M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF COMMISSIONER OF INCOME TAX 1 AND ANR.

A was also the requirement under section 10(22)] but it has now to obtain initial approval from the prescribed authority, in terms of section 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section. That condition of obtaining approval from the prescribed authority came to be inserted because section B 10(22) was abused by some educational institutions/ universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the prescribed authority is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the prescribed authority. Under the third proviso, the prescribed authority has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the prescribed authority 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 12AA 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 prescribed authority 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 H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1125 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

circumstances are given under which the prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority 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 prescribed authority is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein.

33. Having analysed the provisos to section 10(23C)(vi) one finds that there is a difference between stipulation of conditions and compliance thereof. 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 standardized form in terms of the first proviso. It is only if the pre-requisite condition of actual existence of the educational institution is fulfilled that the question of compliance of requirements in the provisos would arise. We find merit in the contention advanced on behalf of the appellant that the third proviso contains monitoring conditions/requirements like application, accumulation, deployment of income in specified assets whose compliance depends on events that have not taken place on the date of the application for initial approval. F

34. To make the section with the proviso workable we are of the view that the Monitoring Conditions in the third proviso like application/utilization of income, pattern of investments to be made etc., could be stipulated as conditions by the prescribed authority subject to which approval could be G granted. For example, in marginal cases like the present case, where appellant-Institute was given exemption up to financial year ending 31-3-1998 (assessment year 1998-99) and where an application is made on 7-4-1999, within seven days of the new dispensation coming into force, the prescribed authority H

p. 1126 Copy page pinpoint

A can grant approval subject to such terms and conditions as it deems fit provided they are not in conflict with the provisions of the 1961 Act (including the above-mentioned monitoring conditions). While imposing stipulations subject to which approval is granted, the prescribed authority may insist on certain percentage of accounting Income to be utilized/ B applied for imparting education in India. While making such stipulations, the prescribed authority has to examine the activities in India which the applicant has undertaken in its Constitution, MoUs, and Agreement with Government of India/ National Council. In this case, broadly the activities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, granting diplomas, supervising exams, all under the terms of an Agreement entered into with Institutions of the Government of India. Similarly, the prescribed authority may grant approvals on such terms and conditions as it deems fit in case where the Institute applies for initial approval for the first time. The prescribed authority must give an opportunity to the applicant-institute to comply with the monitoring conditions which have been stipulated for the first time by the third proviso. Therefore, cases where earlier the applicant has obtained exemption(s), as in this case, need not be re- opened on the ground that the third proviso has not been complied with. However, after grant of approval, if it is brought to the notice of the prescribed authority that conditions on which approval was given are breached or that circumstances mentioned in the thirteenth proviso exists then the prescribed authority can withdraw the approval earlier given by following the procedure mentioned in that proviso. The view we have taken, namely, that the prescribed authority can stipulate conditions subject to which approval may be granted finds support from sub-clause (ii)(B) in the thirteenth proviso.”

45Copy pinpoint45. The next judgement is that of Queen’s Education Society (supra). In that case, the society was engaged in imparting education through its schools. For two successive assessment years the society recorded some profits. It was denied exemption, on the ground that the society’s objects included not only education, but others as well, and that its aim was to make profit. The Uttarakhand High Court affirmed the

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1127 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

view of the revenue. On appeal, this court after considering the previous judgements (discussed above), held that the High Court was in error. After quoting extensively from the judgement in Surat Art Silk(supra), this court recorded its conclusions, entirely affirming the ‘predominant object’ test: “11. Thus, the law common to Section 10 (23C) (iiiad) and B (vi) may be summed up as follows: (1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an C 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 D 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 E 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.” F

