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TMI Blog2022 (10) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ueens Education Society [ 2015 (3) TMI 619 - SUPREME COURT] as to the meaning of the expression solely are erroneous. The trust or educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities. If, incidentally, while carrying on those objectives, the trust earns profits, it has to maintain separate books of account. It is only in those circumstances that business income can be permitted- provided, as stated earlier, that the activity is education, or relating to education. The judgment in American Hotel (supra) as well as Queens Education Society (supra) do not state the correct law, and are accordingly overruled. Whether the PA (Commissioner or any other designated authority) is in any manner enjoined to confine the nature of inquiry to discern the object of a society, trust or other institution at the stage when it approaches the authority for approval under Section 10 (23C)? - Having regard to the plain terms of the second proviso to Section 10(23C), which refers to the procedure for approval of applications including those made by trusts and institutions imparting education, one can discern no such restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and their treatment; Sections 75-77 deal with properties of trusts and charitable institutions and restrictions on transfers. These and other provisions enable the State, which is concerned in the proper administration of such organizations, to ensure that they are managed efficiently without misfeasance. They also contain provisions to protect the interests of trusts, especially funds and properties. It is held that charitable institutions and societies, which may be regulated by other state laws, have to comply with them- just as in the case of laws regulating education (at all levels). Compliance with or registration under those laws, are also a relevant consideration which can legitimately weigh with the Commissioner or other concerned authority, while deciding applications for approval under Section 10 (23C). This reasoning equally applies especially in Section 11(4A) which speaks of profits incidental which specifies that exemption in relation to income or trust of an institution which are profits or means of business cannot be exempted unless the business is incidental, trust or as the case may be institution and separate books of accounts are maintained by such trusts or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is not confined to newly set up trusts it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure. g. It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section 10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uals and in the very survival of our Constitution and Republic. 2. The subject matter of these appeals M/s St. Augustine Educational Society v The Chief Commissioner of Income Tax, C.A. No.3793/2014; M/s St. Patrick Educational Society v The Chief Commissioner of Income Tax, C.A. No. 3794/2014; M/s New Noble Educational Society v The Chief Commissioner of Income Tax, C.A. No. 3795/ 2014; M/s R.R.M Educational Society Hyderabad v The Chief Commissioner of Income Tax, C.A. No. 6418/2012 and M/s Sri Koundinya Educational Society v The Chief Commissioner of Income Tax, C.A. No. 9108/2012 is the rejection of the appellants claim for registration as a fund or trust or institution or any university or other educational institution (hereinafter collectively referred to as institution / trust ) set up for the charitable purpose of education, under the Income Tax Act, 1961 (hereinafter, IT Act ). The Andhra Pradesh High Court, by its detailed impugned judgment M/s New Noble Educational Society v The Chief Commissioner of Income Tax, (2011) 334 ITR 303. This batch of writ petitions was decided on 11.11.2010 , held that the appellant trusts which claimed benefit of exemption under Section 10 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the recipient of the income, it is necessary to consider the nature of the activities undertaken. If the activity has no co-relation to education, exemption has to be denied. The recipient of the income must have the character of an educational institution to be ascertained from its objects. (Aditanar Educational Institution, [1997] 224 ITR 310 (SC)). The emphasis in section 10(23C)(vi) is on the word solely . Solely means exclusively and not primarily. (CIT v. Gurukul Ghatkeswar Trust, (2011) 332 ITR 611 (AP); CIT v. Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). In using the said expression, the Legislature has made it clear that it intends to exempt the income of the institutions established solely for educational purposes and not for commercial activities. (Oxford University Press v. CIT, [2001] 247 ITR 658 (SC)). This requirement would militate against an institution pursuing the objects other than education. (Vanita Vishram Trust v. Chief CIT, [2010] 327 ITR 121 (Bom)). Even if one of the objects enables the institution to undertake commercial activities, it would not be entitled for approval under section 10(23C)(vi) of the Act. (American Hotel and Lod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner shall give notice to the trustee, or the other person, to make an application in that regard within a specified period and, if he fails to make such an application within the period specified, the Commissioner is empowered to have the charitable institution registered after following the prescribed procedure. 