Tax Exemption for Charitable & Educational Institutions: Landmark Judgements by Supreme Court

Tax Exemption for Charitable & Educational Institutions: Landmark Judgements by Supreme Court

Tax Exemption for Charitable & Educational Trust- Section 10 (23C)

Common public understanding of the taxation law states that charitable trusts have been exempted from taxes in India. But this is not absolute and to truly understand the actual taxation of charitable trust, it is important to carefully read the provisions of the Income Tax Act, 1961 and the rules thereunder related to the taxation of trusts. However, provisions and rules relating to the taxation of trust are not free from different interpretations and complications. Let’s see some of the complications around the taxation for charitable organisations.

Issues Relating to Tax Exemptions for Charitable Institutions 

There are various types of trusts and associations incorporated in India that have been exempted from tax. For instance, statutory bodies like the Institute of Chartered Accountants of India and housing development boards such as Noida Authorities, BCCI etc. are some of the institutions that are exempted from tax. However, the activities of all these institutions are different from each other.

Further, there have been various litigations and different judgements on which activities of the trust should be treated as charitable activities and which ones as commercial. Also, the tax exemption for educational institutions has been ambiguous because the provisions of Section 10(23C) of the Income Tax Act, 1961 provides tax exemption to only those institutions that are ‘solely’ for educational purpose.

So, how is the tax exemption for charitable organisations determined? The Supreme Court has settled the confusion revolving around these issues and laid down detailed guidelines on tax exemptions for charitable organisations. What was the Supreme Court ruling on charitable organisations and how will it impact taxes on charitable trust?

Let’s understand this through two landmark judgements by Supreme Court!

CASE-I: M/s New Noble Educational Society vs. The Chief Commissioner of Income Tax 

Facts of the Case

M/s New Noble Educational Society claimed exemption under Section 10(23C) of the Income Tax Act, 1961 which was denied by the tax authorities. The question that arises here is whether the institution should exist ‘solely’ for the purpose of education or it can have income from other sources also. Further, how tax exemption will be determined?

Supreme Court Judgement

As per Section 10(23C) (vi), income from any university or other educational institution that exists solely for educational purposes and not for the purpose of profit should not be included in the taxable income. The word ‘solely’ is of prime importance in this regard. The following were the observations and judgement of the Supreme Court for educational institutions:

  • The Supreme Court stressed on the view that education is equated with the charity in the Indian constitution and thus, it should never be treated as trade, commerce or business. 
  • As per Section 10(23C) of the Income Tax Act, 1961, the income tax exemption can be claimed by the educational institution if they exist ‘solely’ for educational purposes and not for the purpose of profits. 
  • Further, it is stressed that the word ‘solely’ needs to be interpreted literally. As per the intent of the legislature, the exemption should be granted only to those institutions that provide scholastic formal learning.
  • The apex court observed that the 7th proviso to Section 10(23C)(vi) of the Income Tax Act, 1961 permits educational institutions to record the profits and gains from business that is incidental to attaining its objectives. Thus, the business should also be related to education or educational activities as the purpose of the educational institution is to impart education.
  • Such activities can include bus facilities, hostel facilities, providing books etc. However, activities like renting out premises for the conduct of external events won’t qualify as activities that are incidental to education.

After the above ruling, the educational institutions had to satisfy the trust income tax authorities that they existed solely for the purpose of education and there was no other business activity undertaken. 

CASE-II: Assistant Commissioner of Income Tax (Exemptions) vs. Ahmedabad Urban Development Authority

Facts of the Case

Apart from the specified activities, the definition of charitable purpose also includes the advancement of any other object of general public utility. Receipts from such activities are also eligible for exemption under the trust income tax law. However, what should be considered under this provision is not specifically clear. The Supreme Court settled the law pertaining to such objects in the case of ACIT (Exemptions) vs. Ahmedabad Urban Development Authority (AUDA).

The tax officers denied the exemption claimed by the assessee and imposed a penalty of Rs. 101.24 crores. The assessee succeeded in the High Court following which, the matter rested before the Supreme Court. This case concerns a large number of statutory corporations, bodies and authorities like the Gujarat Housing Board, the Institute of Chartered Accountants of India, Karnataka Water Supply and Drainage etc.  

Supreme Court Judgement

The Supreme Court ruled the following judgement to settle this case:

  • There are various statutory corporations, commissions and authorities that are involved in the advancement of general public utility. We need to look at their objectives to determine whether they are eligible for tax exemptions or not. Further, the fact that they are providing goods or services at a nominal markup won’t deny income tax exemption to charitable organisations.
  • However, if the charitable institution is charging a substantial amount for such activities which is significantly higher than the costs, such activities can be categorised as ‘trade, commerce or business’. 
  • A trade promotion body won’t be eligible for trust income tax exemption if it is conducting paid workshops, skill development courses and training courses and such activities are in the nature of business, trade or commerce. Further, it would be considered commercial in nature if the threshold limit of 20% is crossed.  
  • Supreme Court held that an analysis of the nature of activities undertaken by charitable organisations should be done. This is to ascertain whether such activities are predominantly linked to the general public utility.  
  • The trust income tax department has the power to call for the accounts and records to determine whether the tax exemption has been rightfully claimed by the assessee or not.

ASC’s Opinion 

The above guidelines and ruling makes it pretty clear and removes the ambiguity surrounding the tax exemptions for charitable organisations. The above judgements bring a lot of clarity to the exemptions for charitable organisations. However, the trust income tax authorities may aggressively apply the above judgements for their assessments to ensure that the conduct of charitable organisations is in line with the Supreme Court judgement for claiming the exemption. If you need any assistance in relation to the taxation of charitable trust, feel free to contact the ASC Group.


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