46Copy pinpoint46. The court disapproved the Uttarakhand High Court’s view that generating surplus was prohibited and adversely commented on the inferences drawn by the High Court. It was held that the High Court had misconstrued the judgement in Aditanar (supra).It then discussed the appeal directed against the judgement of the Punjab and Haryana G High Court in Pinegrove International Charitable Trust Vs. Union of India19, where the exemption application was denied by the revenue on the ground that the level of fees collected and the surplus generated 19 Pinegrove International Charitable Trust Vs. Union of India, (2010) 327 ITR 73 (P&H). H

p. 1128 Copy page pinpoint

A consistently for several years indicated that the trust was essentially engaging itself in profitable activity under the garb of imparting education. The High Court had held that the generation of profits could not be the only reason to deny exemption, and what was relevant was the ‘predominant’ or main object of the society, which in that case was to impart education. The High Court also heldthat after granting approval, if the PA notices that the conditions in which approval had been granted were violated under the circumstances detailed in the thirteenth proviso (as it existed then), approval could be withdrawn after following the procedure prescribed.

47Copy pinpoint47. This court in Queens Educational Society (supra) approved the judgement of the Punjab and Haryana High Court in Pinegrove International (supra). By the same judgement,it also approved other judgements of High Courts which had followed Pinegrove and disagreed with the Uttarakhand High Court’s judgement.

48Copy pinpoint48. From the above discussion, it is evident that this court has spelt out the following to be considered by the revenue, when trusts or societies apply for registration or approval on the ground that they are engaged in or involved in education: (i) The society or trust may not directly run the school imparting education. Instead, it may be instrumental in setting up schools or colleges imparting education. As long as the sole object of the society or trust is to impart education, the fact that it does not do so itself, but its colleges or schools do so, does not result in rejection of its claim. (Aditanar (supra)). (ii) To determine whether an institution is engaging in education or not, the court has to consider its objects (Aditanar (supra)). (iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University (supra) where the applicant was a publisher, part of the Oxford G University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc. for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India. H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1129 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

(iv) The judgement in American Hotel (supra) states that to discern whether the applicant’s claim for exemption can be allowed, the ‘predominant object’ has to be considered. It was also held that the stage of examining whether and to what extent profits were generated and how they were utilised was not essential at the time of grant of approval, but rather formed part of the monitoring mechanism. (v) Queen’s Educational Society (supra) approved and applied the ‘predominant object’ test (which extensively quoted Surat Art (supra) and applied it with approval). The court also held that the mere fact that substantial surpluses or profits were generated could not be a bar for rejecting the application for approval under C Section 10(23C)(vi) of the IT Act. Examination of the term‘solely’

49Copy pinpoint49. It is evident, that in construing the term ‘any university or other educational institution existing solely for educational purposes D and not for purposes of profit’ the other negative reference to profit, in respect of educational institutions, is in the seventh proviso which states that incomes which are profits of business, cannot be exempt, “unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business”. E

50Copy pinpoint50. The basic provision granting exemption, thus enjoins that the institution should exist ‘solely for educational purposes and not for purposes of profit’. This requirement is categorical.While construing this essential requirement, the proviso, which carves out the exception, so to say, to a limited extent, cannot be looked into. The expression F ‘solely’ has been interpreted, as noticed previously, by other judgments as the ‘dominant / predominant /primary/main’ object. The plain and grammatical meaning of the term ‘sole’ or ‘solely’ however, is ‘only’ or ‘exclusively’. P.Ramanath Aiyar’s Advanced Law Lexicon20 explains the term as, “‘Solely’ means exclusively and not primarily”. The G Cambridge Dictionary defines ‘solely’ to be,”Only and not involving anyone or anything else”.21 The synonyms for ‘solely’ are “alone, independently, single-handed, single-handedly, singly, unaided, 20 P. RAMANATHA AIYAR, ADVANCED LAW LEXICON , (6thEdn.), Pg. 5249-5250 (2019). 21 Solely, Cambridge Dictionary (4thEdn.) (2013). H

p. 1130 Copy page pinpoint

A unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc.”

