Educational Institute – Exemption under section 10(23C) vis-à-vis 12AA of the Income Tax Act, 1961

Brief of Section 10(23C) for claiming exemption by educational institution

Section 10(23C) provides for exemption for different types of educational institutes:

• (iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or
• (iiiad) any university or other educational institution existing solely for educational purposes and not for 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; or
• (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 educational institutes, falling under the sub-clause (iiiab) or (iiiad), are not required to seek any approval from the Income Tax Authorities for claiming exemption. Any educational institute not falling under the sub clause (iiiab) or (iiiad) and existing solely for educational purposes and not for purposes of profit can seek approval from the prescribed authority and claim exemption.

As per Rule 2CA of the Income Tax Rules, 1962, the application for approval shall be made in Form No. 56D to the Chief Commissioner or Director General of the Income Tax.

Brief of Section 12AA for claiming exemption by educational institution

Section 11 of the Act is a popular section for claiming exemption of income by charitable or religious trusts and institutions. The provision state that income shall not be included in the total income to the extent it is applied for the objects of charitable or religious purposes during the previous year in India. Section 12A specifies that the provisions of Section 11 and 12 will not apply to any trust or institution unless such trust or institution is registered under section 12AA.

The word ‘charitable purpose’ has been defined in Section 2(15). It includes relief of the poor; education, yoga and 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. So various categories of trust or institutions can obtain registration under section 12AA and claim exemption. Education is one of the charitable purposes and therefore, educational institution can claim exemption under the said section after obtaining registration under section 12AA.

Whether registration under section 12AA is necessary for approval under section 10(23C)(vi)?

Section 10(23C) read with rules does not prescribe condition which mandates registration under section 12AA necessary a mandatory pre or post condition. In fact, the provisions of section 11 and 10(23C) are two parallel regimes and operate independently in their respective realms although some of the compliance criteria may be common to both. Hence obtaining prior registration before granting approval under section 10(23C) cannot be insisted upon. The above position has been clarified by the Ministry of Finance vide Circular No. 14/2015 dated August 17, 2015.

Whether withdrawal of registration of 12AA leads to withdrawal of approval under section 10(23C)(vi) or vice versa?

Para 2.2 of the Circular No. 14/2015 dated August 17, 2015 reads as, “in case of a trust or an institution having obtained registration under section 12AA as well as approval under section 10(23C)(vi), if registration is withdrawn at some point of time due to certain adverse findings, the withdrawal of approval under section 10(23C)(vi) shall not be automatic but will depend upon whether these adverse findings also impact the conditions necessary to keep approval under section 10(23C)(vi) alive.”

The above para clarifies that withdrawal of registration of 12AA does not automatically lead to withdrawal of approval under section 10(23C)(vi). The Commissioner has to look independently whether the adverse findings for withdrawal of 12AA impacts the condition necessary approval of exemption under section 10(23C)(vi).

Activities outside India

The provisions of Section 11(1)(a) and 11(1)(c) are:

So a charitable organisation registered under section 12AA cannot claim application to the extent of which the income is applied for charitable purposes outside India, i.e., any income applied on activities outside India is not eligible for exemption. However, the application of income can be claimed under the following two scenarios:

• for trusts created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested.
• for trusts created before the 1st day of April, 1952, for charitable or religious purposes.

Provided that the Board by special or general order has permitted such activities.

The third proviso to Section 10(23C)(vi) are as under:

From the above, it can be noted that the provisions of Section 10(23C)(vi) does not mention the words “in India” unlike the provisions of Section 11(1).

So does that mean whether the educational institute claiming exemption under section 10(23C)(vi) can claim exemption for charitable activities outside India? At this juncture, it is pertinent to discuss Supreme Court judgement in the case of American Hotel and Lodging Association Educational Institute:

Brief facts of the case

In the instant case the appellant was a non-profit organisation set up in USA and has been granted tax exemption as an educational institute in that country. Appellant had a branch office in India, mainly to comply with its obligations under various agreements with Government of India (Ministry of Tourism). In 1993, the National Council of Hostel Management and Catering Technology, the apex body overseeing hostel management and catering education under the Ministry of Tourism, signed MoU with the Educational institute under which approval was granted to use courses, resources and expertise of the appellant in India with a view to improving the quality of hospitality education and training in India.

The appellant had also applied for Advance Ruling for claim of income exemption under section 10(22) of the Act. The Advance Ruling authority vide its order dated 14.2.96 had held that income of the appellant was entitled to exemption under section 10(22) of the Act. The decision of the authority was accepted by the department that the appellant’s income was exempt under section 10(22). Since Section 10(22) stood omitted by the Finance Act, 1998, the appellant made an application to the prescribed authority (PA) for initial approval in terms of the first proviso to Section 10(23C)(vi) of 1961 Act.

By its order dated 12.10.2004, CBDT rejected the appellant’s application holding that “there is a surplus repatriated outside India and, therefore, the appellant has not applied its income for the purpose of education in India”.

