The Supreme Court gives a damn about for-profit educational institutions.
On Wednesday, the Supreme Court ruled that in order to qualify for an exemption under Section 10 (23C) of the Income Tax Act, any society, fund, trust, or institutions claiming to have been established for the “charitable purpose of education” must be “solely” devoted to education. The bench of CJI Uday Umesh Lalit, Justices S. Ravindra Bhat, and P. S. Narasimha observed that such institutions would not be entitled to approval where the objective of the institution appears to be profit-oriented.
“True wealth is education – and access to it – in a knowledge-based, information-driven society. Every social structure accepts and even values philanthropic endeavours since they allow one to give back to society what they have gained or benefited from. Our Constitution embodies a principle that connects education with altruism,” The judgement was written by a Supreme Court Justice Ravindra Bhat.
Education and allied endeavours shouldn’t be viewed as trade, business, or commerce. In the T.M.A. Pai Foundation case judgement, one of the court’s most authoritative rulings, Justice Bhat noted that this concept had been established. Delivering a resounding condemnation of profit-oriented educational institutions.
Through this judgement, Justice Bhat noted, “the interpretation of education being the sole’ goal of every trust or organisation which wants to propagate it, complies with the constitutional notion and, moreover, protects its pristine and unsullied nature.”
The court overturned its earlier rulings that read the word “solely” in Section 10(23C) as meaning the “dominant/prevailing/primary/main” object. It was made clear, nonetheless, that the law stated in the current ruling would only be applicable going forward.
Certain forms of income are excluded from taxation under Section 10 of the IT Act. When it was relevant (2012), Section 10 (23C) said the following: Any revenue falling under one of the following clauses shall not be included when calculating a person’s total income for a prior year: (vi) any university or other educational institutions existing solely 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 prescribed authority; or…
In response to the Andhra Pradesh High Court’s ruling that the trusts that sought exemption under Section 10 (23C) of the IT Act were not established “solely” for the purpose of education, a number of educational trusts petitioned the Supreme Court, which denied their request to be registered as funds, trusts, institutions, universities, or other educational institutions established for the charitable purpose of education.
The bench of the Supreme Court came to the following conclusions when dismissing their appeals to restrict profit-oriented institutions:
- According to this interpretation, charitable institutions, societies, trusts, etc. cannot have objectives unrelated to education because they are required to “solely” engage in education or educational activities and refrain from engaging in any profitable activity. In other words, all social objectives, such as trusts, must be related to educating people or involve educational pursuits.
- Institutions would not be eligible for approval under Section 10(23C) of the IT Act if their goal seemed to be profit-oriented. However, if a surplus is generated in the course of delivering education or engaging in educational activities, it is not a bar if it occurs in a particular year or series of years.
- Both Section 11(4A) and the seventh provision to Section 10(23C) mention profits that the charitable institution may “incidentally” create or earn. In the current situation, the same only applies to institutions that provide education or engage in activities related to education.
- The seventh proviso to Sections 10(23C) and 11(4A) refers to “business” and “profits,” which simply refers to business profits that are “incidental” to educational activity, as explained in the earlier section of the judgement, such as the sale of textbooks, the provision of school bus services, hostel services, etc.
- Insofar as they relate to the interpretation of the word “solely,” the arguments and conclusions in American Hotel (above) and Queen’s Education Society (supra) are hereby rejected. As a result, the decisions are overturned to that extent.
- Under the second proviso, the Commissioner or the relevant authority, as applicable, is not required to focus solely on the institution’s goals when evaluating requests for permission under Section 10(23C). The Commissioner or other authority is free to request the audited accounts or other such documents for recording satisfaction where the society, trust, or institution genuinely seeks to achieve the objectives which it professes in order to ascertain the legitimacy of the institution and the manner in which it functions. According to the observations in American Hotel (above), the Commissioner was unable to request the records and the study of such accounts would be at the assessment stage. While that justification unquestionably applies to newly established charities, trusts, etc., the proviso under Section 10(23C) also applies to existing trusts. In order to determine the pattern of income and expenditure, the Commissioner or other authority is not in any way restrained from looking at accounts and other pertinent documents.
- According to the ruling, any state or municipal legislation that requires the registration of trusts or charities must also be followed by the relevant trust, society, other institution, etc. if they want to receive approval under Section 10(23C). This would make it possible for the Commissioner or other appropriate authority to confirm the legitimacy of the trust, society, etc. This justification is supported by the most recent addition of a new proviso to Section 10(23C), which will take effect on April 1, 2021.