51Copy pinpoint51. It is, therefore, clear that term ‘solely’ is not the same as ‘predominant / mainly’. The term ‘solely’ means to the exclusion of all others. None of the previous decisions – especially American Hotel B (supra) or Queens Education Society (supra) – explored the true meaning of the expression ‘solely’.Instead, what is clear from the previous discussion is that the applicable test enunciated in Surat Art (supra) i.e., the ‘predominant object’ test was applied unquestioningly in cases relating to charitable institutions claiming to impart education. The obvious error in the opinion of this court which led the previous decisions in American C Hotel (supra) and in Queens Education Society (supra) was that Surat Art (supra) was decided in the context of asociety that did not claim to impart education. It claimed charitable statusas an institution set up to advance objects of general public utility. The Surat Art (supra) decision picked the first among the several objects (some of them being clearly D trading or commercial objects) as the ‘predominant’ object which had to be considered while judging the association’s claim for exemption. The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from charities set up or established for the object of imparting education. In the case of the latter, the basis of exemption is Section 10(23C) (iiiab), E (iiiad) and (vi). In all these provisions, the positive condition ‘solely for educational purposes’ and the negative injunction ‘and not for purposes of profit’ loom large as compulsive mandates, necessary for exemption. The expression ‘solely’ is therefore important. Thus, in the opinion of this court, a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption,there cannot be any other interpretation.

52Copy pinpoint52. The view of this court is fortified by the previous judgements in Commissioner of Customs(Import), Mumbai v. Dilip Kumar and Company & Ors. 22 where a constitution bench held that taxing statutes are to be construed in terms of their plain language: 22 Commissioner of Customs(Import), Mumbai v. Dilip Kumar and Company & Ors., (2018) 9 SCC 1. H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1131 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

“21. The well-settled principle is that when the words in a A statute are clear, plain and unambiguous and only one meaning can be inferred, the courts are bound to give effect to the said meaning irrespective of consequences. If the words in the statute are plain and unambiguous, it becomes necessary to expound those words in their natural and ordinary sense. B The words used declare the intention of the legislature”. The Court, while noting the nuances between ‘strict’ and ‘literal’ interpretation, held as follows: “29. …We may reiterate at the cost of repetition that strict interpretation of a statute certainly involves literal or plain meaning test. The other tools of interpretation, namely, contextual or purposive interpretation cannot be applied nor any resort be made to look to other supporting material, especially in taxation statutes. Indeed, it is well settled that in a taxation statute, there is no room for any intendment; that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification. Equity has no place in interpretation of a tax statute. Strictly one has to look to the language used; there is no room for searching intendment nor drawing any presumption. Furthermore, nothing has to be read into nor should anything be implied other than essential inferences while considering a taxation statute”. If the language is unambiguous and capable of one meaning, that alone should be applied and not any other, based under surmise that the Parliament or the legislature intended it to be so. In other words, it is only in cases of ambiguity that the court can use other aids to discern the true meaning.Where the statute is clear and the words plain, the legislation has to be given effect in its own terms.

53Copy pinpoint53. In A.V. Fernandez v State of Kerala23, a constitution bench discussed how tax laws should ordinarily be construed: G “29. It is no doubt, true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue 23 A.V. Fernandez v State of Kerala,1957 SCR 837. H

p. 1132 Copy page pinpoint

A satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the B substance of the matter”.

54Copy pinpoint54. It is only when the application of literal interpretation gives rise to an absurdity, should the interpretation be expansive. This was reiterated in Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes & Ors.24: C “24. …The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. D If the words are plain and clear and directly convey the meaning, there is no need for any interpretation”.

55Copy pinpoint55. This court has, in many judgments, stressed that the object of a proviso is to except from the main provision something enacted in the substantive clause. It cannot however, by itself be read as a substantive provision. Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai 25 considered the function and effect of a proviso: “8. The proper function of a proviso is to except or qualify something enacted in the substantive clause, which but for the proviso would be within that clause. It may ordinarily be presumed in construing a proviso that it was intended that the enacting part of the section would have included the subject-matter of the proviso.”

56Copy pinpoint56. In Indore Development Authority v. Manoharlal26 it was held that: G “192. A proviso has to be construed as a part of the clause to which it is appended. A proviso is added to a principal 24 Mangalore Chemicals and Fertilisers Ltd. v. Deputy Commissioner of Commercial Taxes & Ors, (1992) Supp (1) SCC 21. 25 Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai, 1966 (1) SCR 367. H 26 Indore Development Authority v. Manoharlal,(2020) 8 SCC 129.

