New Delhi: On Wednesday, while giving an important decision, the Supreme Court… Government That an educational charitable institution, society or trust can claim income tax exemption only if it is solely concerned with education or education-related activities and should not be involved in any commercial or profit making activities.
A bench of Chief Justice UU Lalit, Justice S Ravindra Bhat and Justice PS Narasimha said that where the object of the institute appears to be profit oriented, such institute will not be entitled for approval under section 10(23C) of the IT Act. ,
It observed, “Our Constitution reflects a value that equates education with charity. That it should be treated as neither trade, nor trade, nor commerce, it is declared by the proclamation of the same court.”
The court was interpreting section 10(23C) of the Income Tax Act, which exempts from taxation any income received by anyone on behalf of a university or other educational institution, which exists solely for educational purposes, not that for profit purposes.
The court explained that for a charitable institution, society or trust etc., to ‘merely’ engage itself in education or educational activities, it means that “the trust or educational institution must exist solely for that purpose ( in this case, education, or merely educational activity), and not for profit”. It said such institutions cannot contain items which are unrelated to education. In other words, an educational institution can claim tax exemption only if all the purposes of such society or trust are related to imparting education or are related to educational activities.
However, it clarified, “Where a surplus accrues in a given year or set of years, it is not a one-time, provided such surplus arises in the course of imparting education or educational activities.”
The court was hearing appeals filed by various institutions and trusts, dismissing their claim of registration as a fund or trust or institution or any university or other educational institution established for charitable purpose of education under the Income Tax Act 1961. was given. 2010 by Andhra Pradesh High Court. The High Court had ruled that the appellants were not made ‘only’ for the purpose of education. The Supreme Court upheld the High Court’s decision and dismissed the appeal.
The Andhra Pradesh High Court ruled in November 2010 that the society was not created ‘solely’ for the purpose of education. The Supreme Court upheld the High Court’s decision and dismissed the appeal.
But how did the Supreme Court interpret the provisions of the Income Tax Act and what does the verdict mean for existing institutions? What kinds of activities can take away the tax exemption for educational institutions? ThePrint clarifies.
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Can Educational Institutions Make Profits?
In its judgment, the court held that educational institutions may have surplus or profit in any year, so long as such surplus arises in the course of providing education or educational activities. These will include related activities like sale of textbooks, school bus facility and hostel facility. If such trusts or educational institutions make profits while fulfilling these objectives, they are required to maintain segregated accounts.
It said that while considering applications for approval under section 10(23C) of the Act, the authorities may also call for audited accounts or other documents of the institution, “to ascertain the genuineness of the institution and the manner of its functioning”. to put”.
The court also clarified that while considering an application for sanction for grant of exemption, the authorities should confine their investigation to the nature of income earned and whether it is for items relating to education or education of the institution. It said officers should not give “proportional weight” to any surplus or profit generated while providing education or related activities, unless they are incidental.
“In the stage of registration or approval, the focus is therefore on activity and not on income ratio. If the income generating activity is intrinsically part of education, the commissioner or other authority cannot reject the application on that ground alone,” it clarified.
what activities are allowed
The decision stressed on the Constitution linking education with charity, saying, “In a knowledge-based, information-driven society, the true asset is education – and access to it. Every social system accommodates charitable efforts, and even It also nurtures, because it is driven by the desire to give back what it has taken or received from the society. Our Constitution reflects a value that equates education to charity.”
It was observed that imparting education through schools, colleges and other such institutions would be charity itself. However, in addition to this, there may be activities incidental to imparting education. This includes textbooks, bus facilities to transport children, and summer camps for specialized educational courses such as computer education.
However, it is stated that where such institutions offer their premises to others for conducting workshops or seminars or educational courses, and outsiders are permitted to enroll in such seminars, the income generated from such activity shall be recognized as education or Cannot be considered part of ‘casual’. ‘to teach.
How it will affect existing institutions
The Supreme Court’s decision has overturned two of its earlier decisions- one passed in 2008 and other passed in 2015– who had held that the word ‘sole’ in section 10(23C) meant the ‘principal/principal/primary/principal’ object. The judgments ruled that casual business activities resulting from exemptions would not be denied as long as their main purpose is education.
However, the Supreme Court has now ruled that the interpretation of the meaning of ‘sole’ by these two judgments is “wrong”, and that ‘sole’ shall mean ‘only’. It ruled, “Thus, in the opinion of this Court, all objects of a trust, university or other institution imparting education, as the case may be, shall be for the purpose of imparting or facilitating education.”
This happens rarely and means that the Supreme Court has changed the way the law was interpreted earlier. Therefore, the court clarified that since the decision would affect multiple institutions, the decision would be “potentially” governed. This means that institutions will be given time to make appropriate changes and adjustments, and this decision will not apply to their past conduct.
Talking about the implications of the decision, Joshi told ThePrint, “A direct impact of this decision is that all institutions and institutions operating educational institutions must verify their object clauses to ensure that There is no activity involved. unrelated to education. It will be for the purpose of education only.”
He also pointed out that the court was aware of the fact that it was disturbing a well established law and hence, made the judgment potentially effective.
“Thus, pending proceedings and previous orders are not affected, bringing certainty to the industry,” he said.
However, Gayatri Viswanathan, a Mumbai-based lawyer who works with educational trusts, believes the decision is “likely to have a negative impact on non-traditional education”, and that the verdict has raised “more questions than answers”. picked up”.
“Institutes that provide regular schooling and post-classroom business-based training for cottage industries will do just fine because the long-standing understanding of educational purpose will now be excluded,” she said.
(Edited by Anumeha Saxena)
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