# M/S. QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER OF INCOME TAX

- **Citation:** [2015] 3 S.C.R. 838
- **Court:** Supreme Court of India
- **Decided:** 2015-03-16
- **Case number:** Civil Appeal No. 5167 of 2008
- **Bench:** T.S. Thakur, R.F. Nariman
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-queen-s-educational-society-v-commissioner-of-income-tax-30550
- **Pages:** 38

## Headnote

Income Tax Act, 1961: ss.10 (23c) (iii-ad), 10(23c) (vi)
- Exemption under - Held: 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
0
the conclusion that it ceases to exist solely for educational
purposes and becomes an institution for the purpose of
making profit - There is difference between the making of
a surplus and an institution being carried on "for profit" -
No inference arises that merely because imparting
E education results in making a surplus, it becomes an activity
for profit - Such surplus would not come within the ambit
of denying exemption.
Disposing of the appeals, the Court
F
HELD: 1. Section 10(23c)(iiiad) has three
requirements - (a) the educational institution must exist
solely for educational purposes (b) it should not be for
purposes of profit and (c) the aggregate annual receipts
of such institution should not exceed the amount or
G annual receipts as may be prescribed. Where an
educational institution carries on the activity of
education primarily for educating persons, the fact that
H
838
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 839
OF INCOME TAX
it makes a surplus does not lead to the conclusion that A
it ceases to exist solely for educational purposes and
becomes an institution for the purpose of making profit.
The predominant object test must be applied - the
purpose of education should not be submerged by a
profit making motive. A distinction must be drawn B
between the making of a surplus and an institution
being carried on "for profit". No inference arises that
merely because imparting educ.-ition results in making
a profit, it becomes an activity for profit. If after meeting
expenditure, a surplus arises incidentally from the C
activity carried on by the educational institution, it will
not be cease to be one existing solely for educational
purposes. The ultimate test is whether on an overall
view of the matter in the concerned assessment year 0
the object is to make profit as opposed to educating
persons. [Paras 5 and 11] [842-D; 854-G-H; 855-A-D]
CIT v. Surat Art Silk Cloth Manufacturers' Assn. (1980)
121 ITR 1; Aditanar Educational Institution v. Additional
Commissioner of Income Tax (1997) 224 ITR 310; American E
Hotel & Lodging Assn. Educational Institute v. CBDT (2008)
301 ITR 86; Municipal Corpn. of Delhi v. Children Book Trust
and Safdarjung Enclave Educational Society (1992) 3 SCC
390: 1992 (2) SCR 535; S.RM.M.CT.M. Tiruppani Trust v.
F
Commissioner of Income Tax (1998) 2 SCC 584: 1998 (1)
SCR 653 - relied on.
St. Lawrence Educational Society (Regd.) v.
Commissioner of Income Tax & Anr.(2011) 53 DTR (Del) G
130; Tolani Education Society v. Deputy Director of Income
Tax (Exemption) & Ors, (2013) 351 ITR 184 - referred to.
Case Law Reference
H
840
SUPREME COURT REPORTS
[2015] 3 S.C.R.
A
(1980) 121 ITR 1
Relied on.
Para 8
(1997) 224 ITR 310
Relied on.
Para 9
(2008) 301 ITR 86
Relied on.
Para 10
B
1992 (2) SCR 535
Relied on.
Para 19
1998 (1) SCR 653
Relied on.
Para 24
(2011) 53 DTR (Del) 130
Relied on.
Para 24
c
(2013) 351 ITR 184
Relied on.
Para 24

## Text

_Characters 0–39,877 of 64,257. This is a partial read: ask again with offset=39877 for what follows._

[2015] 3 S.C.R. 838.
A
M/S. QUEEN'S EDUCATIONAL SOCIETY
B
c
v.
COMMISSIONER OF INCOME TAX
(Civil Appeal No. 5167 of 2008)
MARCH 16, 2015.
[T.S. THAKUR AND R.F. NARIMAN, JJ.]
Income Tax Act, 1961: ss.10 (23c) (iii-ad), 10(23c) (vi)
- Exemption under - Held: 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
0
the conclusion that it ceases to exist solely for educational
purposes and becomes an institution for the purpose of
making profit - There is difference between the making of
a surplus and an institution being carried on "for profit" -
No inference arises that merely because imparting
E education results in making a surplus, it becomes an activity
for profit - Such surplus would not come within the ambit
of denying exemption.
