CA Anilkumar Shah
Now let us discuss the landmark judgment in the case of
New Noble Educational Society v. CCIT,  143 taxmann.com 276 (SC), judgment dt. 19-10-2022.
1. Facts in brief and background
The case is of an Educational institution seeking approval u/s 10(23C)(vi) of the Act which is rejected for two reasons that-
- the trust was not created solely for the purpose of education; and
- it is not registered under the local act The Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments Act,
The facts given in the Hon. H.C. judgment are important and are as under-
The assessee trust/society contended before Hon. High Court that-
- 10(23C)(vi) places emphasis on receipts and, since the amounts are received by the petitioner-societies on behalf of the educational institution, it is only the objects of the educational institution which should be taken into consideration, and not that of the society;
- approval, under s. 10(23C)(vi), is sought only for the educational institution, and not for the society/ educational agency;
- that 10(23C)(vi) of the Act makes a distinction between the educational institution and the society/educational agency running it;
- the society, which runs the educational institution, is entitled to pursue objects other than those relating exclusively for educational purposes;
- at the stage of grant of approval, under s. 10(23C)(vi), only the objects of the society are required to be examined, and not the manner of application of funds by it;
- the words “solely” in s. 10(23C)(vi) is redundant;
- and the other objects of the petitioners are also ancillary to “education”.
The assessee trust/society applied for approval only for one of its institutions and not the entire society. There was surplus of this educational institution. The objects of the trust/society as a whole included objects other than education, which are contended as ancillary to education. The assessee contended that the approval is sought only for the educational institution and not for other institutions and also not for the entire trust/society.
The revenue contended that-
- it is immaterial whether the society pursues all its objects as enumerated in its trust deed;
- even if an object is not pursued in real terms in a particular year, the society can pursue it in any other year as it has the mandate under the objects mentioned in its trust deed;
- such objects of a trust fall foul of the conditions specified in 10(23C)(vi);
- exemption is granted to a society and not to any limb of a society engaged in a particular activity;
- it is, therefore, necessary that all the aims and objects mentioned in the trust deed are exclusively for education, and not for any other purpose;
- the clauses in the trust deed should not be ambiguous allowing the society a wide scope to indulge in any other activity which are strictly not for promotion of education;
- in its Instruction No. 1112 dt. 29th Oct., 1977, the Central Board of Direct Taxes had explicitly prohibited spending of “surplus” of an educational institution for non-educational purposes;
- violation thereof implied that the society did not exist solely for educational purposes;
- even if no amount is spent for non- educational purposes, the society would not be entitled for exemption under the Act if its existence is not solely for educational purposes;
- the surplus, which societies seeking approval make, should again be ploughed back for educational purposes, and not utilized for any other object; and
- diversion of funds to achieve objects, which are not solely for educational purposes, would disentitle the society from being granted
as the assessee had objects other than education, in its trust, which are not pursued at present, but it is always possible that the funds and/ or surplus of educational institution may be utilised for those objects in future. Hence, the trust/society did not exist solely for educational purpose.
2. The objects causing rejection
In W. P. No. 12374 of 2010 the objects of the petitioner-society include
“to maintain unity among members of the society”,
“to organize sports, games and cultural activities”, and
“to solve problems of the members on social grounds”.
In W. P. No. 21248 of 2010 the objects of the petitioner society include
“providing employment among educated people”.
In W. P. No. 21251 of 2010 the objects of the petitioner-society include
“promotion of the economic and educational needs of Christians in particular and others in general”.
In W. P. No. 21257 of 2010 the objects of the applicant society include
“to strive for the upliftment of socially, economically and educationally weaker sections of the society in general and of the Christian community in particular”, and
“to meet all the above aims and objectives for the Christian minority community”.
In W. P. No. 21266 of 2010 the objects of the petitioner-society include
“to establish associate organizations, such as orphanages, hostels for needy students,
home for the aged and disabled, hospitals for the poor etc.”
