The Hon'ble Supreme Court of India has through another landmark judgment proved that PATIENCE ALWAYS PAYS. Definitely a relief for all the educational institutions running in the country, this judgment shall put an end to running controversies and the harassment all these institutions were going through all this while.

A Common judgment passed in the case of Queens Educational Society and Pine groove International Charitable Trust1 has distinguished the long relied case of Municipal Corpn. of Delhi V Children Book Trust and Safdurjung Enclave Educational Society, reported in (1992) 3 SCC 390 by the Income Tax Authorities.

The Court while relying on the judgments of Surat Art Silk Cloth reported in 121 ITR 1 (SC), Aditanar reported in 224 ITR 310 (SC), and American Hotel and Lodging reported on 2008-TIOL-115-SC-IT, decided the issue with regards exemption to be granted U/s 10(23C)(iiad) of the Income Tax Act and summed up Section 10(23C) (iiad) as follows:

  1. Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.
  2. The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.
  3. A distinction must be drawn between the making of a surplus and an institution being carried on "for profit". No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
  4. If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.
  5. The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.

Furthermore, the Court bringing in all cheers for the educational institutions upheld its own view in the Surat Art Silk Manufactureres Associations Case and Aditanar educational institution case that "The fact that the Petitioner has a surplus of income over expenditure for the three years in question, cannot by any stretch of logical reasoning lead to the conclusion that the Petitioner does not exist solely for educational purposes or, as that Chief Commissioner held that the Petitioner exists for profit. The test to be applied is as to whether the predominant nature of the activity is educational. In the present case, the sole and dominant nature of the activity is education and the Petitioner exists solely for the purposes of imparting education. An incidental surplus which is generated, and which has resulted in additions to the fixed assets is utilized as the balance-sheet would indicate towards upgrading the facilities of the college including for the purchase of library books and the improvement of infrastructure. With the advancement of technology, no college or institution can afford to remain stagnant. The Income-tax Act 1961 does not condition the grant of an exemption under Section 10(23C) on the requirement that a college must maintain the status-quo, as it were, in regard to its knowledge based infrastructure. Nor for that matter is an educational institution prohibited from upgrading its infrastructure on educational facilities save on the pain of losing the benefit of the exemption under Section 10(23C). Imposing such a condition which is not contained in the statute would lead to a perversion of the basic purpose for which such exemptions have been granted to educational institutions." Knowledge in contemporary times is technology driven. Educational institutions have to modernize, upgrade and respond to the changing ethos of education.

CONCLUSION:

This landmark judgment is surely going to put an end to alot of tax litigations pending in the country. A very good news for the education industry and a move towards unnecessary harassment of the assesses.

Footnote

1. MANU/SC/0287/2015

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