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1133 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

provision to which it is attached. It does not enlarge the A enactment. In case the provision is repugnant to the enacting part, the proviso cannot prevail. Though in absolute terms of a later Act. Its placement has been considered, and purpose has been considered in the following decisions. It was observed in State of Rajasthan v. Leela Jain [State of B Rajasthan v. Leela Jain, (1965) 1 SCR 276 : AIR 1965 SC 1296] : (AIR p. 1300, para 14) “14. … So far as a general principle of construction of a proviso is concerned, it has been broadly stated that the function of a proviso is to limit the main part of the section and carve out something which but for the proviso would have been within the operative part.”

57Copy pinpoint57. The scope of a proviso was dealt with in great detail in S. Sundaram Pillai v. V.R. Pattabiraman.27 This court observed that normally a proviso is meant to be an exception to something within the main enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. A proviso cannot be torn apart from the main enactment nor can it be used to nullify or set at naught the real object of the main enactment. After quoting previous decisions and authoritative texts, this court summarized the correct legal position, as follows: E “43. We need not multiply authorities after authorities on this point because the legal position seems to be clearly and manifestly well established. To sum up, a proviso may serve four different purposes: (1) qualifying or excepting certain provisions from the main F enactment: (2) it may entirely change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable: G (3) it may be so embedded in the Act itself as to become an integral part of the enactment and thus acquire the tenor and colour of the substantive enactment itself; and

27 S. Sundaram Pillai v. V.R. Pattabiraman,1985 (1) SCC 591. H

p. 1134 Copy page pinpoint

A (4) it may be used merely to act as an optionaladdenda to the enactment with the sole object of explaining the real intendment of the statutory provision.”

58Copy pinpoint58. The seventh proviso to Section 10 (23C) (vi) alludes to business and profits (‘being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business’). The interpretation of Section 10 (23C) therefore, is that the trust or educational institution must solely exist for the object it professes (in this case, education, or educational activity only), and not for profit. The seventh proviso however carves an exception to this rule, and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity- and nothing other than that- is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education).

59Copy pinpoint59. In this court’s judgment in Delhi Cloth & General Mills Co. D Ltd. v Workmen &Ors.28 the question involved was the jurisdiction of an industrial tribunal.Under the Industrial Disputes Act, 1947, as to whether it can decide disputes referred to it, and matters incidental thereto, this court explained the meaning of ‘incidental’ in the following manner: E “21. [T]he word ‘incidental’ means according to Webster’s New World Dictionary: “happening or likely to happen as a result of or in connection with somethingmore important; being an incident; casual; hence, secondary or minor, but usually associated:” F “Something incidental to a dispute” must therefore mean something happening as a result of or; in connection with the dispute or associated with the dispute. The dispute is the fundamental thing while something incidental thereto is an adjunct to it. Something incidental, therefore, cannot cut at G the root of the main thing to which it is an adjunct.” The above decision has been followed in other cases. ‘Incidental’therefore, means, in the context of the present case, something connected with the activity of education. 28 H Delhi Cloth & General Mills Co. Ltd. v Workmen & Ors.,1967 (1) SCR 882.

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1135 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

60Copy pinpoint60. In the light of the above discussion, this court is of the opinion that the interpretation adopted by the judgments in American Hotel (supra) as well as Queens Education Society (supra) as to the meaning of the expression ‘solely’ are erroneous. The trustor educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities. If, incidentally, while carrying on those objectives, the trust earns profits, it has to maintain separate books of account.It is only in those circumstances that ‘business’ income can be permitted-provided, as stated earlier, that the activity is education, or relating to education.The judgment in American Hotel (supra) as well as Queens Education Society (supra) do not state the correct law, and are accordingly overruled. C

61Copy pinpoint61. The second question which this court has to address is whether the PA (Commissioner or any other designated authority) is in any manner enjoined to confine the nature of inquiry to discern the object of a society, trust or other institution at the stage when it approaches the authority for approval under Section 10 (23C). D

