Analysis of Section 10(23C)(iiiad) of the Income Tax Act, 1961

Navigating Tax Exemption for Smaller Educational Institutions: An Analysis of Section 10(23C)(iiiad) of the Income Tax Act, 1961

Introduction

Section 10(23C) of the Income Tax Act, 1961 (hereinafter "the Act") provides for exemption of income received by universities or other educational institutions. Within this section, sub-clause (iiiad) carves out a specific exemption for educational institutions whose aggregate annual receipts do not exceed a prescribed monetary limit. This provision is crucial for smaller educational institutions, offering a somewhat simplified path to tax exemption compared to its counterpart, Section 10(23C)(vi), which applies to institutions with higher receipts and mandates approval from a prescribed authority. The core conditions for availing exemption under Section 10(23C)(iiiad) are that the institution must exist "solely for educational purposes and not for purposes of profit," and its aggregate annual receipts must remain within the stipulated threshold.

The interpretation and application of these conditions have been the subject of considerable judicial scrutiny, leading to an evolving jurisprudence. This article aims to provide a comprehensive analysis of Section 10(23C)(iiiad), examining its statutory framework, the judicial interpretation of its key phrases, particularly in light of recent landmark rulings, and the procedural nuances associated with it. The analysis will draw heavily upon the provided reference materials, including seminal Supreme Court judgments and decisions from various High Courts and Tribunals.

Statutory Framework of Section 10(23C)(iiiad)

Section 10 of the Act enumerates incomes that are not included in the total income of an assessee. Clause (23C) thereof deals with income of, inter alia, educational institutions. Section 10(23C)(iiiad) states that in computing the total income of a previous year of any person, any income falling within the following clause shall not be included:

"(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed;"[1]

The "amount of annual receipts as may be prescribed" is currently Rs. 5 crore, as per Rule 2BC of the Income Tax Rules, 1962, amended by the Income Tax (4th Amendment) Rules, 2021, effective from 1st April 2021. Prior to this amendment, the prescribed limit was Rs. 1 crore.[2]

A significant distinction between sub-clause (iiiad) and sub-clause (vi) of Section 10(23C) is the requirement for approval. While institutions falling under sub-clause (vi) (i.e., those with annual receipts exceeding the prescribed limit for (iiiad) or those not covered by (iiiab)) must seek approval from the prescribed authority,[3] institutions covered by sub-clause (iiiad) are generally exempt by virtue of meeting the conditions of the sub-clause itself, without needing separate approval.[4]

Furthermore, several provisos to Section 10(23C) lay down conditions regarding application of income, accumulation, investment patterns, and audit. However, it has been consistently held that these stringent conditions, primarily designed for institutions requiring approval under sub-clause (vi), do not automatically apply to institutions qualifying for exemption under sub-clause (iiiad). The Delhi High Court in Director Of Income Tax (Exemption) v. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society noted that conditions relating to accumulation and investment forms in the provisos do not apply to institutions covered under clause (iiiad).[5] Similarly, the Income Tax Appellate Tribunal (ITAT) in M/S. Gagan Academic Society v. Addl. C.I.T observed that "the educational institution which are entitled for exemption under section 10(23C)(iiiad), are not required to comply with the conditions as stipulated under proviso to section 10(23C)."[6] This view was also echoed in Assistant Commissioner of Income-tax v. Vatsalya Senior Secondary School.[7]

Interpretation of "Solely for Educational Purposes and Not for Purposes of Profit"

The cornerstone for claiming exemption under Section 10(23C)(iiiad) is the dual requirement that the institution must exist "solely for educational purposes" and "not for purposes of profit." The interpretation of this phrase has witnessed a significant jurisprudential evolution.

The "Predominant Object" Test

For a long time, the judiciary applied the "predominant object" test to determine if an institution met this criterion. The Supreme Court in Queen's Educational Society v. Commissioner Of Income Tax, dealing directly with Section 10(23C)(iiiad), held that if the predominant object of an institution is education, the mere generation of surplus income would not disentitle it from exemption, provided such surplus is ploughed back for educational purposes.[8] The Court summarized the law common to Sections 10(23C)(iiiad) and (vi) as follows:

  • 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 making profit.
  • The predominant object test must be applied — the purpose of education should not be submerged by a profit-making motive.
  • A distinction must be drawn between making 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.
  • If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purposes.[9]

