M/S NEW NOBLE EDUCATIONAL SOCIETY versus THE CHIEF COMMISSIONER OF INCOME TAX 1 AND ANR. on 19 October 2022

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AM/S NEW NOBLE EDUCATIONAL SOCIETY

v.

THE CHIEF COMMISSIONER OF INCOME TAX 1 AND ANR.

(Civil Appeal No. 3795 of 2014)

BOCTOBER 19, 2022

[UDAY UMESH LALIT, CJI, S. RAVINDRA BHAT ANDPAMIDIGHANTAM SRI NARASIMHA, JJ.]

Income Tax Act, 1961 – s.10(23C)(vi) –”solely” –s.10(23C)(vi) exempts income of “university or other educationalCinstitution existing solely for educational purposes and not for purposesof profit” – Meaning of “solely” – Held: The requirement of thecharitable institution, society or trust etc., to ‘solely’ engage itselfin education or educational activities, and not engage in any activityof profit, means that such institutions cannot have objects whichDare unrelated to education – Thus, all objects of the society, trustetc., must relate to imparting education or be in relation toeducational activities– Where the objective of the institution appearsto be profit-oriented, such institutions would not be entitled toapproval u/s.10(23C) – At the same time, where surplus accrues ina given year or set of years per se, it is not a bar, provided suchEsurplus is generated in the course of providing education oreducational activities – The reference to ‘business’ and ‘profits’ inthe seventh proviso to s.10(23C) and s.11(4A) merely means theprofits of business which is ‘incidental’ to educational activity i.e.,relating to education such as sale of text books, providing schoolFbus facilities, hostel facilities, etc.–Reasoning and conclusions inAmerican Hotel and Queen’s Education Society case so far as theypertain to the interpretation of expression ‘solely’ are disapprovedandthe judgments are overruled to that extent–The law declared inthe present judgment shall operate prospectively– Andhra PradeshCharitable and Hindu Religious Institutions and Endowments Act,G1987.

Income Tax Act, 1961 – s.10(23C) – Held: While consideringapplications for approval u/s.10(23C), the Commissioner or theconcerned authority as the case may be under the second provisois not bound to examine only the objects of the institution – ToH

ascertain the genuineness of the institution and the manner of itsfunctioning, the Commissioner or other authority is free to call forthe audited accounts or other such documents for recordingsatisfaction where the society, trust or institution genuinely seeks toachieve the objects which it professes – The Commissioner or otherauthority is not in any manner constrained from examining accountsand other related documents to see the pattern of income andexpenditure.

Income Tax Act, 1961 – s.10(23C)– Andhra PradeshCharitable and Hindu Religious Institutions and Endowments Act,1987 – Held:Wherever registration of trust or charities is obligatoryunder state or local laws, the concerned trust, society, otherinstitution etc. seeking approval u/s.10(23C) should also complywith provisions of such state laws – This would enable theCommissioner or concerned authority to ascertain the genuinenessof the trust, society etc.

Interpretation of Statutes – Proviso – Scope and object of –Discussed.

Words & Phrases–”solely” – Discussed.

Dismissing the appeals, the Court

Conclusion

HELD : 1.This court has spelt out the following to beconsidered by the revenue, when trusts or societies apply forregistration or approval on the ground that they are engaged inor involved in education: (i) The society or trust may not directlyrun the school imparting education. Instead, it may beinstrumental in setting up schools or colleges impartingeducation. As long as the sole object of the society or trust is toimpart education, the fact that it does not do so itself, but itscolleges or schools do so, does not result in rejection of its claim.(ii) To determine whether an institution is engaging in educationor not, the court has to consider its objects. (iii) The applicantinstitution should be engaged in imparting education, if it claimsto be part of an entity or university engaged in education. Thiscondition was propounded in Oxford University where theapplicant was a publisher, part of the Oxford University establishedin the U.K. The assessee did not engage in imparting education,but only in publishing books, periodicals, etc. for profit. Therefore, AB

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Athe court by its majority opinion held that the mere fact that itwas part of a university (incorporated or set up abroad) did notentitle it to claim exemption on the ground that it was impartingeducation in India. (iv) The judgement in American Hotel statesthat to discern whether the applicant’s claim for exemption canbe allowed, the ‘predominant object’ has to be considered. ItBwas also held that the stage of examining whether and to whatextent profits were generated and how they were utilised wasnot essential at the time of grant of approval, but rather formedpart of the monitoring mechanism. (v) Queen’s Educational Societyapproved and applied the ‘predominant object’ test (whichCextensively quoted Surat Art and applied it with approval). Thecourt also held that the mere fact that substantial surpluses orprofits were generated could not be a bar for rejecting theapplication for approval under Section 10(23C)(vi) of the IT Act.[Para 48][1128-D-H; 1129-A-C]

DAditanar Educational Institution v. AdditionalCommissioner of Income Tax (1997) 3 SCC 346 : [1997]1 SCR 948; Oxford University Press v. Commissionerof Income Tax (2001) 3 SCC 359 : [2001] 1 SCR 574 –referred to.

E2.1 It is evident, that in construing the term ‘any universityor other educational institution existing solely for educationalpurposes and not for purposes of profit’ the other negative referenceto profit, in respect of educational institutions, is in the seventhproviso which states that incomes which are profits of business,cannot be exempt, “unless the business is incidental to theFattainment of its objectives and separate books of account aremaintained by it in respect of such business”. The basic provisiongranting exemption, thus enjoins that the institution should exist‘solely for educational purposes and not for purposes of profit’.This requirement is categorical. While construing this essentialGrequirement, the proviso, which carves out the exception, so tosay, to a limited extent, cannot be looked into. The expression‘solely’ has been interpreted, as noticed previously, by otherjudgments as the ‘dominant / predominant /primary/ main’ object.The plain and grammatical meaning of the term ‘sole’ or ‘solely’however, is ‘only’ or ‘exclusively’. P. Ramanath Aiyar’s AdvancedH

Law Lexicon explains the term as, “‘Solely’ means exclusively andnot primarily”. The Cambridge Dictionary defines ‘solely’ to be,“Only and not involving anyone or anything else”. The synonymsfor ‘solely’ are “alone, independently, single-handed, single-handedly, singly, unaided, unassisted” and its antonyms are“inclusively, collectively, cooperatively, conjointly etc. Term ‘solely’is not the same as ‘predominant / mainly’. The term ‘solely’ meansto the exclusion of all others. None of the previous decisions –especially American Hotel or Queens Education Society – exploredthe true meaning of the expression ‘solely’. The approach andreasoning applicable to charitable organizations set up foradvancement of objects of general public utility are entirelydifferent from charities set up or established for the object ofimparting education. In the case of the latter, the basis ofexemption is Section 10(23C) (iiiab), (iiiad) and (vi). In all theseprovisions, the positive condition ‘solely for educational purposes’and the negative injunction ‘and not for purposes of profit’ loomlarge as compulsive mandates, necessary for exemption. Theexpression ‘solely’ is therefore important. Thus, in the opinionof this court, a trust, university or other institution impartingeducation, as the case may be, should necessarily have all itsobjects aimed at imparting or facilitating education. Having regardto the plain and unambiguous terms of the statute and thesubstantive provisions which deal with exemption, there cannotbe any other interpretation. [Paras 49-51][1129-D-G; 1130-A-F]

Commissioner of Customs (Import), Mumbai v. DilipKumar and Company & Ors. (2018) 9 SCC 1 : [2018]7 SCR 1191 – followed.

2.2 The seventh proviso to Section 10 (23C) (vi) alludes tobusiness and profits (‘being profits and gains of business, unlessthe business is incidental to the attainment of its objectives andseparate books of account are maintained by it in respect of suchbusiness’). The interpretation of Section 10 (23C) therefore, isthat the trust or educational institution must solely exist for theobject it professes (in this case, education, or educational activityonly), and not for profit. The seventh proviso however carves anexception to this rule, and permits the trust or institution to record ABC

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A(or earn) profits, provided the ‘business’ which has to be read asthe education or educational activity - and nothing other than that -is incidental to the attainment of its objectives (i.e., the objectivesof, or relating to, education). [Para 58][1134-B-C]

P. Ramanatha Aiyar, Advanced Law Lexicon, (6th Edn.),BPg. 5249-5250 (2019); Solely, Cambridge Dictionary(4th Edn.) (2013) – referred to.

2.3 The second question which this court has to address iswhether the PA (Commissioner or any other designated authority)is in any manner enjoined to confine the nature of inquiry toCdiscern the object of a society, trust or other institution at thestage when it approaches the authority for approval under Section10 (23C). Having regard to the plain terms of the second provisoto Section 10(23C), which refers to the procedure for approval ofapplications including those made by trusts and institutionsimparting education, one can discern no such restrictions. FromDthe pointed reference to ‘audited annual accounts’ as one of theheads of information which can be legitimately called orrequisitioned for consideration at the stage of approval of anapplication, the inference is clear: the Commissioner or theconcerned authority’s hands are not tied in any mannerEwhatsoever. [Paras 61, 63][1135-C-D; 1136-B-C]

3.1 Applicability of Other Laws

3.1 Applicability of Other Laws

Charitable objects – defined by the A.P. Charities Act, areparimateria with the IT Act. Thus, establishments or associationsor organizations (widely phrased terms) formed for ‘charitableFpurpose’ fall within the meaning of charitable institutions. Theseinclude societies and trusts, set up for educational purposes. Theassessees had argued that since they were registered under theAndhra Pradesh Societies Registration Act, 2001 or were trustsduly registered, they could not be compelled to comply with stateGlaws as a condition for consideration of their application ascharitable institutions, under Section 10 (23C). The findings inthe impugned judgment on this aspect are sound. Therequirement of registration of every charitable institution is notoptional. Aside from the fact that the consequences of non-registration are penal, which indicates the mandatory nature ofH

the provisions of the A.P. Charities Act, such local laws providethe regulatory framework by which annual accounts, manner ofchoosing the governing body (in terms of the founding instrument:trust, society, etc.), acquisition and disposal of properties, etc.are constantly monitored. The A.P. Charities Act provides astatutory regulatory framework in regard to activities of charitableinstitutions in the state. Sections 72-74 deal with surplus fundsand their treatment; Sections 75-77 deal with properties of trustsand charitable institutions and restrictions on transfers. Theseand other provisions enable the State, which is concerned in theproper administration of such organizations, to ensure that theyare managed efficiently without misfeasance. They also containprovisions to protect the interests of trusts, especially funds andproperties. [Paras 65, 68 and 69][1137-F; 1138-C-F; 1139A-B ]

3.2 Thus, charitable institutions and societies, which maybe regulated by other state laws, have to comply with them justas in the case of laws regulating education (at all levels).Compliance with or registration under those laws, are also arelevant consideration which can legitimately weigh with theCommissioner or other concerned authority, while decidingapplications for approval under Section 10 (23C). This reasoningequally applies especially in Section 11(4A) which speaks ofprofits incidental which specifies that exemption in relation toincome or trust of an institution which are profits or means ofbusiness cannot be exempted ‘unless the business is incidental,trust or as the case may be institution and separate books of accountsare maintained by such trusts or institution in respect of suchbusiness’. Thus, the underlying objective of seventh proviso toSection 10(23C) and of Section 11(4A) are identical. These haveto be read in the light of the main provision which spells out theconditions for exemption under Section 10(23C) - the sameconditions would apply equally to the other sub-clauses of Section10(23C) that deal with education, medical institution, hospitalsetc. [Paras 70, 71][1159-C-F]

3.3 Conclusions:

(a) It is held that the requirement of the charitableinstitution, society or trust etc., to ‘solely’ engage AB

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[2022] 18 S.C.R.

Aitself in education or educational activities, and notengage in any activity of profit, means that suchinstitutions cannot have objects which are unrelatedto education.

(b) Where the objective of the institution appears to beBprofit-oriented, such institutions would not be entitledto approval under Section 10(23C) of the IT Act.

(c) The seventh proviso to Section 10(23C), as well asSection 11(4A) refer to profits which may be‘incidentally’ generated or earned by the charitableCinstitution. In the present case, the same is applicableonly to those institutions which impart education orare engaged in activities connected to education.

(d) The reference to ‘business’ and ‘profits’ in the seventhproviso to Section 10(23C) and Section 11(4A) merelyDmeans that the profits of business which is ‘incidental’to educational activity –

(e) The reasoning and conclusions in American Hotel andQueen’s Education Society so far as they pertain tothe interpretation of expression ‘solely’ are herebyEdisapproved. The judgments are accordinglyoverruled to that extent.

(f) While considering applications for approval underSection 10(23C), the Commissioner or the concernedauthority as the case may be under the second provisoFis not bound to examine only the objects of theinstitution.

(g) It is held that wherever registration of trust orcharities is obligatory under state or local laws, theconcerned trust, society, other institution etc. seekingapproval under Section 10(23C) should also complyGwith provisions of such state laws. [Para 76][1141-A-G; 1142-C-D]

American Hotel and Lodging Association v. CentralBoard of Direct Taxes (2008) 10 SCC 509 : [2008] 8SCR 117; Queen’s Education Society v Commissioner H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEFCOMMISSIONER OF INCOME TAX 1

of Income Tax (2015) 8 SCC 47 : [2015] 3 SCR 838 –partly overruled.

A

Ishverlal Thakorelal Almaula v. MotibhaiNagjibhai[1966] 1 SCR 367; Indore Development Authority v.Manoharlal (2020) 8 SCC 129 : [2020] 3 SCR 1; S.Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591: [1985] 2 SCR 643 – relied on.

