Section 10(23C) relating to educational institution vis – a – vis section 11 exemption for such institution
As per section 10(23C), the income of certain funds, Universities, educational institutions, hospitals, etc., are not includible in the total income. There are about fourteen sub-clauses to this section, and about 18 provisos. Among the institutions etc., this article is confined to educational institutions only for the purpose of brevity.
Types of educational Institutions eligible for exemption u/s 10(23C):
i) The first class of educational institution dealt with in the Income tax Act is which is financed by the Government. Any income received on behalf of educational institutions existing solely for educational purposes and not for purposes of profit, and which is wholly and substantially financed by the Government is exempt under sub-clause (iiiab).
When the Government grant to such educational institution, exceeds fifty percent of the total receipts including any voluntary contributions of such educational institution, during the relevant previous year, the institution is said to be substantially financed by the Government as explained by way of Explanation after sub-clause (iiiac) combined with Rule 2BBB.
ii) The second class of educational institution dealt with in the Income tax Act is dependent on quantum of annual receipts. Any income received on behalf of educational institutions existing solely for educational purposes and not for purposes of profit, if the aggregate annual receipts do not exceed Rupees one crore is also exempt under sub-clause (iiiad) read with Rule 2BC.
The Karnataka High Court in the case of Children’s Education Society’s case ((2013) 358 ITR 373 has held that if there are number of educational institutions run by a Society, the aggregate of receipts of each institution must be taken. It has explained the provisions in the following words:
“Therefore, if an assessee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assessee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs. 1 crore received by the assessee, is also not included while computing annual total income of the assessee. “
iii) From 1.4.1999 onwards, any educational institution existing solely for educational purposes and not for purposes of profit (not falling under (iiiab) or (iiiad) above) and approved by the Chief Commissioner or the Director General enjoys exemption under sub-clause (vi). The Central Board of Direct Taxes will authorise a particular Chief Commissioner of Director General for the Region to deal with such applications.
Procedure for seeking exemption:
For this purpose the educational institution has to make an application in Form No.56D as prescribed in Rule 2CA. Application can be made at any time (and not necessarily before the end of the financial year), but should be made on or before 30th September of the relevant assessment year from which the exemption is sought. The prescribed authority may call for any documents (including audited annual accounts) or information to verify the genuineness of the activities as may be deemed it fit. He may also make such inquiries as it deems necessary in this behalf. The prescribed authority should pass the order granting or refusing approval within a period of 12 months from the end of the month in which such application was received. Once the approval is granted, it is not necessary to seek the renewal of approval year by year. It shall be valid until withdrawn.
Purpose of educational institution:
For claiming exemption under sub-clause (vi), the dominant object should be imparting education. If there are several objects of a society some of which relate to "education", and others which do not, and the trustees or the managers, in their discretion, are entitled to apply the income or property to any of those objects, the institution would not be eligible to be regarded as one existing solely for educational purposes, and no part of its income would be exempt from tax. But if the primary or dominant purpose of an institution is "educational", another object which is merely ancillary or incidental to the primary or dominant purpose would not dis-entitle the institution from the benefit (New Noble Educational Society & Ors. Vs. Chief Commissioner of Income tax & Anr. (2011) 334 ITR 303 (AP). In the case of American Hotel and Lodging Association Educational Institute vs. CBDT 301 ITR 86 (SC), the apex Court has held that at the time of granting approval u/s 10(23C)(vi), the prescribed authority is to be satisfied that the institution existed during the relevant year solely for educational purposes and not for profit. Once the prescribed authority is satisfied about fulfilment of this criteria i.e., the threshold precondition of actual existence of an educational institution u/s 10(23C)(vi), it would not be justifiable, in denying approval on other grounds, especially where the compliance depends on events that have not taken place on the date on which the application for grant of approval has been made.
Section 11 vis-a-vis 10(23C) and vice versa
Section 10(23C) does not prescribe any stipulation which makes registration u/s 12AA a mandatory condition. The provisions of section 11 and 10(23C) are two parallel regimes and operate independently in their respective realms.
