Analysis of the Income Tax Exemptions available to certain Educational Institutions under Section 10(23C) of the Income Tax Act, 1961 and comparison of the same with exemption available under Section 11.
Background: Section 11 is a popular section for claiming exemption from income tax among the non-government charitable trusts and institutions. Most of the charitable trusts, big or small are registered u/s 12AA of the Act and claim exemption u/s 11. While the exemptions available u/s 11 are general and available to all the charitable organisations, Section 10(23C) of the Act is a specific exemption available to certain Government and non-government universities and educational institutions.
By way of this note, we will analyse the conditions prevalent for claiming of exemption by Government and non-government educational institutions.
A. Government Educational Institutions: Income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government is fully exempt from tax vide Section 10(23C)(iiiab). Hence, a Government educational institution is fully exempt from income tax without any separate approvals etc. as long as it is not for profit purpose.
B. Non-government Educational Institutions: The exemption for non-government (private) educational institutions depends upon the aggregate annual receipts of the university / educational institution.
1) Educational Institutions with annual receipts up to Rs. 1 crore: Section 10(23C)(iiiad) provides that the income earned by any university or educational institution existing solely for educational purposes and not for the purposes of profit shall be exempt from tax if the aggregate annual receipts of such university or educational institution do not exceed Rs. 1 crore.
Thus, an educational institution having receipts upto Rs. 1 crore can claim full exemption under the above clause without requiring a separate approval or registration.
Here it is important to note that the term “annual receipts” has not been defined under the law. Keeping in mind the intention of the provisions, annual receipts should mean receipts from the various fees and charges collected by the institution. It can also include the receipts from donations.
2) Educational Institutions with annual receipts exceeding Rs. 1 crore: Exemption in the case of an educational institution having receipts exceeding Rs. 1 crore is governed by Section 10(23C)(vi) which states that income earned by 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), shall be exempt if they are approved by the prescribed authority. Thus, where the aggregate receipts of the institution exceeds Rs. 1 crore, the institution needs a separate approval for claiming the exemption u/s 10(23C).
The Application for approval is required to be made in Form No. 56D along with the necessary supporting documents before the Commissioner of Income Tax (Exemptions). Like the approval u/s 12AA, the approval u/s 10(23C) is also available indefinitely unless it is rescinded by the authorities.
There are some further conditions prescribed for an educational institution having receipts in excess of Rs. 1 crore. The third proviso to Section 10(23C) provides for the following two conditions:
i) Spend minimum 85%: The educational institution shall apply (spend) its income wholly and exclusively to the objects for which it is established. Further, the institution shall apply at least 85% of the income every year. Thus, just registration u/s 10(23C) by itself does not result in full exemption. The institution shall spend at least 85% of total income in order to claim full exemption. It may be noted that the institution is allowed to retain up to 15% of total income without any conditions.
In case the income applied falls short of the said 85%, the institution can accumulate such excess income for application in subsequent year(s) not exceeding five years. For example-
Gross Income : Rs. 2,00,00,000/-
85% of the Gross Income : Rs. 1,70,00,000/-
Actual Amount Spent : Rs. 1,40,00,000/-
In this case, the shortfall of Rs. 30,00,000/- can be accumulated by the institution which can be spent in the subsequent five years.
However, the accumulated amounts are required to be spent by the institution on its own and it cannot spent the same by way of donations (corpus or otherwise) to any trust registered u/s 12AA or any other institution claiming exemption u/s 10(23C).
From the above, it is clear that the provisions are similar to the one available u/s 11 to the Trusts registered u/s 12AA. The only difference here seems to be that there is no need to pass a trustees’ resolution to accumulate the income and no need to file a separate Form and specify the purpose of accumulation (unlike Form No. 10 in the case of 12AA registered trusts).
ii) Investments: The second condition is that the institution shall invest its money only in the modes specified u/s 11(5). This is once again similar to the provisions applicable to a trust registered u/s 12AA.
iii) Other Conditions:
a) Income Tax Return: By virtue of 139(4C) every educational institution referred to in sub-clause (iiiad) or sub-clause (vi) of Section 10(23C) whose total income, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, shall furnish a return of income. Therefore, if the total receipts of the institution exceeds Rs. 2,50,000/-, it shall file the return of income. The Form of ITR is ITR-7, the same as applicable to a Section 12AA registered Trust.
b) Audit: Proviso no. 10 to Section 10(23C) provides that where the total income of the institution, without giving effect to the provisions of this section, exceeds the maximum amount which is not chargeable to tax in any previous year, such institution shall get its accounts audited and furnish along with the return of income for the relevant assessment year, the report of such audit Form No. 10BB. Therefore, if the total receipts of the institution exceeds Rs. 2,50,000/-, it shall file the return of income.
c) Corpus Donations to other Trusts: Proviso no. 12 to the Section 10(23C) further provides that any amount credited or paid out of income of any university or educational institution to any trust or institution registered under section 12AA, being a corpus donation shall not be treated as application of income to the objects for which such university or educational institution is established. Therefore, the educational institutions registered u/s 10(23C)(vi) are barred from giving corpus donations to other Trusts registered u/s 12AA.
d) Other Provisions: Applicability of other provisions like deduction of tax at Source (TDS) on expenses are fully applicable to an educational institution. Therefore, an educational institution is required to deduct tax from payments, wherever required, in order to claim the amount as application of income.
Conclusion: From the above discussion, it is clear that the exemption provisions of Section 10(23C) and Section 11 are more or less similar. Both have similar conditions and requirements for claiming the exemption. However, Section 10(23C) has less requirements when it comes to accumulation of income i.e. there is no need to file a separate Form and no need to specify the purposes of accumulation.
Disclaimer: The above analysis is based on the current position of the income tax laws and our understanding of the same. The income tax laws are subject to frequent changes and the foregoing analysis may need to be updated with subsequent changes in the law.