62Copy pinpoint62. Section 10(23C) has many provisos. The first proviso enjoins the concerned fund, trust or institution to apply to the concerned authority i.e., the Commissioner, for grant of approval and sets out the timeline for doing so. These include situations where atrust or institution was granted approval up to a particular point in time and sought extension. The second proviso by sub-clause (ii) requires the Commissioner to make such enquiries to specify about the genuineness of the activities of the fund, trust or institution and compliance of such requirements of other laws in force by such fund, trust or institution. Upon considering the materials the Commissioner or the concerned authority can pass an appropriate order granting approval for a specific period of time, or reject the application. The second proviso importantly indicates that before granting approval to any fund, trust or institution, the Commissioner or the concerned authority ‘may call for such documents’ including audited annual accounts or information from the fund, or trust or institution etc., as is deemed necessary for recording satisfaction about the genuineness of the activities. The judgment in American Hotel (supra) dealt extensively with the effect of the provisos to Section 10(23C). While doing so, the court made certain remarks with respect to the effect of these provisos characterizing a few of them as those dealing with the stage of considering applications for approval or registration and other H

p. 1136 Copy page pinpoint

A as those dealing with application of income or receipts of the trust. In respect of the latter, this court was of the opinion that the question of application of income or profits could arise only at the stage of assessment. The court was also of the opinion that the audited books of accounts would be of little or no relevance at the stage of registration or approval.

63Copy pinpoint63. Having regard to the plain terms of the second proviso to Section 10(23C), which refers to the procedure for approval of applications including those made by trusts and institutions imparting education, one can discern no such restrictions. From the pointed reference to ‘audited annual accounts’ as one of the heads of information which can be legitimately called or requisitioned for consideration at the stage of approval of an application, the inference is clear: the Commissioner or the concerned authority’s hands are not tied in any manner whatsoever. The observations to the contrary in American Hotel (supra) appear to have overlooked the discretion vested in the D Commissioner or the relevant authority to look into past history of accounts, and to discern whether the applicant was engaged in fact, ‘solely’ in education. American Hotel (supra) excluded altogether inquiry into the accounts by stating that such accounts may not be available. Those observations in the opinion of the court assume that only newly set up societies, trusts, or institutions may apply for exemption. Whilst the statute potentially applies to newly created organizations, institutions or trusts, it equally applies to existing institutions, societies or trust, which may seek exemption at a later point. At the same time, this court is also of the opinion that the Commissioner or the concerned authority,while considering an application for approval and the further material called for (including audited statements), should confine the inquiry ordinarily to the nature of the income earned and whether it is for education or education related objects of the society (or trust). If the surplus or profits are generated in the hands of the assessee applicant in the imparting of education or related activities, disproportionate weight ought not be given to surpluses or profits, provided they are incidental. At the stage of registration or approval therefore focus is on the activity and not the proportion of income. If the income generating activity is intrinsically part of education, the Commissioner or other authority may not on that basis alone reject the application. H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1137 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

Applicability of Other Laws A

64Copy pinpoint64. In some appeals a grievance was articulated that the revenue did not grant approval to the society or educational institution because it was not registered under the A.P. Charities Act. Section 1(3)(a) the A.P. Charities Act is applicable to all public charitable institutions whether registered or not. The term‘public charitable institutions’ is defined, B and includes every charitable institution the administration of which is for the time being, amongst others, carried on by a society. ‘Charitable institution’, under Section 2(4), and ‘charitable purpose’ under Section 2 (5) of A.P Charities Act are defined as follows: “2 Definitions C ******* (4) ‘charitable institution ‘ means any establishment, undertaking, organisation or association formed for a charitable purpose and includes a specific endowment and dharmadayam; D (5) ‘charitable purpose’ includes- (a) relief of poverty or distress; (b) education; (c) medical relief; E

(d) advancement of any other object of utility or welfare to the general public or a section thereof not being an object of an exclusively religious nature.”

65Copy pinpoint65. Clearly, charitable objects – defined by the A.P. Charities Act, F are pari materia with the IT Act. Thus, establishments or associations or organizations (widely phrased terms) formed for ‘charitable purpose’ fall within the meaning of charitable institutions. These include societies and trusts, set up for educational purposes.

