2015 (3) TMI 619 - SC - Income Tax

SC upholds denial of Section 10(23C)(iiiad) exemption for profit-driven educational institutions, emphasizing strict compliance tests

M/s. Queen’s Educational Society Versus Commissioner of Income Tax

The SC upheld the Punjab and Haryana HC rulings denying exemption under Section 10(23C)(iiiad) where institutions ceased to exist solely for educational ... Exemption under Section 10(23C) (iiiad) denied - Determination of whether educational institutions exist solely for educational purposes or for profit - Pine Grove International Charitable Trust v. Union of India - [2010 (1) TMI 49 - HIGH COURT OF PUNJAB AND HARYANA AT] judgment challenged - AO observed that it ceases to exist solely for educational purposes and becomes a profit making enterprise - Held that:- We approve the judgments of the Punjab and Haryana in Pine Grove International Charitable Trust v. Union of India, St. Lawrence Educational Society (Regd.) v. Commissioner of Income Tax & Anr., [2011 (2) TMI 72 - DELHI HIGH COURT] and Tolani Education Society v. Deputy Director of Income Tax (Exemption) & Ors., [2013 (2) TMI 268 - BOMBAY HIGH COURT]. The judgment of Uttrakhand High Court rendered in the case of Queens Educational Society and the connected matters, is not applicable to cases fall within the provisions of Section 10(23C)(vi) of the Act. Since we have set aside the judgment of the Uttarakhand High Court Queens Educational Society and since the Chief CIT’s orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, Revenue’s appeals from the Punjab and Haryana High Court’s judgment dated 29.1.2010 and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth [1979 (11) TMI 1 - SUPREME COURT], Aditanar [1997 (2) TMI 3 - SUPREME COURT], and American Hotel and Lodging [2008 (5) TMI 17 - SUPREME COURT], would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit. In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C) read with Section 11 of the Income Tax Act. - Decided in favour of assessee. Issues Involved:1. Interpretation of Section 10(23C)(iiiad) of the Income Tax Act, 1961.2. Determination of whether educational institutions exist solely for educational purposes or for profit.3. Applicability of the Uttarakhand High Court judgment in the Queen's Educational Society case.4. Applicability of the Punjab and Haryana High Court judgment in Pine Grove International Charitable Trust v. Union of India.5. Continuous monitoring and compliance with Section 10(23C) and Section 11 of the Income Tax Act.Detailed Analysis:1. Interpretation of Section 10(23C)(iiiad) of the Income Tax Act, 1961:The Supreme Court examined the provision of Section 10(23C)(iiiad), which exempts income of educational institutions existing solely for educational purposes and not for profit if their annual receipts do not exceed the prescribed limit. The Court noted that the section has three requirements: the institution must exist solely for educational purposes, it should not be for profit, and its annual receipts should not exceed Rs. 1 crore as prescribed by Rule 2CA.2. Determination of whether educational institutions exist solely for educational purposes or for profit:The Court emphasized that the primary test is whether the institution's predominant object is education and not profit. It clarified that making a surplus does not automatically imply that the institution exists for profit. The Court cited previous judgments, including CIT v. Surat Art Silk Cloth Manufacturers' Assn. and Aditanar Educational Institution v. Additional Commissioner of Income Tax, to support this interpretation. The Court highlighted that incidental surplus arising from educational activities does not disqualify an institution from being considered as existing solely for educational purposes.3. Applicability of the Uttarakhand High Court judgment in the Queen's Educational Society case:The Supreme Court found that the Uttarakhand High Court did not independently apply its mind and relied on faulty reasoning. The High Court's conclusion that making a surplus and reinvesting it in educational purposes disqualifies an institution from exemption under Section 10(23C) was incorrect. The Supreme Court set aside the Uttarakhand High Court judgment, approving the ITAT's reasoning that incidental surplus does not negate the educational purpose of the institution.4. Applicability of the Punjab and Haryana High Court judgment in Pine Grove International Charitable Trust v. Union of India:The Supreme Court upheld the Punjab and Haryana High Court's judgment, which disagreed with the Uttarakhand High Court's view. The Punjab and Haryana High Court correctly applied the law by stating that merely earning a surplus does not imply that the institution exists for profit. The Court also emphasized the importance of monitoring conditions under the provisos to Section 10(23C)(vi) and ensuring compliance with the statutory requirements.5. Continuous monitoring and compliance with Section 10(23C) and Section 11 of the Income Tax Act:The Supreme Court reiterated that assessing authorities must continuously monitor educational institutions to ensure they apply their income and invest or deposit their funds in accordance with the law. The activities of such institutions must be genuine and carried out in accordance with the conditions of approval. If any violations are found, the approval and exemption must be withdrawn.Conclusion:The Supreme Court approved the judgments of the Punjab and Haryana, Delhi, and Bombay High Courts, setting aside the Uttarakhand High Court judgment. The Court emphasized that educational institutions making incidental surplus do not lose their exemption under Section 10(23C) if the surplus is ploughed back for educational purposes. The Court dismissed the revenue's appeals and clarified the correct tests to determine whether an institution exists solely for educational purposes. The revenue is at liberty to pass fresh orders if necessary, considering the provisions of Section 10(23C) read with Section 11 of the Income Tax Act.