This approach was consistent with earlier rulings like CIT v. Surat Art Silk Cloth Manufacturers' Association[10] and Aditanar Educational Institution v. Additional Commissioner Of Income Tax,[11] which emphasized that incidental profits, when reinvested into the primary charitable or educational objects, do not negate the non-profit character of the institution. The Supreme Court in Chief Commissioner Of Income Tax, Chandigarh (S) v. St. Peter'S Educational Society, Chandigarh (S) also affirmed the principles laid down in Queen's Educational Society.[12] The ITAT in Deputy Commissioner of Income-tax, Haldwani v. St. Pauls Sr. Secondary School similarly held that charging fees is incidental to imparting education and surplus used for the benefit of students does not indicate a profit motive.[13]

The Impact of M/S New Noble Educational Society v. The Chief Commissioner of Income Tax 1

A significant shift in interpretation occurred with the Supreme Court's judgment in M/S New Noble Educational Society v. The Chief Commissioner of Income Tax 1.[14] Although this case primarily dealt with Section 10(23C)(vi), its pronouncements on the phrase "solely for educational purposes and not for purposes of profit" have far-reaching implications for sub-clause (iiiad) as well, given the identical wording. The Court, in New Noble, overruled the "predominant object" test, advocating for a strict, literal interpretation of the word "solely." It held that "solely" means "only" or "exclusively," implying that the institution must be dedicated exclusively to education without any ancillary or unrelated objectives, particularly those of a commercial nature.

The Court stated:

"The plain and grammatical meaning of the expression 'solely' is 'only' or 'exclusively'. The word 'solely' is not a standard or norm which is capable of legislative or executive gloss. It is a legislative term of art, which has to be given its plain and grammatical meaning... The sixth proviso merely requires that the concerned trust, university or other institution, etc. may engage in commercial or business activities with the caveat that the activities, and the application of their profits, should be solely for the purpose of education. This, by no means, can be read and interpreted as a permission to engage in activities that are not educational."[14] (referring to the context of 10(23C)(vi) and its provisos)

While New Noble directed its ruling to operate prospectively, its stringent interpretation necessitates a re-evaluation of how institutions under Section 10(23C)(iiiad) demonstrate their exclusive dedication to education. The Chhattisgarh High Court in M/S SHAHEED NAND KUMAR PATEL VISHWAVIDYALAYA v. COMMISSIONER OF INCOME TAX (E), while dealing with a 10(23C)(vi) application, remitted the matter for fresh consideration in light of New Noble, emphasizing the need for a specific finding on whether the institution exists "solely for educational purposes" and "for purposes of profit."[15]

Incidental Activities and Objects in Memorandum

Prior to New Noble, the presence of non-educational objects in the Memorandum of Association (MoA) was often not fatal if the institution was, in practice, engaged solely in educational activities. For instance, in Geetanjali Education Society v. Assistant Director Of Income Tax Exemptions, the Karnataka High Court considered whether an institution was ineligible for exemption under Section 10(23C)(iiiad) merely because its MoA contained objects other than education, even if those objects were not pursued.[16] The ITAT in M/S. Saraswati Educational & Welfare Society (Regd.) Kharar v. The Income Tax Officer also dealt with a similar issue where the assessee argued that the mere presence of various other objects in the MoA did not disestablish that the society was imparting education as per Section 10(23C)(iiiad).[17] In The Income Tax Officer, Ward Vi(3) Ludhiana. v. Shri Balaji Prem Ashram & Nikhil Vidyalaya, the assessee contended that exemption under Section 10(23C)(iiiad) cannot be denied merely because multiple objects are included in the trust deed, if no other objects were operational.[18]

The strict interpretation in New Noble suggests that tax authorities may now scrutinize the objects clause more rigorously. If the MoA permits activities beyond education, it might be contended that the institution does not exist "solely" for educational purposes, irrespective of whether such other activities are actually carried out. This could pose challenges for institutions with broadly worded object clauses.

Determining "Aggregate Annual Receipts"

The eligibility for exemption under Section 10(23C)(iiiad) hinges on the "aggregate annual receipts" of the university or educational institution not exceeding the prescribed limit (currently Rs. 5 crore).

Inclusion of Capital Receipts

An important question is whether capital receipts form part of "aggregate annual receipts." The Madras High Court in The Commissioner Of Income Tax Chennai v. Madrasa E-Bakhiyath-Us-Salihath Arabic College addressed this issue. The assessee, an educational institution, had sold land and bonds, and contended that these were capital receipts and not recurring annual income, and thus should be excluded for the purpose of the monetary limit under Section 10(23C)(iiiad). The Court upheld the Tribunal's decision that receipts from the sale of bonds and property, being capital and non-recurring in nature, had to be excluded from the aggregate annual receipts for determining eligibility under Section 10(23C)(iiiad).[19]

Unit for Calculating the Threshold: Per Institution or Per Assessee?