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Avinash Mehrotra v. Union of India (2009) 6 SCC 398: [2009] 5 SCR 913; T.M.A Pai Foundation v. State ofKarnataka (2002) 8 SCC 481 : [2002] 3 Suppl. SCR587; PA Inamdar v. State of Maharashtra (2005) 6 SCC537 : [2005] 2 Suppl. SCR 603; Dharmadeepti v.Commissioner of Income Tax (1978) 3 SCC 449; IndianChamber of Commerce v. Commissioner of Income Tax(1976) 1 SCC 324 : [1976] 1 SCR 830; A.V. Fernandezv. State of Kerala [1957] SCR 837; MangaloreChemicals and Fertilisers Ltd. v. Deputy Commissionerof Commercial Taxes & Ors (1992) Supp (1) SCC 21 :[1991] 3 SCR 336; Delhi Cloth & General Mills Co.Ltd. v. Workmen & Ors. [1967] 1 SCR 882; Assam StateText Book Production & Publication Corpn. Ltd. v.Commissioner of Income Tax (2009) 17 SCC 391 –referred to.

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Case Law Reference

[2022] 18 S.C.R.

From the Judgment and Order dated 11.11.2010 of the High Courtof Judicature for Andhra Pradesh at Hyderabad in Writ Petition No.21248Cof 2010.

With

Civil Appeal Nos.3793, 3794 of 2014, 9108, 6418 of 2012.

N. Venkataraman, ASG, Ms. Prabha Swami, Nikhil Swami, Ms.DDivya Swami, Ms. Gargi Khanna, Ms. Alka Agrawal, Rupesh Kumar,H. Raghavendra Rao, Shyam Gopal, Chandrashekara Bharati, RajBahadur Yadav, Ms. Daisy Hannah, Ms. Oindrila Sen, Shekhar Kumar,Advs. for the appearing parties.

The Judgment of the Court was delivered byE

S. RAVINDRA BHAT, J.

1. It has been said that education is the key that unlocks the goldendoor to freedom.[1]In Avinash Mehrotra v Union of India[2], this courtunderlined the object and value of education in the following words:

F“29. Education today remains liberation - a tool for thebetterment of our civil institutions, the protection of our civilliberties, and the path to an informed and questioningcitizenry.Then as now, we recognize education’s

1An aphorism common to all faiths. Proverb 4:13 states, “Take hold of instruction, doGnot let go. Guard her, for she is your life.”The Pavamana Mantras (purifying mantras)appealing to be taken from darkness to light inBrihadaranyaka Upanishad, as part ofverse 1.3.28 too emphasizes the value of knowledge and education, “Lead me from thedarkness of ignorance to the light (of knowledge).”Surah Al-Baqarah, gives an importantinterpretation about learning, “He gives knowledge and wisdom to whomever He willsand to whomsoever knowledge is given, much good has been given.”2Avinash Mehrotra v Union of India, (2009)6 SCC 398.H

“transcendental importance” in the lives of individuals andin the very survival of our Constitution and Republic.”

2. The subject matter of these appeals[3] is the rejection of theappellants’ claim for registration as a fund or trust or institution or anyuniversity or other educational institution(hereinafter collectively referredto as “institution / trust”) set up for the charitable purpose of education,under the Income Tax Act, 1961 (hereinafter, “IT Act”). The AndhraPradesh High Court, by its detailed impugned judgment[4], held that theappellant trusts which claimed benefit of exemption under Section 10(23C) of the IT Act were not created ‘solely’for the purpose of education,and that to determine that issue, the court had to consider the memorandumof association or the rules or the constitution of the concerned trust.Additionally, the appellants were denied registrationon the ground thatthey were not registered under the Andhra Pradesh Charitable and HinduReligious Institutions and Endowments Act, 1987(hereinafter, “A.P.Charities Act”) as condition precedent for grant of approval.

3. The parties had urged that such a preconditionwas absent inthe provisos to Section 10(23C)(vi)of the IT Act, and that since the taxstatute was a complete code in itself, other acts such as A.P. CharitiesAct could not form the basis for denying approval. Rejecting the same,the High Court interpreted Section 10 (23C) (vi) of the IT Act in light ofthe previous decisions of this court, and held as follows:

“7. An educational society, running an educational institutionsolely for educational purposes and not for the purpose ofprofit, must be regarded as “other educational institution”under section 10(23C)(vi) of the Act. It would be unreal andhyper-technical to hold that the assessee-society is only afinancing body and will not come within the scope of “othereducational institution”. If, in substance and reality, the solepurpose for which the assessee has come into existence is to 3M/s St. Augustine Educational Society v The Chief Commissioner of Income Tax,C.A.No.3793/2014; M/s St. Patrick Educational Society v The Chief Commissioner ofIncome Tax, C.A. No. 3794/2014; M/s New Noble Educational Society v The ChiefCommissioner of Income Tax, C.A. No. 3795/ 2014; M/s R.R.M Educational SocietyHyderabad v The Chief Commissioner of Income Tax, C.A. No. 6418/2012and M/s SriKoundinya Educational Society v The Chief Commissioner of Income Tax, C.A. No.9108/2012.

4M/s New Noble Educational Society v The Chief Commissioner of Income Tax,(2011) 334 ITR 303. This batch of writ petitions was decided on 11.11.2010.

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impart education at the level of colleges and schools, suchan educational society should be regarded as an “educationalinstitution”. (Aditanar Educational Institution v. Addl. CIT, [1997]224 ITR 310 (SC)). Educational institutions, which areregistered as a society, would continue to retain their characteras such and would be eligible to apply for exemption undersection 10(23C)(vi) of the Act. (Pine-grove InternationalCharitable Trust v. Union of India, [2010] 327 ITR 73 (P&H)).The distinction sought to be made between the society, andthe educational institution run by it, does not, therefore, meritacceptance.

8. In order to be eligible for exemption, under section10(23C)(vi) of the Act, it is necessary that there must exist aneducational institution. Secondly, such institution must existsolely for educational purposes and, thirdly, the institutionshould not exist for the purpose of profit. (CIT v. SorabjiNusserwanji Parekh, [1993] 201 ITR 939 (Guj)). In deciding thecharacter of the recipient of the income, it is necessary toconsider the nature of the activities undertaken. If the activityhas no co-relation to education, exemption has to be denied.The recipient of the income must have the character of aneducational institution to be ascertained from its objects.(Aditanar Educational Institution, [1997] 224 ITR 310 (SC)). Theemphasis in section 10(23C)(vi) is on the word “solely”.“Solely” means exclusively and not primarily. (CIT v. GurukulGhatkeswar Trust, (2011) 332 ITR 611 (AP); CIT v. MaharajaSawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). Inusing the said expression, the Legislature has made it clearthat it intends to exempt the income of the institutionsestablished solely for educational purposes and not forcommercial activities. (Oxford University Press v. CIT, [2001]247 ITR 658 (SC)). This requirement would militate against aninstitution pursuing the objects other than education. (VanitaVishram Trust v. Chief CIT, [2010] 327 ITR 121 (Bom)). Even ifone of the objects enables the institution to undertakecommercial activities, it would not be entitled for approvalunder section 10(23C)(vi) of the Act. (American Hotel andLodging Association Educational Institute, [2008] 301 ITR 86(SC)). It is only if the objects reveal that the very being of the

assessee-society, as an educational institution, is exclusivelyfor educational purposes and not for profit, the assessee wouldbe entitled for exemption under section 10(23C)(vi) of theAct. (Gurukul Ghatkeswar Trust, [2011] 332 HR 611 (AP))”.

4. On the second question, i.e., whether registration under theA.P. Charities Act was an essential prerequisite for registration orapproval under the IT Act, the impugned judgmentheld that suchregistration was mandatory:

“21. Application of the provisions of A.P. Act 30 of 1987 toall public charitable institutions, whether registered or not inaccordance with the provisions of the Act, continues to be thesame as in the repealed A.P. Act 17 of 1966. Chapter IV ofA.P. Act 30 of 1987 relates to registration of charitableinstitutions. Section 43 relates to registration of charitableinstitutions and, under sub-section (1) thereof, the trustee orother person in charge of the management of every charitableinstitution is required to make an application for its registrationto the concerned Assistant Commissioner. Under section 43(5),on receipt of the application, the Assistant Commissioner shall,after making such enquiry as he thinks fit and after hearingany person having interest in the institution, pass an orderdirecting its registration, and to grant a certificate ofregistration containing the particulars furnished in theapplication with the alterations, if any, made by him as a resultof his enquiry. Section 43(6) requires the particulars relatingto every institution, contained in the certificate of registration,to be entered in the Register of Institutions and Endowmentsmaintained by the Assistant Commissioner. One copy thereofis required to be furnished to the Deputy Commissioner, andanother to the Commissioner. Under section 43(11) where anytrustee or other person fails to apply for registration of acharitable institution, within the time specified, he shall bepunishable with fine which may extend to one thousandrupees. Section 44 relates to the power of the Commissionerto have the institution registered and, thereunder, where anytrustee or other person in charge of the management of acharitable institution fails to apply for registration of theinstitution, the Commissioner shall give notice to the trustee, A

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or the other person, to make an application in that regardwithin a specified period and, if he fails to make such anapplication within the period specified, the Commissioner isempowered to have the charitable institution registered afterfollowing the prescribed procedure.

22. On a conjoint reading of the Explanation to section1(3)(a), section 2(4) and 2(5) of A.P. Act 30 of 1987 it isevident that a society running an educational institution inthe State of Andhra Pradesh is a public charitable institution.The submission that, in the absence of registration, theprovisions of A.P. Act 30 of 1987 are not applicable is nottenable. The provisions of A.P. Act 30 of 1987 apply to allpublic charitable institutions whether registered or not inaccordance with the provisions of the Act. A public charitableinstitution is required, in law, to conduct the management ofits affairs strictly in accordance with the provisions of A.P.Act 30 of 1987. Registration under A.P. Act 30 of 1987 wouldalso ensure that the activities of the educational agency aremonitored by the State agencies, section 58 of A.P. Act 30 of1987 relates to accounts and audit and, under sub-section(2)(a) thereof, the accounts of every charitable institution theannual income of which, as calculated for the purpose ofsection 65 for the financial year immediately preceding,exceeds rupees one lakh, shall be subject to concurrent auditby an agency specified by the Government, and the audit shalltake place as and when expenditure is incurred. The merefact that the authorities failed to act in the matter to get theinstitution registered under the provisions of the Act is of nolegal consequence. (Secretary to Government, Revenue(Endowments) Department of AP v. Sri Swamy Ayyappa Co-operative Housing Societies Ltd., [2003] 6 ALT 62 (AP)).

23. Imparting of education is regarded as an activity that ischaritable in nature. Education has so far not been regardedas a trade or business where profit is the motive. (State ofBombay v. R.M.D. Chamarbaugwala, AIR 1957 SC 699; T.M.A.Pai Foundation v. State of Karnataka, (2002) 8 SCC 481 : AIR2003 SC 355; Islamic Academy of Education, (2003) 6 SCC 697).Section 2(15) of the Income-tax Act defines “charitable

purpose” to include “education”. The sense in which the word“education” has been used in section 2(15) is the systematicinstruction, schooling or training given to the young inpreparation for the work of life. It also connotes the wholecourse of scholastic instruction which a person has received.The word “education”, in section 2(15), has not been used inthat wide and extended sense according to which everyacquisition of further knowledge constitutes education. Whateducation connotes, in that clause, is the process of trainingand developing the knowledge, skill, mind and character ofstudents by formal schooling. (Sole Trustee, Loka ShikshanaTrust v. CIT, [1975] 101 ITR 234 (SC)). This definition of“education” is wide enough to cover the case of an“educational institution” as, under section 10(23C)(vi), the“educational institution” must exist “solely” for educationalpurposes. (Maharaja Sawai Mansinghji Museum Trust, [1988]169 ITR 379 (Raj)). The element of imparting education tostudents or the element of normal schooling where there areteachers and taught must be present so as to fall within thesweep of section 10(23C)(vi) of the Act. Such an institutionmay, incidentally, take up other activities for the benefit ofstudents or in furtherance of their education. It may invest itsfunds or it may provide scholarships or other financialassistance which may be helpful to the students in pursuingtheir studies. Such incidental activities alone, in the absenceof the actual activity of imparting education by normalschooling or normal conduct of classes, would not sufficefor the purpose of qualifying the institution for the benefit ofsection 10(23C)(vi). (Sorabji Nusserwanji Parekh, [1993] 201ITR 939 (Guj)). Section 2(15) is wider in terms than section10(23C)(vi) of the Act. If the assessee’s case does not fallwithin section 2(15), it is difficult to put it in section10(23C)(vi) of the Act. (Maharaja Sawai Mansinghji MuseumTrust, [1988] 169 ITR 379 (Raj)). As “education” falls withinthe scope of “charitable purpose” both under section 2(5) ofA.P. Act 30 of 1987 and section 2(15) of the Income-tax Actand, inasmuch as A.P. Act 30 of 1987 requires all charitableinstitutions in the State of A.P. to be registered, the ChiefCommissioner was justified in holding that the petitioner- ABC

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societies should have registered themselves under theprovisions of A.P. Act 30 of 1987, as failure to so hold wouldhave resulted in one arm of the law being utilized to defeatanother arm of the law which would not only be opposed topublic policy, but would also bring the law into ridicule. (BihariLal Jaiswal v. CIT, [1996] 217 ITR 746 (SC)).”

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The Appellants’ Arguments

5. Ms. Prabha Swami, learned counsel appearing for one of theappellants (R.R.M Educational Society), contended that the impugnedjudgment was in error of the law. She submitted that the High Court’sCapproach in considering the memorandum of association, rules or theconstitution of the trust was no doubt correct,however the literalinterpretation of the expression ‘solely’under Section 10(23C)(vi) wasnot correct.

