It is often a topic of dispute amongst the various judicial authorities that whether the high end educational institutions, especially schools, providing modern and equipped educational aids, maintaining the highest standards of hygiene, offering air-conditioned classroom, buses etc. are involved in activities which are charitable or commercial in nature.

Both starting from the word ‘C’, but still carry a huge difference while considering from the point of view of taxation. The income of a charitable trust or a society under whose aegis these schools run is exempt from Income tax according to the provisions of Section 11, 12 and 13of the Income Tax Act. However, to avail the said exemption, the activities of such trust/society should fall within the definition of ‘Charitable purpose’ as defined U/s 2[15] of the Income Tax Act.

Here, it shall be worth quoting Section 2[15] which is defined to include relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest] and the advancement of any other object of general public utility.

There are many judicial pronouncements which have covered this dispute, however taking contradictory views.

Analyzing the scheme of the Act in the context of tax liabilities of a Chamber Commerce, the Hon’ble Apex Court has observed in the case of Indian Chamber of Commerce Vs. Commissioner of Income Tax [101 ITR 0796] that “Income is taxable., but certain incomes shall not be included in the total income of the previous years if the person in receipt of income.” Emphasizing on the element of “Non Profit”: to availing the exemption under the Act, the Hon’ble Supreme Court further observed as under:- "it may be noted here that though subsequent amendments to Section 2[15] has further restricted the extent to which such fees can be charged, there is no dilution in the underlying principle that in Section 2[15] the benefit of exclusion from total income is taken away when in accompanying a charitable propose the institution engages itself in activities of profit. Their objects are charitable but their activities are for profit.”

However the said judgment has been overruled by the 5 bench judgment in Additional Commissioner of Income Tax Gujrat V. Surat Silk Cloth Manufacturers Association reported in [1980] 2 SCC 31, wherein the majority view has been taken that “the words ‘not involving the carrying on of any activity for profit” qualify or govern only the last head of charitable purpose and not the earlier three heads. Where therefore the purpose of a trust or institution is relief of poor, education, medical relief, the requirement of the definition of ‘charitable purpose’ would be fully satisfied, even if an activity for profit is carried on in course of the actual carrying out of the primary purpose of the trust or institution.”

In the case of Society for Small Medium Exporter vs. DIT [Exemption] Delhi, Hon’ble ITAT Delhi has held that the “DIT exemption was right in refusing registration to the assessee as even though the objects of the society may have been charitable, but, the activities carried out by the society which yielded income to the society were commercial in nature. Applicability of the proviso to section 2(15) was upheld in this case.”

It is also noted that while deciding on whether an educational institution charging the high fees can be termed as a “charitable institutions”; the Hon’ble Chennai ITAT in the case of M/s Rajah Sir Sannamalai Chettiar Foundation Vs. The Director of income Tax [Exemptions] ITA NO. 2927/Mds./2010 has observed as under: “the definition clearly shows that carrying on educational activities by itself is not a charitable purpose. The concept of charitable purpose may be manifested in different forms like relief of the poor, education, medical relief, etc, but a charitable purpose should always take care of the welfare and interest of the public and especially the poor section of the public. Running schools by collecting huge amounts of fees with five star facilities cannot be treated as charitable activity only on the ground that the business carried on by such institutions is the business of education.”

The Hon’ble Uttrakhand High Court in the case of CIT Haldwani v M/s Queens Education Society, Nainital & St Paul Sr. Sec School, Nainital in ITA no. 105/104/2007 has held that “educational institutions making systematic profits are not eligible for exemption”

In the case of Punjab Urban Planning and Development Authority, ITAT Chandigarh has observed that “no activity can be carried on efficiently, properly unless and until carried out on business principle but it does not mean that the provision is misused in any manner under the garb of charity and any institution be allowed to become richer and richer under the garb of by making it a non tax payable organization. A charitable institution provided services for charitable purposes free of cost and not for gain".

However taking a contrary view there are many instances wherein the courts after careful reading of the definition of Charitable purpose in the Act have observed that “…Where, therefore, the purpose of a trust or institution is relief of the poor, education or medical relief, the requirement of the definition of "charitable purpose" would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution.” [Victoria Technical Institute Vs. Addl. Commissioner of Income-tax, Madras and another reported in AIR 1991 SC 997]

The Hon’ble ITAT Delhi ‘F’ Bench in Dy. CIT v. Beer Shiva Educational Social Welfare Society reported in [2007] 103 ITD 403 [Delhi] while discussing the definition of the word “Charitable Purpose” under Section 2 [15] of the Income Tax Act has held that:“relief of poor, education and medical relief are charitable activities per se and if any institution is carrying out any of these objects, then, such an institution would be pursuing a charitable purpose.”

