New Noble Educational Society v. Chief Commissioner of Income Tax

Case snapshot

Sections / provisions: 10(23C); 11(4) of Income-tax Act; 1961

Questions before the Court / Tribunal

• M/s New Noble Education Society Vs The Chief Commissioner of Income-tax and another (Supreme Court) Date-19th October 2022 Sub-Whether an institution claiming exemption u/s 10(23C) has to exist solely for the purpose of education or it can have income from other sources as well and connected issues? The three judges bench of Supreme Court in this important case which will have far reaching implications on all the institutions which are claiming exemption u/s 10(23C) in relation to educational and medical institutions in view of the interpretation which the Supreme Court adopted by approving the decision of the…
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

M/S NEW NOBLE EDUCATIONAL SOCIETY APPELLANT(S)

2. The subject matter of these appeals3 is the rejection of the appellants’ claim for registration as a fund or trust or institution or any university or other educational institution (hereinafter collectively referred to as “institution / trust”) set up for the charitable purpose of education, under the Income Tax Act, 1961 (hereinafter, “IT Act”). The Andhra Pradesh High Court, by its detailed impugned judgment4, held that the appellant 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 memorandum of association or the rules or the constitution of the concerned trust. Additionally, the appellants were denied registration on the ground that they were not registered under the Andhra Pradesh Charitable and Hindu Religious 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 precondition was absent in the provisos to Section 10(23C) (vi) of the IT Act, and that since the tax statute was a complete code in itself, other acts such as…

“7. An educational society, running an educational institution solely for educational purposes and not for the purpose of profit, must be regarded as “other educational institution” under section 10(23C)(vi) of the Act. It would be unreal and hyper-technical to hold that the assessee-society is only a financing 3 M/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 of Income Tax, C.A. No. 3794/2014; M/s New Noble Educational Society v The Chief Commissioner of Income Tax, C.A. No. 3795/ 2014; M/s R.R.M Educational Society Hyderabad v The Chief Commissioner of Income Tax, C.A. No. 6418/2012 and M/s Sri Koundinya Educational Society v The Chief Commissioner of Income Tax, C.A. No. 9108/2012. 4 M/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.

body and will not come within the scope of “other educational institution”. If, in substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the level of colleges and schools, such an educational society should be regarded as an “educational institution”. (Aditanar Educational Institution v. Addl. CIT, [1997] 224 ITR 310 (SC)). Educational institutions, which are registered as a society, would continue to retain their character as such and would be eligible to apply for exemption under section 10(23C)(vi) of the Act. (Pine-grove International Charitable Trust v. Union of India, [2010] 327 ITR 73 (P&H)). The distinction sought to be made between the society, and the educational institution run by it, does not, therefore, merit acceptance.

8. In order to be eligible for exemption, under section 10(23C)(vi) of the Act, it is necessary that there must exist an educational institution. Secondly, such institution must exist solely for educational purposes and, thirdly, the institution should not exist for the purpose of profit. (CIT v. Sorabji Nusserwanji Parekh, [1993] 201 ITR 939 (Guj)). In deciding the character of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. (Aditanar Educational Institution, [1997] 224 ITR 310 (SC)). The emphasis in section 10(23C)(vi) is on the word “solely”. “Solely” means exclusively and not primarily. (CIT v. Gurukul Ghatkeswar Trust, (2011) 332 ITR 611 (AP); CIT v. Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). In using the said expression, the Legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities. (Oxford University…

Appellant / assessee submissions

5. Ms. Prabha Swami, learned counsel appearing for one of the appellants (R.R.M Educational Society), contended that the impugned judgment was in error

of the law. She submitted that the High Court’s approach in considering the memorandum of association, rules or the constitution of the trust was no doubt correct, however the literal interpretation of the expression ‘solely’ under Section 10(23C)(vi) was not correct. 6. It was urged that there was no bar or restriction imposed by law on trusts involved or engaged in activities other than education, from claiming exemption under Section 10(23C)(vi), provided their motive was not-for-profit. It was submitted that in the present case, the assesses had other objects apart from education which were charitable. Consequently, the denial of registration by the Commissioner was contrary to law. 7. Learned counsel relied on the decision of this court in American Hotel and Lodging Association v Central Board of Direct Taxes5 and Queen’s Education Society v Commissioner of Income Tax6 to submit that the test for determination was whether the ‘principal’ or ‘main’ activity was education or not, rather than whether some profits were incidentally earned. The observations relied upon from American Hotel (supra) were:

9. Likewise, the decision in Queen’s Education Society (supra) was also cited, in which this court held that income earned incidentally, or profits incidental to the main activity, per se would not debar a trust’s application for approval, or registration, as a tax-exempt organization. 10. Counsel further submitted that in a similar manner, the previous decision of this court in Aditanar Educational Institution v. Additional Commissioner of Income Tax7 was relevant. The same observed that:

11. It was submitted that in American Hotel (supra), with the insertion of the provisos to Section 10(23C)(vi), a trust seeking approval had to show that it existed ‘solely’ for educational purposes, and should’ve also obtained initial approval of the Prescribed Authority (hereinafter, “PA”), through an application in the standardized form as mandated by the first proviso. The condition of obtaining approval from the PA was inserted because Section 10(22) was misused. The proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. The process of examination of the application was stipulated by the second proviso, which stated that the PA could call for such documents including annual accounts or information from the applicant to check its genuineness. Under the third proviso, the PA had the power to judge the genuineness of the activities of the applicant and consider if it applied its income wholly and exclusively to the objects for which it was constituted/established. Under the twelfth proviso, the PA had to examine cases where an applicant did not apply its income during the year of receipt and accumulated it…