6. It was urged that there was no bar or restriction imposed byDlaw on trusts involved or engaged in activities other than education,fromclaiming exemption under Section 10(23C)(vi), provided their motivewasnot-for-profit. It was submitted that in the present case, the assesseshad other objects apart from education which were charitable.Consequently, the denial of registration by the Commissioner was contraryto law.E

7. Learned counsel relied on the decision of this court in AmericanHotel and Lodging Association v Central Board of Direct Taxes[5]and Queen’s Education Society v Commissioner of Income Tax[6 ]tosubmit that the test for determination was whether the ‘principal’ or‘main’ activity was education or not, rather than whether some profitsFwere incidentally earned. The observations relied upon from AmericanHotel (supra) were:

“38. In deciding the character of the recipient, it is notnecessary to look at the profits of each year, but to considerthe nature of the activities undertaken in India. If the IndianGactivity has no correlation with education, exemption has tobe denied (see judgment of this Court in Oxford UniversityPress [(2001) 3 SCC 359 : (2001) 247 ITR 658] ). Therefore, the 5American Hotel and Lodging Association v Central Board of Direct Taxes, (2008)10 SCC 509.H6Queen’s Education Society v Commissioner of Income Tax, (2015) 8 SCC 47.

character of the recipient of income must have character ofeducational institution in India to be ascertained from thenature of the activities. If after meeting expenditure, surplusremains incidentally from the activity carried on by theeducational institution, it will not cease to be oneexisting solely for educational purposes. In other words,existence of surplus from the activity will not mean absenceof educational purpose (see judgment of this Courtin Aditanar Educational Institution v. CIT [(1997) 3 SCC 346: (1997) 224 ITR 310] ). The test is—the nature of activity. Ifthe activity like running a printing press takes place it is noteducational. But whether the income/profit has been appliedfor non-educational purpose has to be decided only at theend of the financial year.”

8. It was further held that the third proviso was in effect operativeafter the registration or approval of the trust at the stage of assessmentto determine the actual application of income of any given trust. Theprovisos, according to the court, were divided into the processing (orvetting) provisions(applicable at the stage of grant or refusal of anapplication) and the monitoring provisions, involving consideration ofapplication of income of the trust:

“40. We shall now consider the effect of insertion of provisosto Section 10(23-C)(vi) vide the Finance (No. 2) Act, 1998.Section 10(23-C)(vi) is analogous to Section 10(22). To thatextent, the judgments of this Court as applicable to Section10(22) would equally apply to Section 10(23-C)(vi). Theproblem arises with the insertion of the provisos to Section10(23-C)(vi). With the insertion of the provisos to Section10(23-C)(vi) the applicant who seeks approval has not onlyto show that it is an institution existing solely for educationalpurposes [which was also the requirement under Section10(22)] but it has now to obtain initial approval from the PA,in terms of Section 10(23-C)(vi) by making an application inthe standardised form as mentioned in the first proviso to thatsection. That condition of obtaining approval from the PAcame to be inserted because Section 10(22) was abused bysome educational institutions/universities. This proviso wasinserted along with other provisos because there was no

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monitoring mechanism to check abuse of exemption provision.With the insertion of the first proviso, the PA is required to vetthe application. This vetting process is stipulated by the secondproviso.

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42. Under the twelfth proviso, the PA is required to examinecases where an applicant does not apply its income duringthe year of receipt and accumulates it but makes paymenttherefrom to any trust or institution registered under Section12-AA or to any fund or trust or institution or university orother educational institution and to that extent the provisostates that such payment shall not be treated as applicationof income to the objects for which such trust or fund oreducational institution is established. The idea underlying thetwelfth proviso is to provide guidance to the PA as to themeaning of the words “application of income to the objectsfor which the institution is established”. Therefore, the twelfthproviso is the matter of detail.

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43. The most relevant proviso for deciding this appeal is thethirteenth proviso. Under that proviso, the circumstances aregiven under which the PA is empowered to withdraw theEapproval earlier granted. Under that proviso, if the PA issatisfied that the trust, fund, university or other educationalinstitution, etc. has not applied its income in accordance withthe third proviso or if it finds that such institution, trust orfund, etc. has not invested/deposited its funds in accordanceFwith the third proviso or that the activities of such fund orinstitution or trust, etc. are not genuine or that its activitiesare not being carried out in accordance with the conditionssubject to which approval is granted then the PA is empoweredto withdraw the approval earlier granted after complying withthe procedure mentioned therein.

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44. Having analysed the provisos to Section 10(23-C)(vi) onefinds that there is a difference between stipulation ofconditions and compliance therewith. The threshold conditionsare actual existence of an educational institution and approvalof the prescribed authority for which every applicant has tomove an application in the standardised form in terms of the H

first proviso. It is only if the prerequisite condition of actualexistence of the educational institution is fulfilled that thequestion of compliance with requirements in the provisoswould arise. We find merit in the contention advanced onbehalf of the appellant that the third proviso containsmonitoring conditions/requirements like application,accumulation, deployment of income in specified assets whosecompliance depends on events that have not taken place onthe date of the application for initial approval.

45. To make the section with the proviso workable we are ofthe view that the monitoring conditions in the third provisolike application/utilisation of income, pattern of investmentsto be made, etc. could be stipulated as conditions by the PAsubject to which approval could be granted”.

9. Likewise, the decision in Queen’s Education Society (supra)was also cited, in which this courtheld that income earned incidentally,or profits incidental to the main activity, per se would not debar a trust’sapplication for approval, or registration, as a tax-exempt organization.

10. Counsel further submitted that in a similar manner, the previousdecision of this court in Aditanar Educational Institution v. AdditionalCommissioner of Income Tax[7]was relevant. The same observed that:

“8. We may state that the language of Section 10(22) of theAct is plain and clear and the availability of the exemptionshould be evaluated each year to find out whether theinstitution existed during the relevant year solely foreducational purposes and not for the purposes of profit. Aftermeeting the expenditure, if any surplus results incidentallyfrom the activity lawfully carried on by the educationalinstitution, it will not cease to be one existing solely foreducational purposes since the object is not one to make profit.The decisive or acid test is whether on an overall view of thematter, the object is to make profit. In evaluating or appraisingthe above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers ofthe concerned entity”.

7Aditanar Educational Institution v. Additional Commissioner of Income Tax, (1997) 3SCC 346.

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A11. It was submittedthat in American Hotel (supra), with theinsertion of the provisos to Section 10(23C)(vi), a trust seeking approvalhad to show that it existed ‘solely’ for educational purposes,and should’vealso obtained initial approval of the Prescribed Authority (hereinafter,“PA”), through an application in the standardized formas mandated bythe first proviso. The condition of obtaining approval from the PA wasBinserted because Section 10(22) was misused. The proviso was insertedalong with other provisos because there was no monitoring mechanismto check abuse of exemption provision. The process of examination ofthe application was stipulated by the second proviso, which stated thatthe PA could call for such documents including annual accounts orCinformation from the applicant to check its genuineness. Under the thirdproviso, the PA had the power to judge the genuineness of the activitiesof the applicant and consider if it applied its income wholly and exclusivelyto the objects for which it was constituted/established. Under the twelfthproviso, the PA had to examine cases where an applicant did not applyits income during the year of receipt and accumulated it but made paymentDtherefrom to any trust or institution registered under Section 12AA or toany trust and to that extent the proviso stated that such payment shallnot be treated as application of income to the objects for which suchtrust was established. This was to guide the PA to determine the meaningof the words “application of income to the objects for which theinstitution is established”. The thirteenth proviso listed theEcircumstances under which the PA was empowered to withdraw theapproval granted earlier, if the authority was satisfied that the trusthadnot applied its income in accordance with the third proviso or if it foundthat the trust had not invested/deposited its funds in accordance with thethird proviso or that the activities of such trust etc. were not genuine orFthat its activities were not being carried out in accordance with theconditions subject to which approval was granted. In such cases, theauthority could withdraw the approval granted earlier after complyingwith the procedure stipulated.

12. It was urged that there could be no dispute that the appellantGR.R.M. Educational Society was running an educational institution. Thefact that the appellant had other objects did not mean that itceased to bean institution existing ‘solely’ for educational purposes. The emphasis ofthe word ‘solely’was in relation to the institution’s motive to not operatefor the purposes of making profit; it ought not to be interpreted in relationto the objects of the institution. It was argued that the threshold conditionsHwere actual existence of an educational institution and approval of the

PA for which every applicant had to move an application in thestandardized form in terms of the first proviso. If the prescribed conditionsof actual existence of the educational institution were fulfilled, then thequestion of compliance with the requirements as spelt out in the otherprovisos would arise. At the present stage, such considerations were notrelevant.

13. It was also contended by the counsel that Section 10 (23)(iiiab), (iiiad) and (vi) required the institutions to exist solely for educationalpurposes and not for profit. The term ‘exist’ connoted the purpose, goal,object and mission of the institution. Where the purpose of the institutionand the defining character of its mission were education, and educationalone, the test was fulfilled. That incidentally, a surplus had resulted in ayear,was irrelevant and would not change the essential nature of theinstitution into a profit-oriented one. ‘Existence’ meant the central causalpurpose of its being, though the manner in which it carried on its activitiesmay assume relevance. Institutions existed for what they were formedto pursue, and if that was solely and exclusively for the purpose ofeducation, the statutory condition was satisfied.

14. Learned counsel lastly urged that the appellants had establishedand were managing educational institutions which did not make profit. Itwas submitted that the IT Act did not stipulate registration under theA.P. Charities Act, or any other state law as a condition precedent forgrant of approval. As long as the trust was registered under some law(such as the Andhra Pradesh Societies Registration Act, 2001) or evena not-for-profit was duly incorporated, no other requirement underprovisos to Section 10(23C)(vi) of the IT Act compelled further registrationor approval under any state law. It was reiterated that the IT Act was acomplete code in itself, and other acts, including the A.P. Charities Act,could not be the basis for denying institutions the benefit of approval. Itwas submitted that the provisions of the IT Act ought not be linked to, ortaken together with, provisions of other enactments. The objects andreasons and the various provisions of the A.P. Charities Act regulatedand protected the property of charitable institutions.The activities of theappellant trusts and societies were not prohibited under any law includingthe A.P. Charities Act and non-registration under that Act could notresult in discontinuance of their activities.

15. Ms. Daisy Hannah, learned advocate appearing on behalf ofsome of the appellants, supported the arguments of Ms. Prabha Swami.

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AShe submitted that the existence of more than one object could not hinderor bar a trust’s claim to exemption, so long as it ‘mainly’ carried oneducation, or education-related activities. The emphasis was not on theabsence or existence of objects other than education, rather, the negativemandate against profit, in that profit could not motivate a trust’sfunctioning. She stressed that the manner of utilization of surplus orBprofits and conditions imposed by the tax authorities while grantingapproval or exemption, were irrelevant at the stage of consideringapplication seeking exemption under Section 10 (23C). Thoseconsiderations were valid only when tax authorities examined thefunctioning of the trust during the course of assessments to examine itsCcompliance with the law.

16. Counsel relied on the decision of Oxford University Press v.Commissioner of Income Tax[8], where interpretation of the expression‘solely’ for the purpose of educationmeant that the sole purpose of aninstitution must be to impart education and not make profit. The wordD‘existing’ was held to mean ‘being’.

17. It was submitted that the High Court’s reasoning upholdingthe threshold rejection of the appellant’s cases on the ground that theappellant had several objects,only some of which were ‘educational’whileothers were not, leaving the trustees with discretion to apply the incomeEor property to any object, was erroneous. The PA no doubt had to besatisfied through the material on record that the applicant did existandwas involved in a charitable activity, for which the objects of the institutionhad to be examined. However, if more than one object did exist, and allthe objects were essentially charitable in nature, what needed to be seenwas the actual functioning. The mere possibility that the trusteesFpossessed the discretion to apply the surplus or earnings in respect ofany object, and not only education, was not sufficient.

18. Mr. N. Venkataraman, learned Additional Solicitor General(hereinafter, “ASG”) appeared on behalf of the revenue. He pointed outthat from the inception of the IT Act, till 31March 2009, the definition ofGcharitable purposes under Section 2(15) included only four activities.Bythe amendment of 2009 – and later in 2015 – other objects, such aspreservation of watersheds, forests and wildlife, monuments and placesor objects of artistic or historic interest, and yoga were included as H

8Oxford University Press v. Commissioner of Income Tax,(2001) 3SCC359.

activities deemed charitable in nature. The result was that once an activitywas identified as charity,the income of that unit or entity was excludedfrom the ambit of taxation by virtue of Section 10. Likewise, deductionfor income from property held for charitable purposes was providedunder Section 11.

19. It was alleged that since the inception of the IT Act in 1961till31 March 1975, income from education was excluded as a head underSection 10. By Section 10 (22), income of university or other educationalinstitutions existing ‘solely’ for educational purposes, and not for thepurpose of profit, was excluded from tax liability. An identical provisionwas enacted by Section 10 (22A)for hospitals. It was pointed out thatthere were two key elements to the definition of what could be excludedfrom the ambit of taxation – (i) that the institution should exist ‘solely’for the purpose of education; and(ii) it should not exist for the purpose ofprofit.

20. By the Taxation Laws (Amendment)Act, 1975,Section 10(23C) was brought into force for the first time, and by virtue of sub-clauses (iv) and (v), other funds and institutions established for charitablepurposes and trusts including any other legal obligation or institution beingsolely for public religious purposes and charitable purposes, could benotified by the Central Government. Likewise, similar provisions weremade for the purposes of universities and educational institutions. TheDirectTax Laws (Amendment)Act, 1987 deleted Section 10 (23C) (iv)and (v). These clauses were, however, restored by the Direct Tax Laws(Amendment)Act, 1989 with effect from 1 April 1990. Parliament alsointroduced six provisos to Section 10 (23C), broadly dealing with theconsiderations that were to weigh with the Central Government beforeissuing notifications exempting income of such entities. The conditionsembodied in the six provisos dealt with genuineness of activities of theinstitution - application of income or its accumulation for its applicationin future to be wholly and exclusively for the objects for which theinstitution had been established, and allowing profits and gains for thepurpose of exclusion, subject tothe business being incidental to theattainment of its objectives and maintenance of separate books ofaccounts.

