The requirement that charitable institutions, societies, trusts, etc. “solely” engage in education or educational activities and refrain from engaging in any activity for profit means that such institutions are unable to have objectives that are unrelated to educating people or engaging in educational activities. – Institutions that appear to have a profit-oriented goal would not be eligible for approval under Section 10(23C) of the IT Act. However, if a surplus is generated in the course of delivering education or engaging in educational activities, it is not a bar if it occurs in a particular year or series of years.
The Division Bench of Chief Justice of India Uday Umesh Lalit, Justice S. Ravindra Bhat, and Justice P. S. Narasimha held in a significant decision that institutions where the goal of the institution appears to be profit-oriented would not be entitled to approval of exemption under Section 10(23C) of the Income Tax Act, 1961, particularly only to be applied prospectively. Angered by the Andhra Pradesh High Court’s ruling, educational trusts petitioned the Supreme Court to overturn the determination that the trusts were not eligible for income tax exemptions under Section 10(23C) of the Income Tax Act because they were not established “solely” for educational purposes. In order to address this problem, the Court read the pertinent sections of the Income Tax Act as well as the affected trusts’ memorandums of organisation, rules, and constitutions. New Noble Educational Society, the institution-appellant, further complained that the trust’s application for registration had been rejected because it had not been registered in accordance with the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act. The Apex Court ruled in this regard that any state or municipal regulations that require registration of trusts or charities must also be followed by any trust, society, other institution, etc. seeking clearance under Section 10(23C). This would make it possible for the Commissioner or other appropriate authority to confirm the legitimacy of the trust, society, etc. According to the ruling, charity institutions, societies, trusts, etc. cannot have objectives unrelated to education since they must “solely” engage in education or educational activities and refrain from engaging in any profitable business. The decisions in the cases of American Hotel and Lodging Association v. Central Board of Direct Taxes and Queen’s Education Society v. Commissioner of Income Tax were also reversed because of their reasoning and conclusions regarding how the term “solely” should be interpreted to that extent by the Apex Court. The seventh proviso to Section 10(23C) and Section 11(4A) of the Income Tax Act, which refer to profits that may be “incidentally” generated or earned by the charitable institution, were used to further clarify that the object of such institutions must be “wholly, solely, and exclusively” for the purpose of education. The same was determined to be applicable in the current case solely to institutions that teach education or engage in educationally related activities.
The parties had argued that since the tax statute was a full code in itself, other statutes like the A.P. Charities Act could not serve as the basis for withholding approval because such a requirement was not included in the provisos to Section 10(23C)(vi) of the IT Act. The High Court rejected the argument and held as follows: “7. An educational society that operates an educational institution only for educational purposes and not for the purpose of profit must be regarded as “other educational institution” under section 10(23C)(vi) of the Act. To claim that the assessee society is just a funding organisation and does not fall under the definition of “other educational institution” would be irrational and overly technical. An educational society shall be recognised as a “educational institution” if, in essence and reality, the only reason the assessee has existed is to deliver education at the level of colleges and schools. (Addl. CIT v. Aditanar Educational Institution, [1997] 224 ITR 310 (SC)) The Act’s section 10(23C)(vi) allows educational institutions that are registered as societies to petition for an exemption while maintaining their society status. Union of India v. Pine-grove International Charitable Trust, [2010] 327 ITR 73 (P&H). Therefore, it is not acceptable to draw a separation between society and the educational institution it governs.
There must be an educational institution in order to qualify for an exemption under section 10(23C)(vi) of the Act. In addition, the institution must be wholly dedicated to advancing education and not be in it for the sake of financial gain. Sorabji Nusserwanji Parekh v. CIT, [1993] 201 ITR 939 (Guj). The nature of the activities engaged in must be taken into account when determining the character of the income recipient. If there is no connection between the activity and education, the exemption must be rejected. To be determined from its objectives, the income recipient must have the characteristics of an educational institution. (Educational Institution Aditanar, 1997, 224 ITR 310 (SC)). In section 10(23C)(vi), the term “solely” is highlighted. “Solely” indicates wholly, not principally. (CIT v. Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj); CIT v. Gurukul Ghatkeswar Trust, (2011) 332 ITR 611 (AP)) The Legislature has made it plain by using the aforementioned phrase that it wants to exempt the institutions’ income from the tax. (Oxford University Press v. CIT, [2001] 247 ITR 658 (SC)) Established only for educational reasons and not for commercial endeavours An institution pursuing goals other than education would be hindered by this condition. Chief CIT v. Vanita Vishram Trust, [2010] 327 ITR 121 (Bom). Even if one of the purposes allowed the institution to engage in commercial activity, it would not qualify for section 10(23C)(vi) of the Act approval. (Educational Institute of the American Hotel and Lodging Association, [2008] 301 ITR 86 (SC)). The assessee would only be eligible for an exemption under section 10(23C)(vi) of the Act if the objects show that the assessee-very society’s existence as an educational institution is purely for educational purposes and not for profit. Ghatkeswar Trust, [2011] 332 HR 611 (AP)4. The impugned judgement determined that registration under the A.P. Charities Act was required in order to be registered or approved under the IT Act, answering the second question about whether such registration was necessary:
“21. The provisions of A.P. Act 30 of 1987 continue to apply to all public charity institutions, whether or whether they are registered in conformity with the Act’s requirements, just as they did under the A.P. Act 17 of 1966, which has since been repealed. Registration of charitable institutions is covered under Chapter IV of A.P. Act 30 of 1987. Under sub-section (1) of Section 43, which deals with the registration of charity institutions, each charitable institution’s trustee or other manager must submit an application for registration to the relevant Assistant Commissioner. According to section 43(5), the Assistant Commissioner is required to pass an order directing the institution’s registration and to issue a certificate of registration containing the information provided in the application with the alterations, if any, made by him as a result of his inquiry after receiving the application and conducting any inquiries he deems appropriate and speaking with any interested parties. According to Section 43(6), each institution’s information from the registration certificate must be entered in the Assistant Commissioner’s Register of Institutions and Endowments. The Deputy Commissioner and the Commissioner must each receive a copy of the document. Any trustee or other person who violates section 43(11) by failing to submit an application for registration of a charity institution within the allotted period would be fined up to Rs. 1,000. According to Section 44, the Commissioner has the authority to have the institution registered. If a trustee or other person in charge of the management of a charitable institution fails to apply for registration of the institution, the Commissioner shall notify the trustee or other person to make an application in that regard within a specified period and, if he fails to make such an application within the specified period, the Commissioner is entitled to take further action.