Revenue / respondent submissions

under Section 10 (23C). Those considerations were valid only when tax authorities examined the functioning of the trust during the course of assessments to examine its compliance with the law. 16. Counsel relied on the decision of Oxford University Press v. Commissioner of Income Tax8, where interpretation of the expression ‘solely’ for the purpose of education meant that the sole purpose of an institution must be to impart education and not make profit. The word ‘existing’ was held to mean ‘being’. 17. It was submitted that the High Court’s reasoning upholding the threshold rejection of the appellant’s cases on the ground that the appellant had several objects, only some of which were ‘educational’ while others were not, leaving the trustees with discretion to apply the income or property to any object, was erroneous. The PA no doubt had to be satisfied through the material on record that the applicant did exist and was involved in a charitable activity, for which the objects of the institution had to be examined. However, if more than one object did exist, and all the objects were essentially charitable in nature, what needed to be seen was the actual functioning. The mere…

Court / Tribunal analysis and reasoning

9. Likewise, the decision in Queen’s Education Society (supra) was also cited, in which this court held that income earned incidentally, or profits incidental to the main activity, per se would not debar a trust’s application for approval, or registration, as a tax-exempt organization. 10. Counsel further submitted that in a similar manner, the previous decision of this court in Aditanar Educational Institution v. Additional Commissioner of Income Tax7 was relevant. The same observed that:

of the judgement in T.M.A Pai Foundation (supra) to highlight that the rights conferred under Articles 29 and 30 were to be regarded as guarantees to ensure equality to minority communities either based on religion or language. 24. It was submitted that given this enunciation of the principle that education was an occupation and was per se, charitable, it was antithetical to commerce or business. In other words, education could not, either under the Constitution or under the IT Act, be regarded as a business activity. Thus, any commercialisation of education would result in loss of the benefit of tax exemption which an institution would otherwise be entitled to claim legitimately as a charitable trust. The ASG also relied upon the subsequent seven-judge decision in PA Inamdar v State of Maharashtra11 which had followed the reasoning in T.M.A Pai Foundation (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 the provision was plain and that every year the tax authorities had to discern whether the institution existed solely for educational purposes and not for the purpose of profit…

education - i.e., in its scholastic sense of structured learning rather than the wider meaning of the expression. 37. Before the advent of the IT Act, under the old Income Tax Act, 1922, charitable purposes – much like the present one - included four broad heads. The last head was advancement of objects of general public utility. The court had to deal with the changed definition, brought about by the IT Act of 1961, which contained restrictive terms, in that the making of profit in the course of carrying on of objects of general public utility was prohibited. In a couple of decisions of this court 16, it was held that the prohibition against making profit applied only to trusts that had as their objective the advancement of general public utility. The prohibition from making profits therefore, did not apply to trusts meant to advance education, medical relief or relief for the poor. 38. This court in subsequent decisions, notably in Indian Chamber of Commerce v Commissioner of Income Tax17 followed in principle, the ratio in Loka Shikshana Trust (supra) and held that profit-making cannot be an object at all in the case of trusts set up with the object of advancing general public…

rejected as the authority held that the assessee had not applied its income for the purpose of education in India. 44. This court held that: “27. Actual existence of the educational institution was the pre-condition of the application for initial approval under section 10(22). On grant of approval, under section 10(22), sections 11 and 13 did not apply. Therefore, earlier prior to 1-4-1999 when exemption was given to the appellant, there was no assessment nor demand section 10(22) had an automatic effect. Once an applicant- institution came within the phrase 'exists solely for educational purposes and not for profit' no other conditions like application of income were required to be complied with. The Prescribed Authority was only required to examine the nature, activities and genuineness of the Institution. The above phrase was the only requirement for initial approval. The mere existence of profit/surplus did not disqualify the institution if the sole purpose of its existence was not profit- making but educational activities as section 10(22) by its very nature contemplated income of such institution to be exempted. Under section 10(22) the test was restricted to the character…

Operative decision and relief

interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively. The appeals are hereby dismissed, without order on costs.

Ratio and legal principle

• The packaged judgment addresses M/s New Noble Education Society Vs The Chief Commissioner of Income-tax and another (Supreme Court) Date-19th October 2022 Sub-Whether an institution claiming exemption u/s 10(23C) has to exist solely for the purpose of education or it can have income from other sources as well and connected issues? The three judges bench of Supreme Court in this important case which will have far reaching implications on all the institutions which are claiming exemption u/s 10(23C) in relation to educational and medical institutions in view of the interpretation which the Supreme Court adopted by approving the decision of the…. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with m/s new noble education society vs the chief commissioner of income-tax and another (supreme court) date-19th october 2022 sub-whether an institution claiming exemption u/s 10(23c) has to exist solely for the purpose of education or it can have income from other sources as well and connected issues? the three judges bench of supreme court in this important case which will have far reaching implications on all the institutions which are claiming exemption u/s 10(23c) in relation to educational and medical institutions in view of the interpretation which the supreme court adopted by approving the decision of the… Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 10(23C) - apply the exact version considered in the judgment.
• 11(4) of Income-tax Act - apply the exact version considered in the judgment.
• 1961 - apply the exact version considered in the judgment.

Case network

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