21. It was submitted that by the Finance Act 1998, which cameinto force on 1 April 1999, significant changes were affected in thatsection. These were that sub-clauses (iiiab) (iiiac)(iiiad) and (iiiae) wereadded to Section 10(23C). Furthermore, two sub-clauses namely (vi)

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Aand (via) were added. Sub-clause (vi) dealt with education. At the sametime, Parliament deleted Section 10 (22)and Section 10 (22A). Theseamendments, it was highlighted,were crucial inasmuch they changedthe complexion and contours of Section 10 (23C). Firstly, institutionssolely or substantially financed by the government were classified underone category. Secondly, institutions whose aggregate annual receipts didBnot exceed the prescribed limits were classified under another category.Thirdly, institutions approved by the PA, having regard to their importancethroughout the country or throughout any state, were classified underone category. Fourthly, institutions solely for educational purposes andnot for the purpose of making a profit, were classified under one categoryC(i.e., Section 10 (23C) (vi) and (via)). It was submitted that of the severalprovisos added,the most important of them having a bearing on the subjectmatter of these appeals were the first, second, third, seventh, thirteenth,fourteenth, fifteenth and sixteenth provisos.

22. The ASG urged that the expression ‘education’ found place inseveral provisions of the Constitution. As to what was the precise scopeDof the expression was examined by this court on several occasions. TheASG relied on the decision of the eleven-judge bench in T.M.A PaiFoundation v State of Karnataka[9] where it was held that ‘education’under the Constitution meant and included education at all levels, fromprimary school up to postgraduation, and also included professionalEeducation. The expression ‘educational institution’ meant institutionswhich imparted education as understood in the formal sense of schooling.Itwas further elaborated that having regard to the demographics and thegeographical spread of the nation, as well as the challenges faced by thecountry, it was beyond the economic capacity of the State to providefreeor subsidised universal education at all levels. Therefore, per force privateFeducational institutions had to function to fill the needs of students. Withinthat framework, the role of charitable institutions in imparting educationwas vital and prominent. Imparting education had always been regardedas head of charity. Tracing the history of the law relating to charities, thelearned ASG submitted that even in England, charitable objects includedGimparting education.[10 ]It was submitted that various articles in the

9T.M.A Pai Foundation v State of Karnataka,2002 (8)SCC 481.10Special Commissioners of Income Tax v. Pemsel [1891] A.C. 531. Per LordMacNaughten, “”Charity” in its legal sense comprises four principal divisions: trustsfor the relief of poverty; trusts for the advancement of education; trusts for theadvancement of religion; and trusts for other purposes beneficial to the community, notHfalling under any of the preceding heads.”

Constitution, namely Article 21-A, Articles 28 to 30,Article 41, Articles45- 46 and Article 51 (k) as well as several entries in the Seventh Schedulemade it apparent that education meant mainstream curriculum-basededucation and not education as was broadly or commonly understood.He emphasised the importance of this aspect because while decidingwhether tax exemption under the IT Act could be granted for educationalinstitutions,the term ‘education’ as a charitable purpose could not becomprehended as the enlarged meaning. It was in the constitutional sense,and under the IT Act, of curriculum-based schooling,that education hadto be understood under Section 2 (15) of the IT Act as a head ofcharitable purpose.

23. The learned ASG submitted that the ratio in T.M.A PaiFoundation (supra) had established that education per se was regardedas a charitable activity. It could not be regarded as trade or businesswith profit motive driving it. There could be some doubt about whethereducation was to be regarded as a profession; nevertheless, it was coveredby the term ‘occupation’. It was submitted that the court in this contextruled an ‘occupation’ would be an activity of a person undertaken as ameans of livelihood or as a mission in life. Counsel also pointed to certainportionsof the judgement in T.M.A Pai Foundation (supra) to highlightthat the rights conferred under Articles 29 and 30 were to be regardedas guarantees to ensure equality to minority communities either basedon religion or language.

24. It was submitted that given this enunciationof the principlethat education was an occupation and was per se, charitable, it wasantithetical to commerce or business. In other words, education couldnot, either under the Constitution or under the IT Act, be regarded as abusiness activity. Thus, any commercialisation of education would resultin loss of the benefit of tax exemption which an institution would otherwisebe entitled to claim legitimately as a charitable trust. The ASG also reliedupon the subsequent seven-judge decision in PA Inamdar v State ofMaharashtra[11]which had followed the reasoning in T.M.A PaiFoundation (supra).

25. It was submitted next, that this court held in Aditanar (supra)-in the context of Section 10 (22) of the IT Act -that the language of theprovision was plain and that every year the tax authorities had to discern AB

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Awhether the institution existed solely for educational purposes and notfor the purpose of profit after meeting the expenditure, and that if anysurplus resulted incidentally from the lawful activities carried on by theeducational institution, it would not cease to be one existing ‘solely’ foreducational purposes. It was held that the decisive test or litmus testwas whether on an overall view of the matter, the object of the institutionBwas to make profit or to impart education.

26. Turning next to the decision in Oxford UniversityPress(supra)the learned ASG pointed out that the majority judgementhad recognised that the term ‘existing solely for educational purposesand not for the purposes of profit’ qualified ‘university or otherCeducational institution’. It was submitted that the majority judgementstated clearly that being part of an educational institution was insufficientand the concerned entity had to engage in imparting education itself, andin the course of such activity could generate surplus. However, the claimthat a unit which was part of a university abroad and was thus entitled tobe treated as a charity in India was held to be untenable, because theDassessee’s sole activity was to print and publish books for profit.

27. The ASG also pointed out that the decision of this court inAmerican Hotel (supra) was in the context of peculiar facts. Theorganization was a non-profit set up in U.S.A. and was granted taxexemption as an educational institution there. It had a branch office inEIndia mainly to comply with its obligations under various agreementswith the Ministry of Tourism of the Government of India. That branchprovided a focal point in India for Indian missions to avail of its educationalcourses. The branch collected data from educational institutions/personswishing to take courses offered in the field of hospitality andwho paidfeesfor the required course material which was thereafter remitted to U.S.A.FIt was highlighted that like in Oxford University (supra), the assesseedid not carry on any educational activityin India per se. It was in thenature of a support establishment for an entity which was grantedcharitable status in the U.S.A. The ASG contended that American Hotel(supra)propounded an erroneous test, i.e., of ‘predominant object’ (alsoGknown variously as ‘dominant/primary/main’ object), though the statuteexpressly stipulated that the institution must exist ‘solely’ for the purposeof education. It was pointed out that the test of predominant object wasused in Additional Commissioner of Income Tax v Surat Art SilkCloth Manufacturers’ Association[12] which was not a case dealing with12Additional Commissioner of Income Tax v Surat Art Silk Cloth Manufacturers’HAssociation, (1980) 2SCC 31.

educational institutions, but rather with charities that were engaged inadvancing objects of general public utility. It was held that to” ascertainwhether the institute is carried on with the object of making profitor not it is the duty of the prescribed authority to ascertain whetherthe balance of income is applied wholly and exclusively to the objectsfor which the applicant is established”.[13]

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

29. It was submitted that the decision in Queen’s EducationSociety(supra),too could not be sustained, as it relied on the ‘predominantobject’ test enunciated and applied in Oxford University and AmericanHotel (supra). Learned ASG submitted that the court’s reasoning inQueen’s Education Society (supra), in which the ‘predominant object’test was applied, and a distinction was drawn between making a ‘surplus’and carrying on an activity for profit, with the former not debarring aninstitution from claiming tax exemption – was incorrect.

Relevant Provisions

30. An analysis of the relevant provisions is called for.Section 2(15) of the IT Act defines ‘charitable purpose’ as follows:

“(15) “charitable purpose” includes relief of the poor,education, yoga, medical relief, preservation of environment(including watersheds, forests and wildlife) and preservationof monuments or places or objects of artistic or historicinterest, and the advancement of any other object of generalpublic utility:

Provided that the advancement of any other object of generalpublic utility shall not be a charitable purpose, if it involvesthe carrying on of any activity in the nature of trade, commerceor business, or any activity of rendering any service in relationto any trade, commerce or business, for a cess or fee or anyother consideration, irrespective of the nature of use orapplication, or retention, of the income from such activity,unless—

13American Hotel relying on Surat Art, para 37.

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(i) such activity is undertaken in the course of actual carryingout of such advancement of any other object of general publicutility; and A

(ii) the aggregate receipts from such activity or activitiesduring the previous year, do not exceed twenty per cent ofthe total receipts, of the trust or institution undertaking suchactivity or activities, of that previous year”.

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31. Section 10 of the IT Act exempts from the field of taxationcertain classes of income. Section 10 (23C), which is relevant forthe purposes of this case, reads as follows:

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“10. In computing the total income of a previous year of anyperson, any income falling within any of the following clausesshall not be included—

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

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(iiiab) any university or other educational institution existingsolely for educational purposes and not for purposes of profit,and which is wholly or substantially financed by theGovernment; or *******************

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Explanation.—For the purposes of sub-clauses (iiiab) and(iiiac), any university or other educational institution, hospitalor other institution referred therein, shall be considered asbeing substantially financed by the Government for anyFprevious year, if the Government grant to such university orother educational institution, hospital or other institutionexceeds such percentage of the total receipts including anyvoluntary contributions, as may be prescribed, of suchuniversity or other educational institution, hospital or otherinstitution, as the case may be, during the relevant previousGyear; or (iiiad) any university or other educational institution existingsolely for educational purposes and not for purposes of profitif the aggregate annual receipts of such university oreducational institution do not exceed the amount of annualreceipt as may be prescribed or H

(iv) any other fund or institution established for charitablepurposes which may be approved by the prescribed authority,having regard to the objects of the fund or institution and itsimportance throughout India or throughout any State orStates; or

(v) any trust (including any other legal obligation) orinstitution wholly for public religious purposes or wholly forpublic religious and charitable purposes, which may beapproved by the prescribed authority, having regard to themanner in which the affairs of the trust or institution areadministered and supervised for ensuring that the incomeaccruing thereto is properly applied for the objects thereof;

(vi) any university or other educational institution existingsolely 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 prescribedauthority; or…”

The first, second, third, seventh, thirteenth, fourteenth, fifteenthand sixteenth provisos (as of 2012) are relevant to Section 10 (23C).They are reproduced below:

Proviso 1:

Provided that the fund or trust or institution [or anyuniversity or other educational institution or any hospitalor other medical institution] referred to in sub-clause (iv)or sub-clause (v)[or sub-clause (vi) or sub-clause (via)]shall make an application in the prescribed form andmanner to the prescribed authority for the purpose of grantof the exemption, or continuance thereof, under sub-clause(iv) or sub-clause (v) [or sub-clause (vi) or sub-clause(via)]

Proviso 2:

[Provided further that the prescribed authority, beforeapproving any fund or trust or institution or any universityor other educational institution or any hospital or othermedical institution, under sub-clause (iv) or sub-clause (v)or sub-clause (vi) or sub-clause (via), may call for such A

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documents (including audited annual accounts) orinformation from the fund or trust or institution or anyuniversity or other educational institution or any hospitalor other medical institution, as the case may be, as it thinksnecessary in order to satisfy itself about the genuinenessof the activities of such fund or trust or institution or anyuniversity or other educational institution or any hospitalor other medical institution, as the case may be, and theprescribed authority may also make such inquiries as itdeems necessary in this behalf:]

Proviso 3:

Provided also that the fund or trust or institution[or anyuniversity or other educational institution or any hospitalor other medical institution] referred to in sub-clause (iv)or sub-clause (v)[or sub-clause (vi) or sub-clause (via)]—

[(a) applies its income, or accumulates it forapplication, wholly and exclusively to the objects forwhich it is established and in a case where more thanfifteen per cent of its income is accumulated on or afterthe 1st day of April, 2002, the period of theaccumulation of the amount exceeding fifteen per centof its income shall in no case exceed five years; and]

[(b) does not invest or deposit its funds, other than—

(i) any assets held by the fund, trust or institution [orany university or other educational institutionor anyhospital or other medical institution] where such assetsform part of the corpus of the fund, trust orinstitution [or any university or other educationalinstitution or any hospital or other medical institution]as on the 1st day of June, 1973; [(ia) any asset, being equity shares of a public company,held by any university or other educational institutionor any hospital or other medical institution where suchassets form part of the corpus of any university or othereducational institution or any hospital or other medicalinstitution as on the 1st day of June, 1998;]

(ii) any assets (being debentures issued by, or on behalfof, any company or corporation), acquired by the fund,trust or institution [or any university or othereducational institutionor any hospital or other medicalinstitution] before the 1st day of March, 1983;

(iii) any accretion to the shares, forming part of thecorpus mentioned in sub-clause (i)[and sub-clause (ia)],by way of bonus shares allotted to the fund, trust orinstitution[or any university or other educationalinstitution or any hospital or other medical institution];

(iv) voluntary contributions received and maintainedin the form of jewellery, furniture or any other articleas the Board may, by notification in the Official Gazette,specify, for any period during the previous year otherwise than inany one or more of the forms or modes specified in sub-section(5) of Section 11".