22. On a conjoint reading of the Explanation to section 1(3)(a), section 2(4) and 2(5) of A.P. Act 30 of 1987 it is evident that a society running an educational institution in the State of Andhra Pradesh is a public charitable institution. The submission that, in the absence of registration, the provisions of A.P. Act 30 of 1987 are not applicable is not tenable. The provisions of A.P. Act 30 of 1987 apply to all public charitable institutions whether registered or not in accordance with the provisions of the Act. A public charitable institution is required, in law, to conduct the management of its affairs strictly in accordance with the provisions of A.P. Act 30 of 1987. Registration under A.P. Act 30 of 1987 would also ensure that the activities of the educational agency are monitored by the State agencies, section 58 of A.P. Act 30 of 1987 relates to accounts and au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its funds or it may provide scholarships or other financial assistance which may be helpful to the students in pursuing their studies. Such incidental activities alone, in the absence of the actual activity of imparting education by normal schooling or normal conduct of classes, would not suffice for the purpose of qualifying the institution for the benefit of section 10(23C)(vi). (Sorabji Nusserwanji Parekh, [1993] 201 ITR 939 (Guj)). Section 2(15) is wider in terms than section 10(23C)(vi) of the Act. If the assessee's case does not fall within section 2(15), it is difficult to put it in section 10(23C)(vi) of the Act. (Maharaja Sawai Mansinghji Museum Trust, [1988] 169 ITR 379 (Raj)). As education falls within the scope of charitable purpose both under section 2(5) of A.P. Act 30 of 1987 and section 2(15) of the Income-tax Act and, inasmuch as A.P. Act 30 of 1987 requires all charitable institutions in the State of A.P. to be registered, the Chief Commissioner was justified in holding that the petitioner-societies should have registered themselves under the provisions of A.P. Act 30 of 1987, as failure to so hold would have resulted in one arm of the law being utilized to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) 224 ITR 310] ). The test is-the nature of activity. If the activity like running a printing press takes place it is not educational. But whether the income/profit has been applied for non-educational purpose has to be decided only at the end of the financial year. 8. It was further held that the third proviso was in effect operative after the registration or approval of the trust at the stage of assessment to determine the actual application of income of any given trust. The provisos, according to the court, were divided into the processing (or vetting) provisions (applicable at the stage of grant or refusal of an application) and the monitoring provisions, involving consideration of application of income of the trust: 40. We shall now consider the effect of insertion of provisos to Section 10(23-C)(vi) vide the Finance (No. 2) Act, 1998. Section 10(23-C)(vi) is analogous to Section 10(22). To that extent, the judgments of this Court as applicable to Section 10(22) would equally apply to Section 10(23-C)(vi). The problem arises with the insertion of the provisos to Section 10(23-C)(vi). With the insertion of the provisos to Section 10(23-C)(vi) the applicant who seeks approval h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(23-C)(vi) one finds that there is a difference between stipulation of conditions and compliance therewith. The threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardised form in terms of the first proviso. It is only if the prerequisite condition of actual existence of the educational institution is fulfilled that the question of compliance with requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. 45. To make the section with the proviso workable we are of the view that the monitoring conditions in the third proviso like application/utilisation of income, pattern of investments to be made, etc. could be stipulated as conditions by the PA subject to which approval could be granted . 9. Likewise, the decision in Queen s Education Society (supra) was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year of receipt and accumulated it but made payment therefrom to any trust or institution registered under Section 12AA or to any trust and to that extent the proviso stated that such payment shall not be treated as application of income to the objects for which such trust was established. This was to guide the PA to determine the meaning of the words application of income to the objects for which the institution is established . The thirteenth proviso listed the circumstances under which the PA was empowered to withdraw the approval granted earlier, if the authority was satisfied that the trust had not applied its income in accordance with the third proviso or if it found that the trust had not invested/deposited its funds in accordance with the third proviso or that the activities of such trust etc. were not genuine or that its activities were not being carried out in accordance with the conditions subject to which approval was granted. In such cases, the authority could withdraw the approval granted earlier after complying with the procedure stipulated. 12. It was urged that there could be no dispute that the appellant R.R.M. Educational Society was running an educatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Charities Act, could not be the basis for denying institutions the benefit of approval. It was submitted that the provisions of the IT Act ought not be linked to, or taken together with, provisions of other enactments. The objects and reasons and the various provisions of the A.P. Charities Act regulated and protected the property of charitable institutions. The activities of the appellant trusts and societies were not prohibited under any law including the A.P. Charities Act and non-registration under that Act could not result in discontinuance of their activities. 