M/s New Noble Educational Society vs The Chief Commissioner of Income Tax 1 and Anr.

Income Tax Act, 1961 – s.10(23C)– Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act, 1987 – Held:Wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval u/s.10(23C) should also comply with provisions of such state laws – This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc.

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

Words & Phrases–”solely” – Discussed.

Dismissing the appeals, the Court

HELD : 1.This court has spelt out the following to be considered by the revenue, when trusts or societies apply for registration or approval on the ground that they are engaged in or involved in education: (i) The society or trust may not directly run the school imparting education. Instead, it may be instrumental in setting up schools or colleges imparting education. As long as the sole object of the society or trust is to impart education, the fact that it does not do so itself, but its colleges or schools do so, does not result in rejection of its claim.

(ii) To determine whether an institution is engaging in education or not, the court has to consider its objects. (iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University where the applicant was a publisher, part of the Oxford University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc. for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India. (iv) The judgement in American Hotel states that to discern whether the applicant’s claim for exemption can be allowed, the ‘predominant object’ has to be considered. It was also held that the stage of examining whether and to what extent profits were generated and how they were utilised was not essential at the time of grant of approval, but rather formed part of the monitoring mechanism. (v) Queen’s Educational Society approved and applied the ‘predominant object’ test (which extensively quoted Surat Art and applied it with approval). The court also held that the mere fact that substantial surpluses or profits were generated could not be a bar for rejecting the application for approval under Section 10(23C)(vi) of the IT Act. [Para 48][1128-D-H; 1129-A-C]

Aditanar Educational Institution v. Additional Commissioner of Income Tax (1997) 3 SCC 346 : [1997]

1 SCR 948; Oxford University Press v. Commissioner of Income Tax (2001) 3 SCC 359 : [2001] 1 SCR 574 – referred to.

2.1 It is evident, that in construing the term ‘any university or other educational institution existing solely for educational purposes and not for purposes of profit’ the other negative reference to profit, in respect of educational institutions, is in the seventh proviso which states that incomes which are profits of business, cannot be exempt, “unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business”. The basic provision granting 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 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 judgments 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 Advanced Law Lexicon explains the term as, “‘Solely’ means exclusively and not primarily”. The Cambridge Dictionary defines ‘solely’ to be, “Only and not involving anyone or anything else”. The synonyms for ‘solely’ are “alone, independently, single-handed, singlehandedly, singly, unaided, unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc. Term ‘solely’ is not the same as ‘predominant / mainly’. The term ‘solely’ means to the exclusion of all others. None of the previous decisions – especially American Hotel or Queens Education Society – explored the true meaning of the expression ‘solely’. The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from 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), (iiiad) and (vi). In all these provisions, the positive condition ‘solely for educational purposes’ and the negative injunction ‘and not for purposes of profit’ loom large as compulsive mandates, necessary for exemption. The expression ‘solely’ is therefore important. Thus, in the opinion of this court, a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation. [Paras 49-51][1129-D-G; 1130-A-F]

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

7 SCR 1191 – followed.

2.2 The seventh proviso to Section 10 (23C) (vi) alludes to business and profits (‘being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business’). The interpretation of Section 10 (23C) therefore, is that the trust or educational institution must solely exist for the object it professes (in this case, education, or educational activity only), and not for profit. The seventh proviso however carves an exception to this rule, and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity - and nothing other than that is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education). [Para 58][1134-B-C] P. Ramanatha Aiyar, Advanced Law Lexicon, (6th Edn.), Pg. 5249-5250 (2019); Solely, Cambridge Dictionary (4th Edn.) (2013) – referred to.

