Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5167 OF 2008

M/S. QUEEN’S EDUCATIONAL SOCIETY …APPELLANT

VERSUS

COMMISSIONER OF INCOME TAX …RESPONDENT

WITH

C.A. NO.5168 OF 2008

C.A. NO.8962 OF 2010

C.A. NO.909 OF 2011

CIVIL APPEAL NO. 2919 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.3804 OF 2011]

CIVIL APPEAL NO. 2920 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.5381 OF 2011]

CIVIL APPEAL NO. 2921 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.5383 OF 2011]

CIVIL APPEAL NO. 2922 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.5530 OF 2011]

CIVIL APPEAL NO. 2923 OF 2015

[ARISING OUT OF SLP (CIVIL) NO.19945 OF 2012]

1

Page 2 J U D G M E N T

R.F.Nariman, J.

1.Leave granted in the special leave petitions.

2.The present appeals relate to a common judgment dated

24

th

September, 2007 passed by the High Court of Uttarakhand,

Nainital in two income tax appeals, and a judgment of the

Punjab and Haryana High Court dated 29

th

January, 2010 in

Pine Grove International Charitable Trust v. Union of India –

(2010) 327 ITR 273 . Various other appeals (excepting Civil

Appeal No.8962 of 2010) are filed by the Union of India/ Central

Board of Direct Taxes in cases where the aforesaid judgment in

Pine Grove has been followed.

3.The facts necessary to understand the controversy in the

two income tax appeals before the Uttarakhand High Court,

Nainital, may be gleaned from the facts of one of them, namely,

the Queen’s Educational Society case. The appellant filed its

return for assessment years 2000-2001 and 2001-2002

showing a net surplus of Rs.6,58,862/- and Rs.7,82,632/-

respectively. Since the appellant was established with the sole

2

Page 3 object of imparting education, it claimed exemption under

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

Assessing Officer vide its order dated 20

th

February, 2003

rejected the exemption claimed by the appellant. The CIT

(Appeals) by its order dated 28

th

March, 2003 allowed the

appellant’s appeal, and the ITAT, Delhi, by its judgment dated

7

th

July, 2006 passed an order dismissing the appeal preferred

by the revenue. In a reference to the High Court under Section

260A of the Income Tax Act, the High Court vide the impugned

judgment set aside the judgment of the ITAT and affirmed the

order of the Assessing Officer.

4.These appeals from the Uttarakhand High Court, Nainital,

concern themselves with the provision of Section 10(23C) (iiiad)

of the Act:

“Section 10- Incomes not included in total

income.—In computing the total income of a

previous year of any person, any income falling

within any of the following clauses shall not be

included—

(23-C) any income received by any person on

behalf of—

(iii-ad) any university or other educational institution

existing solely for educational purposes and not for

3

Page 4 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”

5.It will be noticed that the Section has three requirements

– (a) the educational institution must exist solely for educational

purposes (b) it should not be for purposes of profit and (c) the

aggregate annual receipts of such institution should not exceed

the amount or annual receipts as may be prescribed. Such

prescription is to be found in Rule 2CA being an amount of Rs.1

crore.

6.The said Section was inserted by Finance Act No.2 of

1998 with effect from 1

st

April, 1999. Prior thereto, the Income

Tax Act had a corresponding Section, namely, Section 10(22)

which was as follows:-

“Section 10- Incomes not included in total

income.—In computing the total income of a

previous year of any person, any income falling

within any of the following clauses shall not be

included—

(22) any income of a university or other educational

institution, existing solely for educational purposes

and not for purposes of profit”

4

Page 5 7.We have heard learned counsel for the assessees as well

as learned counsel for the revenue. The assessees argue that

the impugned judgment is contrary to the law laid down by at

least three Supreme Court judgments. Further, the wrong test

has been adopted and followed, which is a test laid down by the

Assessing Officer and not by any Supreme Court judgment –

namely, that whenever a profit/surplus is made by an

educational institution, it ceases to exist solely for educational

purposes and becomes a profit making enterprise. In support of

the Punjab and Haryana High Court judgment under appeal,

counsel for the assessees argued that since the sole basis for

not granting them exemption for the assessment years under

question was the following of the Uttarakhand High Court

judgment, if the said judgment is found to be incorrect, they are

bound to succeed. For that reason, the revenue’s appeal

against the Punjab and Haryana High Court judgment should

be dismissed. Counsel for the revenue, on the other hand,

attempted to support the Uttarakhand High Court judgment by

stating that the Section does not contemplate the making of

large profits. If an educational institution in fact makes large

5

Page 6 profits then even though it may plough such profits back into

the purchase of assets for education, yet such institution cannot

be said to be existing solely for educational purposes. It would

then become an institution which would really be for profit.

8.In CIT v. Surat Art Silk Cloth Manufacturers' Assn.,

(1980) 121 ITR 1, this Court while construing the definition of

“charitable purpose” in Section 2(15) of the Income Tax Act

held:

“17. The next question that arises is as to what is

the meaning of the expression “activity for profit”.

Every trust or institution must have a purpose for

which it is established and every purpose must for

its accomplishment involve the carrying on of an

activity. The activity must, however, be for profit in

order to attract the exclusionary clause and the

question therefore is when can an activity be said to

be one for profit? The answer to the question

obviously depends on the correct connotation of the

preposition “for”. This preposition has many shades

of meaning but when used with the active participle

of a verb it means “for the purpose of” and connotes

the end with reference to which something is done.

