1.1 S. 10(23C) of the Income-tax Act contains 3 clauses for
granting exemption to universities or other educational institutions — (iiiab),
(iiiad) and (vi). The common requirement for exemption under all these three
clauses is that the university or other educational institution should exist
solely for educational purposes and not for purposes of profit.
1.2 There has been a debate as to the meaning of the term
‘not for purposes of profit’. The tax authorities have sought to interpret this
requirement as meaning that an Institute which earns a surplus would not be
eligible for the benefit of exemption u/s.10(23C).
1.3 While the Uttarakhand High Court has supported this view
of the tax authorities by holding that in a case of surplus, the educational
institution is not eligible for the exemption, the Bombay High Court and the
Punjab and Haryana High Courts have taken a contrary view that the institution
cannot be regarded as existing for purposes of profit simply because it has a
surplus, and would continue to be eligible for the exemption.
2. Queens’ Educational Society’s case :
2.1 The issue came up before the Uttarakhand High Court in
the case of CIT v. Queens Educational Society, 319 ITR 160.
2.2 In this case involving various educational societies
registered under the Societies Registration Act and imparting education to
children, the assessees had claimed exemption u/s.10(23C)(iiiad), on the ground
that they existed solely for educational purposes and not for purposes of
profit.
2.3 The Assessing Officer rejected the claim for exemption.
The Commissioner (Appeals) allowed the benefit of exemption, and the Tribunal
upheld the order of the Commissioner (Appeals).
2.4 The Uttarakhand High Court disapproved the observations
of the Tribunal as hypothetical when the Tribunal noted that there was hardly
any surplus left after investment into fixed assets, that the assessees were
engaged in imparting education and had to maintain a teaching and non-teaching
staff and to pay for the salaries and other expenses, that it became necessary
to charge fees from students for meeting all these expenses, that the charging
of fee was incidental to the prominent objective of the trust of imparting
education, that the school was initially being run in a rented building and the
surplus enabled the Society to acquire its own property, computers, library
books, sports equipment, etc. for the benefit of the students, and that the
members of the Society had not utilised any part of the surplus for their own
benefit. The High Court also noted the Tribunal’s observations that profit was
only incidental to the main object of spreading education, and that if there was
no surplus out of the difference between the receipts and outgoings, the trust
would not be able to achieve its objects.
2.5 The Uttarakhand High Court observed that the reasons
recorded by the Tribunal were hypothetical, and that the Tribunal failed to
appreciate that the profit percentage was 30% and 27% of the total receipts.
According to the Uttarakhand High Court, the law was well settled that is the
profit was proved by an educational Society, then that would be income of the
society as a surplus amount remained in the account books of the Society after
meeting all the expenses incurred towards imparting education. The Uttarakhand
High Court relied on observations of the Supreme Court in the case of
Aditanar Educational Institution v. Addl. CIT, 224 ITR 310 for this
proposition.
2.6 The Uttarakhand High Court observed further that the
objects clause contained other noble and pious objects and the Society had done
nothing to achieve those objects except pushing the main object of providing
education and earning profit. According to the Uttarakhand High Court, with the
profit which it had earned, the Society had strengthened or enhanced its
capacity to earn more rather than to undertake any other activities to fulfil
other noble objects for the cause of poor and needy people or advancement of
religious purposes. The High Court observed that the investment in fixed assets
might have been connected with the imparting of education, but the same had been
constructed and/or purchased out of income from imparting education with a view
to expand the institution and to earn more income.
2.7 The Uttarakhand High Court therefore held that the
Society was not eligible for exemption, as it was existing for purposes of
profit, as evidenced by the surplus earned by the Society.
3. Vanita Vishram Trust’s case :
3.1 The issue again recently came up before the Mumbai High
Court in the case of Vanita Vishram Trust v. CCIT, (unreported — Writ
Petition Nos. 366 & 367 of 2010, dated 6th May 2010 — available on
www.itatonline.org).
3.2 In this case, the assessee was a public charitable trust
registered under the Bombay Public Trusts Act, 1950. It had been running primary
and secondary schools and colleges in Mumbai since 1929 and in Surat since 1940.
