IMPORTANT POINT
If an educational institution carrying on the activity of education primarily for educating persons makes surplus, it does not make it an institution for the purpose of making profit.

Headnote:(a) Income Tax Act, 1961 – Section 10(23C) (iiiad) and (vi) – Charitable purpose – An activity not with profit motive – However the activity resulting in profit does not necessarily make an activity non-charitable – If dominant purpose of the activity is profit making it would not be charitable – If on the other hand, dominant purpose is charitable, it does not matter if profit is earned in the process. (Para 8)
       (1980) 121 ITR 1; (1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796 – Referred
       (b) Income Tax Act, 1961 – Section 10(23C) (iiiad) and (vi) – Educational institution carrying on the activity of education primarily for educating persons – Making surplus does not make it an institution for the purpose of making profit. (Para 11)
       (1997) 224 ITR 310; (2008) 301 ITR 86; (1992) 3 SCC 390; (1998) 2 SCC 584 – Relied upon – Relied upon
       (c) Administration of Justice – Judicial propriety – High Court quoting a non-existent passage from an applicable judgment – Also quoting passage from inapplicable judgment – Holding that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) of the Income Tax Act, 1961 – Contrary to language of the provision and judgments of Supreme Court. (Para 19)
       (1980) 121 ITR 1; (1997) 224 ITR 310; (2008) 301 ITR 86 – Relied upon
       (2010) 327 ITR 273 – Overruled
       (d) Income Tax Act, 1961 – Section 10(23C)(vi) r/w 3rd and 13th provisos and Section 11(5) – Character of educational institutions – Whether it exists solely for educational purposes and not for purposes of profit – Tests stated in Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging should be applied – Approach of Punjab and Haryana High Court followed by Delhi and Bombay High Court approved. (Para 25)
       (1980) 121 ITR 1; (1997) 224 ITR 310; (2008) 301 ITR 86 – Relied upon
       (2011) 53 DTR (Del) 130; (2013) 351 ITR 184 – Cited with approval
       Facts of the case:
       The appellant filed its return for assessment years 2000-2001 and 2001-2002 showing a net surplus of Rs.6,58,862/-and Rs.7,82,632/-respectively. Since the appellant was established with the sole object of imparting education, it claimed exemption under Section 10(23C) (iiiad) of the Income Tax Act, 1961. The Assessing Officer vide its order dated 20th February, 2003 rejected the exemption claimed by the appellant. The CIT (Appeals) by its order dated 28th March, 2003 allowed the appellant’s appeal, and the ITAT, Delhi, by its judgment dated 7th July, 2006 passed an order dismissing the appeal preferred by the revenue. In a reference to the High Court under Section 260A of the Income Tax Act, the High Court vide the impugned judgment set aside the judgment of the ITAT and affirmed the order of the Assessing Officer.
       These appeals are concerned with the provision of Section 10(23C) (iiiad) of the Act.
       Finding of the Court:
       The Punjab and Haryana High Court has taken a right approach which has been followed by Delhi and Bombay High Court. Uttarakhand High Court has taken an unsustainable approach.
       Result: Appeal against judgments of Punjab and Haryana; Delhi; and Bombay High Court dismissed. Appeal against judgment of Uttarakhand High Court allowed.

Judgement Key Points

Certainly. Here are the key points derived from the legal document:

An educational institution primarily engaged in imparting education and generating surplus does not automatically cease to be an institution for educational purposes merely because it makes a surplus or profits. The primary purpose remains the guiding factor (!) (!) .
The dominant purpose test must be applied to determine whether an institution exists solely for educational purposes, and profit-making should not overshadow this primary purpose. The presence of incidental profits does not disqualify the institution from its charitable status (!) (!) .
Making a surplus incidentally from activities related to education does not mean the institution is for profit. The overall object and predominant motive of the institution are crucial in assessing its charitable nature (!) .
The test to determine if an institution exists solely for educational purposes involves examining whether its main object is to educate, rather than to earn profits. The surplus, if any, is considered incidental and not the primary motive (!) (!) .
The law emphasizes that the existence of surplus or profit does not automatically disqualify an institution from being charitable, provided the main objective remains education and not profit (!) .
The assessment of whether an institution is for educational purposes involves considering all relevant facts and circumstances, including its activities, the application of income, and the nature of its investments. The focus is on the predominant object rather than incidental financial gains (!) (!) .
The criteria for exemption under relevant law provisions include that the institution exists solely for educational purposes, does not operate for profit, and its income or surplus is applied wholly and exclusively to its educational objectives (!) (!) .
The monitoring and compliance with conditions laid down by authorities are essential. If an institution's activities are not genuine or do not conform to approved purposes, its exemption can be withdrawn (!) (!) .
The legal framework allows for the approval and withdrawal of exemptions based on ongoing compliance with statutory conditions, including the application of income and the genuineness of activities (!) (!) .
The legal approach discourages a narrow interpretation based solely on profits and instead advocates a holistic view of the institution's main purpose, activities, and application of income to determine its charitable status (!) (!) .