It is not therefore enough that as a matter of fact an

activity results in profit but it must be carried on with

the object of earning profit. Profit-making must be

the end to which the activity must be directed or in

other words, the predominant object of the activity

must be making a profit. Where an activity is not

pervaded by profit motive but is carried on primarily

for serving the charitable purpose, it would not be

correct to describe it as an activity for profit. But

6

Page 7 where, on the other hand, an activity is carried on

with the predominant object of earning profit, it

would be an activity for profit, though it may be

carried on in advancement of the charitable purpose

of the trust or institution. Where an activity is carried

on as a matter of advancement of the charitable

purpose or for the purpose of carrying out the

charitable purpose, it would not be incorrect to say

as a matter of plain English grammar that the

charitable purpose involves the carrying on of such

activity, but the predominant object of such activity

must be to subserve the charitable purpose and not

to earn profit. The charitable purpose should not be

submerged by the profit making motive; the latter

should not masquerade under the guise of the

former. The purpose of the trust, as pointed out by

one of us (Pathak,J.) in Dharmadeepti

v. CIT [(1978) 3 SCC 499 : 1978 SCC (Tax) 193]

must be ‘“essentially charitable in nature” and it

must not be a cover for carrying on an activity which

has profit making as its predominant object. This

interpretation of the exclusionary clause in Section 2

clause (15) derives considerable support from the

speech made by the Finance Minister while

introducing that provision. The Finance Minister

explained the reason for introducing this

exclusionary clause in the following words:

“The definition of ‘charitable purpose’ in that clause

is at present so widely worded that it can be taken

advantage of even by commercial concerns which,

while ostensibly serving a public purpose, get fully

paid for the benefits provided by them namely, the

newspaper industry which while running its concern

on commercial lines can claim that by circulating

newspapers it was improving the general

knowledge of the public. In order to prevent the

misuse of this definition in such cases, the Select

Committee felt that the words ‘not involving the

7

Page 8 carrying on of any activity for profit’ should be added

to the definition.”

It is obvious that the exclusionary clause was added

with a view to overcoming the decision of the Privy

Council in the Tribune case [AIR 1939 PC 208 : In

Re the Trustees of the Tribune, (1939) 7 ITR 415]

where it was held that the object of supplying the

community with an organ of educated public opinion

by publication of a newspaper was an object of

general public utility and hence charitable in

character, even though the activity of publication of

the newspaper was carried on commercial lines with

the object of earning profit. The publication of the

newspaper was an activity engaged in by the trust

for the purpose of carrying out its charitable purpose

and on the facts it was clearly an activity which had

profit making as its predominant object, but even so

it was held by the Judicial Committee that since the

purpose served was an object of general public

utility, it was a charitable purpose. It is clear from

the speech of the Finance Minister that it was with a

view to setting at naught this decision that the

exclusionary clause was added in the definition of

“charitable purpose”. The test which has, therefore,

now to be applied is whether the predominant object

of the activity involved in carrying out the object of

general public utility is to subserve the charitable

purpose or to earn profit. Where profit making is the

predominant object of the activity, the purpose,

though an object of general public utility, would

cease to be a charitable purpose. But where the

predominant object of the activity is to carry out the

charitable purpose and not to earn profit, it would

not lose its character of a charitable purpose merely

because some profit arises from the activity. The

exclusionary clause does not require that the

activity must be carried on in such a manner that it

does not result in any profit. It would indeed be

difficult for persons in charge of a trust or institution

8

Page 9 to so carry on the activity that the expenditure

balances the income and there is no resulting profit.

That would not only be difficult of practical

realisation but would also reflect unsound principle

of management. We, therefore, agree with Beg, J.,

when he said in Sole Trustee, Loka Shikshana

Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax)

14 : (1975) 101 ITR 234] that “if the profits must

necessarily feed a charitable purpose under the

terms of the trust, the mere fact that the activities of

the trust yield profit will not alter the charitable

character of the trust. The test now is, more clearly

than in the past, the genuineness of the purpose

tested by the obligation created to spend the money

exclusively or essentially on charity”. The learned

Judge also added that the restrictive condition “that

the purpose should not involve the carrying on of

any activity for profit would be satisfied if profit

making is not the real object” (emphasis supplied).

We wholly endorse these observations.

The application of this test may be illustrated by

taking a simple example. Suppose the Gandhi

Peace Foundation which has been established for

propagation of Gandhian thought and philosophy,

which would admittedly be an object of general

public utility, undertakes publication of a monthly

journal for the purpose of carrying out this charitable

object and charges a small price which is more than

the cost of the publication and leaves a little profit,

would it deprive the Gandhi Peace Foundation of its

charitable character? The pricing of the monthly

journal would undoubtedly be made in such a

manner that it leaves some profit for the Gandhi

Peace Foundation, as, indeed, would be done by

any prudent and wise management, but that cannot

have the effect of polluting the charitable character

of the purpose, because the predominant object of

the activity of publication of the monthly journal

would be to carry out the charitable purpose by

9

Page 10 propagating Gandhian thought and philosophy and

not to make profit or in other words, profit making

would not be the driving force behind this activity.

But it is possible that in a given case the degree or

extent of profit making may be of such a nature as

to reasonably lead to the inference that the real

object of the activity is profit making and not serving

the charitable purpose. If, for example, in the

illustration given by us, it is found that the

publication of the monthly journal is carried on

wholly on commercial lines and the pricing of the

monthly journal is made on the same basis on

which it would be made by a commercial

organisation leaving a large margin of profit, it might

be difficult to resist the inference that the activity of

publication of the journal is carried on for profit and

the purpose is non-charitable. We may take by way

of illustration another example given by Krishna

Iyer, J., in the Indian Chamber of Commerce

case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 :

(1975) 101 ITR 796] where a blood bank collects

blood on payment and supplies blood for a higher

price on commercial basis. Undoubtedly, in such a

case, the blood bank would be serving an object of

general public utility but since it advances the

charitable object by sale of blood as an activity

carried on with the object of making profit, it would

be difficult to call its purpose charitable. Ordinarily

there should be no difficulty in determining whether

the predominant object of an activity is

advancement of a charitable purpose or profit

making. But cases are bound to arise in practice

which may be on the borderline and in such cases

the solution of the problem whether the purpose is

charitable or not may involve much refinement and

present real difficulty.

