a year if it does not exceed Rs.1 crore, then the income derived from such educational institution in the hands of the assessee cannot be taken into consideration to compute the income of the assessee.

3.4 ACIT v Shiksha Samiti (2015) 38 ITR (Trib) 616 Delhi, dt.16-2-2015- AY 2008-09

(Followed Jat Education society (supra), and Sh. Mahadevi Tirath Sharda Maa Seva Sangh Vs ITO in ITA No. 1091/Chd/2009 Order dt. 29.01.2010)

The assessee society filed return of income declaring NIL total income after claiming the whole of its surplus of Rs. 20,98,900/- as exempt u/s. 10(23C) (iiiad) of the Act. The AO issued notice u/s. 148 for reopening the assessment on the grounds that the annual receipts (capital and revenue) for the year under consideration exceeded Rs.1.00 crore and as such it is not eligible for exemption u/s. 10(23C)(iiiad). During the assessment proceedings, AO noted that the AR of the assessee has submitted that the receipts of the society are only Rs. 60,24,857/-and an amount of Rs.  39,14,102/- was received as donation towards corpus fund. The donation towards corpus funds shall not be added towards receipts of the society. AO further noted that the corpus fund was to construct building of the society and therefore, it should be treated as capital receipt of the society. The AO therefore held that the receipts of the society exceeded Rs. 1.00 Crore and therefore exemption u/s 10(23C)(iiiad) is not allowed. The AO thus made the assessment vide his assessment order dated 19.12.2011 passed u/s. 148/143(3) of the I.T. Act and brought to tax the surplus income of Rs. 20,98,900/- in the hands of the assessee. CIT(A) allowed the exemption aggrieved the Dept. went in appeal before the Hon. ITAT, which upheld CIT(A)’s order and held that-

The amounts contributed voluntarily by the donors with specific direction that it shall form part of corpus would not constitute income of the society. Therefore, the receipts of the educational institution are below Rs.1.00 Crore and as such exemption u/s 10 (23C)(iiiad) is allowable. For the purpose of section 10(23C)(iiiad), in the term ‘aggregate annual receipts’ refers to the receipts by the educational institution and not that of the society. 

3.5 ITO vs. Chironji Lal Virendrapal Saraswati Shiksha Parishad, (2015) 43 CCH 0666 LucknowTrib, 31-3-2015 – AY 2010-11 & 2011-12

In the case trust was running a junior college and senior college the receipts included capital receipt. Ground of appeal was as under-

That the Ld. CIT (Appeals) had erred under the facts and circumstances of the case, as phrase ‘Separate institute’ for the purpose of availing exemption u/s 10 is nowhere defined in the Act. The assessee cited judgment in case of CIT V. Children Education Society (2014) 264 CTR (Kar.) where the assessee society was running as much as 22 educational institutes separately which were miles away from the fact of this case where assessee is running a single school on single location, in single and distinct building with single playground and other facilities claiming to be two Separate educational institute. Hon. ITAT held that

It is seen that while granting this approval on 18/02/2014 also, both the institutions of junior high school and inter college has been treated separately and the permission was granted for inter college.

Considering all these facts, we are of the considered opinion that for the purpose of limit prescribed in section 10(23C)(iiiad), Rs. One crore limit has to be considered for each institution separately and not for the assessee as a whole. This is very important to mention that as per section 10(23C)(iiiad)  also,  the  term  used  is  any  university  or  other  educational  institution existing solely for educational purposes and not for purposes of profit, if the aggregate annual receipts of such  university or educational institution do not exceed the amount of annual receipts as may be prescribed and the receipts so prescribed is Rs. One crore as per Rule 2BC. Hence, it is seen that the reference is to the educational institution and not the assessee as a whole. Considering these facts, we are of the considered opinion that when the annual receipt of each institution is below Rs. One crore, the assessee is eligible for exemption in respect of both the institutions having annual receipt of below Rs. One crore each. Hence, we decline to interfere in the order of CIT(A) on this issue.

3.6 Vivekanand Society of Education and Research vs CIT & Anr., (J & K), ITA No. 23/2014, dt. 26-12-2017 – AY 2005-06

The question before the Hon. High Court was to interpret Sec. 10(23C)(iiiad).