Proviso 7:

“Provided also that nothing contained in sub-clause (iv)or sub-clause (v)[or sub-clause (vi) or sub-clause (via)]shall apply in relation to any income of the fund or trustor institution [or any university or other educationalinstitution or any hospital or other medical institution],being profits and gains of business, unless the business isincidental to the attainment of its objectives and separatebooks of account are maintained by it in respect of suchbusiness:”

Proviso 13:

“Provided also that where the fund or institution referredto in sub-clause (iv) or trust or institution referred to insub-clause (v) is notified by the Central Government [oris approved by the prescribed authority, as the case maybe,] or any university or other educational institutionreferred to in sub-clause (vi) or any hospital or othermedical institution referred to in sub-clause (via), isapproved by the prescribed authority and subsequently thatGovernment or the prescribed authority is satisfied that—

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(i) such fund or institution or trust or any university orother educational institution or any hospital or othermedical institution has not—

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(B) invested or deposited its funds in accordance withthe provisions contained in clause (b) of the thirdproviso; or

(ii) the activities of such fund or institution or trust or anyuniversity or other educational institution or any hospitalor other medical institution—

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(B) are not being carried out in accordance with all orany of the conditions subject to which it was notifiedor approved, D

it may, at any time after giving a reasonable opportunity ofshowing cause against the proposed action to the concernedfund or institution or trust or any university or othereducational institution or any hospital or other medicalinstitution, rescind the notification or, by order, withdraw theapproval, as the case may be, and forward a copy of the orderrescinding the notification or withdrawing the approval tosuch fund or institution or trust or any university or othereducational institution or any hospital or other medicalinstitution and to the Assessing Officer”.

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FProviso 14:

“Provided also that in case the fund or trust or institutionor any university or other educational institution or anyhospital or other medical institution referred to in the firstproviso makes an application on or after the 1st day ofJune, 2006 for the purposes of grant of exemption orcontinuance thereof, such application shall be [1][made onor before the 30th day of September of the relevantassessment year] from which the exemption is sought”.

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Proviso 15:

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“Provided also that any anonymous donation referred toin section 115BBC on which tax is payable in accordancewith the provisions of the said section shall be included inthe total income”.

Proviso 16:

Provided also that all pending applications, on which nonotification has been issued under sub-clause (iv) or sub-clause (v) before the 1st day of June, 2007, shall standtransferred on that day to the prescribed authority andthe prescribed authority may proceed with such applicationsunder those sub-clauses from the stage at which they wereon that day”.

Analysis and Conclusion

32. Education ennobles the mind and refines the sensibilities ofevery human being. It aims to train individuals to make the right choices.Itsprimary purpose is to liberate human beings from the thrall of habits andpreconceived attitudes[14]. It should be used to promote humanity anduniversal brotherhood. By removing the darkness of ignorance, educationhelps us discern between right and wrong. There is scarcely anygeneration that has not extolled the virtues of education, and sought toincrease knowledge.

33. The subject of education is vast, even sublime. Yet, it is notthe broad meaning of the expression which is involved in this case. Aswas held in T.M.A Pai Foundation (supra), education in the narrowermeaning of the term as scholastic structured learning is what is meantin Article21-A, Articles 29-30 and Articles 45-46 of the Constitution. Asto what is ‘education’ in the context of the IT Act, was explained inLoka Shikshana Trust v. Commissioner of Income Tax[15 ]in thefollowing terms:

“5. The sense in which the word “education” has been usedin section 2(15) is the instruction, schooling or training given 14Rabindranath Tagore’s Gitanjali, famous for its unforgettable verses, yearns for aplace where, “Knowledge is free”, and where,”The world has not been broken up intofragments by narrow domestic walls, where words come from the depths of truth”, and“Where the clear stream of reason has not lost its way into the dreary desert sand ofdead habit”.

15Loka Shikshana Trust v. Commissioner of Income Tax,(1976) 1 SCC254.

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Ato the young in preparation for the work of life. It alsoconnotes the whole course of scholastic instruction which aperson has received. The word “education” has not been usedin that wide and extended sense, according to which everyacquisition of further knowledge constitutes education.According to this wide and extended sense, travelling isBeducation, because as a result of travelling you acquire freshknowledge. Likewise, if you read newspapers and magazines,see pictures, visit art galleries, museums and zoos, you therebyadd to your knowledge.…All this in a way is education in thegreat school of life. But that is not the sense in which theCword “education” is used in clause (15) of section 2. Whateducation connotes in that clause is the process of trainingand developing the knowledge, skill, mind and character ofstudents by formal schooling.”

Thus, education i.e., imparting formal scholastic learning, is what Dthe IT Act provides forunder the head of “charitable” purposes, underSection 2 (15).

34. The issues which require resolution in these cases are firstly,thecorrect meaning of the term ‘solely’in Section 10 (23C) (vi) whichexempts income of “university or other educational institutionEexisting solely for educational purposes and not for purposes ofprofit”. Secondly,the proper manner in considering any gains, surplusesor profits, when such receipts accrue to an educational institution, i.e.,their treatment for the purposes of assessment, and thirdly, in addition tothe claim of a given institution to exemption on the ground that it actuallyexists to impart education, in law, whether the concerned tax authoritiesFrequire satisfaction of any other conditions, such as registration ofcharitable institutions, under local or state laws.

I. Institutions existing ‘solely’ for profit

35. The revenue contends that the expression ‘solely’ has to beGgiven its plain and grammatical meaning. It is emphasized that thoughthere are several heads of charity and several kinds of organizationswhich are recognised by the IT Act, the statute underlines that thosewhich claim to be educational institutions should have only the sole objectof education, and no other. On the other hand, the assessee-appellantscontend that the expression ‘solely’ has never been understood in itsHliteral sense, but that this court has consistently held that the expression means that the predominant object, among other objects of the institutionclaiming exemption, should be education.

36. The decision in Loka Shikshana Trust (supra) was renderedin the background of whether a newspaper published by a trust, set upwith the object of publishing it, and educating the Kannada speakingpublic, could be said to have the object of education. It is in that contextthat this court clearly enunciated what is meant by education-i.e., in itsscholastic sense of structured learning rather than the wider meaning ofthe expression.

37. Before the advent of the IT Act, under the old Income TaxAct, 1922, charitable purposes – much like the present one - includedfour broad heads. The last head was advancement of objects of generalpublic utility. The court had to deal with the changed definition, broughtabout by the IT Act of 1961, which contained restrictive terms, in thatthe making of profit in the course of carrying on of objects of generalpublic utility was prohibited. In a couple of decisions of this court[16], itwas held that the prohibition against making profit applied only to truststhat had as their objective the advancement of general public utility. Theprohibition from making profits therefore, did not apply to trusts meantto advance education, medical relief or relief for the poor.

38. This court in subsequent decisions, notably in Indian Chamberof Commerce v Commissioner of Income Tax[17 ]followed in principle,the ratio in Loka Shikshana Trust (supra) and held that profit-makingcannot be an object at all in the case of trusts set up with the object ofadvancing general public utility.Matters came to a head when this courthad occasion to review the previous law in Surat Art (supra). Theassessee in Surat Art (supra) was a trade promotion association set upto advance the interests of silk weavers and promote exports.Some ofits objects included permitting the association to obtain export licensesand export cloth manufactured by members, “To buy and sell anddeal in all kinds of cloth and other goods and fabrics belonging toand on behalf of the Members.” This court was of the opinion that theprincipal object, or in the exact words of the decision, ‘the predominant’object or purpose of the assessee was to advance the interests of silkmanufacturers. The other objects were only incidental. It was in that 16SeeDharmadeepti v. Commissioner of Income Tax (1978) 3SCC449.

17Indian Chamber of Commerce v Commissioner of Income Tax,(1976) 1 SCC 324.

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Acontext that the court held that profit-making in the course of carryingon the predominant objective of a trust or other institution is not per seprohibited. Notably it was held that:

“6. …But if the primary or dominant purpose of a trust orinstitution is charitable, another object which by itself mayBnot be charitable but which is merely ancillary or incidentalto the primary or dominant purpose would not prevent thetrust or institution from being a valid charity: VideCommissioner of Income Tax Madras v Andhra Chamber ofCommerce ((1965) 1 SCR 565).The test which has, therefore,to be applied is whether the object which is said to be non-Ccharitable is a main or primary object of the trust or institutionor it is ancillary or incidental to the dominant or primaryobject which is charitable.”

The court then interpreted the definition in the following terms:

D“10a. It is clear on a plain natural construction of thelanguage used by the Legislature that the ten crucial words“not involving the carrying on of any activity for profit” gowith “object of general public utility” and not with“advancement”. It is the object of general public utility whichmust not involve the carrying on of any activity for profit andEnot its advancement or attainment. What is inhibited by theselast ten words is the linking of activity for profit with the objectof general utility and not its linking with the accomplishmentor carrying out of the object. It is not necessary that theaccomplishment of the object or the means to carry out theFobject should not involve an activity for profit. That is not themandate of the newly added words. What these words requirethat the object should not involve the carrying on of anyactivity for profit. The emphasis is on the object of generalpublic utility and not on its accomplishment or attainment.The decisions of the Kerala and Andhra Pradesh High CourtsGin Commissioner of Income Tax v Cochin Chamber ofCommerce and Industry and Andhra Pradesh State RoadTransport Corporation v Commissioner of Income Tax in ouropinion lay down the correct interpretation of the last tenwords, in section 2 clause (15). The true meaning of theselast ten words is that when the purpose of a trust or institution D

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is the advancement of an object of general public utility, it isthat object of general public utility and not its accomplishmentor carrying out which must not involve the carrying on ofany activity for profit.”

39. It is thus evident that the seeds of the ‘predominant object’test wasevolved for the first time in Surat Art (supra). Noticeably,however, Surat Art (supra) was rendered in the context of a body claimingto be a charity, as it had advancement of general public utility for itsobjects. It was not rendered in the context of an educational institution,which at that stage was covered by Section 10 (22)[18]. In that sense, thecourthad no occasion to deal with the term‘educational institution,existing solely for educational purposes and not for purposes ofprofit’. Therefore, the application of the ‘predominant object’ test wasclearly in apt in the context of charities set up for advancing education.It is important to highlight this aspect at this stage itself, because theenunciation of ‘predominant object’testin Surat Art (supra) crept in tothe interpretation of ‘existing solely for educational purposes’, whichoccurred then in Section 10 (22) and now in Section 10 (23C).

40. The issue in Aditanar (supra) was whether the assesseesociety, whose objects were education, could be denied exemption, onthe ground that it was not engaged in educational activities, but its schoolswere. The Income Tax Appellate Tribunal and the High Court grantedrelief on that score, holding that the assessee’s objects were ‘solely’educational. This court endorsed that view:

“7. It will be rather unreal and hyper-technical to hold thatthe assessee-society is only a financing body and will notcome within the scope of ‘other educational institution’ asspecified in section 10(22). The object of the society is toestablish, run, manage or assist colleges or schools or othereducational institutions solely for educational purposes andin that regard to raise or collect funds, donations, gifts, etc.Colleges and schools are the media through which the assesseeimparts education and effectuates its objects. In substanceand reality, the sole purpose for which the assessee has comeinto existence is to impart education at the levels of collegesand schools and so, such an educational society should be 18 Section 10 (22) exempted “any income of a university or other educational institution,existing solely for educational purposes and not for purposes of profit”

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Aregarded as an ‘educational institution’ coming within section10(22). We hold accordingly. In our view, the judgment of theHigh Court does not merit interference.”

From Aditanar (supra), what can be gleaned is that a societymay not by itself carry on educational activities, however if it sets upBand governs such institutions, and its object is solely educational, it wouldbe regarded as a charity set up solely for the purpose of education.

41. The next relevant decision is Oxford University (supra).TheHigh Court was of the view that to avail the benefit of exemption underSection 10(22), it was necessary that the income should be the incomeCof a university or an educational institution ‘existing solely foreducational purposes and not for the purposes of profit’. Therewas a divergence of judicial opinion in this court. S.P. Bharucha, J. whowrote the dissenting opinion, observed as follows:

“5. By reason of Section 10(22), any income of a universityDor other educational institution, existing solely for educationalpurposes and not for purposes of profit, is not includible inits total income. A university is the creation of a charter or astatute. It is created exclusively for educational purposes, andnot for profit. An educational institution, while it may imparteducation, may yet have a profit motive. Strictly speaking,Etherefore, the phrase “existing solely for educational purposesand not for the purposes of profit” in clause (22) qualifiesonly the words “other educational institution” and not thewords “a university”. But this strict interpretation is of nogreat account for the purposes of this case, and the expressionFmay be read to qualify both “a university” and “othereducational institution”. For the purposes of obtaining theexemption under clause (22) the university must be “existingsolely for educational purposes and not for purposes ofprofit”. What this means is that the sole purpose of a universitymust be to impart education and not at all to make profit. TheGword “existing” in the context means “being”. It has nolocational sense. The clause does not say “existing in India”and the words “in India” cannot be read into it. The clausedoes not require that the university must impart education inIndia before it can qualify for exemption thereunder. The HighHCourt was in error in interpreting the clause differently.”

42. D. P.Mohapatra, J. expressed a different view, in which hewas joined by Y.K. Sabharwal, J.:

“32. I am of the view that the expression ‘existing solely forthe educational purpose and not for the purpose of profit’qualifies a ‘university’or other educational institution’. In acase where a dispute is raised whether the claim of exemptionfrom the tax by the assessee is admissible or not, it is necessaryfor the assessee to establish that it is a part ofa university which is engaged solely or at least primarily foreducational purposes and not for purposes of profit and theincome in respect of which the exemption is claimed is a partof the income of the university. This question assumesimportance in a case like the one in hand where the assesseeis nothing more than a commercial establishment/businessenterprise engaged in the business of printing, publishingand selling of books in this country. The label ‘university press’ is not sufficient to establish that it is engagedin any educational activity. The purpose of the existence ofthe assessee in this country as appears from the material onrecord, is possibly to earn profit. If the interpretation of theprovision in section 10(22) as urged on behalf of the assesseeis accepted, the provision will be exposed to challenge on theground of being irrational and, therefore, arbitrary. Then thequestion will arise for what purpose is this exemption fromtax extended to the assessee? How is it different from the largenumber of such establishments engaged in the business ofprinting, publishing and selling of books.”