15. Ms. Daisy Hannah, learned advocate appearing on behalf of some of the appellants, supported the arguments of Ms. Prabha Swami. She submitted that the existence of more than one object could not hinder or bar a trust s claim to exemption, so long as it mainly carried on education, or education-related activities. The emphasis was not on the absence or existence of objects other than education, rather, the negative mandate against profit, in that profit could not motivate a trust s functioning. She stressed that the manner of utilization of surplus or profits and conditions imposed by the tax authorities while grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 10. By Section 10 (22), income of university or other educational institutions existing solely for educational purposes, and not for the purpose of profit, was excluded from tax liability. An identical provision was enacted by Section 10 (22A) for hospitals. It was pointed out that there were two key elements to the definition of what could be excluded from the ambit of taxation (i) that the institution should exist solely for the purpose of education; and (ii) it should not exist for the purpose of profit. 20. By the Taxation Laws (Amendment) Act, 1975, Section 10 (23C) was brought into force for the first time, and by virtue of sub-clauses (iv) and (v), other funds and institutions established for charitable purposes and trusts including any other legal obligation or institution being solely for public religious purposes and charitable purposes, could be notified by the Central Government. Likewise, similar provisions were made for the purposes of universities and educational institutions. The Direct Tax Laws (Amendment) Act, 1987 deleted Section 10 (23C) (iv) and (v). These clauses were, however, restored by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1 April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d included education at all levels, from primary school up to postgraduation, and also included professional education. The expression educational institution meant institutions which imparted education as understood in the formal sense of schooling. It was further elaborated that having regard to the demographics and the geographical spread of the nation, as well as the challenges faced by the country, it was beyond the economic capacity of the State to provide free or subsidised universal education at all levels. Therefore, per force private educational institutions had to function to fill the needs of students. Within that framework, the role of charitable institutions in imparting education was vital and prominent. Imparting education had always been regarded as head of charity. Tracing the history of the law relating to charities, the learned ASG submitted that even in England, charitable objects included imparting education. Special Commissioners of Income Tax v. Pemsel [1891] A.C. 531. Per Lord MacNaughten, Charity in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Aditanar (supra) - in the context of Section 10 (22) of the IT Act - that the language of the provision was plain and that every year the tax authorities had to discern whether the institution existed solely for educational purposes and not for the purpose of profit after meeting the expenditure, and that if any surplus resulted incidentally from the lawful activities carried on by the educational institution, it would not cease to be one existing solely for educational purposes. It was held that the decisive test or litmus test was whether on an overall view of the matter, the object of the institution was to make profit or to impart education. 26. Turning next to the decision in Oxford University Press (supra) the learned ASG pointed out that the majority judgement had recognised that the term existing solely for educational purposes and not for the purposes of profit qualified university or other educational institution . It was submitted that the majority judgement stated clearly that being part of an educational institution was insufficient and the concerned entity had to engage in imparting education itself, and in the course of such activity could generate surplus. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly at the assessment stage. 29. It was submitted that the decision in Queen s Education Society (supra), too could not be sustained, as it relied on the predominant object test enunciated and applied in Oxford University and American Hotel (supra). Learned ASG submitted that the court's reasoning in Queen s Education Society (supra), in which the predominant object test was applied, and a distinction was drawn between making a surplus and carrying on an activity for profit, with the former not debarring an institution from claiming tax exemption was incorrect. Relevant Provisions 30. An analysis of the relevant provisions is called for. Section 2 (15) of the IT Act defines charitable purpose as follows: (15) charitable purpose includes relief of the poor, education, yoga, 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: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (v) any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be approved by the prescribed authority, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof; (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; or The first, second, third, seventh, thirteenth, fourteenth, fifteenth and sixteenth provisos (as of 2012) are relevant to Section 10 (23C). They are reproduced below: Proviso 1: Provided that the fund or trust or institution [or any university or other educational institution or any hospital or other medical institution] referred to in sub-clause (iv) or sub-clause (v) [or sub-clause (vi) or sub-clause (via)] shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of, any company or corporation), acquired by the fund, trust or institution [or any university or other educational institutionor any hospital or other medical institution] before the 1st day of March, 1983; (iii) any accretion to the shares, forming part of the corpus mentioned in sub-clause (i) [and sub-clause (ia)], by way of bonus shares allotted to