The said order dated 12.10.2004 was challenged by the appellant in the Delhi High Court vide writ Petition No. 17978/04. By the impugned judgement dated 24.11.2006, the Delhi High Court held that that the gross receipts constituted “income” chargeable to tax such “income” was required to be applied to educational purposes in India and since the appellant had failed to do so CBDT was right in rejecting the application dated 7.4.99. In this connection, the Delhi High Court placed reliance on the third proviso to Section 10(23C)(vi) as well as the decision of this Court in the case of Oxford University Press v. Commissioner of Income-tax reported in (2001) 247 ITR 658 SC.

Grounds of the appellant

According to the learned counsel of the appellant, the words ‘in India’ should not be read into clause (a) of the third proviso to Section 10(23C)(vi) of the 1961 Act as done by the High Court in its impugned judgement. The plain words of the third proviso refer to the application of income of the objects for which the Institute is established and the said proviso does not require the application of income in ‘India’. Therefore, it is urged that there is no valid reason given by the Department as to why the words “in India” should be read in the third proviso. Similar words “in India” are found in Sections 10(20A), 10(22B) and 11(1)(a) of the 1961 Act but not in Section 10(23C)(vi). Therefore, by comparison, learned counsel urges that wherever such requirement was considered necessary by the Parliament the same has been incorporated and, therefore, the exclusion of the words “in India” in the third proviso to Section 10(23C)(vi) is not an oversight. For the above reasons, learned counsel submits that the words “in India” should not be read into clause (a) of the third proviso of Section 10(23C)(vi) of the 1961 Act.

Oxford University Press judgement distinguished

In Oxford University Press (supra) this Court found that the applicant was a branch of Oxford Press which was part of the Oxford University but its activity in India was restricted to publishing books, journals, periodicals, etc. The Tribunal held that because Oxford Press is part of the University its income was exempt under section 10(22) as it stood at the relevant time. It is in this context that the words ‘existing solely for educational purposes and not for profit’ in Section 10(22), which words also find place in Section 10(23C)(vi), came for consideration. This Court held that the location of the University is not relevant, what is relevant is - whether there is imparting of education in India.

Therefore, the test formulated by this Court to decide the character of the recipient of income under section 10(22) is whether there is in fact the existence of an activity which is in the nature of ‘imparting of education in India’. This is how the words ‘in India’ have come into judgement and not by incorporation from Section 11(1)(a) of 1961 Act, as contended on behalf of the Department.

Supreme Court held that even after the Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words ‘application of income’ to the objects for which the Institution is established. The third proviso does not use the words ‘in India’ in the matter of application or accumulation of income though in several other sections like Sections 10(20A), 10(22B) and 11(1)(a), etc., Parliament has used the words ‘in India’. Therefore, for this one more reason, the Court cannot read in the words ‘in India’ into the third proviso. As stated, Parliament in its wisdom has stated in the third proviso that the educational institution has to apply its income wholly and exclusively to the objects for which it is established. Therefore, the plain words of the third proviso do not require the application of income to be in India. Our judgement should not be understood to mean that the applicant has not to impart educational activities in India. If the applicant wants exemption under section 10(23C)(vi) it has to impart education in India and only then it would be entitled to claim initial approval under that section. That is the reason for our saying that the ‘non-profit’ qualification has to be tested against Indian activities. Our conclusion is that impartation of education must be in India if applicant desires exemption under section 10 (23C)(vi) and that excess/deficit of income over expenditure will not decide whether the applicant exists for profit or not.

The Court reiterated that items such as application of income or accumulation of income or investment in specified assets indicated in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. As stated, however, there is a difference between the application/utilisation of income and outward remittance of income out of India. As discussed above, with the insertion of the provisos in Section 10(23C)(vi) of the 1961 Act, it is open to the prescribed authority (PA) to stipulate, while granting approval, that the approval is being given subject to conditions. For the sake of clarity, the Court reiterated that items utilisation/application of certain percentage of income, in the accounting sense, towards impartation of education in India. Such exercise would be based on an estimation. There is a difference between ‘accounting income’ and ‘taxable income’. At the stage of Section 10, we are concerned with the accounting income. Therefore, it is open to the PA, if it deems fit, to stipulate that certain percentage of accounting income would be utilised for impartation of education in India. Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes.

Benefit to Interested Persons

In case of trust registered under section 12AA, the provision of Section 11 allowing for exemption of income will be subject to the provisions of Section 13. The provision of Section 13(1)(c) and 13(3) are:

(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :

1. the author of the trust or the founder of the institution;
2. any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;
3. where such author, founder or person is a Hindu undivided family, a member of the family;
4. (cc) any trustee of the trust or manager (by whatever name called) of the institution;
5. any relative of any such author, founder, person, member, trustee or manager as aforesaid;
6. any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.

The brief of the above provisions is that the application of income will not be considered to the extent the income has been applied for the benefit of the interested persons unless it falls within the proviso of the aforesaid section.

Now whether the provisions of Section 13(1)(c) apply to the educational institutes claiming exemption under section 10(23C)(vi) - There are no provisos to Section 10(23C)(vi) which deals with such situation.