Disposing of the appeals, the Court
F
HELD: 1. Section 10(23c)(iiiad) has three
requirements - (a) the educational institution must exist
solely for educational purposes (b) it should not be for
purposes of profit and (c) the aggregate annual receipts
of such institution should not exceed the amount or
G annual receipts as may be prescribed. Where an
educational institution carries on the activity of
education primarily for educating persons, the fact that
H
838
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 839
OF INCOME TAX
it makes a surplus does not lead to the conclusion that A
it ceases to exist solely for educational purposes and
becomes an institution for the purpose of making profit.
The predominant object test must be applied - the
purpose of education should not be submerged by a
profit making motive. A distinction must be drawn B
between the making of a surplus and an institution
being carried on "for profit". No inference arises that
merely because imparting educ.-ition results in making
a profit, it becomes an activity for profit. If after meeting
expenditure, a surplus arises incidentally from the C
activity carried on by the educational institution, it will
not be cease to be one existing solely for educational
purposes. The ultimate test is whether on an overall
view of the matter in the concerned assessment year 0
the object is to make profit as opposed to educating
persons. [Paras 5 and 11] [842-D; 854-G-H; 855-A-D]
CIT v. Surat Art Silk Cloth Manufacturers' Assn. (1980)
121 ITR 1; Aditanar Educational Institution v. Additional
Commissioner of Income Tax (1997) 224 ITR 310; American E
Hotel & Lodging Assn. Educational Institute v. CBDT (2008)
301 ITR 86; Municipal Corpn. of Delhi v. Children Book Trust
and Safdarjung Enclave Educational Society (1992) 3 SCC
390: 1992 (2) SCR 535; S.RM.M.CT.M. Tiruppani Trust v.
F
Commissioner of Income Tax (1998) 2 SCC 584: 1998 (1)
SCR 653 - relied on.
St. Lawrence Educational Society (Regd.) v.
Commissioner of Income Tax & Anr.(2011) 53 DTR (Del) G
130; Tolani Education Society v. Deputy Director of Income
Tax (Exemption) & Ors, (2013) 351 ITR 184 - referred to.
Case Law Reference
H
840
SUPREME COURT REPORTS
[2015] 3 S.C.R.
A
(1980) 121 ITR 1
Relied on.
Para 8
(1997) 224 ITR 310
Relied on.
Para 9
(2008) 301 ITR 86
Relied on.
Para 10
B
1992 (2) SCR 535
Relied on.
Para 19
1998 (1) SCR 653
Relied on.
Para 24
(2011) 53 DTR (Del) 130
Relied on.
Para 24
c
(2013) 351 ITR 184
Relied on.
Para 24
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
5167 of 2008.
D
From the Judgment and Order dated 24.09.2007 of the
E
High Court of Uttarkhand at Nainital in Income Tax Appeal
No. 103/2007.
WITH
Civil Appeal Nos. 5168 of 2008, 8962 of 2010, 909 of
2011, 2919, 2920, 2921, 2922 and 2923 of 2015.
Ajay Vohra, Dhruv Mehta, V. Giri, Dr. Rakesh Gupta,
Ashwani Taneja, Poonam Ahuja, Ambhoj Kumar Sinha,
F Mukul Mathur, S. K. Verma, Arijit Prasad, Gargi Khanna, B.
G
H
V. Balaram Das, Kavita Jha, Anil Katiyar, Namita Choudhary,
Vipin Gogia, Ashish Agarwal, Jaspreet Gogia, Ashok K.
Mahajan, John Mathew, Pawanshree Agrawal for the
Appearing Parties.
The Judgment of the Court was delivered by
R.F.NARIMAN, J. 1. Leave granted in the special leave
petitions.
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 841
OF INCOME TAX [R.F.NARIMAN, J.]
2. The present appeals relate to a common judgment A
dated 241h September, 2007 passed by the High Court of
Uttarakhand, Nainital in two income tax appeals, and a
judgment of the Punjab and Haryana High Court dated 29'h
January, 2010 in Pine Grove International Charitable Trust
v. Union of India - (2010) 327 ITR 273 . Various other B
appeals (excepting Civil Appeal No.8962 of 2010) are filed
by the Union of India/ Central Board of Direct Taxes in cases
where the aforesaid judgment in Pine Grove has been
followed.