A contentious issue arises when a single legal entity (e.g., a society or trust) runs multiple educational institutions. Is the monetary limit applicable to each individual institution, or to the aggregate receipts of all institutions run by that entity? The wording of Section 10(23C)(iiiad) refers to "any university or other educational institution... *whose* aggregate annual receipts do not exceed..." The pronoun "whose" grammatically refers to the "university or other educational institution."

The ITAT, Chandigarh Bench, in Sh. Sant Baba Sunder Singh, Barnala v. ITO, Barnala, considered a case where the assessee claimed exemption under Section 10(23C)(iiiad) on the ground that the gross receipts of the two individual educational institutes run by it did not exceed the prescribed limit individually. The assessee relied on the decision of the Karnataka High Court in CIT & Another Vs. Children's Education Society (2013) 358 ITR 373, which held that if a society runs several educational institutions, each institution is to be considered separately for the purpose of the monetary limit under Section 10(23C)(iiiad).[20] If this interpretation is followed, a society running multiple small schools, each with receipts below Rs. 5 crore, could potentially claim exemption for each school under this sub-clause. However, the ITAT in Jat Education Society v. Deputy Commissioner of Income-tax, while discussing Section 10(23C)(iiiab) (which also uses the "any university or other educational institution" phrasing), noted that the position is examined based on individual institutions.[21] The general practice of the revenue, however, often tends to aggregate the receipts of all institutions under a single legal entity. This area remains subject to judicial interpretation and specific facts of each case.

Procedural Aspects and Compliance

As discussed, institutions qualifying under Section 10(23C)(iiiad) generally do not require formal approval from the prescribed authority, which is a key differentiator from Section 10(23C)(vi).[4], [6]

It has also been held that registration under Section 12A of the Act is not a mandatory prerequisite for claiming exemption under Section 10(23C)(iiiad). The ITAT in Assistant Commissioner of Income-tax v. Vatsalya Senior Secondary School stated that "the provision of section 10(23C)(iiiad) is an independent section and there is no condition precedent that necessarily registration has to be sought under section 12A."[7]

The applicability of filing an audit report in Form 10BB is another pertinent aspect. The tenth proviso to Section 10(23C) mandates an audit for institutions referred to in sub-clauses (iv), (v), (vi), or (via). Sub-clause (iiiad) is not explicitly mentioned in the tenth proviso. Rule 16CC of the Income Tax Rules prescribes Form No. 10BB as the audit report for the purposes of the tenth proviso. Logically, this implies that Form 10BB may not be mandatory for institutions solely claiming exemption under Section 10(23C)(iiiad). However, in The Income Tax Officer, Ward Vi(3) Ludhiana. v. Shri Balaji Prem Ashram & Nikhil Vidyalaya, the Assessing Officer had partly denied exemption because, inter alia, Form 10BB was not furnished.[18] While many tribunals have held Form 10BB is not mandatory for (iiiad), the overall emphasis on compliance post-New Noble might lead to increased scrutiny even on procedural aspects for smaller institutions.

The ITAT in M/S. Gagan Academic Society reiterated that for institutions under (iiiad), there is no restriction about the application of income, mode of investment, and accumulation of income, as these are conditions stipulated in the provisos primarily applicable to institutions under (vi).[6] The ITAT in MULTIPURPOSE EDUCATION SOCIETY RADIO ELECTRIC INSTITUTE, MUMBAI v. DDIT (E) I(1), MUMBAI also noted the assessee's argument that if aggregate annual proceeds do not exceed the prescribed limit (then Rs. 1 crore), the income would be exempt under 10(23C)(iiiad).[22]

Conclusion

Section 10(23C)(iiiad) serves as a vital provision for smaller educational institutions in India, offering a pathway to tax exemption provided they exist "solely for educational purposes and not for purposes of profit" and their aggregate annual receipts are within the prescribed monetary limit. The jurisprudence surrounding this provision has been dynamic. While the "predominant object" test previously allowed for incidental surplus generation if ploughed back into education, the Supreme Court's ruling in New Noble Educational Society has ushered in an era of strict, literal interpretation of "solely," demanding exclusive dedication to educational activities.

This shift poses new challenges for institutions, particularly concerning the scope of their objects and incidental activities. Key aspects such as the exclusion of capital receipts from "aggregate annual receipts" and the potential for considering the monetary limit per institution (as per the Karnataka High Court's view) offer some clarity, though the latter remains a point of contention. Institutions under Section 10(23C)(iiiad) also benefit from fewer procedural burdens compared to their larger counterparts under Section 10(23C)(vi), such as the general non-applicability of mandatory approval and stringent conditions related to income application and accumulation found in the provisos.

