New Delhi: The Supreme Court on Thursday ruled that the surplus income earned by educational institutions could not be taxed and also said imparting education should not be termed “for-profit activity” simply because it yielded high returns.
A Bench of Justice T S Thakur and Justice Rohinton F Nariman said, “Where an educational institution carries on the activity of education, 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.”
The court dismissed the plea by the Revenue Department and said, “A distinction must be drawn between the making of a surplus and an institution being run for profit.”
It said the Centre must examine the activities of such institutions to ensure that the purpose of education was not lost in a profit making motive.
“If they are not genuine, or are not being run in accordance with all or any of the conditions subject to which approval had been given, such exemption must be withdrawn,” the court said.
The order came on a bunch of petitions filed by Queens Educational Society, challenging an Uttarakhand High Court order allowing I-T authorities to tax its surplus income of around Rs 7 lakh for the assessment year 2000-2001.
“A distinction must be drawn between the making of a surplus and an institution being run for profit. If, after meeting expenditure, a surplus arises incidentally, it will not cease to be one existing solely for educational purposes,” the Bench said.
In the present case, it noted, the sole and dominant nature of the activity was education and the petitioner stood for imparting 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,” the court said.
“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),” the apex court Bench noted.
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