M/S NEW NOBLE EDUCATIONAL SOCIETY
THE CHIEF COMMISSIONER OF INCOME TAX & ANR.
In a recent appeal, the Supreme Court ruled that educational trusts or societies claiming exemption under Section 10 (23C) (vi) of the Income Tax Act, 1961 (hereafter, “IT Act”) must be ‘solely’ occupied with education or activities relating to education.
Section 10(23C)(vi) 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.
To understand this section, let’s see the 2 sub-clauses namely (iiiab) and (iiiad) of Section 10 (23C) first:
i. According to Section 10 (23C) (iiiab), income received by a university or other educational institution that exists only for educational purposes and not for profit and is entirely or primarily sponsored by the government is completely exempt from tax. Therefore, as long as a government educational institution is not operated for profit, it is completely exempt from income tax and does not require any further approvals.
ii. The exemption for private educational institutions is based on the university’s or educational institution’s total annual revenue, thereby, according to Section 10 (23C) (iiiad), any university or educational institution that exists purely for educational purposes and not for profit shall be exempt from tax on income earned by such university or educational institution, if its total yearly receipts do not exceed Rs. 5 crores.
Hence, Section 10 (23C) (vi) governs exemption in the case of educational institutions having receipts above Rs. 5 crores. Where the aggregate receipts of the institution exceed Rs. 5 crores, the institution needs a separate approval from the prescribed authority to claim the exemption u/s 10 (23C) (vi) with the prior mandate that it exists ‘solely’ for the purpose of education and not for profit.
In the present appeal mainly two issues were brought up:
1. Can an educational institution that wasn’t established “solely” for educational purposes claim the exemption provided by Section 10 (23c) (vi) of the IT Act?
2. Whether registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 (hereinafter “A.P. Charities Act”) was an essential prerequisite for registration or approval under the IT Act?
Earlier, the High Court of Andhra Pradesh held that:
1. The appellant’s trust was not ‘solely’ established for educational purposes, and to determine that the court took the trust’s MOA into consideration.
2. In addition, the appellants were refused registration because they did not meet the prerequisite requirement of registration under the A.P. Charities Act before being granted approval.
The Supreme Court upheld the above decision and held that:
1. For a charitable institution, organisation, or trust to be eligible for an exemption under section 10 (23C) (vi) of the IT Act, it had to be wholly dedicated to advancing education and refrain from engaging in any other for-profit endeavours. The institution will not be eligible for Section 10 (23C) approval if its goal seems to be one of profit. The profits shall be incidental to the educational activity as per the seventh proviso to Section 10 (23C) and 11 (4A).
2. In addition, it was determined that, in cases where registration of trusts, societies, other institutions, etc. is required by such state or local laws, the concerned trust, society, etc. seeking approval under Section 10 (23C) should also abide by such state or local laws. This would make it possible for the relevant authority to ascertain the genuineness of that trust, society, etc.
This decision has overruled the judgement given in the case of American Hotel and Queen’s Education Society to the extent of the interpretation of the expression ‘solely’ as a ‘dominant/predominant/primary/main’ object.