Y.K. Sabharwal, J.’s opinion was:

“41. The plain language of clause (22) does not suggest thatthe words mentioned above qualify only other educationalinstitution and not universities. Mr. Dastur though faintlysuggested that it can be argued that these words do notqualify universities and qualify other educational institutionsbut the learned counsel did not argue on that basis. Thelearned counsel assumed that the requirement of sole existencefor educational purposes and not for purposes of profit appliesto universities as well as to other educational institutions.Unfortunately, the existence of the so-called universities ostensibly

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for sole educational purposes and in reality for purposes of profitis not unknown in this country. The words to the similar effecthave also been used in clause (22A) of section 10 in relation to a‘hospital’ or ‘other institution for the reception and treatment ofpersons. . . .’ The words used in the similar setting in clause (22A)are ‘existing solely for philanthropic purposes and not for purposesof profit’. There is no reason to restrict the application of thesewords only to ‘other institution’ and not to ‘a hospital’ byholding that these words do not qualify the words ‘a hospital’.

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42. The requirement of existing university solely foreducational purposes and not for purposes of profit will alsobe applicable to the universities and to this extent I am inrespectful agreement with the reasoning of brotherMohapatra. For the present purposes, however, as alreadysaid, I will assume that sole purpose of University of Oxford iseducational and not profit.

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Auniversity or other educational institution which exists solelyfor educational purposes and not for purposes of profit thoughnot established in India but having some educational activityin this country alone would be entitled to claim exemption.ESuch a university or educational institution havingeducational activity in India but being established orconstituted in some other country would not be denied thebenefit of exemption only on the ground that it has not beenestablishedor constituted in India. The imparting of educationFor existence of educational activity in India is the basicassumption of section 10(22) and the place of theestablishment or constitution of a university or othereducational institution is of no consequence. Similarphraseology has also been used in clause (22A) in relation tothe income of a hospital or other institution for the receptionGand treatment of the ailments referred to in the said provision.The requirement there is about existence solely forphilanthropic purposes and not for the purposes of profit.Clause (22A) of section 10 reads as under:

(22A) any income of a hospital or other institution for theHreception and treatment of persons suffering from illness or

mental defectiveness or for the reception and treatment ofpersons during convalescence or of persons requiringmedical attention or rehabilitation, existing solely forphilanthropic purposes and not for purposes of profit.”***

“60. If the contention urged on behalf of the assessee isaccepted, it would result in an university or other educationalinstitution [clause (22)] or hospital or other institution ascontemplated by [clause (22A)], without providing in Indiaany educational or philanthropic activity, as the case maybe, claiming the benefit of exemption on the ground that sucha service is being provided in some part of the world thoughin India such body is engaged itself or through its branch inan activity akin to a business or profit-making activity. Theexistence of activity, which is in the nature of service to societyin India is implicit in clauses (22) and (22A) of section 10.Further, under clause (29) though the words ‘Indian law’ arenot used, but to claim exemption the authority therein has tobe constituted under any law for the time being in force inIndia.”

43. The next decision which dealt with education and its charitablenature was American Hotel (supra). The appellant was a U.S.Aregistered non-profit organization which was granted tax exemption inthat country. It had a branch office in India to comply with its obligationsunder various agreements with the Ministry of Tourism of the Governmentof India. In accordance with the terms of the Memorandum ofUnderstanding, it was responsible inter alia, for providing a full andcomplete curriculum recognized throughout the world for all hospitalityeducational programmes in India, making available text books, coursematerials and software programmes utilized in the appellant’s ‘HospitalityManagement Diploma’, offering a comprehensive certification andregistration programme for the Indians desirous of availing an educationin the hospitality field in India. The appellant received tax exemptionunder Section 10(22) up to the year ending 31 March 1998. The branchoffice accounts showed surplus, which was repatriated outside India.Its claim for approval under Section 10 (23C) after the repeal of Section10 (22) was rejected as the authority held that the assessee had notapplied its income for the purpose of education in India.

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44. This court held that:

“27. Actual existence of the educational institution was thepre-condition of the application for initial approval undersection 10(22). On grant of approval, under section 10(22),sections 11 and 13 did not apply. Therefore, earlier prior to1-4-1999 when exemption was given to the appellant, therewas no assessment nor demand section 10(22) had anautomatic effect. Once an applicant-institution came withinthe phrase ‘exists solely for educational purposes and notfor profit’ no other conditions like application of income wererequired to be complied with. The Prescribed Authority wasonly required to examine the nature, activities and genuinenessof the Institution. The above phrase was the only requirementfor initial approval. The mere existence of profit/surplus didnot disqualify the institution if the sole purpose of its existencewas not profit-making but educational activities as section10(22) by its very nature contemplated income of suchinstitution to be exempted. Under section 10(22) the test wasrestricted to the character of the recipient ofincome, viz, whether it had the character of educationalinstitution in India, its character outside India was irrelevantfor deciding whether its income would be exempt under section10(22).

28. The moot question in section 10(22) was - whether theactivities of the applicant came within the definition of ‘incomeof educational institution’. Under section 10(22) one had toclosely analyse the activities of the Institute, the objects ofthe Institute and its source of income and its utilization. Evenif one of the objects enabled the Institute to undertake,commercial activity, the institute would not be entitled toapproval under section 10(22). The said section interalia excludes the income of the educational institute from theTotal Income…

29. In Surat Art Silk Cloth Mfg. Association’s case (supra) ithas been held by this Court that test of predominant object ofthe activity is to be seen whether it exists solely for educationand not to earn profit. However, the purpose would not loseits character merely because some profit arises from the

activity. That, it is not possible to carry on educational activityin such a way that the expenditure exactly balances the incomeand there is no resultant profit, for, to achieve this, would notonly be difficult of practical realization but would reflectunsound principles of management. In order to ascertainwhether the Institute is carried on with the object of makingprofit or not it is duty of the prescribed authority to ascertainwhether the balance of income is applied wholly andexclusively to the objects for which the applicant is established.

30. In deciding the character of the recipient, it is notnecessary to look at the profits of each year, but to considerthe nature of the activities undertaken in India. If the Indianactivity has no co-relation to education, exemption has to bedenied, (see judgment of this Court in Oxford UniversityPress case (supra). Therefore, the character of the recipientof income must have character of educational institution inIndia to be ascertained from the nature of the activities, ifafter meeting expenditure, surplus remains incidentally fromthe activity carried on by the educational institution, it willnot cease to be one existing solely for educational purposes.In other words, existence of surplus from the activity will notmean absence of educational purpose (see judgment of thisCourt in Aditanar Educational Institution v. Addl. CIT 1997(224) ITR 310 . The test is the nature of activity. If the activitylike running a printing press takes place it is not educational.But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of thefinancial year”.

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“32. We shall now consider the effect of insertion of provisosto section 10(23C)(vi) vide Finance Act, 1998. section10(23C)(vi) is analogous to section 10(22). To that extent,the judgments of this Court as applicable to section 10(22)would equally apply to section 10(23C)(vi). The problem ariseswith the insertion of the provisos to section 10(23C)(vi). Withthe insertion of the provisos to section 10(23C)(vi) theapplicant who seeks approval has not only to show that it isan institution existing solely for educational purposes [which A

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Awas also the requirement under section 10(22)] but it hasnow to obtain initial approval from the prescribed authority,in terms of section 10(23C)(vi) by making an application inthe standardized form as mentioned in the first proviso to thatsection. That condition of obtaining approval from theprescribed authority came to be inserted because sectionB10(22) was abused by some educational institutions/universities. This proviso was inserted along with otherprovisos because there was no monitoring mechanism to checkabuse of exemption provision. With the insertion of the firstproviso, the prescribed authority is required to vet theCapplication. This vetting process is stipulated by the secondproviso. It is important to note that the second proviso alsoindicates the powers and duties of the prescribed authority.While considering the approval application in the secondproviso, the prescribed authority is empowered before givingapproval to call for such documents including annualDaccounts or information from the applicant to check thegenuineness of the activities of the applicant institution.Earlier that power was not there with the prescribed authority.Under the third proviso, the prescribed authority has toascertain while judging the genuineness of the activities ofEthe applicant institution as to whether the applicant appliesits income wholly and exclusively to the objects for which it isconstituted/established. Under the twelfth proviso, theprescribed authority is required to examine cases where anapplicant does not apply its income during the year of receiptand accumulates it but makes payment therefrom to any trustFor institution registered under section 12AA or to any fund ortrust or institution or university or other educational institutionand to that extent the proviso states that such payment shallnot be treated as application of income to the objects forwhich such trust or fund or educational institution isGestablished. The idea underlying the twelfth proviso is toprovide guidance to the prescribed authority as to the meaningof the words ‘application of income to the objects for which,the institution is established’. Therefore, the twelfth provisois the matter of detail. The most relevant proviso for decidingthis appeal is the thirteenth proviso. Under that proviso, the A

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circumstances are given under which the prescribed authorityis empowered to withdraw the approval earlier granted. Underthat proviso, if the prescribed authority is satisfied that thetrust, fund, university or other educational institution etc. hasnot applied its income in accordance with the third proviso orif it finds that such institution, trust or fund etc. has notinvested/deposited its funds in accordance with the thirdproviso or that the activities of such fund or institution ortrust etc., are not genuine or that its activities are not beingcarried out in accordance with the conditions subject to whichapproval is granted then the prescribed authority isempowered to withdraw the approval earlier granted aftercomplying with the procedure mentioned therein.

33. Having analysed the provisos to section 10(23C)(vi) onefinds that there is a difference between stipulation ofconditions and compliance thereof. The threshold conditionsare actual existence of an educational institution and approvalof the prescribed authority for which every applicant has tomove an application in the standardized form in terms of thefirst proviso. It is only if the pre-requisite condition of actualexistence of the educational institution is fulfilled that thequestion of compliance of requirements in the provisos wouldarise. We find merit in the contention advanced on behalf ofthe appellant that the third proviso contains monitoringconditions/requirements like application, accumulation,deployment of income in specified assets whose compliancedepends on events that have not taken place on the date ofthe application for initial approval.

34. To make the section with the proviso workable we are ofthe view that the Monitoring Conditions in the third provisolike application/utilization of income, pattern of investmentsto be made etc., could be stipulated as conditions by theprescribed authority subject to which approval could begranted. For example, in marginal cases like the present case,where appellant-Institute was given exemption up to financialyear ending 31-3-1998 (assessment year 1998-99) and wherean application is made on 7-4-1999, within seven days of thenew dispensation coming into force, the prescribed authority AB

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Acan grant approval subject to such terms and conditions as itdeems fit provided they are not in conflict with the provisionsof the 1961 Act (including the above-mentioned monitoringconditions). While imposing stipulations subject to whichapproval is granted, the prescribed authority may insist oncertain percentage of accounting Income to be utilized/Bapplied for imparting education in India. While making suchstipulations, the prescribed authority has to examine theactivities in India which the applicant has undertaken in itsConstitution, MoUs, and Agreement with Government of India/National Council. In this case, broadly the activitiesCundertaken by the appellant are - conducting classicaleducation by providing course materials, designing courses,conducting exams, granting diplomas, supervising exams, allunder the terms of an Agreement entered into with Institutionsof the Government of India. Similarly, the prescribed authoritymay grant approvals on such terms and conditions as it deemsDfit in case where the Institute applies for initial approval forthe first time. The prescribed authority must give an opportunityto the applicant-institute to comply with the monitoringconditions which have been stipulated for the first time bythe third proviso. Therefore, cases where earlier the applicantEhas obtained exemption(s), as in this case, need not be re-opened on the ground that the third proviso has not beencomplied with. However, after grant of approval, if it is broughtto the notice of the prescribed authority that conditions onwhich approval was given are breached or that circumstancesmentioned in the thirteenth proviso exists then the prescribedFauthority can withdraw the approval earlier given byfollowing the procedure mentioned in that proviso. The viewwe have taken, namely, that the prescribed authority canstipulate conditions subject to which approval may be grantedfinds support from sub-clause (ii)(B) in the thirteenth proviso.”

G45. The next judgement is that of Queen’s Education Society(supra). In that case, the society was engaged in imparting educationthrough its schools. For two successive assessment years the societyrecorded some profits. It was denied exemption, on the ground that thesociety’s objects included not only education, but others as well, and thatHits aim was to make profit. The Uttarakhand High Court affirmed the

view of the revenue. On appeal, this court after considering the previousjudgements (discussed above), held that the High Court was in error.After quoting extensively from the judgement in Surat Art Silk(supra),this court recorded its conclusions, entirely affirming the ‘predominantobject’ test:

“11. Thus, the law common to Section 10 (23C) (iiiad) and(vi) may be summed up as follows:

(1) Where an educational institution carries on the activity ofeducation primarily for educating persons, the fact that itmakes a surplus does not lead to the conclusion that it ceasesto exist solely for educational purposes and becomes aninstitution for the purpose of making profit.

(2) The predominant object test must be applied - the purposeof education should not be submerged by a profit makingmotive.

(3) A distinction must be drawn between the making of asurplus and an institution being carried on “for profit”. Noinference arises that merely because imparting educationresults in making a profit, it becomes an activity for profit.

(4) If after meeting expenditure, a surplus arises incidentallyfrom the activity carried on by the educational institution, itwill not be cease to be one existing solely for educationalpurposes.

(5) The ultimate test is whether on an overall view of the matterin the concerned assessment year the object is to make profitas opposed to educating persons.”

46. The court disapproved the Uttarakhand High Court’s viewthat generating surplus was prohibited and adversely commented on theinferences drawn by the High Court. It was held that the High Courthad misconstrued the judgement in Aditanar (supra).It then discussedthe appeal directed against the judgement of the Punjab and HaryanaHigh Court in Pinegrove International Charitable Trust Vs. Union ofIndia[19], where the exemption application was denied by the revenue onthe ground that the level of fees collected and the surplus generated 19Pinegrove International Charitable Trust Vs. Union of India, (2010) 327 ITR 73(P&H).

