The main issue considered by the court was the interpretation of Section 10(23C)(iiiad) of the Income Tax Act. Under Section 10(23C)(iiiad) of the Income Tax Act, income received by any university or educational institution existing solely for educational purposes and not for purposes of profit, is fully exempt from tax. To secure such exemption, the institution (NGO) should make an application to the Principle Commissioner or Commissioner of Income Tax. The Supreme Court has held that:
i. Approval under Section 10(23C) of the Income Tax Act cannot be given to an institution that has multiple objectives, one of which is education, and that “solely” means that the institution must exist singularly for the purpose of education, without any other non-education related objectives. This interpretation will apply prospectively, not retrospectively.
ii. Though, there is no bar on accrual of surplus income, accrual of surplus should only be as a result of an educational activity.
iii. While considering an application for approval under Section 10(23C), the commissioner can call for any documents to ascertain the authenticity and manner of functioning of any institution.
iv. 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.
Facts of the case
The appellants had filed an appeal before the Supreme Court after its claim of 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”) was rejected by the Andhra Pradesh High Court.
The Andhra Pradesh High Court 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.
It was the appellant’s arguments 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.
What the Andhra Pradesh High Court Held
However, the Andhra Pradesh High Court rejected the appellant’s arguments and interpreted Section 10(23C) (vi) of the IT Act by placing reliance on previous judicial precedents. These judgments recognized that in order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. Therefore, there were three questions for consideration before the Supreme Court-
i. what is the correct interpretation of the term ‘solely’ in Section 10 (23C) (vi) which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit
ii. what is the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment?
iii. whether registration of charitable trust is mandatory under local or state laws?
Analysis and Conclusion
The Supreme Court placed reliance on the judgment in T.M.A Pai Foundation which provided a narrower meaning of the term education as scholastic structured learning as reflected by Article 21-A, Articles 29-30 and Articles 45- 46 of the Constitution. The court also reiterated previous jurisprudence that trade and commerce under the guise of “general public utility” would not be amenable to avail income tax exemptions. The first part of the judgment deals with the issue of – institutions existing solely for profit as well as the examination of the term ‘solely’. The court observed that term ‘solely’ is not the same as ‘predominant / mainly’. The term ‘solely’ means to the exclusion of all others and therefore charitable trusts shall operate solely with the objective of imparting education or related activities. The court also observed that the second proviso to Section 10(23C), which refers to the procedure for approval of applications including those made by trusts and institutions imparting education, imposes no restrictions on the commissioner that prevent him from calling for auditing documents or other documents for ascertaining the manner or functioning of the institution.
In light of these observations, the Supreme Court denied the appellant’s appeal.