the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] ; (iv) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of Section 11 . Proviso 7: Provided also that nothing contained in sub-clause (iv) or sub-clause (v) [or sub-clause (vi) or sub-clause (via)] shall apply in relation to any income of the fund or trust or institution [or any university or other educational institution or any hospital or other medical institution], being profits and gains of business, unless the business is incidental to the attainment of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in section 115BBC on which tax is payable in accordance with the provisions of the said section shall be included in the total income . Proviso 16: Provided also that all pending applications, on which no notification has been issued under sub-clause (iv) or sub-clause (v) before the 1st day of June, 2007, shall stand transferred on that day to the prescribed authority and the prescribed authority may proceed with such applications under those sub-clauses from the stage at which they were on that day . Analysis and Conclusion 32. Education ennobles the mind and refines the sensibilities of every human being. It aims to train individuals to make the right choices. Its primary purpose is to liberate human beings from the thrall of habits and preconceived attitudes Rabindranath Tagore s Gitanjali, famous for its unforgettable verses, yearns for a place where, Knowledge is free , and where, The world has not been broken up into fragments by narrow domestic walls, where words come from the depths of truth , and Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit . It should be used to promote humanity and universal brotherhood. By removing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually exists to impart education, in law, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws. I. Institutions existing solely for profit 35. The revenue contends that the expression solely has to be given its plain and grammatical meaning. It is emphasized that though there are several heads of charity and several kinds of organizations which are recognised by the IT Act, the statute underlines that those which claim to be educational institutions should have only the sole object of education, and no other. On the other hand, the assessee-appellants contend that the expression solely has never been understood in its literal sense, but that this court has consistently held that the expression means that the predominant object, among other objects of the institution claiming exemption, should be education. 36. The decision in Loka Shikshana Trust (supra) was rendered in the background of whether a newspaper published by a trust, set up with the object of publishing it, and educating the Kannada speaking public, could be said to have the object of education. It is in that con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity: Vide Commissioner of Income Tax Madras v Andhra Chamber of Commerce ((1965) 1 SCR 565).The test which has, therefore, to be applied is whether the object which is said to be non-charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable. The court then interpreted the definition in the following terms: 10a. It is clear on a plain natural construction of the language used by the Legislature that the ten crucial words not involving the carrying on of any activity for profit go with object of general public utility and not with advancement . It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjects were solely educational. This court endorsed that view: 7. It will be rather unreal and hyper-technical to hold that the assessee-society is only a financing body and will not come within the scope of 'other educational institution' as specified in section 10(22). The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts, etc. Colleges and schools are the media through which the assessee imparts education and effectuates its objects. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an 'educational institution' coming within section 10(22). We hold accordingly. In our view, the judgment of the High Court does not merit interference. From Aditanar (supra), what can be gleaned is that a society may not by itself carry on educational activities, however if it sets up and governs such institutions, and its object is solely educational, it would be regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the assessee to establish that it is a part of a university which is engaged solely or at least primarily for educational purposes and not for purposes of profit and the income in respect of which the exemption is claimed is a part of the income of the university. This question assumes importance in a case like the one in hand where the assessee is nothing more than a commercial establishment/business enterprise engaged in the business of printing, publishing and selling of books in this country. The label ' university press' is not sufficient to establish that it is engaged in any educational activity. The purpose of the existence of the assessee in this country as appears from the material on record, is possibly to earn profit. If the interpretation of the provision in section 10(22) as urged on behalf of the assessee is accepted, the provision will be exposed to challenge on the ground of being irrational and, therefore, arbitrary. Then the question will arise for what purpose is this exemption from tax extended to the assessee? How is it different from the large number of such establishments engaged in the business of printing, publishing and selling of books. Y.K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er educational institution is of no consequence. Similar phraseology has also been used in clause (22A) in relation to the income of a hospital or other institution for the reception and treatment of the ailments referred to in the said provision. The requirement there is about existence solely for philanthropic