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Aconsistently for several years indicated that the trust was essentiallyengaging itself in profitable activity under the garb of imparting education.The High Court had held that the generation of profits could not be theonly reason to deny exemption, and what was relevant was the‘predominant’ or main object of the society, which in that case was toimpart education. The High Court also heldthat after granting approval,Bif the PA notices that the conditions in which approval had been grantedwere violated under the circumstances detailed in the thirteenth proviso(as it existed then), approval could be withdrawn after following theprocedure prescribed.

47. This court in Queens Educational Society (supra) approvedCthe judgement of the Punjab and Haryana High Court in PinegroveInternational (supra). By the same judgement,it also approved otherjudgements of High Courts which had followed Pinegrove and disagreedwith the Uttarakhand High Court’s judgement.

48. From the above discussion, it is evident that this court hasDspelt out the following to be considered by the revenue, when trusts orsocieties apply for registration or approval on the ground that they areengaged in or involved in education:

(i) The society or trust may not directly run the school impartingeducation. Instead, it may be instrumental in setting up schools orEcolleges imparting education. As long as the sole object of thesociety or trust is to impart education, the fact that it does not doso itself, but its colleges or schools do so, does not result in rejectionof its claim. (Aditanar (supra)).

(ii) To determine whether an institution is engaging in educationFor not, the court has to consider its objects (Aditanar (supra)).

(iii) The applicant institution should be engaged in impartingeducation, if it claims to be part of an entity or university engagedin education. This condition was propounded in Oxford University(supra) where the applicant was a publisher, part of the OxfordGUniversity established in the U.K. The assessee did not engage inimparting education, but only in publishing books, periodicals, etc.for profit. Therefore, the court by its majority opinion held that themere fact that it was part of a university (incorporated or set upabroad) did not entitle it to claim exemption on the ground that itwas imparting education in India.H

(iv) The judgement in American Hotel (supra) states that todiscern whether the applicant’s claim for exemption can beallowed, the ‘predominant object’ has to be considered. It wasalso held that the stage of examining whether and to what extentprofits were generated and how they were utilised was notessential at the time of grant of approval, but rather formed partof the monitoring mechanism.

(v) Queen’s Educational Society (supra) approved and appliedthe ‘predominant object’ test (which extensively quoted SuratArt (supra) and applied it with approval). The court also held thatthe mere fact that substantial surpluses or profits were generatedcould not be a bar for rejecting the application for approval underSection 10(23C)(vi) of the IT Act.

Examination of the term‘solely’

49. It is evident, that in construing the term ‘any university orother educational institution existing solely for educational purposesand not for purposes of profit’ the other negative reference to profit,in respect of educational institutions, is in the seventh proviso whichstates that incomes which are profits of business, cannot be exempt,“unless the business is incidental to the attainment of its objectivesand separate books of account are maintained by it in respect ofsuch business”.

50. The basic provision granting exemption, thus enjoins thatthe institution should exist ‘solely for educational purposes and notfor purposes of profit’. This requirement is categorical.While construingthis essential requirement, the proviso, which carves out the exception,so to say, to a limited extent, cannot be looked into. The expression‘solely’ has been interpreted, as noticed previously, by other judgmentsas the ‘dominant / predominant /primary/main’ object. The plain andgrammatical meaning of the term ‘sole’ or ‘solely’ however, is ‘only’ or‘exclusively’. P.Ramanath Aiyar’s Advanced Law Lexicon[20] explainsthe term as, “‘Solely’ means exclusively and not primarily”. TheCambridge Dictionary defines ‘solely’ to be,”Only and not involvinganyone or anything else”.[21 ]The synonyms for ‘solely’ are “alone,independently, single-handed, single-handedly, singly, unaided, 20P. RAMANATHA AIYAR, ADVANCED LAW LEXICON, (6thEdn.), Pg. 5249-5250 (2019).

21Solely, Cambridge Dictionary (4thEdn.) (2013).

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Aunassisted” and its antonyms are “inclusively, collectively,cooperatively, conjointly etc.”

51. It is, therefore, clear that term ‘solely’ is not the same as‘predominant / mainly’. The term ‘solely’ means to the exclusion of allothers. None of the previous decisions – especially American HotelB(supra) or Queens Education Society (supra) – explored the truemeaning of the expression ‘solely’.Instead, what is clear from the previousdiscussion is that the applicable test enunciated in Surat Art (supra) i.e.,the ‘predominant object’ test was applied unquestioningly in cases relatingto charitable institutions claiming to impart education. The obvious errorin the opinion of this court which led the previous decisions in AmericanCHotel (supra) and in Queens Education Society (supra) was that SuratArt (supra) was decided in the context of asociety that did not claim toimpart education. It claimed charitable statusas an institution set up toadvance objects of general public utility. The Surat Art (supra) decisionpicked the first among the several objects (some of them being clearlyDtrading or commercial objects) as the ‘predominant’ object which had tobe considered while judging the association’s claim for exemption. Theapproach and reasoning applicable to charitable organizations set up foradvancement of objects of general public utility are entirely differentfrom charities set up or established for the object of imparting education.In the case of the latter, the basis of exemption is Section 10(23C) (iiiab),E(iiiad) and (vi). In all these provisions, the positive condition ‘solely foreducational purposes’ and the negative injunction ‘and not forpurposes of profit’ loom large as compulsive mandates, necessary forexemption. The expression ‘solely’ is therefore important. Thus, in theopinion of this court, a trust, university or other institution impartingFeducation, as the case may be, should necessarily have all its objectsaimed at imparting or facilitating education. Having regard to the plainand unambiguous terms of the statute and the substantive provisionswhich deal with exemption,there cannot be any other interpretation.

52. The view of this court is fortified by the previous judgementsGin Commissioner of Customs(Import), Mumbai v. Dilip Kumar andCompany & Ors. [22] where a constitution bench held that taxing statutesare to be construed in terms of their plain language:

22Commissioner of Customs(Import), Mumbai v. Dilip Kumar and Company & Ors.,(2018) 9 SCC 1.H

“21. The well-settled principle is that when the words in astatute are clear, plain and unambiguous and only onemeaning can be inferred, the courts are bound to give effectto the said meaning irrespective of consequences. If the wordsin the statute are plain and unambiguous, it becomes necessaryto expound those words in their natural and ordinary sense.The words used declare the intention of the legislature”.

The Court, while noting the nuances between ‘strict’ and ‘literal’interpretation, held as follows:

“29. …We may reiterate at the cost of repetition that strictinterpretation of a statute certainly involves literal or plainmeaning test. The other tools of interpretation, namely,contextual or purposive interpretation cannot be applied norany resort be made to look to other supporting material,especially in taxation statutes. Indeed, it is well settled that ina taxation statute, there is no room for any intendment; thatregard must be had to the clear meaning of the words andthat the matter should be governed wholly by the languageof the notification. Equity has no place in interpretation of atax statute. Strictly one has to look to the language used;there is no room for searching intendment nor drawing anypresumption. Furthermore, nothing has to be read into norshould anything be implied other than essential inferenceswhile considering a taxation statute”.

If the language is unambiguous and capable of one meaning, thatalone should be applied and not any other, based under surmise that theParliament or the legislature intended it to be so. In other words, it isonly in cases of ambiguity that the court can use other aids to discern thetrue meaning.Where the statute is clear and the words plain, the legislationhas to be given effect in its own terms.

53. In A.V. Fernandez v State of Kerala[23], a constitution benchdiscussed how tax laws should ordinarily be construed:

“29. It is no doubt, true that in construing fiscal statutes andin determining the liability of a subject to tax one must haveregard to the strict letter of the law and not merely to thespirit of the statute or the substance of the law. If the Revenue 23A.V. Fernandez v State of Kerala,1957 SCR 837.

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Asatisfies the Court that the case falls strictly within theprovisions of the law, the subject can be taxed. If, on theother hand, the case is not covered within the four corners ofthe provisions of the taxing statute, no tax can be imposed byinference or by analogy or by trying to probe into theintentions of the legislature and by considering what was theBsubstance of the matter”.

54. It is only when the application of literal interpretation givesrise to an absurdity, should the interpretation be expansive. This wasreiterated in Mangalore Chemicals and Fertilisers Ltd. v. DeputyCommissioner of Commercial Taxes & Ors.[24]:C

“24. …The choice between a strict and a liberal constructionarises only in case of doubt in regard to the intention of thelegislature manifest on the statutory language. Indeed, theneed to resort to any interpretative process arises only wherethe meaning is not manifest on the plain words of the statute.DIf the words are plain and clear and directly convey themeaning, there is no need for any interpretation”.

55. This court has, in many judgments, stressed that the object ofa proviso is to except from the main provision something enacted in thesubstantive clause. It cannot however, by itself be read as a substantiveEprovision. Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai[25]considered the function and effect of a proviso:

“8. The proper function of a proviso is to except or qualifysomething enacted in the substantive clause, which but forthe proviso would be within that clause. It may ordinarily beFpresumed in construing a proviso that it was intended thatthe enacting part of the section would have included thesubject-matter of the proviso.”

56. In Indore Development Authority v. Manoharlal[26] it washeld that:G

“192. A proviso has to be construed as a part of the clause towhich it is appended. A proviso is added to a principal 24Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of CommercialTaxes & Ors, (1992) Supp (1) SCC 21.

25Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai, 1966 (1) SCR 367.

H26Indore Development Authority v. Manoharlal,(2020) 8 SCC 129.

provision to which it is attached. It does not enlarge theenactment. In case the provision is repugnant to the enactingpart, the proviso cannot prevail. Though in absolute terms ofa later Act. Its placement has been considered, and purposehas been considered in the following decisions. It wasobserved in State of Rajasthan v. Leela Jain [State ofRajasthan v. Leela Jain, (1965) 1 SCR 276 : AIR 1965 SC1296] : (AIR p. 1300, para 14)

“14. … So far as a general principle of construction of aproviso is concerned, it has been broadly stated that thefunction of a proviso is to limit the main part of the sectionand carve out something which but for the proviso wouldhave been within the operative part.”

57. The scope of a proviso was dealt with in great detail in S.Sundaram Pillai v. V.R. Pattabiraman.[27] This court observed thatnormally a proviso is meant to be an exception to something within themain enactment or to qualify something enacted therein which but forthe proviso would be within the purview of the enactment. A provisocannot be torn apart from the main enactment nor can it be used tonullify or set at naught the real object of the main enactment. Afterquoting previous decisions and authoritative texts, this court summarizedthe correct legal position, as follows:

“43. We need not multiply authorities after authorities on thispoint because the legal position seems to be clearly andmanifestly well established. To sum up, a proviso may servefour different purposes:

(1) qualifying or excepting certain provisions from the mainenactment:

(2) it may entirely change the very concept of the intendmentof the enactment by insisting on certain mandatoryconditions to be fulfilled in order to make the enactmentworkable:

(3) it may be so embedded in the Act itself as to become anintegral part of the enactment and thus acquire the tenorand colour of the substantive enactment itself; and 27S. Sundaram Pillai v. V.R. Pattabiraman,1985 (1) SCC 591.

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A(4) it may be used merely to act as an optionaladdenda tothe enactment with the sole object of explaining the realintendment of the statutory provision.”

58. The seventh proviso to Section 10 (23C) (vi) alludes to businessand profits (‘being profits and gains of business, unless the businessBis incidental to the attainment of its objectives and separate booksof account are maintained by it in respect of such business’). Theinterpretation of Section 10 (23C) therefore, is that the trust or educationalinstitution must solely exist for the object it professes (in this case,education, or educational activity only), and not for profit. The seventhproviso however carves an exception to this rule, and permits the trustCor institution to record (or earn) profits, provided the ‘business’ whichhas to be read as the education or educational activity- and nothingother than that- is incidental to the attainment of its objectives (i.e.,the objectives of, or relating to, education).

59. In this court’s judgment in Delhi Cloth & General Mills Co.DLtd. v Workmen &Ors.[28 ]the question involved was the jurisdiction ofan industrial tribunal.Under the Industrial Disputes Act, 1947, as towhether it can decide disputes referred to it, and matters incidentalthereto, this court explained the meaning of ‘incidental’ in the followingmanner:E“21. [T]he word ‘incidental’ means according to Webster’sNew World Dictionary:

“happening or likely to happen as a result of or in connectionwith somethingmore important; being an incident; casual;hence, secondary or minor, but usually associated:”F“Something incidental to a dispute” must therefore meansomething happening as a result of or; in connection with thedispute or associated with the dispute. The dispute is thefundamental thing while something incidental thereto is anadjunct to it. Something incidental, therefore, cannot cut atGthe root of the main thing to which it is an adjunct.”

The above decision has been followed in other cases.‘Incidental’therefore, means, in the context of the present case,something connected with the activity of education.

H28Delhi Cloth & General Mills Co. Ltd. v Workmen & Ors.,1967 (1) SCR 882.

60. In the light of the above discussion, this court is of the opinionthat the interpretation adopted by the judgments in American Hotel (supra)as well as Queens Education Society (supra) as to the meaning of theexpression ‘solely’ are erroneous. The trustor educational institution, whichseeks approval or exemption, should solely be concerned with education,or education related activities. If, incidentally, while carrying on thoseobjectives, the trust earns profits, it has to maintain separate books ofaccount.It is only in those circumstances that ‘business’ income can bepermitted-provided, as stated earlier, that the activity is education, orrelating to education.The judgment in American Hotel (supra) as wellas Queens Education Society (supra) do not state the correct law, andare accordingly overruled.

61. The second question which this court has to address is whetherthe PA (Commissioner or any other designated authority) is in any mannerenjoined to confine the nature of inquiry to discern the object of a society,trust or other institution at the stage when it approaches the authority forapproval under Section 10 (23C).