The above objects were treated as not educational. However, Hon. HC has held following objects as educational –
35. Publication of journals, magazines, or other media for diffusion of useful knowledge for promotion of education is incidental and ancillary to the primary object of the society e., to run an educational institution. It is the applicant’s case that publication of journals and magazines is to provide knowledge to students and the teaching staff. Inasmuch as the petitioner is an educational institution, the mere fact that the object of publication of journals and magazines for promotion of education is not restricted, in so many words, only for the benefit of students and teaching staff is of no significance. It is not even the case of the prescribed authority that publication of these journals and magazines was for anyone else. The prescribed authority was, therefore, not justified in rejecting the application on this ground.
36.The objects of the petitioner-society included “to conduct seminars, symposiums, workshops and invite experts from India and abroad to improve the quality of education and to support students to elevate themselves to international standards”. This object was held not to be “solely educational” in nature.
37. The aforesaid object, which the prescribed authority held not to be for the purposes of education, is incidental and ancillary to the primary object of carrying on educational activities by the educational The Chief Commissioner was, therefore, not justified in rejecting the petitioner’s application on this ground.
Under these circumstances the Hon. High Court delivered its judgment stating that-
16. We, accordingly, hold that in cases where approval, under s. 10(23C)(vi) of the
Act, is initially sought, the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and as being eligible for approval, under s. 10(23C)(vi) of the Act.
In addition, an application in the prescribed proforma should be submitted to the prescribed authority within the time stipulated and the specified documents should be enclosed thereto.
However, in cases where an application is submitted, seeking renewal of the exemption granted earlier, the prescribed authority shall, in addition to the conditions aforementioned, also examine whether the income of the applicant-society has been applied solely for the purposes of education in terms of s. 10(23C)(vi) of the Act, the provisos thereunder, the Income-tax Rules, and the documents enclosed to the application submitted in Form 56D.
26. We, accordingly, hold that the certificate signed by the Commissioner of Endowments, as the appropriate authority under s. 43 of the A. P. Act No. 30 of 1987, is but one of the factors, and not conclusive proof, of an assessee under the Income-tax Act being a charitable institution existing solely for the purposes of education. Even in case the assessee produces a certificate of registration under s. 43 of A.P. Act No. 30 of 1987, the Chief Commissioner has to independently examine the objects of the applicant-society, their application seeking approval under s. 10(23C)(vi), and the prescribed documents enclosed thereto, and satisfy himself, in the light of the provisions of s. 10(23C)(vi), the provisos thereto, r.2CA and Form 56D, that the existence of the educational institution is solely for the purposes of education and not for the purpose of profit and, only if he is so satisfied, to grant approval. Registration under s. 43 of the A. P. Act 30 of 1987 is not a condition precedent for seeking approval under s. 10(23C)(vi) of the Act. The Chief Commissioner can, however, prescribe registration under A. P. Act 30 of 1987 as a condition subject to which approval is granted under s. 10(23C)(vi) of the Act. Questions Nos. 2, 3 and 4 are answered accordingly.
Please see – New Noble Educational Society & Ors. vs. CCIT, (2011) 334 ITR 303 (AP): (2011) 242 CTR (AP) 266: (2011) 201 TAXMAN 33 (AP).
3. Questions before Hon. Supreme Court
Questions before Hon. Supreme Court
- Whether the objects in the memorandum of association of a society/trust are conclusive proof of such a trust existing solely as an educational institution entitled for the benefits, and being eligible for approval, under 10(23C)(vi) of the Act?
- Whether registrations under the state laws was required to be checked and required in the process of approval u/s 10(23C) (vi)?
4. Decision by Hon. Supreme Court
Hon. Court framed the questions as follows-
34. The issues which require resolution in these cases are –
firstly, the correct meaning of the term solely in Section 10 (23C) (vi) which exempts income of university or other educational institution existing solely for educational purposes.
Secondly, the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment, and
thirdly, in addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in law, whether the concerned
tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws.
72. What then is incidental business activity inrelation to education? Imparting education throughschools, colleges and other such institutions wouldbe per se charity. Apart from that there could beactivities incidental to providing 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 ((2009) 17 SCC 391) has held that dealing intext books is part of a larger educational activity. The Court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning of its pupils by sourcing and providing text books, such activity would be incidental to education. Similarly, if a school or other educational institution ran itsown buses and provided bus facilities to transportchildren, that too would be an activity incidentalto education. There can be similar instances suchas providing summer camps for pupil specialeducational courses, such as relating to computersetc., which may benefit its pupils in their pursuit oflearning.