purposes and not for the purposes of profit. Clause (22A) of section 10 reads as under: (22A) any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit. *** 60. If the contention urged on behalf of the assessee is accepted, it would result in an university or other educational institution [clause (22)] or hospital or other institution as contemplated by [clause (22A)], without providing in India any educational or philanthropic activity, as the case may be, claiming the benefit of exemption on the ground that such a service is being provided in some part of the world though in India such body is eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the only requirement for initial approval. The mere existence of profit/surplus did not disqualify the institution if the sole purpose of its existence was not profit-making but educational activities as section 10(22) by its very nature contemplated income of such institution to be exempted. Under section 10(22) the test was restricted to the character of the recipient of income, viz, whether it had the character of educational institution in India, its character outside India was irrelevant for deciding whether its income would be exempt under section 10(22). 28. The moot question in section 10(22) was - whether the activities of the applicant came within the definition of 'income of educational institution'. Under section 10(22) one had to closely analyse the activities of the Institute, the objects of the Institute and its source of income and its utilization. Even if one of the objects enabled the Institute to undertake, commercial activity, the institute would not be entitled to approval under section 10(22). The said section inter alia excludes the income of the educational institute from the Total Income 29. In Surat Art Silk Cloth Mfg. Association's case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeks approval has not only to show that it is an institution existing solely for educational purposes [which was also the requirement under section 10(22)] but it has now to obtain initial approval from the prescribed authority, in terms of section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section. That condition of obtaining approval from the prescribed authority came to be inserted because section 10(22) was abused by some educational institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the prescribed authority is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. 34. To make the section with the proviso workable we are of the view that the Monitoring Conditions in the third proviso like application/utilization of income, pattern of investments to be made etc., could be stipulated as conditions by the prescribed authority subject to which approval could be granted. For example, in marginal cases like the present case, where appellant-Institute was given exemption up to financial year ending 31-3-1998 (assessment year 1998-99) and where an application is made on 7-4-1999, within seven days of the new dispensation coming into force, the prescribed authority can grant approval subject to such terms and conditions as it deems fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous judgements (discussed above), held that the High Court was in error. After quoting extensively from the judgement in Surat Art Silk (supra), this court recorded its conclusions, entirely affirming the predominant object test: 11. Thus, the law common to Section 10 (23C) (iiiad) and (vi) may be summed up 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its objects (Aditanar (supra)). (iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University (supra) where the applicant was a publisher, part of the Oxford University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc. for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India. (iv) The judgement in American Hotel (supra) states that to discern whether the applicant s claim for exemption can be allowed, the predominant object has to be considered. It was also held that the stage of examining whether and to what extent profits were generated and how they were utilised was not essential at the time of grant of approval, but rather formed part of the monitoring mechanism. (v) Queen s Educational Society (supra) approved and applied the predominant object test (which extensively quoted Surat Art (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in the opinion of this court which led the previous decisions in American Hotel (supra) and in Queens Education Society (supra) was that Surat Art (supra) was decided in the context of a society that did not claim to impart education. It claimed charitable status as an institution set up to advance objects of general public utility. The Surat Art (supra) decision picked the first among the several objects (some of them being clearly trading or commercial objects) as the predominant object which had to be considered while judging the association s claim for exemption. The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from charities set up or established for the object of imparting education. In the case of the latter, the basis of exemption is Section 10(23C) (iiiab), (iiiad) and (vi). In all these provisions, the positive condition solely for educational purposes and the negative injunction and not for purposes of profit loom large as compulsive mandates, necessary for exemption. The expression solely is therefore important. Thus, in the opinion of this court, a trust, university o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Kerala 1957 SCR 837 , a constitution bench discussed how tax laws should ordinarily be construed: 29. It is no doubt, true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter . 54. It is only when the application of literal interpretation gives rise to an absurdity, should the interpretation be expansive. This was reiterated in Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes Ors. (1992) Supp (1) SCC 21 : 24. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, as follows: 43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and (4) it may be used merely to act as an optional addenda to the enactment with the sole object of explaining the real intendment of the statutory provision. 58. The seventh proviso to Section 10 (23C) (vi) alludes to business and profits ( being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business ). The interpretation of Section 10 (23C) therefore, is that the trust or educational institution must solely exist for the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly overruled. 61. The second question which this court has to address is whether the PA (Commissioner or any other designated authority) is in any manner enjoined to confine the nature of inquiry to discern the object of a society, trust or other institution at the stage when it approaches the authority for approval under Section 10 (23C). 62. Section 10(23C) has many provisos. The first proviso enjoins the concerned fund, trust or institution to apply to the concerned authority i.e., the Commissioner, for grant of approval and sets out the timeline for doing so. These include situations where a trust or institution was granted approval up to a particular point in time and sought extension. The second proviso by sub-clause (ii) requires the Commissioner to make such enquiries to specify about the genuineness of the activities of the fund, trust or institution and compliance of such requirements of other laws in force by such fund, trust or institution. Upon considering the materials the Commissioner or the concerned authority can pass an appropriate order granting approval for a specific period of time, or reject the application. The second proviso importantly indicates that before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity, while considering an application for approval and the further material called for (including audited statements), should confine the inquiry ordinarily to the nature of the income earned and whether it is for education or education related objects of the society (or trust). If the surplus or profits are generated in the hands of the assessee applicant in the imparting of education or related activities, disproportionate weight ought not be given to surpluses or profits, provided they are incidental. At the stage of registration or approval therefore focus is on the activity and not the proportion of income. If the income generating activity is intrinsically part of education, the Commissioner or other authority may not on that basis alone reject the application. Applicability of Other Laws 64. In some appeals a grievance was articulated that the revenue did not grant approval to the society or educational institution because it was not registered under the A.P. Charities Act. Section 1(3)(a) the A.P. Charities Act is applicable to all public charitable institutions whether registered or not. The term public charitable institutions is defined, and includes every charitable ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistration Act, 2001 or were trusts duly registered, they could not be compelled to comply with state laws as a condition for consideration of their application as charitable institutions, under Section 10 (23C). 69. This court is of the opinion that the findings in the impugned judgment on this aspect are sound. The requirement of registration of every charitable institution is not optional. Aside from the fact that the consequences of non-registration are penal, which indicates the mandatory nature of the provisions of the A.P. Charities Act, such local laws provide the regulatory framework by which annual accounts, manner of choosing the governing body (in terms of the founding instrument: trust, society, etc.), acquisition and disposal of properties, etc. are constantly monitored. Entry 32 of List II of the Seventh Schedule to the Constitution reads as follows: 32. Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; cooperative societies. By Entry 28, List III of the Seventh Schedule, the states have undoubted power to enact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling in text books is part of a larger educational activity. The Court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning of its pupils by sourcing and providing text books, such activity would be incidental to education. Similarly, if a school or other educational institution ran its own buses and provided bus facilities to transport children, that too would be an activity incidental to education. There can be similar instances such as providing summer camps for pupils special educational courses, such as relating to computers etc., which may benefit its pupils in their pursuit of learning. 73. However, where institutions provide their premises or infrastructure to other entities, trusts, societies etc., for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses etc., then the income derived from such activity cannot be characterised as part of education or incidental to the imparting education. Such income can properly fall under the other head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education. d. The reference to business and profits in the seventh proviso to Section 10(23C) and Section 11(4A) merely means that the profits of business which is incidental to educational activity as explained in the earlier part of the judgment i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc. e. The reasoning and conclusions in American Hotel (supra) and Queen s Education Society (supra) so far as they pertain to the interpretation of expression solely are hereby disapproved. The judgments are accordingly overruled to that extent. f. While considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents ..... 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