Exemption u/s 11 is available to a Charitable trust or endowments or settlements, but also to a Company incorporated under section 8 of the Companies Act, 2013 (corresponding to S. 25 of the Companies Act, 1956) and to a Society formed under the Societies Registration Act, provided the object of these entities are charitable in nature.
What is charitable purpose is defined u/s 2(15) of the Income tax Act, as including relief of the poor, education, “yoga”, medical relief, preservation of environment (including water sheds, 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. The advancement of any other object of general public utility has qualifications which have been incorporated under the proviso which has been amended by Finance Act, 2015 w.e.f. 1.4.2016.
In order to avail exemption u/s 11, 12 and 13, the entity should be registered u/s 12AA.
The other essential requirements are (a)The property should be held under a trust or legal obligation;(b) The property should be so held for charitable or religious purposes which, enure for the benefit of the public. No part of the income or property of the trust should be used or applied directly or indirectly for the benefit of the settlor or other specified persons;(c) The trust should not be created for the benefit of any particular religious community or caste; (d) The exemption is restricted to such portion of the income as is applied or accumulated for application to charitable purpose in India;(e) The accounts of the trust should be audited in certain cases as provided in Sec. 12A(b); (f) The funds of the trust should be invested or deposited in the permissible forms and modes only.
For claiming exemption under section 11, it is not necessary that the conditions u/s 10(23)(vi) must be fulfilled.
In Commissioner Of Income tax Vs. Mahasabha Gurukul Vidyapeeth Haryana (2010) 326 ITR 25 (Pun), it was held that Exemption under s. 11 was allowable to the assessee society running an educational institution which was registered under s. 12A, once it is held that all requisite conditions for exemption under s. 11 have been met, even if conditions under s. 10(23C)(vi) have not been complied with, there will be no bar to seek exemption under s. 11.
Conversely, while claiming the exemption u/s 10(23)(vi), it is not required to fulfil the conditions mentioned u/s 11 as also exemption u/s 10(23)(vi). Exemption u/s 10(23)(vi) can be claimed by the assessee without applying for registration us 12A. See Commissioner Of Income tax and Another Vs. Society Of Advanced Management Studies (2013) 352 ITR 269 (All) wherein it has been held that Exemption u/s 10(23C)(vi) of the Act can be claimed by an assessee without applying for registration u/s 12A of the Act as it is not required to fulfil the conditions mentioned u/s 11 of the Act while claiming exemption u/s 10(23C) (vi) of the Act.
In the case of Commissioner Of Income tax Vs. Jeevan Deep Charitable Trust (2014) 361 ITR 0143 (All) the assessee was registered u/s. 12A as being a charitable institution. However, its claim for exemption u/s. 10(23C)(vi) was rejected on the ground that the institution was solely not established for the educational purposes. Relying on the same, assessee’s registration u/s. 12A was cancelled by CIT. The High Court held that exemption u/s. 10(23C)(vi) can be claimed by an assessee without applying for registration u/s. 12A as it is not required to fulfil the conditions mentioned u/s. 11 and hence the registration u/s 12A was restored.
Section 80G vis-a-vis 10(23C):
Similarly the exemption u/s 10(23C) would not be necessary to make assessee eligible for approval under section 80G Sonepat Hindu Educational & Charitable Society Vs. Commissioner Of Income tax & Anr. (2005) 278 ITR 0262 (P & H).
Amendments by Finance Act, 2014
By Finance (No.2) Act, 2014, the provisions relating to exemption were rationalised. The CBDT by its Circular No.1/2015, dated: 21.1.2015 has clarified the amendment and the circular relating to rationalisation is extracted below:
“Rationalisation of taxation regime in the case of charitable trusts and institutions
7.1 The provisions of section 11 of the Income-tax Act provide for exemption to trusts or institutions in respect of income derived from property held under trust and voluntary contributions subject to various conditions contained in the said section. The primary condition for grant of exemption is that the income derived from property held under trust should be applied for the charitable purposes, and where such income cannot be applied during the previous year, it has to be accumulated in the modes prescribed and applied for such purposes in accordance with various conditions provided in the section. If the accumulated income is not applied in accordance with the conditions provided in the said section, then such income is deemed to be taxable income of the trust or institution. Section 13 of the Income-tax Act provides for the circumstances under which exemption under section 11 or 12 of the said Act in respect of whole or part of income would not be available to a trust or institution.