73. However, where institutions provide theirpremises or infrastructure to other entities, trusts, societies , for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses etc., then the income derived from such activity cannot be characterised as part of education or incidental to the imparting education. Such income can properly fall under the other heads of income.
74. In R.R.M. Educational Society’s appeal before this court, the charitable status of the appellant within Section 10(23C) was denied inter alia on the ground that the institution was not merely imparting education but also was running hostels. It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M. Educational Society was providing hostel facility only to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students, that activity would clearly be incidental to the objective of imparting education.
76. The conclusions of this court are summarized as follows:
- It is held that the requirement of the charitable institution, society or trust , to solely engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannothave objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.
- 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 At the same time, where surplus accrues in a given year or setof years per se, it is not a bar, provided suchsurplus is generated in the course of providingeducation or educational activities.
- The seventh proviso to Section 10(23C), aswell as Section 11(4A) refer to profits whichmay 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.
- The reference to business and profits inthe seventh proviso to Section 10(23C) andSection 11(4A) merely means that the profitsof business which is incidental to educationalactivity as explained in the earlier part ofthe judgment e., relating to education suchas sale of text books, providing school busfacilities, hostel facilities, etc.
- The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression “solely” are hereby disapproved. The judgments are accordingly overruled to that extent.
- 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. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts the proviso under Section 10(23C) is not confined to newly set up trusts it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.
- It is held that wherever registration of trustor charities is obligatory under state or locallaws, the concerned trust, society, otherinstitution seeking approval under Section10(23C)shouldcomplywith provisionsof such state laws.This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from 01.04.2021.
5. Effects on existing trusts/ societies/institutions/educational institutions
The trust/societies etc. having any other activity in its object clause, which is not educational activity or incidental to education or educational activity, shall have to amend their object clauses to make them solely for education by removing such clauses in the light of this judgment.
Upon changes in the object clauses, the approvals u/s 10(23C)(vi) and/or registrations u/s 12A will have to be sought again by updating the changes.
Henceforth, any amount spent on such non educational activities shall not be allowed as expenditure on the object and in counting the 85% amount for the purpose of exemption u/s 11, 12 and 10(23C)(vi).
It may be noted that the term “Education” is not examined by Hon. Apex Court in the present case.
However, the case of Lok Shikshana Trust is referred in the discussion which defined education. The relevant para from the present case are as follows-
32. Education ennobles the mind and refines the sensibilities of every human It aims to train individuals to make the right choices. Its primary purpose is to liberate human beings from the thrall of habits and preconceived attitudes14. It should be used to promote humanity and universal brotherhood. By removing the darkness of ignorance, education helps us discern between right and wrong. There is scarcely any generation that has not extolled the virtues of education, and sought to increase knowledge.
33. The subject of education is vast, even Yet, it is not the broad meaning of the expression which is involved in this case. As was held in T.M.A Pai Foundation (supra), education in the narrower meaning of the term as scholastic structured learning is what is meant in Article 21-A, Articles 29-
30 and Articles 45-46 of the Constitution. As to what is education in the context of the IT Act, was explained in Loka Shikshana Trust v. Commissioner of Income Tax [1975, 101 ITR 234 (SC)] in the following terms:
“5. The sense in which the word “education” has been used in section 2(15) is the instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word “education” has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge. All this in a way is education in the great school of life. But that is not the sense in which the word “education” is used in clause (15) of section
2. What education connotes in that clauseis the process of training and developingthe knowledge, skill, mind and character ofstudents by formal schooling.”
Thus, education i.e., imparting formal scholastic learning, is what the provides for under the head “charitable” purpose in Sec.2(15).
It may kindly be noted that the Lok Shikshana Trust case pertains to AY 1962-63. The trust was engaged in the business of printing and publication of newspaper and journals and making profits, and claimed exemption u/s 11 of the 1961 Act. The trust’s object clause amongst other was –
“2. The object of the Trust shall be to educate the people of India in general and of Karnatak in particular by
- establishing, conducting and helping directly or indirectly institutions calculated to educate the people by spread of knowledge on all matters of general interest and welfare:
- founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, booklets, leaf lets, pamphlets, magazines etc., in Kannada and other languages, all these activities being started, conducted and carried on with the object of educating the people…….