However, in the post-New Noble landscape, all educational institutions seeking tax exemption must meticulously ensure their objectives, activities, and compliance frameworks align with the heightened standards of scrutiny. For those falling under Section 10(23C)(iiiad), while procedurally simpler, the fundamental requirement of existing "solely" for education and not for profit must be unequivocally demonstrated to navigate the evolving tax exemption regime successfully.

References

  1. Section 10(23C)(iiiad), Income Tax Act, 1961. (As quoted in M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF COMMISSIONER OF INCOME TAX 1, Supreme Court Of India, 2022, and other reference materials).
  2. Rule 2BC, Income Tax Rules, 1962. The limit was Rs. 1 crore as noted in M/S. Gagan Academic Society v. Addl. C.I.T, Range-1, Aligarh (Income Tax Appellate Tribunal, 2010) and Queen's Educational Society v. Commissioner Of Income Tax (Supreme Court Of India, 2015).
  3. Proviso 1 to Section 10(23C), Income Tax Act, 1961. (As quoted in American Hotel And Lodging Association Educational Institute v. Central Board Of Direct Taxes And Others, Supreme Court Of India, 2008).
  4. M/S. Gagan Academic Society v. Addl. C.I.T, Range-1, Aligarh (Income Tax Appellate Tribunal, 2010).
  5. Director Of Income Tax (Exemption) v. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society (Delhi High Court, 2015).
  6. M/S. Gagan Academic Society v. Addl. C.I.T, Range-1, Aligarh (Income Tax Appellate Tribunal, 2010).
  7. Assistant Commissioner of Income-tax v. Vatsalya Senior Secondary School (Income Tax Appellate Tribunal, 2010).
  8. Queen'S Educational Society v. Commissioner Of Income Tax . (2015 SCC 8 47, Supreme Court Of India, 2015).
  9. Chief Commissioner Of Income Tax, Chandigarh (S) v. St. Peter'S Educational Society, Chandigarh (S) (Supreme Court Of India, 2016), quoting Queen's Educational Society.
  10. CIT v. Surat Art Silk Cloth Manufacturers' Association (1980) 2 SCC 31. (Cited in Queen's Educational Society and American Hotel And Lodging Association Educational Institute).
  11. Aditanar Educational Institution v. Additional Commissioner Of Income Tax . (1997) 3 SCC 346, Supreme Court Of India, 1997. (Cited in Queen's Educational Society and American Hotel And Lodging Association Educational Institute).
  12. Chief Commissioner Of Income Tax, Chandigarh (S) v. St. Peter'S Educational Society, Chandigarh (S) (Supreme Court Of India, 2016).
  13. Deputy Commissioner of Income-tax, Haldwani, Distt. Nainital v. St. Pauls Sr. Secondary School (Income Tax Appellate Tribunal, 2006).
  14. M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF COMMISSIONER OF INCOME TAX 1 (2022 SCC ONLINE SC 1458, Supreme Court Of India, 2022).
  15. M/S SHAHEED NAND KUMAR PATEL VISHWAVIDYALAYA, v. COMMISSIONER OF INCOME TAX (E), (Chhattisgarh High Court, 2024).
  16. Geetanjali Education Society v. Assistant Director Of Income Tax Exemptions (2014 CTR KAR 267 369, Karnataka High Court, 2014).
  17. M/S. Saraswati Educational & Welfare Society (Regd.) Kharar () v. The Income Tax Officer, Ward 6(5), Mohali () (2014 SCC ONLINE ITAT 3550, Income Tax Appellate Tribunal, 2014).
  18. The Income Tax Officer, Ward Vi(3) Ludhiana. () v. Shri Balaji Prem Ashram & Nikhil Vidyalaya, Thakur Colony, Near Sterling Resort, Pakhowal Road, Ludhiana. () (2015 SCC ONLINE ITAT 11540, Income Tax Appellate Tribunal, 2015).
  19. The Commissioner Of Income Tax Chennai v. Madrasa E-Bakhiyath-Us-Salihath Arabic College Bakhiyath-Us-Salihath Street Vellore - 632 004 (2014 SCC ONLINE MAD 5342, Madras High Court, 2014).
  20. Sh. Sant Baba Sunder Singh, Barnala v. ITO, Barnala (Income Tax Appellate Tribunal, 2016), referencing CIT & Another Vs. Children's Education Society (2013) 358 ITR 373 (Kar).
  21. Jat Education Society v. Deputy Commissioner of Income-tax, Rohtak Circle, Rohtak (2011 TAXMANNCOM DELHI 10 127, Income Tax Appellate Tribunal, 2011).
  22. MULTIPURPOSE EDUCATION SOCIETY RADIO ELECTRIC INSTITUTE, MUMBAI v. DDIT (E) I(1), MUMBAI (Income Tax Appellate Tribunal, 2017).