22. It is clear from a joint reading of the A.P. Act 30 of 1987’s Explanation to sections 1(3)(a), 2(4), and 2(5) that a society operating an educational institution in the State of Andhra Pradesh is a public charity institution. The argument that the provisions of A.P. Act 30 of 1987 are not applicable in the absence of registration is unpersuasive. All public charitable organisations, whether or not they are registered in line with the Act’s requirements, are subject to its provisions under A.P. Act 30 of 1987. According to the law, public charitable institutions must closely adhere to the guidelines in A.P. Act 30 of 1987 when managing their affairs. A.P. Act 30 of 1987’s section 58 relates to accounts and audit, and under its sub-section (2)(a), every charitable institution whose annual income, as calculated for the purpose of section 65 for the financial year immediately prior, exceeds rupees one lakh, shall be subject to concurrent audit by an independent auditor. Registration under this Act would also ensure that the activities of the educational agency are monitored by the State agencies. There are no legal repercussions simply because the authorities did not take action to register the institution in accordance with the Act’s provisions. Sri Swamy Ayyappa Co-operative Housing Societies Ltd. v. Secretary to Government, Revenue (Endowments) Department of AP, [2003] 6 ALT 62 (AP)).
23. The provision of education is viewed as a philanthropic activity. Up until now, education has not been seen as a profession or a company where profit is the primary goal. (State of Bombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699; T.M.A. Pai Foundation v. State of Karnataka, (2002)8 SCC 481, AIR 2003 SC 355, Islamic Academy of Education, (2003)6 SCC 697.) Education is included in the definition of “charitable purpose” in Section 2(15) of the Income Tax Act. The systematic instruction, schooling, or training provided to the young in order to prepare them for the responsibilities of adult life is the sense in which the word “education” has been used in section 2(15). Additionally, it refers to the total amount of academic training that a person has obtained. In section 2(15), the word “education” has not been employed in the broad and expansive meaning that any new piece of knowledge acquired qualifies as education. In that sentence, the term “education” refers to the process of educating students and fostering their intellectual, moral, and social growth. CIT, [1975] 101 ITR 234 (SC) (Sole Trustee, Loka Shikshana Trust v. Sole Trustee) Given that a “educational institution” is required to exist “solely” for educational purposes by section 10(23C)(vi), this definition of “education” is broad enough to apply in this situation. 169 ITR 379 (Raj) (Maharaja Sawai Mansinghji Museum Trust, 1988). To be covered by section 10(23C)(vi) of the Act, there must be the element of teaching pupils or the aspect of regular schooling when there are teachers and students. In addition, such a facility might engage in additional endeavours that aid students or advance their education. It may invest its money or offer scholarships or other forms of financial aid that could aid students in continuing their education. Such incidental activities by themselves would not be sufficient to qualify the institution for the benefit of section 10(23C) in the absence of the real action of imparting education through regular schooling or regular conduct of courses (vi). 201 ITR 939 (Guj), Sorabji Nusserwanji Parekh (1993). In comparison to section 10(23C)(vi) of the Act, section 2(15) has a greater scope. It is challenging to include the assessee’s case under section 10(23C)(vi) of the Act if it does not meet the requirements of section 2(15). 169 ITR 379 (Raj) (Maharaja Sawai Mansinghji Museum Trust, 1988). The Chief Commissioner was justified in ruling that the petitioner-societies should have registered themselves under the provisions of A.P. Act 30 of 1987 as failure to do so would have resulted in one arm of the petitioner-societies not being registered under the provisions of A.P. Act 30 of 1987. “Education” falls within the scope of “charitable purpose” both under section 2(5) of A.P. Act 30 of 1987 and section 2(15) of the Income-tax Act.