Based on the object clauses, the trust claimed that its purpose was charitable u/s 2(15) and claimed exemption u/s 11.
It was in this background that the Hon. Supreme Court made the observations in para 5 and quoted by the Hon. SC as stated above in the present judgment under discussion.
Hon. Supreme Court has opened the present judgment under discussion, with the following lines-
1. It has been said that education is the key that unlocks the golden door to freedom. (quoted from Ravindranath Tagore’s Gitanjali). In Avinash Mehrotra v Union of India ((2009) 6 SCC 398), this court underlined the object and value of education in the following words:
9. Education today remains liberation – a tool for the betterment of our civil institutions, the protection of our civil liberties, and the path to an informed and questioning citizenry. Then as now, we recognize education’s “transcendental importance” in the lives of individuals and in the very survival of our Constitution and Republic.”
In the opening paragraph itself the Hon. Apex court has recognised the wide definition and meaning of education and the objective precisely in one word i.e. liberation.
But in the judgment relied only on the 1962 judgment. Much water has flown under the bridge since 1962.
The system of communication which is an essential part of learning process has undergone tremendous changes. The invent of computers, in fact, is referred to as the “third wave” by the famous writer Alwyn Toffler.
With due respect to Hon. Supreme Court, I am in doubt about whether, for the purpose of the definition of “education” as stated in Lok Shikshana trust still holds good?
What would happen to various institutions working in various fields to impart education to its members without holding a formal classroom?
Let us ask the question about the Tax Consultants’ Associations working across the nation, nay, across the globe. Do these institutions not impart education through journals, seminars, symposiums and various residential and non-residential courses?
In Marathi there is a saying that
केल्याने देशाटन, पंडित मैत्री, सभेत संचार, शास्त्रग्रंथविलोकत मनुजा येतसे चातुर्य फार..
Meaning – by travelling, friendship of intellectuals, talk as a speaker before a gathering and by reading analytical books earns one the intellect. I agree that, this meaning is too wide but it is in our culture to train ourselves from whatever we come across. This is the reason that they say education is an ongoing process.
There are numerous institutions working to train people on field. e.g. Agricultural, farming, horticulture, vermiculture, permaculture etc. etc. and the like. Are these activities not education? What would happen to them?
Wikipedia gives the definition of Education as under-
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Various researchers emphasize the role of critical thinking in order to distinguish education from indoctrination. Some theorists require that education results in an improvement of the student while others prefer a value-neutral definition of the term. In a slightly different sense, education may also refer, not to the process, but to the product of this process: the mental states and dispositions possessed by educated people. Education originated as the transmission of cultural heritage from one generation to the next. Today, educational goals increasingly encompass new ideas such as the liberation of learners, skills needed for modern society, empathy, and complex vocational skills.
Types of education are commonly divided into formal, non-formal, and informal education. Formal education takes place in education and training institutions, is usually structured by curricular aims and objectives, and learning is typically guided by a teacher. In most regions, formal education is compulsory up to a certain age and commonly divided into educational stages such as kindergarten, primary school and secondary school. Non-formal education occurs as addition or alternative to formal education. It may be structured according to educational arrangements, but in a more flexible manner, and usually takes place in community-based, workplace-based or civil society-based settings. Lastly, informal education occurs in daily life, in the family, any experience that has a formative effect on the way one thinks, feels, or acts may be considered educational, whether unintentional or intentional. In practice there is a continuum from the highly formalized to the highly informalized, and informal learning can occur in all three settings. For instance, home-schooling can be classified as non-formal or informal, depending upon the structure.
Public libraries are now acknowledged to be an indispensable part of community life as promoters of literacy, providers of a wide range of reading for all ages, and centres for community information services. Yet, although the practice of opening libraries to the public has been known from ancient times, it was not without considerable opposition that the idea became accepted, in the 19th century, that a library’s provision was a legitimate charge on public funds. It required legislation to enable local authorities to devote funds to this cause.
Public libraries now provide well-stocked reference libraries and wide-ranging loan services based on systems of branch libraries. They are further supplemented by traveling libraries, which serve outlying districts.