2.3 The second question which this court has to address is whether the PA (Commissioner or any other designated authority) is in any manner enjoined 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 for approval under Section

10 (23C). Having regard to the plain terms of the second proviso to Section 10(23C), which refers to the procedure for approval of applications including those made by trusts and institutions imparting education, one can discern no such restrictions. From the pointed reference to ‘audited annual accounts’ as one of the heads of information which can be legitimately called or requisitioned for consideration at the stage of approval of an application, the inference is clear: the Commissioner or the concerned authority’s hands are not tied in any manner whatsoever. [Paras 61, 63][1135-C-D; 1136-B-C]

3.1 Applicability of Other Laws

Charitable objects – defined by the A.P. Charities Act, are parimateria with the IT Act. Thus, establishments or associations or organizations (widely phrased terms) formed for ‘charitable purpose’ fall within the meaning of charitable institutions. These include societies and trusts, set up for educational purposes. The assessees had argued that since they were registered under the Andhra Pradesh Societies Registration Act, 2001 or were trusts duly registered, they could not be compelled to comply with state laws as a condition for consideration of their application as charitable institutions, under Section 10 (23C). The findings in the impugned judgment on this aspect are sound. The requirement of registration of every charitable institution is not optional. Aside from the fact that the consequences of nonregistration are penal, which indicates the mandatory nature of the provisions of the A.P. Charities Act, such local laws provide the regulatory framework by which annual accounts, manner of choosing 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 a statutory regulatory framework in regard to activities of charitable institutions in the state. Sections 72-74 deal with surplus funds and their treatment; Sections 75-77 deal with properties of trusts and charitable institutions and restrictions on transfers. These and other provisions enable the State, which is concerned in the proper administration of such organizations, to ensure that they are managed efficiently without misfeasance. They also contain provisions to protect the interests of trusts, especially funds and properties. [Paras 65, 68 and 69][1137-F; 1138-C-F; 1139A-B ]

3.2 Thus, charitable institutions 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 also a relevant consideration which can legitimately weigh with the Commissioner or other concerned authority, while deciding applications for approval under Section 10 (23C). This reasoning equally applies especially in Section 11(4A) which speaks of profits incidental which specifies that exemption in relation to income or trust of an institution which are profits or means of business cannot be exempted ‘unless the business is incidental, trust or as the case may be institution and separate books of accounts are maintained by such trusts or institution in respect of such business’. Thus, the underlying objective of seventh proviso to Section 10(23C) and of Section 11(4A) are identical. These have to be read in the light of the main provision which spells out the conditions for exemption under Section 10(23C) - the same conditions would apply equally to the other sub-clauses of Section 10(23C) that deal with education, medical institution, hospitals etc. [Paras 70, 71][1159-C-F]

3.3 Conclusions:

(a)

It is held that the requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education.

(b)

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

(c)

The seventh proviso to Section 10(23C), as well as Section 11(4A) refer to profits which may be

‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.

(d)

The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A) merely means that the profits of business which is ‘incidental’ to educational activity –

(e)

The reasoning and conclusions in American Hotel and Queen’s Education Society so far as they pertain to the interpretation of expression ‘solely’ are hereby disapproved. The judgments are accordingly

overruled to that extent.

(f)

While considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution.

(g)

It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section 10(23C) should also comply with provisions of such state laws. [Para 76][1141-AG; 1142-C-D]

American Hotel and Lodging Association v. Central Board of Direct Taxes (2008) 10 SCC 509 : [2008] 8 SCR 117; Queen’s Education Society v Commissioner of Income Tax (2015) 8 SCC 47 : [2015] 3 SCR 838 – partly overruled.

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.

Avinash Mehrotra v. Union of India (2009) 6 SCC 398 : [2009] 5 SCR 913; T.M.A Pai Foundation v. State of Karnataka (2002) 8 SCC 481 : [2002] 3 Suppl. SCR 587; PA Inamdar v. State of Maharashtra (2005) 6 SCC

537 : [2005] 2 Suppl. SCR 603; Dharmadeepti v. Commissioner of Income Tax (1978) 3 SCC 449; Indian Chamber of Commerce v. Commissioner of Income Tax (1976) 1 SCC 324 : [1976] 1 SCR 830; A.V. Fernandez v. State of Kerala [1957] SCR 837; Mangalore

Chemicals and Fertilisers Ltd. v. Deputy Commissioner of 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 State Text Book Production & Publication Corpn. Ltd. v. Commissioner of Income Tax (2009) 17 SCC 391 – referred to.