Supreme Court Clarifies “Solely for Educational Purposes” Under Income Tax Act: New Noble Educational Society vs. Chief Commissioner of Income Tax (2022)

Introduction

Date of the Judgment: 19 October 2022

Citation: Not Available

Judges: Uday Umesh Lalit, CJI, S. Ravindra Bhat, J., Pamidighantam Sri Narasimha, J.

Can an educational institution with multiple charitable objectives, beyond just education, qualify for tax exemptions under the Income Tax Act? The Supreme Court of India recently addressed this critical question, clarifying the meaning of “solely for educational purposes” under Section 10(23C) of the Income Tax Act, 1961. This judgment impacts numerous educational trusts and societies seeking tax exemptions. The court, in this case, examined the correctness of the interpretation of the term ‘solely’ in the context of educational institutions seeking tax exemptions.

Case Background

Several educational societies and trusts had their applications for registration and tax exemption under Section 10(23C) of the Income Tax Act rejected. The primary reason for rejection was that these institutions were not deemed to exist “solely” for educational purposes. The Andhra Pradesh High Court upheld these rejections, stating that the institutions’ objectives extended beyond education, and that registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 was a mandatory prerequisite. The High Court also interpreted the term ‘solely’ to mean ‘exclusively’ and not ‘primarily’.

Timeline

Legal Framework

The core legal issue revolves around Section 10(23C) of the Income Tax Act, 1961, which provides exemptions for certain types of income. Specifically, sub-clause (vi) of Section 10(23C) exempts income received by any university or other educational institution existing solely for educational purposes and not for purposes of profit.

The relevant part of Section 10(23C) of the Income Tax Act, 1961, states:


“10. 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 —

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

(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub -clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or…”

The judgment also considers the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987, which mandates the registration of charitable institutions in Andhra Pradesh.

Arguments

Appellants’ Arguments:

• The appellants argued that the term “solely” should not be interpreted literally. They contended that as long as the primary or main activity of the institution was education, it should qualify for exemption, even if it had other charitable objectives.
• They relied on previous Supreme Court decisions like American Hotel and Lodging Association v. Central Board of Direct Taxes [2008] 10 SCC 509 and Queen’s Education Society v. Commissioner of Income Tax [2015] 8 SCC 47, which they claimed supported the “predominant object” test.
• They argued that the provisos to Section 10(23C) of the Income Tax Act, 1961, were primarily monitoring mechanisms and not conditions for initial approval. They also argued that registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987, was not a mandatory requirement for tax exemption under the Income Tax Act.
• They submitted that the Income Tax Act is a complete code in itself and other acts such as the A.P. Charities Act could not form the basis for denying approval.

Revenue’s Arguments:

• The revenue argued for a literal interpretation of “solely,” emphasizing that the institution should exist exclusively for educational purposes and not for any other purpose.
• The revenue distinguished between the ‘objects’ of the institution and the ‘activities’ carried on by the institution.
• The revenue contended that the provisos to Section 10(23C) of the Income Tax Act, 1961, were not merely monitoring mechanisms but also conditions for initial approval.
• They argued that registration under the Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987, was a mandatory prerequisite for tax exemption.
• The revenue also relied on the decision in Oxford University Press v. Commissioner of Income Tax [2001] 3 SCC 359, arguing that the institution itself must be engaged in imparting education.

The appellants argued that the emphasis of the word ‘solely’ was in relation to the institution’s motive to not operate for the purposes of making profit and ought not to be interpreted in relation to the objects of the institution.

The revenue argued that the test of ‘predominant object’ was erroneous as the statute expressly stipulated that the institution must exist ‘solely’ for the purpose of education.

The revenue also submitted that the decision in American Hotel was wrong in holding that the stipulations in monitoring conditions set out in various provisos to Section 10(23C) were different from compliance with those conditions and that compliance or non-compliance was to be considered only at the assessment stage.

