Institutions can get tax exemption benefit only if they solely engaged in education: SC

Holding that our Constitution equated education with charity, the Supreme Court on Wednesday declared that institutions or trusts can claim benefits of tax exemptions only if they are "solely" engaged in education and not in any other activity of profit.

If the objective of such institutions appeared to be profit-oriented, they cannot get approval under Section 10(23C) of the Income Tax Act, the top court added.

A bench of Chief Justice U U Lalit and Justices S Ravindra Bhat and P S Narasimha passed the ruling in a batch of cases filed by New Noble Educational Society and other against the orders of the Chief Commissioner of Income Tax.

The court, however, clarified that the law declared would operate prospectively.

“In a knowledge-based, information-driven society, true wealth is education – and access to it. Every social order accommodates and even cherishes, charitable endeavour since it is impelled by the desire to give back, what one has taken or benefitted from society. Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade, nor commerce…,” Justice Bhat, who authored the judgement on behalf of the bench, said.

The court noted that 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 like sale of textbooks, providing school bus facilities, hostel facilities, etc.

The bench also overruled the reasoning and conclusions given in earlier judgements of American Hotel and Queen’s Education Society which stated that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment.

"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 bench said.