3. The facts necessary to understand the controversy
. c
in the two income tax appeals before the Uttarakhand High
Court, Nainital, may be gleaned from the facts of one of
them, namely, the Queen's Educational Society case. The
appellant filed its return for assessment years 2000-2001
D
and 2001-2002 showing a net surplus of Rs.6,58,862/- and
R~.7,82,632/- respectively. Since the appellant was
established with the sole object of imparting education, it
claimed exemption under Section 10(23C) (iiiad) of the
Income Tax Act, 1961. The Assessing Officer vide its order E
dated 201h February, 2003 rejected the exemption claimed
by the appellant. The CIT (Appeals} by its order dated 28'h
March, 2003 allowed the appellant's appeal, and the ITAT,
Delhi, by its judgment dated 7th July, 2006 passed an order F
dismissing the appeal preferred by the revenue. In a
reference to the High Court under Section 260A of the
Income Tax Act, the High Court vide the impugned judgment
set aside the judgment of the ITAT and affirmed the order
of the Assessing Officer.
G
4. These appeals from the Uttarakhand High Court,
Nainital, concern themselves with the provision of Section
10(23C) (iiiad) of the Act:
"Section 10- Incomes not included in total income.-
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A
In computing the total income of a previous year of any
person, any income falling within any of the following
clauses shall not be included-
(23-C) any income received by any person on behalf
B
of-
(iii-acf) any university or other educational institution
existing solely for educational purposes and not for
purposes of profit if the aggregate annual receipts of
c ·
such university or educational institution do not exceed
the amount of annual receipts as may be prescribed"
5. It will be noticed that the Section has three
requirements - (a) the educational institution must exist
0
solely for educational purposes (b) it should not be for
purposes of profit and (c) the aggregate annual receipts of
such institution should not exceed the amount or annual
receipts as may be prescribed. Such prescription is to be
found in Rule 2CA being an amount of Rs.1 crore.
E
F
G
6. The said Section was inserted by Finance Act No.2
of 1998 with effect from 1'1 April, 1999. Prior thereto, the
Income Tax Act had a corresponding Section, namely,
Section 10(22) which was as follows:-
"Section 10- Incomes not included in total income.-
In computing the total income of a previous year of any
person, any income falling within any of the following
clauses shall not be included-
(22) any income of a university or other educational
institution, existing solely for educational purposes and
not for purposes of profit"
7. We have heard learned counsel for the assessees
H as well as learned counsel for the revenue. The assessees
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 843
OF INCOME TAX [R.F.NARIMAN, J.]
argue that the impugned judgment is contrary to the law A
laid down by at least three Supreme Court judgments.
Further, the wrong test has been adopted and followed,
which is a test laid down by the Assessing Officer and not
by any Supreme Court judgment - namely, that whenever
a profiUsurplus is made by an educational institution, it B
ceases to exist solely for educational p.urposes and
becomes a profit making enterprise. In support of the
Punjab and Haryana High Court judgment under appeal,
counsel for the assessees argued that since the sole basis
for not granting them exemption for the assessment years · C
under question was the following of the Uttarakhand High
Court judgment, if the said judgment is found to be incorrect,
they are bound to succeed. For that reason, the revenue's
appeal against the Punjab and Haryana High Court
judgment should be dismissed. Counsel for the revenue, .D
on the other hand, attempted to support the Uttarakhand
High Court judgment by stating that the Section doe~ not
contemplate the making of large profits. If an educational
institution in fact makes large profits then even though it E
may plough such profits back into the purchase of assets
for education, yet such institution cannot be said to be
existing solely for educational purposes. It would then
become an institution which would really be for profit.
8. In CIT v. Surat Art Silk Cloth Manufacturers'
Assn., (1980) 121 ITR 1, this Court while construing the
definition of "charitable purpose" in Section 2(15) of the
Income Tax Act held:
F
"17. The next question that arises is as to what is the G
meaning of the expression "activity for profit". Every
trust or institution must have a purpose for which it is
established and every purpose must for its
accomplishment involve the carrying on of an activity. H
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The activity must, however, be for profit in order to
attract the exclusionary clause and the question
therefore is when can an activity be said to be one for
profit? 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. The purpose of the trust, as pointed out by
one of us (Pathak,J.) in Dharmadeepti v. CIT [(1978) 3
SCC 499: 1978 SCC (Tax) 193] must be "'essentially
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 845
OF INCOME TAX [R.F.NARIMAN, J.]