Its main object was education of women. Its memorandum provided that no portion
of the income or property of the Association would be paid directly or
indirectly by way of dividend, bonus or otherwise to the members of the
Association, and that the surplus if any, was not to be paid or distributed
amongst the members of the Association, but to be transferred to another
institution or institutions having similar objects. Till A.Y. 2004-05, the trust
was allowed exemption u/s.10(22) and u/s.10(23C)(vi).
3.3 The assessee filed applications for continuation of
approval u/s.10(23C)(vi) with the Chief Commissioner of Income-tax (CCIT). The
CCIT held that the trust had other objects, such as construction of ashrams for
Gujarati Hindu women, and was therefore not existing solely for education. He
also noted that since the trust had a surplus in excess of 12% of the receipts
from its activities, which was invested in making additions to assets and
increasing bank deposits, it was not entitled to the exemption. He therefore
rejected the applications for approval.
3.4 Before the Bombay High Court, it was argued on behalf of the assessee that for nearly 80 years, the assessee had been carrying on only the activity of conducting schools and colleges and had not carried on any other activity. It was also argued that the incidental existence of a surplus generated from the activity of conducting schools and colleges would not detract from the character of the assessee as existing solely for educational purposes and not for profit, and that the entire surplus was utilised only for the purpose of education, there being a specific provision in the Memorandum under which no part of the profits could be distributed. It was further argued that the existence of a surplus did not disentitle an institution to the grant of approval, and that the purpose of the surplus was to build up corpus for the capital enhancement of the educational institutions conducted by the trust, which was not a commercial purpose, but a purpose directly proximate to the main object of conducting educational institutions.
3.5 On behalf of the Revenue, it was argued that the threshold requirement of S. 10(23C)(vi) was the existence of an educational institution or university, and its existence solely for educational purposes and not for profit.
3.6 Noting the fact that the trust had carried on only the running of schools and colleges for the last 80 years, the Bombay High Court noted that even in the past, the tax authorities had held the trust to be existing solely for educational purposes. The Bombay High Court noted that in a reference made to a Division Bench of the Bombay High Court u/s.256(1) on the issue of whether the same assessee (as was now before it) was entitled to exemption u/s.10(22) on interest earned on surplus funds of the school run by it, the Division Bench had observed that merely because a certain surplus arose from the operations of the trust, it could not be held that the institution was run for the purpose of profit, so long as no person or individual was entitled to any portion of the profit and the profit was utilised for the purpose of promoting the objects of the institution.
3.7 In that case, the Division Bench had relied on the Supreme Court decision in the case of Aditanar Educational Institution (supra), in holding that as a principle of law, if after meeting the expenditure, a surplus resulted incidentally from an activity law-fully carried on by the educational institution, the institution would not cease to be one which was existing solely for educational purposes since the object was not to make profit. The Bombay High Court noted the findings of the earlier Division Bench in the case of the same assessee holding that the assessee existed only for educational purposes which consisted of running educational institutions, and not for earning profits.
3.8 The Bombay High Court also pointed out the provisions of the third proviso to S. 10(23C), which permitted an accumulation not exceeding 15% for a period of not more than 5 years. According to the Bombay High Court, this provision established that the Parliament did not regard the accumulation of income by a university or other educational institution as a disabling factor, so long as the purpose of accumulation was the application of the income wholly and exclusively to the objects for which the institution had been established. The Parliament had however placed a limit on the amount and period of such accumulation.
3.9 Referring to the decision of the Uttarakhand High Court in Queens’ Educational Society’s case, the Bombay High Court observed that that case seemed to be distinguishable, as the assessee in that case was construed to be one which existed with the object of enhancing the income and of earning profits as opposed to the provision of education. However, with reference to the observations of the Uttarakhand High Court that though it was entitled to pursue other noble and pious objects, the assessee had done nothing to achieve them and had only pursued the main object of providing education and earning profit, the Bombay High Court observed that the requirement that the institution must exist solely for educational purposes would militate against an institution pursuing other objects. The Bombay High Court therefore disagreed with the views expressed by the Uttarakhand High Court that the benefit of the exemption should be denied on the ground that the assessee had only pursued its main object of providing education and had not pursued the other objects for which the trust was constituted.
As observed by the Bombay High Court, if the assessee were to pursue other objects, it would clearly violate the requirement of existing solely for educational purposes.