62. Section 10(23C) has many provisos. The first proviso enjoinsthe concerned fund, trust or institution to apply to the concerned authorityi.e., the Commissioner, for grant of approval and sets out the timeline fordoing so. These include situations where atrust or institution was grantedapproval up to a particular point in time and sought extension. The secondproviso by sub-clause (ii) requires the Commissioner to make suchenquiries to specify about the genuineness of the activities of the fund,trust or institution and compliance of such requirements of other laws inforce by such fund, trust or institution. Upon considering the materialsthe Commissioner or the concerned authority can pass an appropriateorder granting approval for a specific period of time, or reject theapplication. The second proviso importantly indicates that before grantingapproval to any fund, trust or institution, the Commissioner or theconcerned authority ‘may call for such documents’ including auditedannual accounts or information from the fund, or trust or institution etc.,as is deemed necessary for recording satisfaction about the genuinenessof the activities. The judgment in American Hotel (supra) dealtextensively with the effect of the provisos to Section 10(23C). Whiledoing so, the court made certain remarks with respect to the effect ofthese provisos characterizing a few of them as those dealing with thestage of considering applications for approval or registration and other A

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Aas those dealing with application of income or receipts of the trust. Inrespect of the latter, this court was of the opinion that the question ofapplication of income or profits could arise only at the stage ofassessment. The court was also of the opinion that the audited books ofaccounts would be of little or no relevance at the stage of registration orBapproval.

63. Having regard to the plain terms of the second proviso toSection 10(23C), which refers to the procedure for approval ofapplications including those made by trusts and institutions impartingeducation, one can discern no such restrictions. From the pointedreference to ‘audited annual accounts’ as one of the heads of informationCwhich can be legitimately called or requisitioned for consideration at thestage of approval of an application, the inference is clear: theCommissioner or the concerned authority’s hands are not tied in anymanner whatsoever. The observations to the contrary in American Hotel(supra) appear to have overlooked the discretion vested in theDCommissioner or the relevant authority to look into past history ofaccounts, and to discern whether the applicant was engaged in fact,‘solely’ in education. American Hotel (supra) excluded altogether inquiryinto the accounts by stating that such accounts may not be available.Those observations in the opinion of the court assume that only newlyEset up societies, trusts, or institutions may apply for exemption. Whilstthe statute potentially applies to newly created organizations, institutionsor trusts, it equally applies to existing institutions, societies or trust, whichmay seek exemption at a later point. At the same time, this court is alsoof the opinion that the Commissioner or the concerned authority,whileFconsidering an application for approval and the further material calledfor (including audited statements), should confine the inquiry ordinarilyto the nature of the income earned and whether it is for education oreducation related objects of the society (or trust). If the surplus or profitsare generated in the hands of the assessee applicant in the imparting ofeducation or related activities, disproportionate weight ought not be givenGto surpluses or profits, provided they are incidental. At the stage ofregistration or approval therefore focus is on the activity and not theproportion of income. If the income generating activity is intrinsicallypart of education, the Commissioner or other authority may not on thatbasis alone reject the application.H

Applicability of Other Laws

64. In some appeals a grievance was articulated that the revenuedid not grant approval to the society or educational institution because itwas not registered under the A.P. Charities Act. Section 1(3)(a) theA.P. Charities Act is applicable to all public charitable institutions whetherregistered or not. The term‘public charitable institutions’ is defined,and includes every charitable institution the administration of which isfor the time being, amongst others, carried on by a society. ‘Charitableinstitution’, under Section 2(4), and ‘charitable purpose’ under Section2 (5) of A.P Charities Act are defined as follows:

“2 Definitions

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(4) ‘charitable institution ‘ means any establishment,undertaking, organisation or association formed for acharitable purpose and includes a specific endowment anddharmadayam;

(5) ‘charitable purpose’ includes-

(a) relief of poverty or distress;

(b) education;

(c) medical relief;

(d) advancement of any other object of utility or welfare tothe general public or a section thereof not being an object ofan exclusively religious nature.”

65. Clearly, charitable objects – defined by the A.P. Charities Act,are pari materia with the IT Act. Thus, establishments or associationsor organizations (widely phrased terms) formed for ‘charitable purpose’fall within the meaning of charitable institutions. These include societiesand trusts, set up for educational purposes.

66. By Section 43(1), every charitable institution, existing as onthe date of commencement of the A.P. Charities Act was obliged toapply for registration.‘New trusts or institutions are obliged, withinninety days of their formation, to apply for registration’ throughpersons in charge - the Registrar, by Section 43(2) to Section 43 (4) isobliged to inquire into the material provided with the application, andtake into account other relevant material. Section 43 (5) reads as follows:

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A“43(5) On receipt of the application, the AssistantCommissioner shall, after making such enquiry as he thinksfit and hearing any person having interest in the institutionor endowment, pass an order directing its registration andgrant to the trustee or other person a certificate of registrationcontaining the particulars furnished in the application withBthe alterations, if any, made by him as a result of his enquiry.”

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67. In the event of failure to comply with Section 43(1), or failureto intimate changes in the trust, or for supplying false information, thetrustee or other person in charge, can be penalized by Section 43 (11).Section 44 empowers the Commissioner to direct charitable organizationsCand trusts to comply and register under the Act.

68. The assessees had argued that since they were registeredunder the Andhra Pradesh Societies Registration Act, 2001 or were trustsduly registered, they could not be compelled to comply with state lawsas a condition for consideration of their application as charitableDinstitutions, under Section 10 (23C).

69. This court is of the opinion that the findings in the impugnedjudgment on this aspect are sound. The requirement of registration ofevery charitable institution is not optional. Aside from the fact that theconsequences of non-registration are penal, which indicates theEmandatory nature of the provisions of the A.P. Charities Act, such locallaws provide the regulatory framework by which annual accounts, mannerof choosing the governing body (in terms of the founding instrument:trust, society, etc.), acquisition and disposal of properties, etc. areconstantly monitored. Entry 32 of List II of the Seventh Schedule to theConstitution reads as follows:F

“32. Incorporation, regulation and winding up ofcorporations, other than those specified in List I, anduniversities; unincorporated trading, literary, scientific,religious and other societies and associations; cooperativesocieties.”G

By Entry 28, List III of the Seventh Schedule, the states haveundoubted power to enact on the subject of charities:

“28. Charities and charitable institutions, charitable andreligious endowments and religious institutions.”

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The A.P. Charities Act provides a statutory regulatory frameworkin regard to activities of charitable institutions in the state. Sections 72-74 deal with surplus funds and their treatment; Sections 75-77 deal withproperties of trusts and charitable institutions and restrictions on transfers.These and other provisions enable the State, which is concerned in theproper administration of such organizations, to ensure that they aremanaged efficiently without misfeasance. They also contain provisionsto protect the interests of trusts, especially funds and properties.

70. In view of the above discussion, it is held that charitableinstitutions and societies, which may be regulated by other state laws,have to comply with them- just as in the case of laws regulating education(at all levels). Compliance with or registration under those laws, are alsoa relevant consideration which can legitimately weigh with theCommissioner or other concerned authority, while deciding applicationsfor approval under Section 10 (23C).

71. This reasoning equally applies especially in Section 11(4A)which speaks of profits incidental which specifies that exemption inrelation to income or trust of an institution which are profits or means ofbusiness cannot be exempted ‘unless the business is incidental, trustor as the case may be institution and separate books of accountsare maintained by such trusts or institution in respect of suchbusiness’. Thus, the underlying objective of seventh proviso to Section10(23C) and of Section 11(4A) are identical. These have to be read inthe light of the main provision which spells out the conditions for exemptionunder Section 10(23C) - the same conditions would apply equally to theother sub-clauses of Section 10(23C) that deal with education, medicalinstitution, hospitals etc.

72. What then is ‘incidental’ business activity in relation toeducation? Imparting education through schools, colleges and other suchinstitutions would be per se charity. Apart from that there could beactivities incidental to providing education. One example is of text books.This court in a previous ruling in Assam State Text Book Production &Publication Corpn. Ltd. v. Commissioner of Income Tax[29]has heldthat dealing in text books is part of a larger educational activity. TheCourt was concerned with State established institutions that publishedand sold text books. It was held that if an institution facilitated learning 29Assam State Text Book Production & Publication Corpn. Ltd. v. Commissioner ofIncome Tax, (2009) 17 SCC 391.

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Aof its pupils by sourcing and providing text books, such activity would be‘incidental’to education. Similarly, if a school or other educationalinstitution ran its own buses and provided bus facilities to transportchildren, that too would be an activity incidental to education. There canbe similar instances such as providing summer camps for pupils’ specialeducational courses, such as relating to computers etc., which may benefitBits pupils in their pursuit of learning.

73. However, where institutions provide their premises orinfrastructure to other entities, trusts, societies etc., for the purposes ofconducting workshops, seminars or even educational courses (whichthe concerned trust is not actually imparting) and outsiders are permittedCto enrol in such seminars, workshops, courses etc., then the incomederived from such activity cannot be characterised as part of educationor ‘incidental’ to the imparting education. Such income can properly fallunder the other heads of income.

74. In R.R.M Educational Society’s appeal before this court,theDcharitable status of the appellant within Section 10(23C) was deniedinter alia on the ground that the institution was not merely impartingeducation but also was running hostels. It is clarified that providing hostelfacilities to pupils would be an activity incidental to imparting education.It is unclear from the record whether R.R.M Educational Society wasEproviding hostel facility only to its students or to others as well.If theinstitution provided hostel and allied facilities(such as catering etc.) onlyto its students, that activity would clearly be ‘incidental’ to the objectiveof imparting education.

75. The last ground urged was with respectto the refusal by theFCommissioner to register certain institutions who had amended theirobjectives. This court is of the opinion that the impugned judgment cannotbe faulted with in rejecting the challenge by the appellant societies andtrusts, because the requirement of trust or societies applying forregistration or approval under the provisos to Section 10(23)(C) spell outa specific time (before 30 September). As the High Court has observed,Gthere is no provision to extendsuch a deadline. In the circumstances forthe concerned year, the reasoning of the High Court in refusing to interferewith the concerned authorities decisions to approve or reject theregistration of the institution, is hereby affirmed.

76. The conclusions of this court are summarized as follows:

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a.It is held that the requirement of the charitable institution,society or trust etc., to ‘solely’ engage itself in educationoreducational activities, and not engage in any activity ofprofit,means that such institutions cannot have objectswhich are unrelated to education. In other words,all objectsof the society, trust etc., mustrelate to imparting educationor be in relation to educational activities.

b.Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approvalunder Section 10(23C) of the IT Act. At the same time,where surplus accrues in a given year or set of years perse,it is not a bar, provided such surplus is generated in thecourse of providing education or educational activities.

c.The seventh proviso to Section 10(23C), as well as Section11(4A) refer to profits which may be ‘incidentally’ generatedor earned by the charitable institution. In the present case,the same is applicable only to those institutions which imparteducation or are engaged in activities connected toeducation.

d.The reference to ‘business’ and ‘profits’ in the seventhproviso to Section 10(23C) and Section 11(4A)merely meansthat the profits of business which is ‘incidental’ to educationalactivity – as explained in the earlier part of the judgmenti.e., relating to education such as sale of text books, providingschool bus facilities, hostel facilities, etc.

e.The reasoning and conclusions in American Hotel(supra)and Queen’s Education Society(supra)so far asthey pertain to the interpretation of expression ‘solely’arehereby disapproved.The judgments are accordinglyoverruled to that extent.

f.While considering applications for approval under Section10(23C), the Commissioner or the concerned authority asthe case may be under the second proviso is not bound toexamine only the objects of the institution. To ascertain thegenuineness of the institution and the manner of itsfunctioning, the Commissioner or other authority is free tocall for the audited accounts or other such documents for A

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Arecording satisfaction where the society, trust or institutiongenuinely seeks to achieve the objects which it professes.The observations made in American Hotel (supra) suggestthat the Commissioner could not call for the records andthat the examination of such accountswould be at the stageof assessment. Whilst that reasoning undoubtedly appliesBto newly set up charities, trusts etc. the proviso under Section10(23C) is not confined to newly set up trusts – it also appliesto existing ones. The Commissioner or other authority isnot in any manner constrained from examining accountsand other related documents to see thepattern of incomeCand expenditure.

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g.It is held that wherever registration of trust or charities isobligatory under state or local laws, the concerned trust,society, other institution etc. seeking approval under Section10(23C) should also comply with provisions of such statelaws. This would enable the Commissioner or concernedauthority to ascertain the genuineness of the trust, societyetc. This reasoning is reinforced by the recent insertion ofanother proviso of Section 10(23C) with effect from01.04.2021.

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E77. In a knowledge based, information driven society, true wealthis education – and access to it. Every social order accommodates, andeven cherishes, charitable endeavour, since it is impelled by the desire togive back, what one has taken or benefitted from society. Our Constitutionreflects a value which equates education with charity. That it is to betreated as neither business, trade, nor commerce, has been declared byFone of the most authoritative pronouncements of this court in T.M.A PaiFoundation (supra). The interpretation of education being the ‘sole’object of every trust or organization which seeks to propagate it, throughthis decision, accords with the constitutional understanding and, what ismore, maintains its pristine and unsullied nature.G

78. In the light of the foregoing discussion, the assessees’ appealsfail. It is however clarified that their claim for approval or registrationwould have to be considered in the light of subsequent events, if any,disclosed in fresh applications made in that regard. This court is furtherof the opinion that since the present judgment has departed from theHprevious rulings regarding the meaning of the term ‘solely’, in order to

avoid disruption, and to give time to institutions likely to be affected tomake appropriate changes and adjustments, it would be in the largerinterests of society that the present judgment operates hereafter. As aresult, it is hereby directed that the law declared in the present judgmentshall operate prospectively. The appeals are hereby dismissed, withoutorder on costs.

Divya Pandey(Assisted by : Priyanshu Agarwal, LCRA)

Appeals dismissed.

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