Let us go through Form No. 56D which is an application form for grant of exemption or continuance thereof under section 10(23C)(vi) and (via). Relevant extract from the point no. 17 of the Form 56D has been reproduced below:

So does this mean that provisions of Section 13(1)(c) apply to the educational institution claiming exemption under section 10(23C)(vi) although there is no specific proviso in the said section. The board has issued a circular no. 557 dated 19.03.1990 to provide clarification in this regard. Relevant extracts from the circular are reproduced:

The clause (vi) in Section 10(23C) was introduced in the Finance (No. 2) Act, 1998 w.e.f. April 1, 1999. In the author’s view, the above circular issued by the board will apply mutatis mutandis to educational institution claiming exemption under section 10(23C)(vi) of the Act and hence, provision of Section 13(1)(c) will not apply to such educational institute.

Compliance in case of accumulation in excess of 15% of income

Section 11(2)(a) provides that where eighty-five percent of the income is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or part, for application to such purposes in India, such income so accumulated or set apart shall not be included in total income of the previous year, provided such person furnishes a statement in the prescribed form and in the manner to the Assessing Officer, stating the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed five years. Such a statement needs to be furnished on or before the due date specified under sub-section (1) of Section 139 for furnishing the return of income of the previous year.

Rule 17(2) specifies Form No. 10 as the statement to be furnished to the Assessing Officer under section 11(2). The form asks for the amount which has been accumulated or set apart, the purpose of accumulation and ending period of accumulation/set apart. The form also keeps track of amount of accumulation made in the previous year by seeking following details:

1. Year of accumulation [previous year]
2. Amount accumulated
3. period for which accumulated / set apart
4. amount applied upto the end of previous year
5. amount remaining for application
6. amount deemed to be income within meaning sub-section (3) of Section 11.

While the provisions of Section 10(23C)(vi) do provide for accumulation of income exceeding fifteen percent of its income, there are no conditions attached to it except that the period of accumulation shall in no case exceed five years. So there is no requirement of filing a statement as specified in Section 11.

Change in Objects of the Trust or Institution

Provisions of Section 12A(1)(ab) of the Act are:

The above provisions have been introduced by the Finance Act, 2017 w.e.f. 1-4-2018.

The memorandum explaining the provisions of Finance Bill, 2017 clarifies for the above amendment as under:

Rule 17A was amended through Income Tax (First Amendment) Rules, 2018 to give to the above provisions. The rules came into force from February 19, 2018. Now Form 10A seeks details covering the above amendment:

• 5. Is this a case of registration under clause (ab) of sub-section (1) of Section 12A? – Yes / No
• 5a. If Yes, please provide details of existing registration:
  • Date of Registration
  • Effective Date
  • Registration No.
  • Designation of Registered Authority and Station
• 5b. Date of modification of objects
• Also, certified copy of the documents evidencing adoption or modification of the objects, if any is to be attached.

There is no express provisions in Section 10(23C)(vi) regarding the procedure to be followed whenever there is a change in objects of the educational institution. Generally, the prescribing authority grants approves exemption subject to the condition that the activities are carried out as per the objects stated in the Memorandum of Association or Trust Deed furnished while seeking approval. So in the author’s view, it is always wiser to intimate the department about the change in objects although there is no express provisions or process defined in Section 10(23C)(vi).

Return filing section

The charitable trust or institute registered under section 12AA has to file the return under Section 139(4A) while institute claiming exemption under section 10(23C)(vi) has to file the return under section 139(4C) of the Act.

Receipt of Corpus Donation – Whether included in Income?

Section 2(24)(iia) defines income to include,

Going through the above definition it can be said that all voluntary contributions whether forming part of corpus or not are included in income.

At the same time Section 12 excludes from the scope of income any voluntary contribution made with a specific direction that they shall form part of corpus of the trust or constitution for the purpose of Section 11. Section 12(1) has been reproduced below for reference:

Also Section 11(1)(d) provides that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the previous year subject to the provisions of Section 60 to 63.

So it can be concluded that voluntary contributions made with a specific direction that they shall form part of the corpus will not be includible in income for the purposes of Section 11.

Now coming to the educational institute claiming an exemption under section 10(23C)(vi) – All voluntary contributions including contribution forming part of corpus are included in income as defined in Section 2(24)(iia) of the Act above. But there is no specific exclusion provided in provisos to Section 10(23C)(vi) as provided in Section 12.

At this juncture, it is important to understand the reason for inclusion of voluntary contributions in the definition of income for educational institutions claiming exemption under section 10(23C)(vi). Finance Act, 2006 amended the definition of income with retrospective effect from 1st April, 1999. The notes on Finance Bill 2006 explains the legislative intent behind the amendment. It explains that the amendment was consequential to the insertion of new Section 115BBC inserted vide clause 22 of the Finance Bill 2006. Section 115BBC tax the anonymous donations referred to in that section in certain cases. So in view of the author the corpus donation are also not includible in the total income considering the legislative intent unless it is in the form of anonymous donation.