There is, however, one comment which is

necessary to be made whilst we are on this point

and that arises out of certain observations made by

10

Page 11 this Court in Sole Trustee, Loka Shikshana Trust

case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 :

(1975) 101 ITR 234] as well as Indian Chamber of

Commerce case [(1976) 1 SCC 324 : 1976 SCC

(Tax) 41 : (1975) 101 ITR 796] . It was said by

Khanna, J. in Sole Trustee, Loka Shikshana Trust

case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 :

(1975) 101 ITR 234] :

“[I]f the activity of a trust consists of carrying on a

business and there are no restrictions on its making

profit, the court would be well justified in assuming

in the absence of some indication to the contrary

that the object of the trust involves the carrying on

of an activity for profit.”

And to the same effect, observed Krishna Iyer, J. in

the Indian Chamber of Commerce case [(1976) 1

SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR

796] when he said:

“An undertaking by a business organisation is

ordinarily assumed to be for profit unless expressly

or by necessary implication or by eloquent

surrounding circumstances the making of profit

stands loudly negatived .... A pragmatic condition,

written or unwritten, proved by a prescription of

profits or by long years, of invariable practice or

spelt from some strong surrounding circumstances

indicative of anti-profit motivation — such a

condition will qualify for charitable purpose.”

Now we entirely agree with the learned Judges who

decided these two cases that activity involved in

carrying out the charitable purpose must not be

motivated by a profit objective but it must be

undertaken for the purpose of advancement or

carrying out of the charitable purpose. But we find it

difficult to accept their thesis that whenever an

activity is carried on which yields profit, the

inference must necessarily be drawn, in the

11

Page 12 absence of some indication to the contrary, that the

activity is for profit and the charitable purpose

involves the carrying on of an activity for profit. We

do not think the Court would be justified in drawing

any such inference merely because the activity

results in profit. It is in our opinion not at all

necessary that there must be a provision in the

constitution of the trust or institution that the activity

shall be carried on no profit no loss basis or that

profit shall be proscribed. Even if there is no such

express provision, the nature of the charitable

purpose, the manner in which the activity for

advancing the charitable purpose is being carried

on and the surrounding circumstances may clearly

indicate that the activity is not propelled by a

dominant profit motive. What is necessary to be

considered is whether having regard to all the facts

and circumstances of the case, the dominant object

of the activity is profit making or carrying out a

charitable purpose. If it is the former, the purpose

would not be a charitable purpose, but, if it is the

latter, the charitable character of the purpose would

not be lost.

9.Coming closer to the section at hand, in Aditanar

Educational Institution v. Additional Commissioner of

Income Tax, (1997) 224 ITR 310, this Court while construing

the predecessor Section, namely, Section 10(22) of the Income

Tax act, held:

“The High Court has made an observation that any

income which has a direct relation or incidental to

the running of the institution as such would qualify

for exemption. We may state that the language of

12

Page 13 Section 10(22) of the Act is plain and clear and the

availability of the exemption should be evaluated

each year to find out whether the institution existed

during the relevant year solely for educational

purposes and not for the purposes of profit. After

meeting the expenditure, if any surplus results

incidentally from the activity lawfully carried on by

the educational institution, it will not cease to be one

existing solely for educational purposes since the

object is not one to make profit. The decisive or acid

test is whether on an overall view of the matter, the

object is to make profit. In evaluating or appraising

the above, one should also bear in mind the

distinction/difference between the corpus, the

objects and the powers of the concerned entity.”

10.In American Hotel & Lodging Assn. Educational

Institute v. CBDT, (2008) 301 ITR 86, this Court dealt with

Section 10(23C)(vi) as follows:

“29. In CIT v. Surat Art Silk Cloth Manufacturers'

Assn. [(1980) 2 SCC 31 : 1980 SCC (Tax) 170 :

(1980) 121 ITR 1] it has been held by this Court that

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 realisation 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

13

Page 14 balance of income is applied wholly and exclusively

to the objects for which the applicant is established.

30. In deciding the character of the recipient, it is

not necessary to look at the profits of each year, but

to consider the nature of the activities undertaken in

India. If the Indian activity has no correlation with

education, exemption has to be denied (see

judgment of this Court in Oxford University

Press [(2001) 3 SCC 359 : (2001) 247 ITR 658] ).

Therefore, the character of the recipient of income

must have character of educational institution in

India to be ascertained from the nature of the

activities. If after meeting expenditure, surplus

remains incidentally from the activity carried on by

the educational institution, it will not cease to be one

existing solely for educational purposes. In other

words, existence of surplus from the activity will not

mean absence of educational purpose (see

judgment of this Court in Aditanar Educational

Institutionv. CIT [(1997) 3 SCC 346 : (1997) 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.

32. 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 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 PA, in

terms of Section 10(23-C)(vi) by making an

14

Page 15 application in the standardised form as mentioned in

the first proviso to that section. That condition of

obtaining approval from the PA 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 PA is required to vet the application.