7.2 The sections 11, 12, 12A, 12AA and 13 of the Income-tax Act constitute a complete code governing the grant, cancellation or withdrawal of registration, providing exemption to income, and also the conditions subject to which a charitable trust or institution is required to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled.
7.3 Several issues had arisen in respect of the application of exemption regime to trusts or institutions in respect of which clarity in law was required.
7.4 The first issue was regarding the interplay of the general provision of exemptions which are contained in section 10 of the Income-tax Act vis-a-vis the specific and special exemption regime provided in sections 11 to 13 of the said Act. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilised for the object or purpose for which the institution or trust has been established. In many cases it had been noted that trusts or institutions which are registered and have been availing benefits of the exemption regime do not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This defeats the very objective and purpose of placing the conditions of application of income etc. in respect of income derived from property held under trust in the first place.
7.4.1 Sections 11, 12 and 13 of the Income-tax Act are special provisions governing institutions which are being given benefit of tax exemption. It is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigation.
7.4.2 Similar situation existed in the context of section 10(23C) of the Income-tax Act which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc.
7.4.3 Therefore, the Income-tax Act has been amended to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)] of the Income-tax Act. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) of the Income-tax Act would not be entitled to claim any benefit of exemption under other provisions of section 10 of the said Act (except the exemption in respect of agricultural income).
7.5 The second issue which had arisen was that the existing scheme of section 11 as well as section 10(23C) of the Income-tax Act provided exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. was being claimed and such amount of notional deduction was not being applied for charitable purpose. As a result, double benefit was being claimed by the trusts and institutions. Therefore, these provisions were required to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.
7.5.1 Accordingly, the Income-tax Act has been amended to provide that under section 11 and section 10(23C), income for the purposes of its application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.
7.6 Applicability:- These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.
The Central Board of Direct Taxes has also issued Circular No.14/2015, dated: 17th August, 2015 clarifying certain issues relating to grant of approval and claim of exemption u/s 10(23C)(vi), reiterating the position of law narrated in this Article.
Accumulation of income u/s 10(23C(vi):
The assessee can accumulate only 15% of the income for the future activities and if there is excess it should be applied for the object within a period of five years. If the accumulation is less than fifteen per cent of the income earned during the year by these educational institutions, there is no limitation on period of accumulation. The income so accumulated is required to be invested in securities as specified in Section 11(5) only. Merely because there is surplus in the income and expenditure account, the institution does not cease to be non-profit organisation. The only condition is that such surplus should be utilised wholly and exclusively for educational purposes and not for any other purpose.
Return of income:
By virtue of 139(4C) every educational institution referred to in sub-clause (iiiab) or sub-clause (iiiad) or sub-clause (vi) of Section 10(23C) whose total income in respect of which such institution is assessable, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax, furnish a return of such income of the previous year in the prescribed form.
Audit:
Once the total income without giving effect to sub-clauses of 10(23C) exceeds the maximum amount which is not chargeable to tax in any previous year, the accounts are required to be audited by a qualified Accountant as per S.288(2) and should furnish such report in Form 10BB along with the return of income for the relevant assessment year.
Withdrawal of exemption:
The Prescribed Authority is also allowed to withdraw the exemption granted u/s 10(23C). If the prescribed authority is satisfied that educational institution has not applied its income exclusively and wholly for educational purposes, or invested or deposited funds in violation of clause (b) of third proviso, or the activities of the educational institutions are not genuine or are not being carried out in accordance with all or any of the conditions subject to which it was approved, the prescribed authority may withdraw the approval, after giving a reasonable opportunity of being heard. A copy of the order will be served on the educational institution and to the Assessing Officer. The charging of “capitation fee” may amount breach of the provisions of the laws and may invite withdrawal of exemption.
