The Supreme Court ruled that the trust or educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities.
The subject matter of these appeals is the rejection of the 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 Andhra Pradesh High Court, by its detailed impugned judgment, 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 to determine that issue, the court had to consider the memorandum of association or the rules or the constitution of the concerned trust.
Additionally, the appellants were denied registration on the ground that they were not registered under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 as condition precedent for grant of approval.
Advocate Prabha Swami, appearing for the appellants (R.R.M Educational Society), contended that the impugned judgment was in error of the law.
She submitted that the High Court’s approach in considering the memorandum of association, rules or the constitution of the trust was no doubt correct, however the literal interpretation of the expression ‘solely’ under Section 10(23C)(vi) was not correct.
N. Venkataraman, Additional Solicitor General, appeared on behalf of revenue, pointed out that from the inception of the IT Act, till 31March 2009, the definition of charitable purposes under Section 2(15) included only four activities.
It was alleged that since the inception of the IT Act in 1961 till31 March 1975, income from education was excluded as a head under Section 10. By Section 10 (22), income of university or other educational institutions existing ‘solely’ for educational purposes, and not for the purpose of profit, was excluded from tax liability.
The three judges bench of The Chief Justice of India Uday Umesh Lalit, Justice S. Ravindra Bhat and Justice Pamidighantam Sri Narasimha stated that Education ennobles the mind and refines the sensibilities of every human being. It aims to train individuals to make the right choices. Its primary purpose is to liberate human beings from the thrall of habits and preconceived attitudes.
“It should be used to promote humanity and universal brotherhood. By removing the darkness of ignorance, education helps us discern between right and wrong. There is scarcely any generation that has not extolled the virtues of education, and sought to increase knowledge” the court said.
The bench observed that the term ‘solely’ is not the same as ‘predominant / mainly’. The term ‘solely’ means to the exclusion of all others. None of the previous decisions – especially American Hotel or Queens Education Society – explored the true meaning of the expression ‘solely’.
The court opined that a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation.
The 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.
It was observed by the court that 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.
It was held by the court that 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.
The court said that the reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A) merely means that the profits of business which is ‘incidental’ to educational activity – as explained in the earlier part of the judgment i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.
The court further held that while considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution.
It was further held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section 10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from 01.04.2021.
The bench directed that the law declared in the judgment shall operate prospectively.
Case title: M/S New Noble Educational Society v/s The Chief Commissioner of Income Tax 1 and Anr.
Citation: Civil appeal no. 3795 of 2014