This vetting process is stipulated by the second

proviso. Under the twelfth proviso, the PA is

required to examine cases where an applicant does

not apply its income during the year of receipt and

accumulates it but makes payment therefrom to any

trust or institution registered under Section 12-AA or

to any fund or trust or institution or university or

other educational institution and to that extent the

proviso states that such payment shall not be

treated as application of income to the objects for

which such trust or fund or educational institution is

established. The idea underlying the twelfth proviso

is to provide guidance to the PA as to the meaning

of the words “application of income to the objects for

which the institution is established”. Therefore, the

twelfth proviso is the matter of detail. The most

relevant proviso for deciding this appeal is the

thirteenth proviso. Under that proviso, the

circumstances are given under which the PA is

empowered to withdraw the approval earlier

granted. Under that proviso, if the PA is satisfied

that the trust, fund, university or other educational

institution, etc. has not applied its income in

accordance with the third proviso or if it finds that

such institution, trust or fund, etc. has not

invested/deposited its funds in accordance with the

third proviso or that the activities of such fund or

institution or trust, etc. are not genuine or that its

activities are not being carried out in accordance

with the conditions subject to which approval is

granted then the PA is empowered to withdraw the

15

Page 16 approval earlier granted after complying with the

procedure mentioned therein.

33. Having analysed the provisos to Section 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.

34. 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.”

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

16

Page 17 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 whether on an overall view of the

matter in the concerned assessment year the object

is to make profit as opposed to educating persons.

17

Page 18 12.The Uttarakhand High Court in the impugned judgment

dated 24

th

September, 2007 quoted the ITAT order in paragraph

7 as follows:

“The ITAT while granting exemption under

Section 10(23C) (iiiad) recorded the following

reasons:

“During the years relevant for asstt. Year 2000-01

and 2001-02, the excess of income over

expenditure stood at Rs.6,58,862/- and

Rs.7,82,632/- respectively. It was also noticed that

the appellant society had made investment in fixed

assets including building at Rs.9,52,010/- in F.Y.

1999-2000 and Rs.8,47,742/- in FY 2000-01

relevant for Asstt. Years 2000-01 and 2001-02

respectively. Thus, if the amount of investment into

fixed assets such as building, furniture and fixture

etc. were also kept in view, there was hardly any

surplus left….. The assessee society is

undoubtedly engaged in imparting education and

has to maintain a teaching and non teaching staff

and has to pay for their salaries and other incidental

expenses. It, therefore, becomes necessary to

charge certain fee from the students for meeting all

these expenses. The charging of fee is incidental to

the prominent objective of the trust i.e. imparting

education. The trust was initially running the school

in a rented building and the surplus, i.e. the excess

of the receipts over expenditure.

In the year under appeal (and in the earlier appeals)

has enabled the appellant to acquire its own

property, acquire computers, library books, sports

equipments etc. for the benefit of the students. And

more importantly the members of the society have

not utilized any part of the surplus for their own

benefit. The AO wrongly interpreted the resultant

18

Page 19 surplus as the main objective of the assessee trust.

As held above, profit is only incidental to the main

object of spreading education. If there is no surplus

out of the difference between receipts and

outgoings, the trust will not be able to achieve the

objectives. Any education institution cannot be run

in rented premises for all the times and without

necessary equipment and without paying to the staff

engaged in imparting education. The assessee is

not getting any financial aid/assistance from the

Government or other philanthropic agency and,

therefore, to achieve the objective, it has to raise its

own funds. But such surplus would not come within

the ambit of denying exemption u/s 10(23C) (iiiad)

of the Act.”

13.Having set out the ITAT order, the Uttarakhand High

Court held:

“Thus, in view of the established fact relating to

earned profit, we do not agree with the reasoning

given by the ITAT for granting exemption.”

14.Having said this, the impugned judgment goes on to

quote Aditanar Educational Institution v. CIT. as follows:-

“After meeting the expenditure, if any surplus result

incidentally from the activity lawfully carried on by

the educational institution, it will not cease to be one

existing solely for educational purpose since the

object is not one to make profit. The decisive or

acid test is whether on an overall view of the matter,

the object is to make profit. In evaluating or

appraising the above, one should also bear in mind

19

Page 20 the distinction difference between the corpus, the

objects and powers of the concerned entity.

If one looks at the object clause, there are

other noble and pious objects but assessee society

has done nothing to achieve the other objects

except pursuing main object of providing education

and earning profit. Further, with profit earned the

society has strengthened or enhanced its capacity

to earn more rather than to fulfill other noble objects

for the cause of poor and needy people or

advancement of religious purpose.

Therefore, the law laid down by the Apex

Court has rightly been applied and exemption has

also rightly been refused by the Assessing Officer in

the facts and circumstances of the case.”

15.It is clear that the High Court did not apply its mind

independently. What has been copied is one paragraph from

the Supreme Court judgment in Aditanar followed by a

paragraph of faulty reasoning by the Assessing Officer and the

said faulty reasoning of the Assessing Officer has been wrongly

said to be the law laid down by the Apex Court.

16.Further, the Supreme Court Judgment in Municipal

Corpn. of Delhi v. Children Book Trust and Safdarjung

Enclave Educational Society, (1992) 3 SCC 390 has then

been followed. The aforesaid judgment dealt with a property

tax provision, namely, Section 115 (4) of the Delhi Municipal

20

Page 21 Corporation Act, 1957. Three questions were raised in the said

judgment as follows:-

“56. In the present case, the questions which arise

for our determination are:

(i) Whether the society or body is occupying and

using the land and building for a charitable

purpose within the meaning of sub-section (4)?

(ii) What is the meaning of the expression

“supported wholly or in part by voluntary

contribution”?