In Maharashtra the public libraries are governed under the Education Dept. of State Govt.
After giving a thorough thought to the narrow definition ruled by Hon. Supreme Court, under the Income Tax Act, 1961, do we not need to redefine the word Education?
7. Comparison between 10(23C) and Section 11
For the sake of convenience, the four provisions are reproduced as under-
(iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government;
(iiiad) any university or other educational institution existing solely for educational purposes and not for the purposes of profit if the aggregate annual receipts of the person from such university or universities or educational institution or educational institutions do not exceed five crore rupees;
(vi) any university or other educational institution 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.
(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.
Hon. Supreme Court has referred to clause (4A) of Section 11 and has observed that,
71. 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.
In my personal view, the parameters for exemption u/s 11 are not affected by this judgment as far as the educational institutions are concerned. As per section 11(4A) the business, if any, is carried out then it must be incidental to education.
However, it is advisable for all the educational trust/societies to revisit their object clauses and
realign the same with the principles enunciated by this judgment.
If the educational trust/society etc. is carrying out any activity which cannot be called educational or incidental to education, will have to hive off that part either to other trust/society or form a new trust/society and carry out the same separately under the new entity.
Otherwise the existing trust is certainly going to face the music in the years to come.
8. What needs to be done?
- The spears of education always keep To define the term too narrowly to only cover the scholastic academic education, other fields which have developed beyond the scholastic education will suffer very harshly and the effects are disastrous.
- What is meaning of the term “solely” is defined and interpreted narrowly as against the same was defined widely with the parameter of “predominant object”. For the educational trusts/societies/ institutions, the predominant object test which was hitherto ruled the scenario is overruled now and the objects have to be aligned with education only.
- No parent would ever permit the pupil to be admitted to an institution with an inadequate To maintain a high standard of service, the educational trusts/societies will have to maintain their infrastructure and continuously upgrade it to keep in tune with the time.
- As the word “solely” is very narrowly defined by Hon. Supreme Court to cover only the scholastic academic education, the basic clauses (iiiab), (iiiad) and (vi) of Section 10(23C), these provisions certainly need to be revisited and redefined to make it wide enough to cover the entire spectrum of education under the same, if India wishes to improve its educational sector infrastructure.
- At present the provisions focus on monitoring the One of the suggestion is to monitor the spending instead of creating an artificial and highly debatable and subjective limits or cap on the receipts.
Drafting of the Object clause – Draftsmen try to make it all inclusive as the amendment of the same poses a long and tedious procedure under the state and central laws in addition to those under the Income Tax Act, which makes it compulsory to get it approved from the proper authorities for exemptions u/s 11, 12 and 10(23C). This will have to change drastically.
9. Stanford University’s tax system
I am not an expert in international taxation. But for this subject searched the taxation of Stanford University as I have visited this University personally and have some contacts.
The income of the University is exempt. The definition of exemption gives an interesting insight to the other income which is not exempt.
The words used are “unrelated business” to make the income taxable.
It is defined as under-
For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:
- It is a trade or business,
- It is regularly carried on, and
- It is not substantially related to furthering the exempt purpose of the organization.
There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.
It means if the activity is substantially related to the exempt purpose the same is also exempt. This is quite wide and sufficient to cover the allied, but not necessarily incidental, activities of any educational trust/society.
This is too similar to the predominant object theory which prevailed hitherto.
This is just a sample and is given with only primary look into the taxation of that university. An in-depth comparative study of other countries would certainly throw more light on the issue. We as a country can be guided in the light of the same.
Is it not possible for our country to incorporate the wordings or the like to stop the menace of using the word “solely”?
The judgment has disastrous effects.
To usher India’s educational sector especially in its infrastructure, with the advancement of technology and tremendous changes since the “third wave”, is it not possible to align the definitions in section 2(15) and exemption sections to make the scope of Education enough wide and clear to avoid any confusion and avoid the costs of litigation?
Now let us discuss the landmark judgment in the case of
ACIT (Exemptions) v. Ahmedabad Urban Development Authority, (2022) 115 CCH 0156 ISCC, (2022) 449 ITR 0389 (SC),  143 taxmann.com 278 (SC), dt. 19-10-2022.