charitable in nature" and it must not be a cover for A
carrying on an activity which has profit making as its
predominant object. This interpretation of the
exclusionary clause in Section 2 clause ( 15) derives
considerable support from the speech made by the
Finance Minister while introducing that provision. The B
Finance Minister explained the reason for introducing
this exclusionary clause in the following words:
"The definition of 'charitable purpose' in that clause is
at present so widely worded that it can be taken C
advantage of even by commercial concerns which,
while ostensibly serving a public purpose, get fully paid
for the benefits provided by them namely, the
newspaper industry which while running its concern on
commercial lines can claim that by circulating D
newspapers it was improving the general knowledge of
the public. In order to prevent the misuse of this
definition in such cases, the Select Committee felt that
the words 'not involving the carrying on of any activity
for profit' should be added to the definition."
E
It is obvious that the exclusionary clause was added
with a view to overcoming the decision of the Privy
Council in the Tribune case [AIR 1939 PC 208: In Re
the Trustees of the Tribune, (1939) 7 ITR 415] where F
it was held that the object of supplying the community
with an organ of educated public opinion by publication
of a newspaper was an object of general public utility
and hence charitable in character, even though the
activity of publication of the newspaper was carried on G
commercial lines with the object of earning profit. The
publication of the newspaper was an activity engaged
in by the trust for the purpose of carrying out its
charitable purpose and on the facts it was clearly an H
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activity which had profit making as its predominant
object, but even so it was held by the Judicial
Committee that since the purpose served was an object
of general public utility, it was a charitable purpose. It
is clear from the speech of the Finance Minister that it
was with a view to setting at naught this decision that
the exclusionary clause was added in the definition of
"charitable purpose''. The test which has, therefore, now.
to be appli~d is whether the predominant object of the
activity involved in carrying out the object of general
public utility is to subserve the charitable purpose or to
earn profit. Where profit making is the predominant
object of the activity, the purpose, though an object of
general public utility, would cease to be a charitable
purpose. But where the predominant object of the
activity is to carry out the charitable purpose and not
to earn profit, it would not lose its character of a
'
.
charitable purpose merely because some profit arises
from the activity. The exclusionary clause does not
require that the activity must be carried on in such a
manner that it does not result in any profit. It would
indeed be difficult for persons in charge of a trust or
institution to so carrv on the activity that the expenditure
balances the income and there is no resulting profit.
F
That would not only be difficult of practical realisation
but would also reflect unsound principle of
management. We, therefore, agree with Beg, J., when
he said in Sole Trustee, Loka Shikshana Trust case
[(1976) 1 sec 254: 1976 sec (Tax) 14: (1975) 101
G
ITR 234] that "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. The test
now is, more clearly than in the past, the genuineness
H
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 847
OF INCOME TAX [R.F.NARIMAN, J.]
of the purpose tested by the obligation created to spend A
the money exclusively or essentially on charity". The
learned Judge also added that the restrictive condition
"that the purpose should not involve the carrying on of
any activity for profit would be satisfied if profit making
is not the real object" (emphasis supplied). We wholly B
endorse these observations.
The application of this test may be illustrated by taking
a simple example. Suppose the Gandhi Peace
Foundation which has been established for propagation C
of Gandhian thought and philosophy, which would
admittedly be an object of general public utility,
undertakes publication of a monthly journal for the
purpose of carrying out this charitable object and
charges a small price wtiich is more than the cost of D
the publication and leaves a little profit, would it deprive
the Gandhi Peace Foundation of its charitable
character? The pricing of the monthly journal would
undoubtedly be made in such a manner that it leaves
sor:!le profit for the Gandhi Peace Foundation, as,
E
indeed, would be done by any prudent and wise
management, but that cannot have the effect of
polluting the charitable character of the purpose,
because the predominant object of the activity of F
publication of the monthly journal would be to carry out
the charitable purpose by propagating Gandhian
thought and philosophy and not to make profit or in
other words, profit making would not be the driving force
behind this activity. But it is possible that in a given case G
the degree or extent of profit making may be of such a
nature as to reasonably lead to the inference that the
real object of the activity is profit making and not serving
the charitable purpose. If, for example, in the illustration
given by us, it is found that the publication of the H
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monthly journal is carried on wholly on commercial lines
and the pricing of the monthly journal is made on the
same basis on which it would be made by a commercial
organisation leaving a large margin of profit, it might
be difficult to resist the inference that the activity of
publication of the journal is carried on for profit and the
purpose is non-charitable. We may take by way of
illustration another example given by Krishna Iyer, J.,
in the Indian Chamber of Commerce case [(1976) 1
sec 324 : 1976 sec (Tax) 41 : (1975) 101 ITR 796]
where a blood bank collects blood on payment and
supplies blood for a higher price on commercial basis.