(iii) Whether any trade or business is carried on in

the premises within the meaning of sub-section

(5)?”

17.In answering question one, the Court held that School

Education would only come within an exemption if it involved

public benefit. Having so held, the Court stated:

“78. The rulings arising out of Income Tax Act may

not be of great help because in the Income Tax Act

“charitable purpose” includes the relief of the poor,

education, medical relief and the advancement of

any other object of general public utility. The

advancement of any other object of general public

utility is not found under the Delhi Municipal

Corporation Act. In other words, the definition is

narrower in scope. This is our answer to question

No. 1.”

18.Secondly, the extracted portion from the said judgment in

the judgment of the Uttarakhand High Court concerned itself

21

Page 22 with question two, namely, whether the educational society is

supported wholly or in part by voluntary contributions. It is part

of paragraph 80 of the said judgment. If the sentences after the

quoted portion are also set out, it becomes clear that the

passage relied upon by the High Court has absolutely nothing

to do with the present case. The entirety of the passage is now

set out hereinbelow:

“82. …In other words, what we want to stress is,

where a society or body is making systematic profit,

even though that profit is utilised only for charitable

purposes, yet it cannot be said that it could claim

exemption. If, merely qualitative test is applied to

societies, even schools which are run on

commercial basis making profits would go out of the

purview of taxation and could demand exemption.

Thus, the test, according to us, must be whether the

society could survive without receiving voluntary

contributions, even though it may have some

income by the activities of the society. The word

“part” mean an appreciable amount and not an

insignificant one. The “part” in other words, must be

substantial part. What is substantial would depend

upon the facts and circumstances of each case.”

19.It is clear, therefore, that the Uttarakhand High Court has

erred by quoting a non existent passage from an applicable

judgment, namely, Aditanar and quoting a portion of a property

tax judgment which expressly stated that rulings arising out of

22

Page 23 the Income Tax Act would not be applicable. Quite apart from

this, it also went on to further quote from a portion of the said

property tax judgment which was rendered in the context of

whether an educational society is supported wholly or in part

by voluntary contributions, something which is completely

foreign to Section 10(23C) (iiiad). The final conclusion that if a

surplus is made by an educational society and ploughed back

to construct its own premises would fall foul of Section 10(23C)

is to ignore the language of the Section and to ignore the tests

laid down in the Surat Art Silk Cloth case, Aditanar case and

the American Hotel and Lodging case. It is clear that when a

surplus is ploughed back for educational purposes, the

educational institution exists solely for educational purposes

and not for purposes of profit. In fact, in S.RM.M.CT.M.

Tiruppani Trust v. Commissioner of Income Tax, (1998) 2

SCC 584, this Court in the context of benefit claimed under

Section 11 of the Act held:

“9. In the present case, the assessee is not

claiming any benefit under Section 11(2) as it

cannot; because in respect of this assessment year,

the assessee has not complied with the conditions

laid down in Section 11(2). The assessee, however,

23

Page 24 is entitled to claim the benefit of Section 11(1)(a). In

the present case, the assessee has applied Rs 8

lakhs for charitable purposes in India by purchasing

a building which is to be utilised as a hospital. This

income, therefore, is entitled to an exemption under

Section 11(1). In addition, under Section 11(1)(a),

the assessee can accumulate 25% of its total

income pertaining to the relevant assessment year

and claim exemption in respect thereof. Section

11(1)(a) does not require investment of this limited

accumulation in government securities. The balance

income of Rs 1,64,210.03 constitutes less than 25%

of the income for Assessment Year 1970-71.

Therefore, the assessee is entitled to accumulate

this income and claim exemption from income tax

under Section 11(1)(a).”

We set aside the judgment of the Uttarakhand High Court

dated 24

th

September, 2007. The reasoning of the ITAT (set

aside by the High Court) is more in consonance with the law

laid down by this Court, and we approve its decision.

20. Revenue’s appeals from the Punjab and Haryana High

Court concern themselves with Sections 10(23C) (vi). A large

number of writ petitions were heard in Civil Writ Petition No.

6031 of 2009 and disposed of on 29

th

January, 2010. By

various impugned orders passed, the Chief, CIT, Chandigarh

withdrew exemptions granted under Section 10(23C) (vi) of the

Income Tax Act read with Rule 2CA of Income Tax Rules,

24

Page 25 1961, for various assessment years. The operative part of the

order passed by the Chief, CIT in these cases is the same and

reads as follows:

“4. I have considered the submissions of the

assessee. The decisions quoted in support of its

contention are not relevant and are distinguishable

on facts as well as issues. It is clear that the ratio of

the decision of Hon'ble Uttarakhand High Court is

squarely applicable in this case.

5. The Hon'ble Supreme Court has held, in the case

of Aditanar Educational Institution etc. v. Addl.

Commissioner of Income Tax [224 ITR 310 (SC)],

that in the case of an educational institution, after

meeting the expenditure, if any surplus results

incidentally, then the institution will not cease to be

one existing solely for educational purposes.

6. The crucial condition is that surplus should result

only incidentally and should not be aimed for. If

substantial profits are earned in one year if (it)?

would be duty of the institution to lower its fees for

the subsequent year so that such profits are not

intentionally generated. If, however, profits continue

year after year than it cannot be said that the

surplus is arising incidentally.

7. In the present ease, the profits are substantial

and are arising year alter year and therefore, the

decision of the Apex Court in the case of Aditanar

Education Institution v. Addl. Commissioner of

Income Tax as well as the decision of the Hon'ble

Uttrakhand High Court is applicable.

8. Exemption u/s 10(23C)(vi) is not available to the

assessee under the law in view of the above facts

and circumstances and therefore, exemption

already granted vide order dated 4th June, 2007 is

hereby withdrawn.

