SC landmark Order on exemption u/s 10(23C): Whether institution has to exist solely for the purpose of education?

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SC landmark Order on exemption u/s 10(23C): Whether institution has to exist solely for the purpose of education?

 

Here is a landmark order by the Hon’ble Supreme Court on the scope of section 10(23C) vis a vis society engaged in education. The issue before the SC in the case of M/s New Noble Education Society Vs The Chief Commissioner of Income-tax and another was whether an institution claiming exemption u/s 10(23C) has to exist solely for the purpose of education or it can have income from other sources as well and connected issues?*

The case is decided by the three judges bench of the Supreme Court and will  have far reaching repercussions on all such trusts & institutions which are claiming exemption u/s 10(23C) as educational and medical institutions.

Hon’ble Supreme Court held that institutions claiming exemption u/s 10(23C) cannot have objects which are unrelated to education. Further, it is held that the profit-oriented institutions would not be entitled to approval under Section 10(23C).

The order could be summarized with following points:

  1. It is 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.
  2. 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
  3. The seventh proviso to Section 10(23C), as well as Section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.
  4. 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 textbooks, providing school bus facilities, hostel facilities, etc.
  5. The reasoning and conclusions in the case of American Hotel and Queen’s Education Society so far as they pertain to the interpretation of expression ‘solely’ are hereby disapproved.The judgments are accordingly overruled to that extent.
  6. 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. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes.The observations made in the case of American Hotel suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment.
    Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.
  7. It is 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.

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