2016 (6) TMI 536 - SC - Income Tax

Supreme Court defines tax exemption rules for educational institutions, prioritizing educational purpose over profit.

CHIEF COMMISSIONER OF INCOME TAX, CHANDIGARH Versus ST. PETER'S EDUCATIONAL SOCIETY, CHANDIGARH AND GULAB DEVI MEMORIAL HOS. TRUST

The Supreme Court clarified the exemption for educational institutions under Section 10(23C) of the Income Tax Act, emphasizing the educational purpose ... Exemption to the educational institutions (assessees herein) under Section 10(23C) of the Income Tax Act - Held that:- The issue involved in these appeals is squarely covered by the judgment of this Court in Queen's Educational Society vs. Commissioner of Income Tax [2015 (3) TMI 619 - SUPREME COURT ] wherein held 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 OF INDIA], would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit. Also 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all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn.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. Exemption to educational institutions under Section 10(23C) of the Income Tax Act.2. Application of the predominant object test in determining profit-making motives.3. Difference of opinion among High Courts on the issue.4. Approval of judgments by various High Courts.5. Dismissal of appeals from Punjab and Haryana High Court.Analysis:The Supreme Court addressed the issue of exemption for educational institutions under Section 10(23C) of the Income Tax Act. The Court emphasized that the purpose of education should not be overshadowed by profit-making motives, applying the predominant object test. It clarified that merely making a surplus from educational activities does not convert the institution into a profit-making entity. The Court summarized the legal position based on previous judgments, highlighting the importance of assessing whether the institution's primary objective is profit-making or education.There was a disagreement among High Courts on this matter, with the Supreme Court approving judgments from Punjab and Haryana, Delhi, and Bombay High Courts while reversing the view of the Uttarakhand High Court. The Court specifically mentioned the Pinegrove International Charitable Trust case from Punjab and Haryana High Court, setting aside Uttarakhand High Court's decision. It emphasized the need for assessing authorities to monitor institutions continuously to ensure compliance with the law.The Supreme Court dismissed appeals from the Department of Income Tax based on the approved view from Punjab and Haryana High Court. It reiterated that the observations made in the Queen's Educational Society case should be followed. The Court also addressed an appeal from the Gujarat High Court, which aligned with the Pinegrove International Charitable Trust case. The judgment emphasized the significance of monitoring institutions' activities and promptly withdrawing approval if they do not adhere to the conditions.In conclusion, the Supreme Court granted leave in one specific case, dismissed civil appeals based on the signed order, and disposed of any pending interlocutory applications accordingly. The judgment underscored the importance of maintaining the educational purpose of institutions and closely monitoring their activities to ensure compliance with the law.