25

Page 26 9. The assessee is at liberty to reduce the fees

being charged and price of its services and apply

afresh, in which case the application will be duly

considered on merits.”

21.It is these orders that were set aside by the judgment of

the Punjab and Haryana High Court impugned by the Revenue

before us.

22.Section 10(23C)(vi) read with the 3

rd

and 13

th

provisos

thereto and Section 11(5) of the Income Tax Act are as

follows:-

“Section 10- Incomes not included in total

income.—In computing the total income of a

previous year of any person, any income falling

within any of the following clauses shall not be

included—

(23-C) any income received by any person on

behalf of—

(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 (iii-ab) or sub-clause (iii-ad) and which

may be approved by the prescribed authority

Provided also 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 (vi-a)]—[(a) applies its income, or

accumulates it for application, wholly and

exclusively to the objects for which it is established

26

Page 27 and in a case where more than fifteen per cent of its

income is accumulated on or after the 1st day of

April, 2002, the period of the accumulation of the

amount exceeding fifteen per cent of its income

shall in no case exceed five years; and;].

[(b) does not invest or deposit its funds, other than

—

(i) any assets held by the fund, trust or institution [or

any university or other educational institution or any

hospital or other medical institution] where such

assets form part of the corpus of the fund, trust or

institution [or any university or other educational

institution or any hospital or other medical

institution] as on the 1st day of June, 1973;

[(i-a) any asset, being equity shares of a public

company, held by any university or other

educational institution or any hospital or other

medical institution where such assets form part of

the corpus of any university or other educational

institution or any hospital or other medical institution

as on the 1st day of June, 1998;]

(ii) any assets (being debentures issued by, or on

behalf of, any company or corporation), acquired by

the fund, trust or institution [or any university or

other educational institution or 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

(i-a)], 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,

27

Page 28 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:

Provided also that where the fund or institution

referred to in sub-clause (iv) or trust or institution

referred to in sub-clause (v) is notified by the

Central Government or any university or other

educational institution referred to in sub-

clause (vi) or any hospital or other medical

institution referred to in sub-clause (vi-a), is

approved by the prescribed authority and

subsequently that Government or the prescribed

authority is satisfied that—

(i) such fund or institution or trust or any university or

other educational institution or any hospital or other

medical institution has not,—

(A) applied its income in accordance with the

provisions contained in clause (a) of the third

proviso; or

(B) invested or deposited its funds in accordance with

the provisions contained in clause(b) of the third

proviso; or

(ii) the activities of such fund or institution or trust or

any university or other educational institution or any

hospital or other medical institution,—

(A) are not genuine; or

(B) are not being carried out in accordance with all or

any of the conditions subject to which it was notified

or approved,

it may, at any time after giving a reasonable

opportunity of showing cause against the proposed

action to the concerned fund or institution or trust or

any university or other educational institution or any

hospital or other medical institution, rescind the

notification or, by order, withdraw the approval, as

the case may be, and forward a copy of the order

28

Page 29 rescinding the notification or withdrawing the

approval to such fund or institution or trust or any

university or other educational institution or any

hospital or other medical institution and to the

Assessing Officer;]

Section 11. Income from property held for

charitable or religious purposes.—

(5) The forms and modes of investing or

depositing the money referred to in clause (b) of

sub-section (2) shall be the following, namely:—

(i) investment in savings certificates as defined in

clause (c) of Section 2 of the Government Savings

Certificates Act, 1959 (46 of 1959), and any other

securities or certificates issued by the Central

Government under the Small Savings Schemes of

that Government;

(ii) deposit in any account with the Post Office Savings

Bank;

(iii) deposit in any account with a scheduled bank or a

cooperative society engaged in carrying on the

business of banking (including a cooperative land

mortgage bank or a cooperative land development

bank).

Explanation.—In this clause, “scheduled bank” means

the State Bank of India constituted under the State

Bank of India Act, 1955 (23 of 1955), a subsidiary

bank as defined in the State Bank of India

(Subsidiary Banks) Act, 1959 (38 of 1959), a

corresponding new bank constituted under Section

3 of the Banking Companies (Acquisition and

Transfer of Undertakings) Act, 1970 (5 of 1970), or

under Section 3 of the Banking Companies

(Acquisition and Transfer of Undertakings) Act,

1980 (40 of 1980), or any other bank being a bank

included in the Second Schedule to the Reserve

Bank of India Act, 1934 (2 of 1934);

29

Page 30 (iv) investment in units of the Unit Trust of India

established under the Unit Trust of India Act, 1963

(52 of 1963);

(v) investment in any security for money created and

issued by the Central Government or a State

Government;

(vi) investment in debentures issued by, or on behalf

of, any company or corporation both the principal

whereof and the interest whereon are fully and

unconditionally guaranteed by the Central

Government or by a State Government;

(vii) investment or deposit in any public sector

company:

[Provided that where an investment or deposit in any

public sector company has been made and such

public sector company ceases to be a public sector

company,—

(A) such investment made in the shares of such

company shall be deemed to be an investment

made under this clause for a period of three years

from the date on which such public sector company

ceases to be a public sector company;

(B) such other investment or deposit shall be deemed

to be an investment or deposit made under this

clause for the period up to the date on which such

investment or deposit becomes repayable by such

company;].