It is a big judgment in every respect. The case covers a wide spectrum of assessees and as many as thirteen senior counsels argued for various parties to the case. The judgment delivered runs into 150 pages and is styled like a book with proper page wise Index to subjects.
The Advancement of any other object of general public utility (GPU) category is always treated different from the per se purposes of medical relief, education, relief to poor, to which are added preservation of environment, preservation of monuments or places or objects of artistic or historic interest, and yoga, states the Court.
“Advancement of any other object of general public utility” (GPU) is the subject of interpretation of this case, says Hon. Supreme Court.
The cases mainly relate to assessment years subsequent to amendment in S. 2(15) and the primary question before the Supreme Court was the correct interpretation of the proviso to Section 2(15), which defines ‘Charitable purpose’.
Hon. Supreme Court has clarified that an assessee advancing GPU cannot engage itself in any trade, commerce, or business or provide service in relation thereto for any consideration. In the course of achieving the object of GPU, the concerned organisation can carry on trade, commerce, or business or provide services in relation thereto for consideration, provided that:
- The activities of trade, commerce, or business are connected to the achievement of its objects of GPU; and
- The receipt from such business or commercial activity or service in relation thereto does not exceed the quantified limit of 20% of total receipts of the previous year.
Charging an amount towards consideration for such an activity (advancing GPU), which is on a cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto.
Only when the consideration is significantly above the cost incurred by the assessee, it would fall within the mischief of “cess, or fee, or any
other consideration” towards “trade, commerce or business”.
Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities should be conducted in the course of achieving the GPU object, and the income, profit, or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15) has not been breached.
The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption.
Hon. Court has also observed that the Central Govt. would have to decide on a case to case basis whether and to what extent exemption can be awarded to bodies that are notified under S.10(46).
1. On the issue of binding nature of Circulars
Hon. Court first went through and analysed the history of the sections right from the Act of 1922 which did not define charitable purpose, till the 1961 Act and amendments under the same.
On the issue of binding nature of circulars, it ultimately quoted excerpts from Ratan Melting and Wire Industries case:
6. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications/circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions They are not binding upon the court It is for the Court to declare what the particular provision of statute says and it is not for the Executive Looked at from another angle, a circular which is contrary to the statutory provisions has really no existence in law.”
And concluded that
123. In the opinion of this court, the views expressed in Keshavji Ravji [(1990) 183 ITR 0001], Indian Oil Corporation [(2004) 267 ITR 272], and Ratan Melting and Wire Industries, [(2008) 220 CTR 0098], (though the last decision does not cite Navnit Lal Jhaveri), reflect the correct position, i.e. that circulars are binding upon departmental authorities, if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding Furthermore, they cannot bind the courts, which have to independently interpret the statute, in their own terms. At best, in such a task, they may be considered as departmental understanding on the subject and have limited persuasive value. At the highest, they are binding on tax administrators and authorities, if they accord with and are not at odds with the statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their express terms, they are to be ignored.
2. Interpretation of Section 2(15)
The court analysed the provisions since its insertion and its journey till amendments by F. Act 2015.
The Hon. Apex Court has thoroughly analysed the term “unless the context otherwise requires”, “in the nature of”, “business”, “in relation to” occurring in S. 2(15) and its provisos and the changes in the section, and how the judicial thinking has shaped it.
It has analysed the term “any other object of general public utility” and the sentence “not being charitable purpose “if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.”
It states that:
138. Parliamentary endeavour, was to alter the regime applicable to taxation of GPU category charities, under the IT Act. The absolute bar imposed on GPU charities from carrying on activities in the nature of trade, commerceor business, or of rendering any service inrelation to any trade, commerce or business,for a cess or fee or any other consideration, evidences this intent. The original Section 2(15) did not allude to trade, commerce or business, or any service in relation to such activities. It only enjoined the GPU charities from involving themselves from carrying on of any activity for profit (which was interpreted in Surat Art Silk). This substantial change brought about by the amendments of 2008-2012 and 2015 is the prohibition from engaging in any kind of activity in thenature of business, commerce, or trade or any rendering any service in relation thereto, and earning income by the way of cess, fee or consideration. In the opinion of this court, the express deletion of the reference to ‘activity for profit’ on the one hand, and the enactment of an expanded list of what cannot be done by GPU charities if they are to retain their characteristic as charities, is an emphatic manner in which Parliament wished to express itself.
