TAX EXEMPTIONS ON EDUCATIONAL INSTITUTIONS-----AN ANALYSIS

TAX EXEMPTIONS ON EDUCATIONAL INSTITUTIONS-----AN ANALYSIS

				By: aastha sahu
				April 18, 2023
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Tax Exemptions on Educational Institutions-----An Analysis

Aastha sahu[1]

Abstract

Incomes “of educational activities have been granted exemption from levy of tax subject to satisfaction of certain conditions as mentioned in the relevant provisions. While seeking tax exemption, controversies have been arising time and again; generally, in the cases of educational institutions having annual receipts in excess of 1 crore. Even in judicial fora, there is no unanimity on these controversies. Present research paper attempts to deal with important aspects of registration under section 12A of the Income-tax Act, 1961 and the approval as is given by the Chief Commissioner under section 10(23C)( vi). For the purpose, relevant case laws have been discussed in detail.”

Introduction

The “Income-tax Act, 1961 (‘the Act’) provides for tax concessions and exemptions to certain charitable activities. Apart from considering education as a charity activity, the Act gives particular attention to educational activities in general. Income from educational activities has been exempted from taxation, subject to the fulfilment of certain conditions outlined in the applicable regulations. The aim for extending tax incentives appears to be to stimulate the development and operation of educational institutions in the country.”

Legal Provisions Relating to Exemption of Educational Institution

Section 2 Clause 15 of the Income Tax Act treats education as a charitable purpose. As a result of the inclusion of "education" as a charity object, educational activities are exempted from taxation under the provisions of sections 11, 12, and 13 of the Act. “Apart from that, income of any university or other educational institution established only for educational purposes is free from taxation under section 10(23C) (iiiad) if the aggregate yearly receipts of such university or educational institution do not exceed the stipulated maximum of one crore. Income is made exempt only if the educational institution or university has been approved by the prescribed authorities in cases where aggregate annual receipts exceed this defined maximum.”

Bone of Contention

Tax exemptions and the disputes that surround them are almost always linked. Even if the trusts/institution carrying out educational activities have been granted registration by the Commissioner (the CIT) under section 12A of the Act, revenue officers believe that approval as contemplated under section 10(23C)(vi) is a must for claiming exemption in the case of educational institutions with annual receipts in excess of 1 crore. “Similarly, even in cases where annual receipts are less than 1 crore, in which case an exemption must be granted under section 10(23C) (iiiad), Assessing Officers tend to look at the exemption claimed under section 10(23C) (iiiad) in conjunction with the provisions of sections 11, 12, and 13 of the Act. Taxpayers, on the other hand, believe that the revenue officers' approach is incorrect because these provisions give for alternatives, and it is up to the taxpayers to select between the two options. Even in court forums, there is no consensus on these issues.”

An Analysis

The provision related to exemption of University/Educational Institution are found contained in sub-clause (vi) of clause (23C) of section 10 of the Act, 1961, which reads as under :

In computing the total income . . . . any income falling within any of the following clauses shall not be included—

(vi)any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority;"

Furthermore, according to rule 2BC, any university or educational institution with yearly receipts in excess of one crore rupees on or after April 1, 1998 must be approved by the prescribed authority, which, according to rule 2CA, is the Chief Commissioner or the Director General.

The issue arises when educational institutions refuse to seek approval from the Chief Commissioner even though their receipts exceed the allowed maximum of 1 crore on the grounds that they are already registered with the CIT under section 12A of the Act, which would exempt their income on its own. In other words, they believe that simply because they did not acquire Chief Commissioner permission under section 10(23C)(vi), they should not be denied income-tax exemptions that are otherwise available to them under sections 11, 12, and 13 of the Act. Registration under section 12A, they believe, is a viable alternative to approval under section 10(23C) (vi) of the Act. The taxpayers' viewpoint is backed up by a number of court decisions.

In the case of Asstt. CIT v. Mahasabha Gurukul Vidyapeeth[2], the Delhi Bench of the Income-tax Tribunal held that it is not necessary to have the educational society notified under section 10(23C) (vi), and that an alternative route for exemption is available on registration of the society under section 12A, and that assesse can choose either of the routes. The Punjab and Haryana High Court affirmed the Tribunal's verdict in CIT v. Mahasabha Gurukul Vidyapeeth Haryana[3] by applying the Supreme Court's ruling in CIT v. Maharashtra Bar Council[4] as follows:

"...Once it is held that all requisite conditions for exemption under section 11 have been met, even if conditions under section 10(23C)(vi) have not been complied, with, there will be no bar to seek exemption under section 11....The view taken in Bar Council of Maharashtra [1981] 130 ITR 28 SC is not shown to have been affected. The Commissioner of Income-tax (Appeals) as well as the Tribunal have categorically held that all the conditions of section 11 were fulfilled and the judgment in Bar Council of Maharashtra was applicable. We are, thus, unable to hold that any substantial question of law arises."

“In this connection, before proceeding further to examine the issue at length, it is observed that the sole reliance in the decision of the Punjab and Haryana High Court is on the decision of the Supreme Court, in the case of Bar Council of Maharashtra (supra). A careful examination of the Supreme Court's ruling in the case of the Maharashtra Bar Council reveals that the Supreme Court did not, in fact, establish any legislation in the way that the High Court has interpreted it.” It is also clear that the Supreme Court's decision was not founded on any extensive arguments in support of the legal concept that, even if the case is covered by section 10(23A), general provisions found in section 11 can still be used to make an exemption claim. The Supreme Court made its decision solely on the basis of the department's acquisition of a specific position.