(viii) deposits with or investment in any bonds issued

by a financial corporation which is engaged in

providing long-term finance for industrial

development in India and [which is eligible for

deduction under clause (viii) of sub-section (1) of

Section 36];

(ix) deposits with or investment in any bonds issued by

a public company formed and registered in India

with the main object of carrying on the business of

30

Page 31 providing long-term finance for construction or

purchase of houses in India for residential purposes

and[which is eligible for deduction under clause (viii)

of sub-section (1) of Section 36];

[(ix-a) deposits with or investment in any bonds issued

by a public company formed and registered in India

with the main object of carrying on the business of

providing long-term finance for urban infrastructure

in India.

Explanation.—For the purposes of this clause,—

(a) “long-term finance” means any loan or advance

where the terms under which moneys are loaned or

advanced provide for repayment along with interest

thereof during a period of not less than five years;

(b) “public company” shall have the meaning assigned

to it in Section 3 of the Companies Act, 1956;

(c) “urban infrastructure” means a project for providing

potable water supply, sanitation and sewerage,

drainage, solid waste management, roads, bridges

and flyovers or urban transport;].

(x) investment in immovable property.

Explanation.—”Immovable property” does not include

any machinery or plant (other than machinery or

plant installed in a building for the convenient

occupation of the building) even though attached to,

or permanently fastened to, anything attached to the

earth;

(xi) deposits with the Industrial Development Bank of

India established under the Industrial Development

Bank of India Act, 1964 (18 of 1964);

(xii) any other form or mode of investment or deposit

as may be prescribed.”

31

Page 32 23. The Punjab and Haryana High Court, by the impugned

judgment dated 29

th

January, 2010 expressed its dissatisfaction

with the view taken by the Uttarakhand High Court in the case

of Queen’s Educational Society as follows:

“8.8 We have not been able to persuade ourselves

to accept the view expressed by the Division Bench

of the Uttrakhand High Court in the case of Queens

Educational Society (supra). There are variety of

reasons to support our opinion. Firstly, the scope of

the third proviso was not under consideration,

inasmuch as, the case before the Uttrakhand High

Court pertained to Section 10(23C)(iiiad) of the Act.

The third proviso to Section 10(23C)(vi) is not

applicable to the cases falling within the purview of

Section 10(23C)(iiiad). Secondly, the judgment

rendered by the Uttarkhand High Court runs

contrary to the provisions of Section 10(23C)(vi) of

the Act including the provisos thereunder. Section

10(23C)(vi) of the Act is equivalent to the provisions

of Section 10(22) existing earlier, which were

introduced with effect from 1st April, 1999 and it

ignores the speech of the Finance Minister made

before the introduction of the said provisions,

namely. Section 10(23C) of the Act [See

observations in American Hotel and Lodging

Association Educational Institute's case (supra)].

Thirdly, the Uttrakhand High Court has not

appreciated correctly the ratio of the judgment

rendered by Hon'ble the Supreme Court in the case

of Aditanar Educational Institution(supra) and while

applying the said judgment including the judgment

which had been rendered by Hon'ble the Supreme

Court in the case of Children Book Trust (supra), it

lost sight of the amendment which had been carried

out with effect from 1st April, 1999 leading to the

32

Page 33 introduction of the provisions of Section 10(23C) of

the Act. Lastly, that view is not consistent with the

law laid down by Hon'ble the Supreme Court in

American Hotel and Lodging Association

Educational Institute (surpa).”

It then summed up its conclusions as follows:

“8.13 From the aforesaid discussion, the following

principles of law can be summed up:—

(1) 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 (un-numbered). 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 has earned profit

would not be deciding factor to conclude that the

educational institution exists for profit.

(2) The provisions of Section 10(23C)(vi) of the Act are

analogous to the erstwhile Section 10(22) of the

Act, as has been laid down by Hon'ble the Supreme

Court in the case of American Hotel and Lodging

Association (supra). To decide the entitlement of an

institution for exemption under Section 10(23C)(vi)

of the Act, the test of predominant object of the

activity has to be applied by posing the question

whether it exists solely for education and not to earn

profit [See 5-Judges Constitution Bench judgment in

the case of Surat Art Silk Cloth Manufacturers

Association (supra)]. It has to be borne in mind that

merely because profits have resulted from the

activity of imparting education would not result in

change of character of the institution that it exists

solely for educational purpose. A workable solution

has been provided by Hon'ble the Supreme Court in

33

Page 34 para 33 of its judgment in American Hotel and

Lodging Association's case (supra). Thus, on an

application made by an institution, the prescribed

authority can grant approval subject to such terms

and conditions as it may deems fit provided that

they are not in conflict with the provisions of the Act.

The parameters of earning profit beyond 15% and

its investment wholly for educational purposes may

be expressly stipulated as per the statutory

requirement. Thereafter the Assessing Authority

may ensure compliance of those conditions. The

cases where exemption has been granted earlier

and the assessments are complete with the finding

that there is no contravention of the statutory

provisions, need not be reopened. However, alter

grant of approval if it comes to the notice of the

prescribed authority that the conditions on which

approval was given, have been violated or the

circumstances mentioned in 13th proviso exists,

then by following the procedure envisaged in 13th

proviso, the prescribed authority can withdraw the

approval.

(3) The capital expenditure wholly and exclusively to

the objects of education is entitled to exemption and

would not constitute part of the total income.

(4) The educational institutions, which are registered

as a Society, would continue to retain their

character as such and would be eligible to apply for

exemption under Section 10(23C)(vi) of the Act.

[See para 8.7 of the judgment-Aditanar Educational

Institution case (supra)]

(5) Where more than 15% of income of an educational

institution is accumulated on or after 1st April, 2002,

the period of accumulation of the amount exceeding

15% is not permissible beyond five years, provided

the excess income has been applied or

accumulated for application wholly and exclusively

for the purpose of education.