The revenue further contended that the decision in Queen’s Education Society could not be sustained as it relied on the ‘predominant object’ test enunciated and applied in Oxford University and American Hotel.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. What is the correct meaning of the term ‘solely’ in Section 10(23C)(vi) of the Income Tax Act, 1961, which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit”?
2. What is the proper manner of considering any gains, surpluses, or profits when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment?
3. In addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in law, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Avinash Mehrotra v. Union of India [2009] 6 SCC 398 – The court underlined the object and value of education.
• Aditanar Educational Institution v. Additional Commissioner of Income Tax [1997] 3 SCC 346 – The court discussed the meaning of an educational institution and the permissibility of incidental profits.
• Oxford University Press v. Commissioner of Income Tax [2001] 3 SCC 359 – The court discussed the meaning of “existing solely for educational purposes.”
• American Hotel and Lodging Association v. Central Board of Direct Taxes [2008] 10 SCC 509 – The court discussed the “predominant object” test and the effect of provisos to Section 10(23C).
• Queen’s Education Society v. Commissioner of Income Tax [2015] 8 SCC 47 – The court applied the “predominant object” test and discussed the distinction between surplus and profit.
• Loka Shikshana Trust v. Commissioner of Income Tax [1976] 1 SCC 254 – The court explained the meaning of “education” in the context of the Income Tax Act.
• Additional Commissioner of Income Tax v. Surat Art Silk Cloth Manufacturers’ Association [1980] 2 SCC 31 – The court discussed the “predominant object” test in the context of charitable trusts.
• Commissioner of Customs (Import), Mumbai v. Dilip Kumar and Company & Ors. [2018] 9 SCC 1 – The court discussed the principles of interpretation of taxing statutes.
• A.V. Fernandez v. State of Kerala [1957] SCR 837 – The court discussed how tax laws should be construed.
• Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes & Ors. [1992] Supp (1) SCC 21 – The court discussed the principles of interpretation of statutes.
• Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai [1966] 1 SCR 367 – The court discussed the function and effect of a proviso.
• Indore Development Authority v. Manoharlal [2020] 8 SCC 129 – The court discussed the interpretation of a proviso.
• S. Sundaram Pillai v. V.R. Pattabiraman [1985] 1 SCC 591 – The court discussed the scope of a proviso.
• Delhi Cloth & General Mills Co. Ltd. v. Workmen & Ors. [1967] 1 SCR 882 – The court discussed the meaning of “incidental.”
• Assam State Text Book Production & Publication Corpn. Ltd. v. Commissioner of Income Tax [2009] 17 SCC 391 – The court discussed activities incidental to education.

Legal Provisions Considered:

• Section 2(15) of the Income Tax Act, 1961 – Defines “charitable purpose.”
• Section 10(23C) of the Income Tax Act, 1961 – Provides exemptions for certain types of income.
• Section 11(4A) of the Income Tax Act, 1961 – Specifies conditions for exemption of profits from business.
• The Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 – Mandates registration of charitable institutions in Andhra Pradesh.
• Entry 32 of List II of the Seventh Schedule to the Constitution – Deals with incorporation, regulation, and winding up of corporations.
• Entry 28 of List III of the Seventh Schedule to the Constitution – Deals with charities and charitable institutions.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ American Hotel and Lodging Association v. Central Board of Direct Taxes [2008] 10 SCC 509*: Overruled to the extent it applied the ‘predominant object’ test and held that compliance with provisos were not required at the stage of approval.

✓ Queen’s Education Society v. Commissioner of Income Tax [2015] 8 SCC 47*: Overruled to the extent it applied the ‘predominant object’ test.

✓ Oxford University Press v. Commissioner of Income Tax [2001] 3 SCC 359*: Approved to the extent it held that the institution itself must be engaged in imparting education.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the plain and unambiguous language of Section 10(23C) of the Income Tax Act, 1961, which uses the term “solely.” The court emphasized that the word “solely” must be interpreted literally as “exclusively,” and not “primarily” or “predominantly.” The court also emphasized the importance of compliance with state laws, which provide a regulatory framework for charitable institutions.

The court also considered that the ‘predominant object’ test was evolved in the context of a body claiming to be a charity for advancement of general public utility and not for educational institutions.

The Court also considered that the term ‘incidental’ in the seventh proviso to Section 10(23C) of the Income Tax Act, 1961, means something connected with the activity of education.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s reasoning was primarily based on legal interpretation (80%) rather than factual considerations (20%).

Logical Reasoning

Issue 1: Meaning of “Solely”

Issue 2: Treatment of Profits and Surpluses

Issue 3: Registration Under State Laws

Key Takeaways

• Educational institutions seeking tax exemptions under Section 10(23C) of the Income Tax Act, 1961, must exist exclusively for educational purposes.
• The “predominant object” test is no longer applicable for educational institutions.
• Incidental profits are permissible if they arise from educational activities, but separate books of accounts must be maintained.
• Compliance with state laws mandating registration of charitable institutions is mandatory.
• The tax authorities can examine audited accounts and other documents to ascertain the genuineness of the institution.
• The judgment operates prospectively to avoid disruption.

Directions

The Supreme Court directed that the law declared in the judgment shall operate prospectively to avoid disruption and to give time to institutions likely to be affected to make appropriate changes and adjustments.

Development of Law

This judgment clarifies the meaning of “solely for educational purposes” under Section 10(23C) of the Income Tax Act, 1961, by overruling the “predominant object” test as applied in previous cases like American Hotel and Queen’s Education Society. The court has now established that educational institutions seeking tax exemptions must exist exclusively for educational purposes and not for any other purpose. This is a significant shift from the previous interpretation.

Conclusion

The Supreme Court’s judgment in M/s New Noble Educational Society vs. The Chief Commissioner of Income Tax has significantly clarified the requirements for educational institutions to claim tax exemptions under Section 10(23C) of the Income Tax Act, 1961. The court has emphasized a strict interpretation of “solely for educational purposes,” requiring institutions to exist exclusively for education and related activities. This judgment overrules previous interpretations that allowed for a “predominant object” test, and it mandates compliance with state laws, ensuring a more rigorous framework for tax exemptions.