Educational trusts can claim income tax exemption only if sole objective is education: Supreme Court

The Supreme Court on Wednesday held that for an educational charitable institution, society or trust to claim income tax exemption under under Section 10(23C) of the Income Act, such institutions cannot have objects which are unrelated to education and should not engage in any activity of profit [New Noble Education Society vs Chief Commissioner of IT]..The bench of Chief Justice of India UU Lalit, Justices S Ravindra Bhat and PS Narasimha, however, clarified that if profits accrue in the course of providing education or educational activities, it will not be a bar on exemption under IT Act."All objects of the society, trust etc., must relate to imparting education or be in relation to educational activities....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," the Court heldThe Court also held that the reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A) of the Income Tax Act, 1961, "merely means that the profits of business which is ‘incidental’ to educational activity – i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.".Facts.Andhra Pradesh High Court had rejected appellants’ claim for registration as a fund or trust or institution or any university or other educational institution set up for the charitable purpose of education, under the Income Tax Act, 1961. The HC , 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 the trust was not registered under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 as condition precedent for grant of approval. The parties had urged that such a precondition was absent in the provisos to Section 10(23C) (vi) of the IT Act, and that since the tax statute was a complete code in itself, other acts such as AP Charities Act could not form the basis for denying approval. HC rejected this argument. .Issues.The top court framed the following issues:What is the correct meaning of the term ‘solely’ in Section 10 (23C) (vi) which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit”. What is the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment, and thirdly, in addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in lawLastly, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws..Findings.The Supreme Court held that 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, the Court underscored..In arriving to this conclusion, the top court held that the interpretation adopted by the judgments in American Hotel as well as Queens Education Society "as to the meaning of the expression ‘solely’, are erroneous". ."The trust or educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities. If, incidentally, while carrying on those objectives, the trust earns profits, it has to maintain separate books of account. It is only in those circumstances that ‘business’ income can be permitted- provided, as stated earlier, that the activity is education, or relating to education. The judgment in American Hotel as well as Queens Education Society do not state the correct law, and are accordingly overruled," the judgment said..The top court also held that where 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.But "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," the apex court held. .The Court also held that the requirement of registration of every charitable institution is not optional. "Aside from the fact that the consequences of non-registration are penal, which indicates the mandatory nature of the provisions of the A.P. Charities Act, such local laws provide the regulatory framework by which annual accounts, manner of choosing the governing body (in terms of the founding instrument: trust, society, etc.), acquisition and disposal of properties, etc. are constantly monitored," the Court held. .The top court dismissed the appeal but clarified that the appellant's claim for approval or registration would have to be considered in the light of subsequent events, if any, disclosed in fresh applications made in that regard.The Court also stated that the law declared in the present judgment shall operate prospectively..[Read Judgment]