34

Page 35 (6) The judgment of Uttrakhand High Court rendered in

the case of Queens Educational Society (supra) and

the connected matters, is not applicable to cases

fall within the provision of Section 10(23C)(vi) of the

Act. There are various reasons, which have been

discussed in para 8.8 of the judgment, and the

judgment of Allahabad High Court rendered in the

case of City Montessori School (supra) lays down

the correct law.”

And finally held:

“8.15 As a sequel to the aforesaid discussion,

these petitions are allowed and the impugned

orders passed by the Chief Commissioner of

Income Tax withdrawing the exemption granted

under Section 10(23C)(iv) of the Act are hereby

quashed. However, the revenue is at liberty to pass

any fresh orders, if such a necessity is felt after

taking into consideration the various propositions of

law culled out by us in para 8.13 and various other

paras.

8.16 The writ petitions stand disposed of in the

above terms.”

24.The view of the Punjab and Haryana High Court has been

followed by the Delhi High Court in St. Lawrence Educational

Society (Regd.) v. Commissioner of Income Tax & Anr.,

(2011) 53 DTR (Del) 130. Also in Tolani Education Society v.

Deputy Director of Income Tax (Exemption) & Ors., (2013)

351 ITR 184, the Bombay High Court has expressed a view in

line with the Punjab and Haryana High Court view, following the

35

Page 36 judgments of this Court in the Surat Art Silk Manufacturers

Association Case and Aditanar Educational Institution case

as follows:

“…..The fact that the Petitioner has a surplus of

income over expenditure for the three years in

question, cannot by any stretch of logical reasoning

lead to the conclusion that the Petitioner does not

exist solely for educational purposes or, as that

Chief Commissioner held that the Petitioner exists

for profit. The test to be applied is as to whether the

predominant nature of the activity is educational. In

the present case, the sole and dominant nature of

the activity is education and the Petitioner exists

solely for the purposes of imparting education. An

incidental surplus which is generated, and which

has resulted in additions to the fixed assets is

utilized as the balance-sheet would indicate towards

upgrading the facilities of the college including for

the purchase of library books and the improvement

of infrastructure. With the advancement of

technology, no college or institution can afford to

remain stagnant. The Income-tax Act 1961 does not

condition the grant of an exemption under Section

10(23C) on the requirement that a college must

maintain the status-quo, as it were, in regard to its

knowledge based infrastructure. Nor for that matter

is an educational institution prohibited from

upgrading its infrastructure on educational facilities

save on the pain of losing the benefit of the

exemption under Section 10(23C). Imposing such a

condition which is not contained in the statute would

lead to a perversion of the basic purpose for which

such exemptions have been granted to educational

institutions. Knowledge in contemporary times is

technology driven. Educational institutions have to

36

Page 37 modernise, upgrade and respond to the changing

ethos of education.

Education has to be responsive to a rapidly evolving

society. The provisions of Section 10(23C) cannot

be interpreted regressively to deny exemptions. So

long as the institution exists solely for educational

purposes and not for profit, the test is met.”

25.We approve the judgments of the Punjab and Haryana,

Delhi and Bombay High Courts. Since we have set aside the

judgment of the Uttarakhand High Court and since the Chief

CIT’s orders cancelling exemption which were set aside by the

Punjab and Haryana High Court were passed almost solely

upon the law declared by the Uttarakhand High Court, it is clear

that these orders cannot stand. Consequently, Revenue’s

appeals from the Punjab and Haryana High Court’s judgment

dated 29.1.2010 and the judgments following it are dismissed.

We reiterate that the correct tests which have been culled out in

the three Supreme Court judgments stated above, namely,

Surat Art Silk Cloth, Aditanar, and American Hotel and Lodging,

would all apply to determine whether an educational institution

exists solely for educational purposes and not for purposes of

profit. In addition, we hasten to add that the 13

th

proviso to

37

Page 38 Section 10(23C) is of great importance in that assessing

authorities must continuously monitor from assessment year to

assessment year whether such institutions continue to apply

their income and invest or deposit their funds in accordance

with the law laid down. Further, it is of great importance that

the activities of such institutions be looked at carefully. If they

are not genuine, or are not being carried out in accordance with

all or any of the conditions subject to which approval has been

given, such approval and exemption must forthwith be

withdrawn. All these cases are disposed of making it clear that

revenue is at liberty to pass fresh orders if such necessity is felt

after taking into consideration the various provisions of law

contained in Section 10(23C) read with Section 11 of the

Income Tax Act.

26.We now come to Civil Appeal No.8962 of 2010. Vide a

judgment dated 29

th

January, 2010, the Punjab and Haryana

High Court dismissed CWP No.7268 of 2009 in the following

terms:

“8.It is conceded position that the assessee-

petitioner has filed the application on 23.9.2008

seeking exemption under Section 10(23C)(vi) in

38

Page 39 respect of assessment year 2008-09, which could

have been filed during the financial year 2007-08

i.e. on or before 31.3.2008. It is, thus, evident that

the application by the assessee petitioner has been

filed after the prescribed period and the Chief

Commissioner of Income Tax has rightly rejected

the same being not maintainable.

9.As a sequel to the above discussion, we find

no ground to interfere with the impugned order

passed by the Chief Commissioner of Income Tax.

There is no merit in the instant petition warranting

its admission. Accordingly, the writ petition fails and

the same is dismissed.”

27.These being the facts, we see no reason to interfere. This

appeal shall stand dismissed with no order as to costs.

….…..…..………………………...J.

(T.S. Thakur)

….…..…..………………………...J.

(R.F. Nariman)

New Delhi,

March 16, 2015.

39