“Charitable purpose” includes relief of poor, education, medical relief, and the advancement of any other object of general public utility. Before proceeding further, it may be pointed out that the words “not involving the carrying on of any activity of profit”, finding place in the section at the end of the words “objects of general public utility”, were omitted by the Finance Act, 1983, with effect from 1-04-1984. Therefore, the cases relied upon under the old definition will not come to the aid of the revenue. This definition does not make a distinction between the institutions carrying on any activity for profit or nonprofit institutions. It is further seen that punctuation, and the word “and” are used after medical relief and, therefore, the words “relief of poor, education, medical relief stand on different footing than the words “advancement of any other object of general public utility”. The Hon’ble Supreme Court has pointed out that private profit motive is manifestly excluded by the words “general public utility”, but these words qualify the words “advancement of any other object”. Therefore, we are of the considered view that relief of poor, education and medical relief are charitable activities per se and if any institution is carrying out any of these objects, then, such an institution will be pursuing a charitable purpose.”

The case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association reported in (1980) 121 ITR 1, from which it is evident that the test of predominant object of the activity is to be seen whether it exists solely for education and not to earn profit. However, the purpose would not lose its character merely because some profit arises from the activity. That, it is not possible to carry on educational activity in such a way that the expenditure exactly balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realization but would reflect unsound principles of management. In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established.

The Hon’ble High Court of Punjab and Haryana at Chandigarh in Pinegrove International Charitable Trust Vs. Union of India and Others reported [2010] 230 CTR [P&H] 477 has categorically held that “it is obligatory on the part of the Chief Commissioner of Income Tax or the Director, which are the prescribed authorities, to comply with proviso thirteen [unnumbered]. Accordingly, it has to be ascertained whether the educational institution has been applying its profit wholly and exclusively to the object for which the institution is established. Merely because an institution is earning profit would not be deciding factor to conclude that the educational institution exists for profit.”

Hon’ble High Court of Delhi in St. Lawrence Education Society [Regd] and Anr. V. Commissioner of Income Tax Delhi [Central] and Anr. The Baptist Education Society and Anr. Vs. Chief Commissioner of Income Tax reported in [2011] 197 TAXMAN504 [Delhi] while deciding the appeal and discussing various authorities on the said subject, allowing the Writ petition held that “the opinion expressed by the respondent that the educational institution seeking exemption should not generate any quantitative surplus is legally untenable and incorrect. The chief Commissioner has erred in assuming that for exemption there should not be any surplus; otherwise the institution society exists for profit and not charity i.e education in the present case. In view of the aforesaid judgments of the Supreme Court, Bombay High Court and Punjab and Haryana High Court, reasoning inscribed by the competent authority solely on the foundation that there has been some surplus profit is unjustified.”

Nevertheless, here, it is pertinent to bring to notice a clarification issued by the Board in Circular No. 11/2008 dated December 19, 2008, which further elucidates the picture and most likely to settle the dispute on the issue which states as under.

“The amendment made by the finance Act, 2008 will not apply in respect to the first three limbs of Section 2[15]. Consequently, where the purpose of a trust or institution is relief for the poor, education or medical relief, preservation of environment and preservation of monuments, it will constitute ‘Charitable Purpose’ even if it incidentally involves the carrying on of commercial activities.

Relief of the poor’ encompasses a wide range of objects for the welfare of the economically and socially disadvantaged or needy. It will, therefore, include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women or children, small and marginal farmers, indigent artisans or senior citizens in need of aid. Entities who have these objects will continue to be eligible for exemption even if they incidentally carry on a commercial activity, subject, however, to the conditions stipulated under section 11(4A) or the seventh proviso to section 10(23C) which are that

  1. the business should be incidental to the attainment of the objectives of the entity, and
  2. separate books of account should be maintained in respect of such business.

Similarly, entities whose object is ‘education’ or ‘medical relief’ would also continue to be eligible for exemption as charitable institutions even if they incidentally carry on a commercial activity subject to the conditions mentioned above.

The newly inserted proviso to section 2(15) will apply only to entities whose purpose is ‘advancement of any other object of general public utility’ i.e. the fourth limb of the definition of ‘charitable purpose’ contained in section 2(15). Hence, such entities will not be eligible for exemption under section 11 or under section 10(23C) of the Act if they carry on commercial activities. Whether such an entity is carrying on an activity in the nature of trade, commerce or business is a question of fact which will be decided based on the nature, scope, extent and frequency of the activity.”

Here, it shall also be important to note that this circular in the light of Section 119 of the I.T Act and in light of the case of Catholic Syrian Bank Ltd. Vs. Commissioner of Income Tax, Thrissur [MANU/SC/0127/2012] is binding on the Income Tax Authorities.

Considering the discussion above, it can be inferred that schools imparting education, even if earning some amount of profits and charging high fees shall still be said to be engaged in charitable activities. Meaning thereby entities whose object is Education would continue to be eligible for exemption as charitable institutions even if they incidentally carry on commercial activities and Education as an object is charitable per se under the Indian Income Tax Act.