66Copy pinpoint66. By Section 43(1), every charitable institution, existing as on G the date of commencement of the A.P. Charities Act was obliged to apply for registration.‘New trusts or institutions are obliged, within ninety days of their formation, to apply for registration’ through persons in charge - the Registrar, by Section 43(2) to Section 43 (4) is obliged to inquire into the material provided with the application, and take into account other relevant material. Section 43 (5) reads as follows: H

p. 1138 Copy page pinpoint

A “43(5) On receipt of the application, the Assistant Commissioner shall, after making such enquiry as he thinks fit and hearing any person having interest in the institution or endowment, pass an order directing its registration and grant to the trustee or other person a certificate of registration containing the particulars furnished in the application with the alterations, if any, made by him as a result of his enquiry.”

67Copy pinpoint67. In the event of failure to comply with Section 43(1), or failure to intimate changes in the trust, or for supplying false information, the trustee or other person in charge, can be penalized by Section 43 (11). Section 44 empowers the Commissioner to direct charitable organizations and trusts to comply and register under the Act.

68Copy pinpoint68. The assessees had argued that since they were registered under the Andhra Pradesh Societies Registration Act, 2001 or were trusts duly registered, they could not be compelled to comply with state laws as a condition for consideration of their application as charitable institutions, under Section 10 (23C).

69Copy pinpoint69. This court is of the opinion that the findings in the impugned judgment on this aspect are sound. The requirement of registration of every charitable institution is not optional. Aside from the fact that the consequences of non-registration are penal, which indicates the mandatory nature of the provisions of the A.P. Charities Act, such local laws provide the regulatory framework by which annual accounts, manner of choosing the governing body (in terms of the founding instrument: trust, society, etc.), acquisition and disposal of properties, etc. are constantly monitored. Entry 32 of List II of the Seventh Schedule to the F Constitution reads as follows: “32. Incorporation, regulation and winding up of corporations, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; cooperative G societies.” By Entry 28, List III of the Seventh Schedule, the states have undoubted power to enact on the subject of charities: “28. Charities and charitable institutions, charitable and religious endowments and religious institutions.” H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1139 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

The A.P. Charities Act provides a statutory regulatory framework in regard to activities of charitable institutions in the state. Sections 72- 74 deal with surplus funds and their treatment; Sections 75-77 deal with properties of trusts and charitable institutions and restrictions on transfers. These and other provisions enable the State, which is concerned in the proper administration of such organizations, to ensure that they are managed efficiently without misfeasance. They also contain provisions to protect the interests of trusts, especially funds and properties.

70Copy pinpoint70. In view of the above discussion, it is held that charitable institutions and societies, which may be regulated by other state laws, have to comply with them- just as in the case of laws regulating education (at all levels). Compliance with or registration under those laws, are also C a relevant consideration which can legitimately weigh with the Commissioner or other concerned authority, while deciding applications for approval under Section 10 (23C).

71Copy pinpoint71. This reasoning equally applies especially in Section 11(4A) which speaks of profits incidental which specifies that exemption in D relation to income or trust of an institution which are profits or means of business cannot be exempted ‘unless the business is incidental, trust or as the case may be institution and separate books of accounts are maintained by such trusts or institution in respect of such business’. Thus, the underlying objective of seventh proviso to Section E 10(23C) and of Section 11(4A) are identical. These have to be read in the light of the main provision which spells out the conditions for exemption under Section 10(23C) - the same conditions would apply equally to the other sub-clauses of Section 10(23C) that deal with education, medical institution, hospitals etc. F

72Copy pinpoint72. What then is ‘incidental’ business activity in relation to education? Imparting education through schools, colleges and other such institutions would be per se charity. Apart from that there could be activities incidental to providing education. One example is of text books. This court in a previous ruling in Assam State Text Book Production & Publication Corpn. Ltd. v. Commissioner of Income Tax29 has held G that dealing in text books is part of a larger educational activity. The Court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning 29 Assam State Text Book Production & Publication Corpn. Ltd. v. Commissioner of Income Tax, (2009) 17 SCC 391. H

p. 1140 Copy page pinpoint

A of its pupils by sourcing and providing text books, such activity would be ‘incidental’to education. Similarly, if a school or other educational institution ran its own buses and provided bus facilities to transport children, that too would be an activity incidental to education. There can be similar instances such as providing summer camps for pupils’ special educational courses, such as relating to computers etc., which may benefit its pupils in their pursuit of learning.

