Educational Institution – Exemption – 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 as intuition for the purpose of making profits – Assessing Authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down.

The petitioner Society registered under the Societies Registration Act, 1860 as well as under the provisions of the Bombay Public Trusts Act, 1950, was engaged in imparting higher and specialised education. It is specialised in imparting education in the field of communication including advertising and its related subjects. The petitioner had also been granted the registration u/s. 12A of the Act. The Director of Income Tax (Exemption) had issued a notice u/s. 12AA(3) of the Act and called upon the petitioner to explain as to why its registration u/s. 12A of the Act should not be withdrawn. The said notice came to be challenged by the petitioner before the Gujarat High Court by filing a writ petition, which was withdrawn at a later stage in view of the fact that only show-cause notice was under challenge. However, the procedure initiated by the Director of income tax (Exemption) u/s. 12AA(3) of the Act were dropped by an order dated March 3, 2014 and accordingly the registration granted in favour of the petitioner u/s. 12A of the Act, remained intact. The petitioner submitted an application for getting an exemption certification u/s. 10 (23C)(vi) of the Act, for the assessment year 2013- 14 and onwards on September 30, 2013. The petitioner was called upon to make submissions. By two letters dated February 28, 2014 and August 13, 2014 detailed submissions were made before the Commissioner with whom the application was pending for adjudication. By the order dated September 29, 2014 the Commissioner refused to issue the certificate u/s. 10(23C)(vi) of the Act on various grounds.

By way of a writ petition under articles 14, 19(1)(g) and 226 of the Constitution of India the petitioner challenged the order dated September 29, 2014 passed by the Commissioner by which the application submitted by the by the petitioner to issue exemption certificate in its favour u/s. 10(23C)(vi) of the Act. had been refused.

The High Court noted that it was an admitted position that a certificate u/s. 12A of the Act had already been issued in favour of the petitioner and the same had continued till date. Therefore, according to the High Court it was established that the petitioner-institution was a charitable trust as far as applicability of the Income-tax Act was concerned.

The High Court held that the sole object of the institution was to impart education. By providing latest information and thereafter training to those people who were already in the field of advertising communication, etc. and in such process if certain persons became super-specialists in a particular field, and for which the institution was charging fee, such a case would not fall under proviso to section 2(15).

The High Court concluded that the petitioner institution was established for the sole purpose of imparting education in a specialized field.

Before the Supreme Court, the learned Solicitor General appearing for the Income-tax Department and the counsel appearing for the respondent-assessee in the appeal did not dispute that the issue involved in these appeals was squarely covered by the judgment of the Supreme Court in Queen’s Educational Society vs. CIT [2015] 372 ITR 699 (SC). The Supreme Court noted that the matter pertained to the exemption to the educational institutions u/s.10(23C) of the Income-tax Act, 1961. In the said judgment, the court summarized the legal position as under:

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

(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 as intuition for the purpose of making profits.

(2) The predominant object test 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 the surplus and an institution being carried on ‘for profit’. No inference arises that merely because imparting education result in making a profit, it becomes an activity for profit.

(4) If after meeting the expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not 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.”

The Supreme Court noted that there was a difference of opinion amongst various High Courts on the aforesaid issue. While summarizing the law, it approved the judgments of Punjab and Haryana High Court, Delhi and Bombay High Courts and reversed the view taken by the Uttarakhand High Court. In so far as the judgment of the Punjab and Haryana High Court was concerned, it was given in the case of Pinegrove International Charitable Trust vs. Union of India [2010] 327 ITR 73 (P&H). The relevant para in this behalf which also stated as to how such cases were to be dealt with reads as under:

“25. We approve the judgment of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment the Uttarakhand High Court and since the Chief Commissioner of Income-tax’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, the Revenue’s appeal from the Punjab and Haryana High Court’s judgment dated January 29, 2010, and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgment stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profits. In addition, we hasten to add that the 13th proviso to section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institution be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that the Revenue is at liberty to pass fresh order if such necessity is felt after taking into consideration the various provisions of law contained in section 10(23C) read with section 11 of the Income-tax Act.”

The Supreme Court dismissed the appeal clarifying that the observations made in para. 25 in Queen’s Educational Society (supra) shall be followed