Thus, it is evident that the matter has not been thoroughly considered and decided on the merits of the case, particularly in light of the fact that section 11 was ruled out due to an exception granted under section 10(23A) of the Act. The Supreme Court's ruling on this precise argument is plainly a precedent sub-silentio, because the above legal reasons offered by revenue were not even examined. The Supreme Court ruling in Mittal Engg. Works v. CCE[5] is instructive, as their lordships noted that a decision cannot be relied upon to support a proposition that it did not decide. “It is a well-established notion that a precedent is only authoritative for what it really decides, not for what may appear to follow logically or remotely from it. Here it is reiterated that the interpretation as given to the Supreme Court decision by Delhi Bench of the Tribunal as well as by the Punjab and Haryana High Court is just the inference drawn because the Supreme Court did not at all hold by examining the issues in the light of the specific legal arguments raised. On this point, the Supreme Court in its judgment in the case of Rajput Ruda Maha v. State of Gujarat[6] has held that a discussion by the Court on a question which was neither raised nor argued would not be a precedent binding. Even otherwise, it is a settled principle of interpretation that a decision rendered by concessions or acquisance does not acquire the status of a binding precedence. It is felt that had this aspect been considered by the Delhi Bench of the Tribunal or by the Punjab & Haryana High Court, probably their decision would have been different or the issue would have been decided by undertaking an in-depth examination of the relevant provisions instead of just banking upon solely on the Supreme Court decision.” Thus, the Supreme Court has not decided the issue so as to call it as a binding precedent within the meaning of article 141 of the Constitution. As a matter of fact, the Supreme Court has not decided the issue either way. With respect, it is felt that the issue is open to be decided strictly in the light of the legal provisions for the reason that there is no authoritative element or concrete decision or Ratio decidendi on the specific point in hand.

“Notwithstanding what has been submitted above, if we endorse the aforesaid view of the Punjab & Haryana High Court, we would clearly be rendering the provisions of section 10(23C) (vi ) otiose or nugatory in a case when the educational institution is found having registration of the CIT under section 12A of the Act and has annual receipts in excess of 1 crore. Justice Venkatarama Ayyar in the case of Bengal Immunity Co. Ltd. v. State of Bihar[7] has remarked that it is a cardinal rule of construction that when there are in a statute two provisions which are in conflict with each other so that both of them cannot stand, they should, if possible, be so interpreted that, effect can be given to both, and that, a construction which renders either of them inoperative and useless should not be adopted, except in the last resort.”

Apart from the above, “it is to be observed that sections 11, 12, and 13 are general provisions dealing with more than one activities considered to be charitable in nature, whereas section 10(23C) (vi) is a special provision dealing specifically with the charitable activity of ‘education’. If the principles of "harmonious construction" and "giving primacy to the special provision over general provision" are kept in mind, it would appear that interpretation to be adopted has to be such which does not result in evasion of the mandatory conditions imposed by section 10(23C) (vi) of the Act.”

“Even otherwise, interpretation as adopted by the Delhi Bench of the Tribunal as endorsed by Punjab & Haryana High Court leads to an anomalous situation where necessity of obtaining approval under section 10(23C) (vi) of the Chief Commissioner/ Director General, a superior authority, is found circumvented by just placing reliance on the registration under section 12A given by the Commissioner who otherwise is comparatively inferior authority in the hierarchy of the Income Tax Department.”

“The preceding debate leads to just one inescapable conclusion: if an educational institution's annual receipts exceed 1 crore, the Chief Commissioner's permission is required. This would also mean that, even if educational activity is considered a charitable activity under section 2(15) read with section 12A of the Act, an educational institution with annual receipts of more than 1 crore would not be eligible for an exemption unless it has been approved by the Chief Commissioner specifically for this purpose.”

Issue of exemption when receipts are not more than one crore

When examining the exception, it's worth noting that no other prerequisites are specified in section 10(23C) (iiiad). As previously stated, section 10(23C)(iiiad) is a specific provision, whereas sections 11, 12, 12A, and 13, etc., are general provisions that cover many activities considered charitable under section 215, including the activity of 'education,' and thus, exemption cannot be denied as long as an educational institution is found to exist solely for the purpose of education and not for profit.

As a result, any limits contained in general provisions regulating charitable activities as provided in sections 11, 12, 12A, and 13 of the Act will not be correct to import for the reasons stated above in reference to requirements of section 10(23C)(vi).

“In other words, educational institutions' income would be exempt regardless of whether or not they are registered with the Commissioner under section 12A or whether or not the limitations or restrictions imposed under sections 11, 12, 12A, or 13 are met. In summary, the general provisions of charity found in sections 11, 12, 12A, and 13 cannot be imported directly or impliedly while examining a claim for exemption under section 10(23C) (iiiad).”

Conclusion

“Following the explanation in the preceding paragraphs, it is clear that section 10(23C) (vi) and l0 (23C) (iiiad) are exceptional provisions that must take precedence over the general requirements of charity found in sections 11, 12, 12A, and 13. The broad provisions of sections 11, 12, 12A, and 13 cannot be used by a university or educational institution because there are special provisions for tax exemptions under sections 10(23C) (vi) and 10(23C)(iiiad). Furthermore, when determining whether a claim for tax exemption under section 10(23C)(vi) or section 10(23C)(iiiad) is allowable or covered by the general provisions of charity contained in sections 11, 12, 12A, and 13 of the Act, it must be ensured that these provisions are fully complied