The assessee was running 2 educational institutions, total receipt after clubbing both the institutions exceeded Rs.1 crore and exemption was claimed u/s 10(23C)(iiiad). But the surplus was taxed by the AO taking a view that. “The word used in the Section 10(23C)(iiiad) is educational institution and not educational institutions.”

In appeal before the first appellate authority, the exemption was allowed u/s 10(23C)(iiiad) being eligible.

The revenue challenged the order before Hon. ITAT Amritsar [(2014) 39 CCH 0280 AsrTrib] and held that,

….we are of the view that the Assessing Officer has completed the assessment under the law and rightly made the total taxable income of Rs. 69.27,948/- and rightly held that the receipts of both the institutions should have been clubbed and the society, which is the Educational Society, was required to file its return by clubbing the receipts of both the institutes and to claim exemption of income over expenditure, the society must have obtained exemption certificate u/s 10(23C)(iv) of the Act from the prescribed authority under the I.T. Act.

The order was challenged before Hon. High Court of Jammu & Kashmir and Hon. High Court allowed the exemption. In response to the question –

Whether the aggregate annual receipts of the said two institutions are to be clubbed for the purposes of Section 10 (23C) (iiiad) or not?

After analysing the section and Rule 2BC it observed as under-

14. ………..It is, therefore, clear that there is a distinction between the expression “any person” and “educational institution”, and that the two are not the same. Had it been the intention of the legislature to have limited the scope of the provision to the interpretation which has been given by the Tribunal, it could easily have said that, if the aggregate annual receipts of any person from all institution(s) do not exceed Rs. 1.00 crore then the income derived there from would not be included in the total income of that person. But, this is not the case here. The reference here is pointedly to the “aggregate annual receipts” of the educational institution. The expression, “educational institution” and “any person” do not refer to the same entity and are distinct and different insofar as Section 10 (23C) (iiiad) of the said Act is concerned.

15. In our view, therefore, where there are more than one such institutions, which are under a particular society or trust, such as the assessee society in the present case, the aggregate annual receipts of each of the educational institutions would have to be considered separately and not together. Thus, if there are two institutions A and B and if the aggregate annual receipts of the Institution A is less than Rs. 1.00 crore, then the income received by a person (such as the assessee society) on behalf of the Institution A, would not be included in the total income of that person (such as the assessee society). At the same time, if the aggregate annual receipts of Institution B exceed Rs. 1.00 crore, then any income received by any person on behalf of Institution B would be included in the total income of that person. Similarly, by taking this logic further, if neither Institution A nor Institution B has aggregate annual receipts of Rs. 1.00 crore or more, any income received by any person on behalf of these institutions, would not form part of the total income for the purposes of income tax.

16. This is our opinion and view upon a plain reading of the provisions. We are, of course, not alone insofar as this interpretation is concerned. The High Court of Karnataka has considered this very issue in its decision in the case of The Commissioner of Income Tax and Deputy Commissioner of Income Tax v. M/S Children Education Society, (2013) 358 ITR 373 (Kar). …………

18. We entirely agree with the conclusion arrived at by the Karnataka High Court in the case of Children’s Education Society (supra).

19. In view of the foregoing, the questions are answered in favour of the assessee and against the revenue.

The SLP against this judgment is dismissed on the ground of delay.

Ref. (2019) 104 CCH 0265 ISCC, 5-3-2019.

3.7 Queen’s Educational Society vs. CIT, (2015) 372 ITR 0699 (SC), 16-3-2015- AY 2008-09

This is a very interesting case. Revenue had filed appeals against two cases decided by Hon. Uttarakhand High Court and a case in which Hon. Panjab & Haryana High Court judgment in Pine Grove case was followed.

The facts in brief are that the trust since established was imparting education and claimed exemption u/s 10(23C)(iiiad) but the AO rejected the exemption giving reason that there was surplus. In appeal the CIT(A) allowed the exemption and ITAT dismissed revenue’s appeal. Hon. High Court set aside the ITAT’s order and upheld the AO’s order. Hon. Supreme Court squashed the HC order and upheld the ITAT’s order.

In this case Hon. Supreme Court has cleared the doubts and misconceptions of the Revenue about Hon. Supreme Court’s remarks about surplus in the 5 cases of –

1) CIT v. Surat Art Silk Cloth Manufacturers’ Assn., (1980) 121 ITR 1,

2) Sole Trustee, Loka Shikshana Trust (1975) 101 ITR 234]

3) Indian Chamber of Commerce (1975) 101 ITR 796].