Undoubtedly, in such a case, the blood bank would be
serving an object of general public utility but since it
advances the charitable object by sale of blood as an
activity carried on with the object of making profit, it
would be difficult to call its purpose charitable. Ordinarily
there should be no difficulty in determining whether the
predominant object of an activity is advancement of a
charitable purpose or profit making. But cases are
bound to arise in practice which may be on the
borderline and in such cases the solution of the problem
whether the purpose is charitable or not may involve
much refinement and present real difficulty.
There is, however, one comment which is necessary
to be made whilst we are on this point and that arises
out of certain observations made by this Court in Sole
Trustee, Loka Shikshana Trust case ((1976) 1 SCC 254
: 1976 SCC (Tax) 14: (1975) 101 ITR 234] as well as
Indian Chamber of Commerce case ((1976) 1SCC324
: 1976 SCC (Tax) 41 : (1975) 101 ITR 796] . It was said
by Khanna, J. in Sole Trustee, Loka Shikshana Trust
case ((1976) 1SCC254: 1976 SCC (Tax) 14: (1975)
101 ITR 234] :
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 849
OF INCOME TAX [R.F.NARIMAN, J.]
"[l]f the activity of a trust consists of carrying on a A
business and there are no restrictions on its making
profit, the court would be well justified in assuming in
the absence of some indication to the contrary that the
object of the trust involves the carrying on of an activity
for profit."
B
And to the same effect, observed Krishna Iyer, J. in the
Indian Chamber of Commerce case [(1976) 1 SCC 324
: 1976 SCC (Tax) 41 : (1975) 101 ITR 796] when he
said:
C
"An undertaking by a business organisation is ordinarily
assumed to be for profit unless expressly or by
necessary implication or by eloquent surrounding
circumstances the making of profit stands loudly o
negatived .... A pragmatic condition, written or unwritten,
proved by a prescription of profits or by long years, of
invariable practice or spelt from some strong
surrounding circumstances indicative of anti-profit
motivation -
such a condition will qualify for charitable E
purpose."
Now we entirely agree with the learned Judges who
decided these two cases that activity involved in
carrying out the charitable purpose must not be F
motivated by a profit objective but it must be undertaken
for the purpose of advancement or carrying out of the
charitable purpose. But we find it difficult to accept their
thesis that whenever an activity is carried on which
yields profit, the inference must necessarily be drawn, G
in the absence <;>f some indication to the contrary, that
the activity is for profit and the charitable purpose
involves the carrying on of an activity for profit. We do
not think the Court would be justified in drawing any
such inference merely because the activity results in
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;:irofit. It is in our opinion not at all necessary that there
must be a provision in the constitution of the trust or
institution that the activity shall be carried on no profit
no loss basis or that profit shall be proscribed. Even if
there is no such express provision, the nature of the
charitable purpose, the manner in which the activity for
advancing the charitable purpose is being carried on
and the surrounding circumstances may clearly indicate
that the activity is not propelled by a .dominant profit
motive. 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.
9. Coming closer to the section at hand, in Aditanar
Educational Institution v. Additional Commissioner of
Income Tax, (1997) 224 ITR 310, this Court while
E construing the predecessor Section, namely, Section 10(22)
F
G
H
of the Income Tax act, held:
"The High Court has made an observation that any
income which has a direct relation or incidental to the
running of the institution as such would qualify for
exemption. We may state that the language of Section
10(22) of the Act is plain and clear and the availability
of the exemption should be evaluated each year to find
out whether the institution existed during the relevant
year solely for educational purposes and not for the
purposes of profit. After meeting the expenditure. if any
surplus results incidentally from the activity lawfully
carried on by the educational institution. it will not cease
to be one existing solely for educational purposes since
'
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 851
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the object is not one to make profit. The decisive or A
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."
B
10. In American Hotel & Lodging Assn. Educational
Institute v. CBDT, (2008) 301 ITR 86, this Court dealt with
Section 10(23C)(vi) as follows:
"29. In CIT v. Surat Art Silk Cloth Manufacturers' Assn.