These points collectively highlight that the primary purpose of education, and not profit motive, is the key criterion in determining the charitable status of educational institutions under the law.

Judgment

R.F. Nariman, J.

1. Leave granted in the special leave petitions.

2. The present appeals relate to a common judgment dated 24th September, 2007 passed by the High Court of Uttarakhand, Nainital in two income tax appeals, and a judgment of the Punjab and Haryana High Court dated 29th January, 2010 in Pine Grove International Charitable Trust v. Union of India – (2010) 327 ITR 273 . Various other appeals (excepting Civil Appeal No.8962 of 2010) are filed by the Union of India/ Central Board of Direct Taxes in cases where the aforesaid judgment in Pine Grove has been followed.

3. The facts necessary to understand the controversy in the two income tax appeals before the Uttarakhand High Court, Nainital, may be gleaned from the facts of one of them, namely, the Queen’s Educational Society case. The appellant filed its return for assessment years 2000-2001 and 2001-2002 showing a net surplus of Rs.6,58,862/-and Rs.7,82,632/-respectively. Since the appellant was established with the sole object of imparting education, it claimed exemption under Section 10(23C) (iiiad) of the Income Tax Act, 1961. The Assessing Officer vide its order dated 20th February, 2003 rejected the exemption claimed by the appellant. The CIT (Appeals) by its order dated 28th March, 2003 allowed the appellant’s appeal, and the ITAT, Delhi, by its judgment dated 7th July, 2006 passed an order dismissing the appeal preferred by the revenue. In a reference to the High Court under Section 260A of the Income Tax Act, the High Court vide the impugned judgment set aside the judgment of the ITAT and affirmed the order of the Assessing Officer.

4. These appeals from the Uttarakhand High Court, Nainital, concern themselves with the provision of Section 10(23C) (iiiad) of the Act:

“Section 10-Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(23-C) any income received by any person on behalf of—

(iii-ad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed”

5. It will be noticed that the Section has three requirements – (a) the educational institution must exist solely for educational purposes (b) it should not be for purposes of profit and (c) the aggregate annual receipts of such institution should not exceed the amount or annual receipts as may be prescribed. Such prescription is to be found in Rule 2CA being an amount of Rs.1 crore.

6. The said Section was inserted by Finance Act No.2 of 1998 with effect from 1st April, 1999. Prior thereto, the Income Tax Act had a corresponding Section, namely, Section 10(22) which was as follows:-

“Section 10-Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit”

7. We have heard learned counsel for the assessees as well as learned counsel for the revenue. The assessees argue that the impugned judgment is contrary to the law laid down by at least three Supreme Court judgments. Further, the wrong test has been adopted and followed, which is a test laid down by the Assessing Officer and not by any Supreme Court judgment – namely, that whenever a profit/surplus is made by an educational institution, it ceases to exist solely for educational purposes and becomes a profit making enterprise. In support of the Punjab and Haryana High Court judgment under appeal, counsel for the assessees argued that since the sole basis for not granting them exemption for the assessment years under question was the following of the Uttarakhand High Court judgment, if

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2015 Supreme(SC) 222

IMPORTANT POINTIf an educational institution carrying on the activity of education primarily for educating persons makes surplus, it does not make it an institution for the purpose of making profit.

Cases Referred (3)

IMPORTANT POINT
If an educational institution carrying on the activity of education primarily for educating persons makes surplus, it does not make it an institution for the purpose of making profit.