1. Rejection of registration as educational institutions under Section 10(23C) of the Income Tax Act due to non-exclusive educational objects and lack of state-level charitable registration. (Para 2 , 3 , 4 )
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2022 Supreme(SC) 1075
SUPREME COURT OF INDIA
Uday Umesh Lalit, CJI., S. Ravindra Bhat, Pamidighantam Sri Narasimha, JJ.
M/s New Noble Educational Society – Appellant
Versus
The Chief Commissioner of Income Tax-1 and Anr. – Respondents
Civil Appeal No. 3795, 3793, 3794 of 2014 and 9108, 6418 of 2012
Decided On : 19-10-2022
Advocates appeared:
For the Appellant(s) : Mr. Nikhil Swami,Adv. Mrs. Prabha Swami, Adv.
For the Respondent(s): Ms. Pushpa Kishore, Adv.
For the Appellant(s) : Mr. Nikhil Swami,Adv. Mrs. Prabha Swami, Adv.
For the Respondent(s): Ms. Pushpa Kishore, Adv.
The Court ruled that 'solely' in Section 10(23C)(vi) of the IT Act means 'exclusively,' requiring all objects of an institution to relate to education, overruling the 'predominant object' test. It affirmed that incidental profits are permissible and compliance with state laws is a valid consideration for granting tax exemptions.
Headnote:(A) Income Tax Act, 1961 - Section 10(23C) - Charitable purpose - Registration of educational institutions - Court reaffirmed definitions of charitable purposes and 'education', emphasizing that institutions must exist solely for educational purposes and not for profit - A.P. Charities Act as a necessary framework for registration - 'Solely' means exclusively, overruling previous interpretations that equated it with predominant purpose - The requirement for registration for tax exemption is underscored. (Paras 3, 32, 40, 78)
Facts of the case:
The appellants sought income tax exemption for their educational institutions, which were denied due to their operations not falling within the framework of 'solely educational purposes' as stated in Section 10(23C). The Andhra Pradesh High Court ruled against them citing inadequacies in compliance with regional charity regulations, leading to these civil appeals.
Findings of Court:
The court held that the institutions must exist solely for educational purposes, as tied to the definition under Section 2(15) of the Income Tax Act, and that adherence to state regulations was essential for the approval of their operational status as charitable entities.
Issues: The court addressed whether 'solely' meant only educational activities without profit motives, and if registration under state charity laws was compulsory for tax exemption under the Income Tax Act.
Ratio Decidendi: The court established that 'solely' must be interpreted strictly as exclusive of other objectives, and upheld that compliance with state charitable registration is a prerequisite for tax exemption, thereby clarifying gaps in previous judgments on educational institutions' profit-making capabilities.
Result: Appeals dismissed, requiring strict adherence to the definitions and operational statutes governing educational institutions.
Legal Category Hierarchy
Table of Contents
2. Dispute over whether solely means predominantly or exclusively and whether registration under state charitable laws is a prerequisite for federal tax exemption. (Para 5 , 6 , 14 , 15 )
3. Analysis of the term solely as exclusive, the nature of incidental business profits, and the regulatory role of state charitable registration in verifying genuineness. (Para 50 , 51 , 58 , 60 , 62 , 63 , 69 , 70 )
4. Exemption under Section 10(23C) requires all objects to relate to education; incidental profits are permissible if education-related; state registration is a valid criterion for genuineness. (Para 51 , 60 , 70 , 76 )
5. Appeals dismissed; the declared law operates prospectively. (Para 78 )
6. What is the correct interpretation of the term solely in Section 10(23C)(vi) of the Income Tax Act?
The term solely means exclusively and not primarily or predominantly. To qualify for exemption, a trust or educational institution must have all its objects aimed at imparting or facilitating education, to the exclusion of unrelated objects. (Para 50 , 51 , 76 )
7. Are incidental profits a bar to claiming exemption as an educational institution?
No, incidental profits generated from activities connected to education—such as selling textbooks or providing school transport and hostels—are permissible, provided separate books of account are maintained and the activity is incidental to the educational objective. (Para 58 , 60 , 72 , 74 , 76 )
8. Can the Prescribed Authority require registration under state laws as a condition for granting tax exemption?
Yes, compliance with and registration under state laws regulating charitable institutions are relevant considerations that the Commissioner can legitimately use to ascertain the genuineness of the trust or society. (Para 69 , 70 , 76 )
9. What is the scope of the Prescribed Authority's inquiry when considering an application for approval under Section 10(23C)?
The authority is not restricted to examining only the objects of the institution; it may call for audited annual accounts and other documents to verify the genuineness of the activities and the pattern of income and expenditure. (Para 62 , 63 , 76 )
JUDGMENT :
S. RAVINDRA BHAT, J.
1. It has been said that education is the key that unlocks the golden door to freedom.1[An aphorism common to all faiths. Proverb 4:13 states, “Take hold of instruction, do not let go. Guard her, for she is your life.” The Pavamana Mantras (purifying mantras) appealing to be taken from darkness to light in Brihadaranyaka Upanishad, as part of verse 1.3.28 too emphasizes the value of knowledge and education, “Lead me from the darkness of ignorance to the light (of knowledge).” Surah Al-Baqarah, gives an important interpretation about learning, “He gives knowledge and wisdom to whomever He wills and to whomsoever knowledge is given, much good has been given.”] In Avinash Mehrotra v. Union of India , (2009) 6 SCC 398, this court underlined the object and value of education in the following words:
“29. Education today remains liberation - a tool for the betterment of our civil institutions, the protection of our civil liberties, and the path to an informed and questioning citizenry. Then as now, we recognize education's "transcendental importance" in the lives of individuals and in the very survival of our Constitution and Republic.”
2. The subject matter of these appeals3[M/s St. Augustine Educational Society v The Chief Commissioner of Income Tax, C.A. No.3793/2014; M/s St. Patrick Educational Society v The Chief Commissioner of Income Tax, C.A. No. 3794/2014; M/s New Noble Educational Society v. The Chief Commissioner of Income Tax , C.A. No. 3795/ 2014; M/s R.R.M Educational Society Hyderabad v The Chief Commissioner of Income Tax, C.A. No. 6418/2012 and M/s Sri Koundinya Educational Society v The Chief Commissioner of Income Tax, C.A. No. 9108/2012] is the rejection of the appellants’ claim for registration as a fund or trust or institution or any university or other educational institution (hereinafter collectively referred to as “institution / trust”) set up for the charitable purpose of education, under the INCOME TAX ACT , 1961 (hereinafter, “IT Act”). The Andhra Pradesh High Court, by its detailed impugned judgment4[M/s New Noble Educational Society v. The Chief Commissioner of Income Tax , (2011) 334 ITR 303. This batch of writ petitions was decided on 11.11.2010], 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 (hereinafter, “A.P. Charities Act”) as condition precedent for grant of approval.
3. The parties had urged that such a precondition was absent in the provisos to Section 10 (23C) (vi) of the IT Act, and that since the tax statute was a complete code in itself, other acts such as A.P. Charities Act could not form the basis for denying approval. Rejecting the same, the High Court interpreted Section 10 (23C) (vi) of the IT Act in light of the previous decisions of this court, and held as follows:
“7. An educational society, running an educational institution solely 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. It would be unreal and hyper-technical to hold that the assessee-society is only a financing body and will not come within the scope of “other educational institution”. If, in substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the level of colleges and schools, such an educational society should be regarded as an “educational institution”. (Aditanar Educational Institution v. Addl. CIT, [1997] 224 ITR 310 (SC)). Educational institutions, which are registered as a socie