73Copy pinpoint73. However, where institutions provide their premises or infrastructure to other entities, trusts, societies etc., for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses etc., then the income derived from such activity cannot be characterised as part of education or ‘incidental’ to the imparting education. Such income can properly fall under the other heads of income.

74Copy pinpoint74. In R.R.M Educational Society’s appeal before this court,the charitable status of the appellant within Section 10(23C) was denied inter alia on the ground that the institution was not merely imparting education but also was running hostels. It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M Educational Society was providing hostel facility only to its students or to others as well.If the institution provided hostel and allied facilities(such as catering etc.) only to its students, that activity would clearly be ‘incidental’ to the objective of imparting education.

75Copy pinpoint75. The last ground urged was with respectto the refusal by the F Commissioner to register certain institutions who had amended their objectives. This court is of the opinion that the impugned judgment cannot be faulted with in rejecting the challenge by the appellant societies and trusts, because the requirement of trust or societies applying for registration or approval under the provisos to Section 10(23)(C) spell out a specific time (before 30 September). As the High Court has observed, G there is no provision to extendsuch a deadline. In the circumstances for the concerned year, the reasoning of the High Court in refusing to interfere with the concerned authorities decisions to approve or reject the registration of the institution, is hereby affirmed.

76Copy pinpoint76. The conclusions of this court are summarized as follows: H

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1141 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

a. It is held that the requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in educationor educational activities, and not engage in any activity of profit,means that such institutions cannot have objects which are unrelated to education. In other words,all objects of the society, trust etc., mustrelate to imparting education or be in relation to educational activities. b. Where the objective of the institution appears to be profit- oriented, such institutions would not be entitled to approval under Section 10(23C) of the IT Act. At the same time, where surplus accrues in a given year or set of years per se,it is not a bar, provided such surplus is generated in the course of providing education or educational activities. c. The seventh proviso to Section 10(23C), as well as Section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education. d. The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A)merely means that the profits of business which is ‘incidental’ to educational activity – as explained in the earlier part of the judgment i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc. e. The reasoning and conclusions in American Hotel (supra)and Queen’s Education Society(supra)so far as they pertain to the interpretation of expression ‘solely’are hereby disapproved.The judgments are accordingly overruled to that extent. f. While considering applications for approval under Section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for H

p. 1142 Copy page pinpoint

A recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accountswould be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under Section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see thepattern of income and expenditure. g. It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc. seeking approval under Section 10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from 01.04.2021.

77Copy pinpoint77. In a knowledge based, information driven society, true wealth is education – and access to it. Every social order accommodates, and even cherishes, charitable endeavour, since it is impelled by the desire to give back, what one has taken or benefitted from society. Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade, nor commerce, has been declared by F one of the most authoritative pronouncements of this court in T.M.A Pai Foundation (supra). The interpretation of education being the ‘sole’ object of every trust or organization which seeks to propagate it, through this decision, accords with the constitutional understanding and, what is more, maintains its pristine and unsullied nature.

78Copy pinpoint78. In the light of the foregoing discussion, the assessees’ appeals fail. It is however clarified that their claim for approval or registration would have to be considered in the light of subsequent events, if any, disclosed in fresh applications made in that regard. This court is further of the opinion that since the present judgment has departed from the previous rulings regarding the meaning of the term ‘solely’, in order to

M/S NEW NOBLE EDUCATIONAL SOCIETY v. THE CHIEF 1143 COMMISSIONER OF INCOME TAX 1 [S. RAVINDRA BHAT, J.]

avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, it would be in the larger interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively. The appeals are hereby dismissed, without order on costs. B

Divya Pandey Appeals dismissed. (Assisted by : Priyanshu Agarwal, LCRA)