3.10 The Bombay High Court therefore directed the CCIT to grant approval to the assessee u/s. 10(23C)(vi) as an educational institution existing solely for educational purposes and not for purposes of profit.
3.11 A similar view was taken by the Punjab and Haryana High Court in the case of Pinegrove International Charitable Trust v. Union of India, 188 Taxman 402, where the Punjab and Haryana High Court held that merely because profits have resulted from activity of imparting education would not result in change of character of institution that it existed solely for educational purposes.
4.Observations:
4.1 Since all the three High Courts in the above cases have referred to the Supreme Court decision in the case of Aditanar Educational Institution (supra ) in support of the view taken by each of them, and relied on the same observations, it is necessary to understand the ratio of that decision and those observations of the Supreme Court in Aditanar’s case.
4.2 In Aditanar’s case (supra ), the Supreme Court was considering a case of a Society which was running various schools, and had received donations. The tax authorities sought to tax the donations, on the ground that the Society was not an educational institution, but merely a financing body. While holding that the Society itself was also an educational institution existing solely for educational purposes, the Supreme Court observed as under:
“We may state that the language of S. 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity. The following decisions are relevant in this context: Governing Body of Rangaraya Medical College v. ITO, (1979) 117 ITR 284 (AP) and Secondary Board of Education v. ITO, (1972) 86 ITR 408 (Orissa).”
4.3 The Supreme Court therefore impliedly approved the ratio of these two decisions of the Andhra Pradesh High Court and the Orissa High Court. In Rangaraya Medical College’s case, the Andhra Pradesh High Court had held that merely because certain surplus arose from the society’s operations, it could not be held that the institution was run for purpose of profit, so long as no person or individual was entitled to any portion of the said profit and the said profit was utilised for the purpose and for the promotion of the objects of the institution.
4.4 In Secondary Board of Education’s case, the Orissa High Court held:
“One of the sources of income of the Board is profits from compilation, publication, printing and sale of textbooks. The profits so earned enter into the Board fund. The income and expenditure of the Board is controlled and the entire expenditure is to be directed towards development and expansion of educational purposes. Even if there is some surplus, it remains as a part of the sinking fund to be devoted to the cause of education as and when necessary. This being the objective and there being various ways of control of the income and expenditure, the Board of Secondary Education cannot be said to be existing for purposes of profit. It exists solely for purposes of education.”
4.5 It therefore appears that so long as the main object is provision of education, surplus arising from any of the activities would not disentitle the claim for exemption, so long as the surplus can be utilised only for education. This view is also supported by the permitted accumulation.
4.6 Further, the Punjab & Haryana High Court in Pinegrove’s case, has rightly observed that there is a definite purpose behind allowing setting up of educational institutions by private sector, including trusts/societies. Various educational colleges could not have been established for want of funds, and the Government which lacked funds thought that the private sector could assist in this regard. The Court observed that in every educational institution, there is bound to be a profit to support growth of the educational infrastructure and activities. Interestingly, the Punjab & Haryana High Court has held that in computing the surplus, capital expenditure has also to be deducted, as that is also an expenditure on the objects of the trust.
4.7 As rightly observed by the Bombay High Court in Vanita Vishram’s case, where S. 10(23C) itself now permits an accumulation of income up to 15% of the income of the trust, a trust cannot be penalised by treating it as existing for purposes of profit merely because it earns and accumulates such a surplus. In any case, today it is restricted from accumulating a surplus exceeding a particular level and beyond a particular period. As observed by the Supreme Court in Aditanar’s case, there is a clear distinction between the objects, which is that of education, and the powers, which is to spend on objects or accumulate surplus.
4.8 The Uttarakhand High Court seems to have misinterpreted the observations of the Supreme Court in Aditanar’s case, regarding the corpus, objects and powers, to mean that the assessee should pursue other objects as well. As rightly pointed out by the Bombay High Court, if this interpretation were adopted and the assessee pursued other non- educational objects, it may in fact result in total denial of the benefit meant only for educational institutions.
4.8 The better view therefore is that of the Mumbai and Punjab & Haryana High Courts, that an educational trust cannot be held to be existing for purposes of profit and not for education merely because it earns a surplus from its activities.