It, after taking note of the arguments in brief by the parties on the ground of the term business and analysing it, the Court concluded that:
142. What then is the true meaning of the expressions “fee, cess or consideration”? The careful analysis of the amended proviso to Section 2(15), reveal that the prohibition applies in a four-fold manner-
- The bar to engaging in trade, commerce or business,
- The bar to providing any service in relation to trade, commerce or business,
- Wherein “for a fee, cess or any other consideration” is the controlling phrase for both (a) and (b) (which are collectively referred to as “prohibited activities” for brevity)
- irrespective of the application of the income derived from such ‘prohibited activities’.
After analysing terms “cess”,“fee”and“consideration”, the Hon. Court has summarised the interpretation of S.2(15) as under:
152. Section 2(15) – in the wake of its several amendments between 2008 and 2015 – can be juxtaposed with the interpretation of the un-amended Section 2(15) by this Court. In Surat Art Silk [(1980) 121 ITR 0001] the principle enunciated was that so long as the predominant object of GPU category charity is charitable, its engagement in a non-charitable object resulting in profits that are incidental, is The court also declared that profits and gains from such activities which were non-charitable had to be deployed or “fed” back to achieve the dominant charitable object.
153. The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are:
- That such activities in the nature of trade, commerce, business or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and
- The quantum of receipts from such activities should be exceed 20% of the total receipts
- Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of “or” connecting the two of This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub- clause (ii) to the proviso.
3. Hon. Supreme Court divided it into five groups as under:
- Authorities, Corporations or bodies established by statutes,
- Statutory Regulators
- Trade Promotion bodies
- Sports Associations; and
- Private Trusts
and has summarised the judgment for each of them in separate paragraphs. However, the underlying principle for all of them stated is that:
Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto.
It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”.
4. What is nominal or mark-up limit?
Hon. Court has although emphatically mentioned about the nominal or mark-up limit over the cost, but has not defined or clarified what it is. This is left to the legislature to define it and insert in the law, else the revenue is certain to create and make the lacunae a big chaos. An officer working in the field is not likely to have a judgment of what is markedly excess and what is nominal. Without any guiding factor, every officer will have his own judgment, leading the entire situation to sheer chaos.
Best examples are stay applications and Reassessment cases. Although Hon. Supreme Court itself has laid down the principle that it will be open to the authorities, on the facts of individual case, to grant deposit orders of a lesser amount that 20 per cent, pending appeal. [Principal CIT v. LG Electronics India (P) Ltd. (2018) 303 CTR (SC)]. But, practically the authorities do not even wish to read the judgments quoted and given with the stay applications.
Similar is the scenario in reassessment cases. There are cases where Hon. High Court has stayed further proceedings u/s 148A, still the officers have taken further steps in the matter conveniently ignoring, the Hon. High Court’s stay orders, for reasons best known to them.
5. Hon. Supreme Court’s duty
What Hon. Supreme Court has done is, interpreted the law passed by the legislature, as it stands in the statute books.
While reading these judgments, I am reminded of the words of Hon. First Chief Justice Harilal J. Kania, on the occasion of opening of the Supreme Court of free India on 28th January, 1950:
It is not the function of the court to supervise or correct the laws passed by the legislature as an overriding authority. It is its function and duty to point out, when examining the acts of individuals or of the executive authority purporting to be done under some act of the legislature, the lacunae or the loopholes only with the object that, if so desired, the legislative authority may put matters right.
Through various judgements discussed in the series, Hon. Supreme Court has pointed out the lacunae and the loopholes of the law relating to charitable trusts and institutions. Now it is the legislature to put the matters right through corrective amendments to make the functions smooth and to set right the path of growth in the right direction and perspective of the entire charitable sector.
The judgments discussed underline the need as never before, for the law makers, to take utmost care while drafting the law and check all the possible effects of the same before passing and putting it on the statute books.
Let us hope the amendments on a positive side in the coming budget and Finance Bill.