2017 (1) TMI 174 - HC - Income Tax

High Court Upholds Tax Exemption for Educational Institution Emphasizing Educational Purpose Over Profit

Commissioner of Income Tax, Alwar Versus Model Public School Society, Bhiwadi

The High Court upheld the tax exemption for an educational institution, emphasizing that the institution's surplus did not compromise its educational ... Exemption from payment of tax under the provisions of Section 10(23C)(iiiab) - Exemption u/s 11 - charitable activity - proof of working of school or purposes of education - Held that:- In exercise of powers conferred by the sub-clause (vi) of the Clause (23C) of Section 10 of the Income Tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes vide order dated 23.3.2007 hereby approves that an income received by any person on behalf of “M/s. Model Public School Society, Opp Ashiana Green, Bhiwadi” (hereinafter the “Institution”) shall not be included in the total income of such person as assesseable. The Supreme Court in the case of Visvesvaraya Technological University vs. Assistant Commissioner of Income Tax [2016 (4) TMI 874 - SUPREME COURT], in para 6 has held as under: The relevant principles of law which will govern the first issue i.e. whether an educational institution or a university, as may be, exists only for educational purpose and not for profit are no longer res integra, having been dealt with by a long line of decisions of this Court which have been elaborately noticed and extracted in a recent pronouncement i.e. Queen's Educational Society v. Commissioner of Income Tax [2015 (3) TMI 619 - SUPREME COURT ] wherein held as Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. - Decided in favour of assessee Issues:- Interpretation of Section 10 of the Income Tax Act, 1961 regarding tax exemption for educational institutions.- Determination of whether surplus generated by an educational institution affects its tax-exempt status.- Application of legal principles regarding the purpose of educational institutions and profit-making motives.Analysis:The High Court dealt with appeals challenging a Tribunal's decision favoring the assessee, an educational institution. The institution provided free exemptions to some students, mainly staff members' children, from its significant receipts. Despite engaging in commercial activities like bus services and hostels, it did not maintain separate accounts. The Central Board of Direct Taxes approved tax exemption for the institution under Section 10(23C) of the Income Tax Act, 1961, subject to conditions like utilizing income for educational purposes and not investing funds in certain ways. The Supreme Court's ruling emphasized that an educational institution's surplus does not negate its educational purpose if profit-making is not its primary objective.The Court applied legal principles to determine that the institution's surplus did not compromise its educational status. It emphasized that the purpose of education should not be overshadowed by profit motives. The judgment clarified that making a surplus incidentally does not convert an educational institution into a profit-making entity. The Court concluded that the institution existed solely for educational purposes, resolving all issues in favor of the assessee and against the department.In conclusion, the High Court upheld the tax exemption for the educational institution, emphasizing the importance of the institution's primary educational purpose over profit-making activities. The judgment highlighted the distinction between generating a surplus and operating for profit, ultimately ruling in favor of the institution's eligibility for tax benefits under Section 10 of the Income Tax Act, 1961.