4) Aditanar Educational Institution v. ACIT, (1997) 224 ITR 310

5) American Hotel & Lodging Assn. Educational Institute v. CBDT, (2008) 301 ITR 86,

After examining the section, Hon. Supreme Court has laid down the principles for the said exemption as follows-

11. Thus, the law common to Section 10(23C) (iiiad) and (vi) may be summed up as follows:

(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.

Reason given by Hon. Uttarakhand High Court for rejecting exemption was that there is a surplus and hence the exemption u/s 10(23C)(iiiad) is not allowed. The most surprising and shocking part was that Hon. High Court not only made a mistake in quoting Hon. Apex court’s ruling in Aditanar Educational Institution v. CIT, but added one paragraph of AO’s order stating it to be of Hon. Supreme Court.

Hon. Supreme Court rightly accepted the same as pointed out by the appellant Society and remarked as follows-

15. It is clear that the High Court did not apply its mind independently. What has been copied is one paragraph from the Supreme Court judgment in Aditanar followed by a paragraph of faulty reasoning by the Assessing Officer and the said faulty reasoning of the Assessing Officer has been wrongly said to be the law laid down by the Apex Court.

3.7  CCIT vs. St. Peter’s Educational Society, (2016) 385 ITR 0066 (SC), dt.10-5-2016

In a civil appeal Hon. Supreme Court has again reiterated its views mentioned in Queen’s Educational Society vs. CIT, (2015) 372 ITR 0699 (SC) and held in favour of the assessee allowing exemption and against the revenue.

4. Whether approval and/or registration of trust u/s 12A/AA is necessary

The approval as envisaged under clause (iv) of sec. 10(23C) is not necessary. Similarly, for the exemption u/s 10(23C) registration u/s 12A/12AA is not required. Following cases have settled the principle-

ACIT vs. Vatsalya Senior Secondary School, (2010) 130 TTJ (Ind)(UO) 27

Sec.10(23C)(iiiad) is an independent section and has no direct or indirect link with  the registration under s. 12A because registration under s.12AA is only needed when exemption is claimed under s. 11.

Jat Education Society vs DCIT –

The requirement of approval of Chief CIT under sub-cl. (vi) of cl. (23C) of s. 10 is for those who are not covered by sub-cls. (iiiab) or (iiiad) of cl. (23C) of s. 10.

In the following cases the question was under consideration and is held that the approval as envisaged u/s 10(23C)(vi) or registration u/s 12A is not required to avail the exemption u/s 10(23C)(iiiad)-

Vivekanand Society of Education and Research vs CIT & Anr., (J & K), ITA No. 23/2014 (SLP dismissed)

Pinegrove International Charitable Trust & Ors. vs. UoI & Ors, (2010) 327 ITR 0073 (P & H) (approved by SC in Queen’s Education Society, (2015) 372 ITR 0699 (SC))

5. Limit of Rs. One crore fixed in 1998 needs upward revision

The sections were incorporated and the limits were fixed in 1998, i.e. 23 years ago. This is a substantial period of more than two decades. The situation in 1998 has undergone lot of changes including devaluation and inflation. The costs have gone haywire in this long period and the scale of fees also has undergone a huge change, naturally due to inflation.

But, no cognizance is taken by the law makers in respect of this limit fixed for the charitable institutions. This certainly needs suitable upward amendment.

6. Conclusion

Considering the entirety of the issue it can be summarised that,

– The section 10(23C)(iiiad) refers to the institutions and not the assessee

– The limit of Rs.1 crore of aggregate receipts is to be independently calculated per institution and not for the assessee trust/society as a whole.

– For availing this exemption approval as envisaged u/s 10(23C)(vi) is not required

– For availing this exemption registration u/s 12A/AA is also not required.

– Mere surplus cannot deny exemption as long as the institution is working for the purpose of education and not for profit.

Considering the law and principles settled by various orders of Hon. ITAT, and judgments of Hon. High Courts and the Apex Court, there is no doubt that the limit of Rs.1 crore has to be calculated per institution. However, CPC does not consider the same as distinct in processing and clubs all the receipts of all the institutions. Similarly, the limit of Rs. One crore needs to be suitably amended upwards.

This needs to be addressed properly by the appropriate authorities to avoid the unnecessary litigations and loss of precious national resourced and avoidable harassments.