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Income Tax - Trust - Charitable - Activity - Education - Profit - Supreme Court

1. CIT v. Surat Art Silk Cloth Manufacturers' Assn., (1980) 121 ITR - Supreme Court - defined of "charitable purpose" & "activity for profit"
2. Dharmadeepti v. CIT [(1978) 3 SCC 499 : 1978 SCC (Tax) 193
3. Privy Council in the Tribune case [AIR 1939 PC 208 : In Re the Trustees of the Tribune, (1939) 7 ITR 415
4. Sole Trustee, Loka Shikshana Trust case [(1976) 1 SCC 254 : 1976 SCC (Tax) 14 : (1975) 101 ITR 234]
5. Indian Chamber of Commerce case [(1976) 1 SCC 324 : 1976 SCC (Tax) 41 : (1975) 101 ITR 796]
6. Aditanar Educational Institution v. Additional Commissioner of Income Tax, (1997) 224 ITR 310
7. American Hotel & Lodging Assn. Educational Institute v. CBDT, (2008) 301 ITR 86
8. Oxford University Press [(2001) 3 SCC 359 : (2001) 247 ITR 658]
9.  Municipal Corpn. of Delhi v. Children Book Trust and Safdarjung Enclave Educational Society, (1992) 3 SCC 390
10. S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax, (1998) 2 SCC 584

M/S Queen'S Educational Society vs Commr.Of Income Tax on 16 March, 2015, Supreme Court

The Supreme Court had to consider appeals arising from the judgements of the Uttarakhand High Court in Queens Equcational Society 319 ITR 160 and the Punjab and Haryana High Court in Pine Grove International Charitable Trust v. Union of India (2010) 327 ITR 273 concerning the interpretation of s.10(23C) (iiiad) and (vi) of the Income-tax Act. HELD by the Supreme Court reversing Queens Equcational Society and affirming Pine Grove International Charitable Trust v. Union of India:

Define "activity for profit"

1) 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 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.

2) 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.

3)  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.

4) 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.

5) 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

6) 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.
................

(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 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.

(6) The correct tests which have been culled out in the three Supreme Court judgments, namely, Surat Art Silk Cloth 121 ITR 1 (SC), Aditanar 224 ITR 310 (SC), 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.

(7) In addition, we hasten to add that the 13th proviso to 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.

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