The Income Tax Appellate Tribunal (ITAT), Hyderabad, has held that charging substantial school fees and generating a surplus cannot, by themselves, justify denying registration under Section 12AB of the Income Tax Act, 1961, where an institution carries out genuine educational activities in accordance with its charitable objects.

The bench of Vijay Pal Rao (Vice President) and Manjunatha G (Accountant Member) directed the Commissioner of Income Tax (Exemptions), Hyderabad, to condone the delay in its application and grant registration. The society’s application had been rejected principally because it charged annual kindergarten fees ranging from ₹2.10 lakh to ₹3.50 lakh and reported a substantial excess of income over expenditure. 

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The bench emphasised that the examination must focus on the institution’s objects, actual activities and use of funds. The amount of fees collected or surplus earned in a particular year cannot alone establish that an educational institution operates for profit.

The appellant/assessee registered under the Telangana Societies Registration Act, 2001, operates a kindergarten providing foundational education to children. Its stated objects include establishing institutions imparting kindergarten, primary, secondary and higher secondary education.

The society initially received provisional registration through an order dated May 27, 2021, for assessment years 2021-22 to 2023-24. It subsequently applied for regular registration, which was granted under Section 12AB through an order dated September 17, 2022, covering assessment years 2021-22 to 2025-26.

The society submitted Form 10AB seeking renewal of registration under Section 12A(1)(ac)(ii). During the proceedings, it furnished written submissions, audited financial statements, a note explaining its activities and documents supporting its claim that it satisfied the requirements of Section 2(15).

However, the Commissioner rejected the application by an order dated June 26, 2025, concluding that the society’s activities could not be regarded as charitable.

The Commissioner noted that the society charged annual fees between ₹2.10 lakh and ₹3.50 lakh for different preschool groups. According to the authority, the fee structure indicated that the school operated with a profit motive rather than to provide education to the public at large.

The authority also relied on the society’s financial results for assessment year 2024-25. Against total receipts of ₹3,45,93,501, the society reported an excess of income over expenditure of ₹1,34,24,945.

Treating the surplus as excessive, the Commissioner concluded that the society did not qualify as a charitable institution. Before the tribunal, the Revenue similarly argued that the surplus was approximately 38% and exceeded what it described as a 15–20% tolerance limit.

The tribunal did not accept that the surplus percentage, by itself, justified refusal of registration.

The society argued that the Commissioner had rejected its application without establishing that its activities were non-genuine or inconsistent with its educational objects.

Its representative, chartered accountant K. A. Sai Prasad, submitted that the society had previously obtained registration after scrutiny of its objects and records. There had been no change in either its objects or activities.

The society maintained that earning a surplus while imparting education did not destroy its charitable character, particularly where the funds remained devoted to educational purposes.

The Revenue, represented by CIT-DR Seema Meena, defended the rejection, relying on the level of kindergarten fees and the magnitude of the surplus.

The tribunal found that the society was engaged in imparting education and that its educational objects were charitable. It further recorded that its activities were carried out in accordance with those objects.

Examining the financial records, the bench noted that although the income and expenditure account reflected a surplus of ₹1,34,24,945, the society’s computation concerning application and accumulation of income reflected ₹56,04,909 after considering amounts applied for educational purposes.

The tribunal also found that no part of the society’s surplus had been diverted to unrelated purposes or used to benefit its members.

Against this factual background, the bench held that the fees charged and surplus generated could not independently determine whether the society was acting in accordance with its aims and objects.

It concluded that an institution could not be treated as non-charitable merely because its fees were considered high or its surplus exceeded 15–20%, where its objects and actual activities otherwise supported its claim to charitable status.

The bench relied on the Supreme Court’s decision in New Noble Educational Society v. CIT, explaining that disproportionate weight should not be attached to incidental profits or surpluses generated through education or related activities.

As the tribunal explained, scrutiny at the registration or approval stage must focus on the activity, rather than merely the proportion of income generated. Where the income-generating activity forms an intrinsic part of education, that factor alone cannot justify rejection.

The tribunal also referred to Queen’s Educational Society v. CIT in support of the principle that a surplus ploughed back into educational purposes does not, by itself, establish that the institution exists for profit.

It further examined the Madras High Court’s ruling in Malco Vidyalaya Matriculation Higher Secondary School v. Chief CIT, which the Commissioner had cited. The tribunal observed that the decision supported relief where the institution carried on educational activities and used its surplus for school development.

Applying these authorities, the bench held that the Commissioner had erred in rejecting the society’s application.

The department also contended that the renewal application was belated and barred by limitation.

The tribunal observed that the Commissioner’s order had not specifically discussed the limitation issue. It nevertheless considered the society’s petition seeking condonation of delay and found that the reasons furnished warranted condonation.

The tribunal directed the Commissioner to condone the delay and grant registration under Section 12AB pursuant to the society’s Form 10AB application.

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