[(1980) 2 sec 31 : 1980 sec (Tax) 110: (1980) 121
ITR 1] it has been held by this Court that test of
predominant object of the activity is to be seen whether
c
it exists solely for education and not to earn profit. D
However, the purpose would not lose its character
merely because some profit arises from the activity.
That, it is not possiole to carry on educational activity
in such a way that the expenditure exactly balances the
income and there is no resultant profit, for, to achieve E
this, would not only be difficult of practical realisation
but would reflect unsound principles of management.
In order to ascertain whether the institute is carried on
with the object of making profit or not it is the duty of
the prescribed authority to ascertain whether the F
balance of income is applied wholly and exclusively to
the objects for which the applicant is established.
30. In deciding the character of the recipient, it is not
necessary to look at the profits of each year, but to G
consider the nature of the activities undertaken in India.
If the Indian activity has no correlation with education,
exemption has to be denied (see judgment of this Court
in Oxford University Press [(2001) 3 SCC 359: (2001)
247 ITR 658] ). Therefore, the character of the recipient H
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of income must have character of educational institution
in India to be ascertained from the nature of the
activities. If after meeting expenditure, surplus remains
incidentally from the activity carried on by the
educational institution, it will not cease to be one
existing solely for educational purposes. In other words,
existence of surplus from the activity will not mean
absence of educational purpose (see judgment of this
Court in Aditanar Educational lnstitutionv. CIT [(1997)
3 SCC 346: (1997) 224 ITR 310] ). 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.
32. We shall now consider the effect of insertion of
provisos to Section 10(23-C)(vi) vide the Finance (No.
2) Act, 1998. Section 10(23-C)(vi) is analogous to
Section 10(22). To that extent, the judgments of this
Court as applicable to Section 10(22) would equally
apply to Section 10(23-C)(vi). The problem arises with
the insertion of the provisos to Section 10(23-C)(vi).
With the insertion of the provisos to Section 10(23C)(vt) the applicant who seeks approval has not only
to show that it is an institution existing solely for
educational purposes [which was also the requirement
under Section 10(22)] but it has now to obtain initial
approval from the PA, in terms of Section 10(23-C)(vt)
by making an application in the standardised form as
mentioned in the first proviso to that section. That
condition of obtaining approval from the PA came to be
inserted because Section 10(22) was abused by some
educational institutions/universities. This proviso was
inserted along with other provisos because there was
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 853
OF INCOME TAX [R.F.NARIMAN, J.]
no monitoring mechanism to check abuse of exemption A
provision. With the insertion of the first proviso, the PA
is required to vet the application, This vetting process
is stipulated by the second proviso. Under the twelfth
proviso, the PA is required to examine cases where an
applicant does not apply its income during the year of B
receipt and accumulates it but makes payment
therefrom to any trust or institution registered under
Section 12-AA 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 C
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 PA as to the meaning of the 0
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 circumstances are given under wi1ich
E
the PA is empowered to withdraw the approval earlier
granted. Under that proviso, if the PA 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 F
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 G
approval is granted then the PA is empowered to
withdraw the approval earlier granted after complying
with the procedure mentioned therein.
33. Having analysed the provisos to Section 10(23H
854
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SUPREME COURT REPORTS
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C)(v1) one finds that there is a difference between
stipulation of conditions and compliance therewith. 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 standardised form in terms of the first
proviso. It is only if the prerequisite condition of actual
existence of the educational institution is fulfilled that
the question of compliance with 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.
34. To make the section with the proviso workable we
are of the view that the monitoring conditions in the third
proviso like application/utilisation of income, pattern of
investments to be made, etc. could be stipulated as
conditions by the PA subject to which approval could
be granted."
11. Thus, the law common to Section 10(23C) (iiiad)
F and (vi) rnay 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
G
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
H
purpose of education should not be submerged by a
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 855
OF INCOME TAX tR.F.NARIMAN, J.)
profit making motive.
A
(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 beB
comes 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 c
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.
12. The Uttarakhand High Court in the impugned
judgment dated 241" September, 2007 quoted the
ITAT order in paragraph 7 as follows:
D
"The ITAT while granting exemption under Section E
10(23C) (iiiad) recorded the following reasons:
"During the years relevant for asstt. Year 2000-01 and
2001-02, the excess of income over expenditure stood
at Rs.6,58,862/- and Rs.7,82,632/- respect:vely. It was F
also noticed that the appellant society had made
investment in fixed assets including building at
Rs.9,52,010/- in F.Y. 1999-2000 and Rs.8,47,742/- in
FY 2000-01 relevant for Asstt. Years 2000-01 and
2001-02 respectively. Thus, if the amount of G
investment into fixed assets such as building, furniture
and fixture etc. were also kept in view, there was
hardly any surplus left ..... The assessee society is
undoubtedly engaged in imparting education and has
to maintain a teaching and non teaching staff and has H
856
A
B
c
D
E
F
G
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SUPREME COURT REPORTS
[2015] 3 S.C .. R.
to pay for their salaries and other incidental expenses.
It, therefore, becomes necessary to charge certain fee
from the students for meeting all these expenses. The
charging of fee is incidental to the prominent objective
of the trust i.e. imparting education. The trust was
initially running the school in a rented building and the
surplus, i.e. the excess of the receipts over
expenditure.
In the year under appeal (and in the earlier appeals)
has enabled the appellant to acquire its own property,
acquire computers, library books, sports equipments
etc. for the benefit of the students. And more
importantly the members of the society have not
utilized any part of the surplus for their own benefit.
The AO wrongly interpreted the resultant surplus as
the main objective of the assessee trust. As held
above, profit is only incidental to the main object of
spreading education. If there is no surplus out of the
difference between receipts and outgoings, the trust
will not be able to achieve the objectives. Any
education institution cannot be run in rented premises
for all the times and without necessary equipment and
without paying to the staff engaged in imparting
•
education. The assessee is not getting any financial
aid/assistance from the Government or other
philanthropic agency and, therefore, to achieve the
objective, it has to raise its own funds. But such
surplus would not come within the ambit of denying
exemption u/s 10(23C) (iiiad) of the Act."
13. Having set out the ITAT order, the Uttarakhand High
Court held:
"Thus, in view of the established fact relating to earned
H
profit, we do not agree with the reasoning given by the
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 857
OF INCOME TAX [R.F.NARIMAN, J.]
ITAT for granting exemption."
14. Having said this, the impugned judgment goes on
to quote Aditanar Educational Institution v. CIT. as
follows:-
A
B
"After meeting the expenditure, if any surplus result
incidentally from the activity lawfully carried on by the
educational institution, it will not cease to be one
existing solely for educational purpose since the object
is not one to make profit. The decisive or acid test is c
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 powers of the
concerned entity.
D
If one looks at the object clause, there are other
noble and pious objects but assessee society has done
nothing to achieve the other objects except pursuing
main object of providing education and earning profit.
E
Further, with profit earned the society has strengthened
or enhanced its capacity to earn more rather than to
fulfill other noble objects for the cause of poor and
needy people or advancement of religious purpose.
Therefore, the law laid down by the Apex. Court has
rightly been applied and exemption has also rightly
been refused by the Assessing Officer in the facts and
circumstances of the case."
F
15. It is clear that the High Court did not apply its mind G
independently. What has been copied is one paragraph
from the Supreme Court judgment in Aditanarfollowed by
a paragraph of faulty reasoning by the Assessing Officer
and the said faulty reasoning of the Assessing Officer has H
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(2015] 3 S.C.R.
A been wrongly said to be the law laid down by the Apex
Court.
16. Further, the Supreme Court Judgment in Municipal
Corpn. of Delhi v. Children Book Trust and Safdarjung
B Enclave Educational Society, (1992) 3 SCC 390 has then
been followed. The aforesaid judgment dealt with a property
tax provision, namely, Section 115 (4) of the Delhi Municipal
Corporation Act, 1957. Three questions were raised in the
c
D
said judgment as follows:-
"56. In the present case, the questions which arise for
our determination are:
(1) Whether the society or body is occupying and using
the land and building for a charitable purpose within the
meaning of sub-section (4)?
(it) What is the meaning of the expression "supported
wholly or in part by voluntary contribution"?
E
(iit) Whether any trade or business is carried on in the
premises within the meaning of sub-section (5)?"
17. In answering question one, the Court held that
School Education would only come within an exemption if
F it involved public benefit. Having so held, the Court stated:
G
H
"78. The rulings arising out of Income Tax Act may not
be of great help because in the Income Tax Act
"charitable purpose" includes the relief of the poor,
education, medical relief and the advancement of any
other object of general public utility. The advancement
of any other object of general public utility is not found
under the Delhi Municipal Corporation Act. In other
words, the definition is narrower in scope. This is our
answer to question No. 1."
QUEEN'S EDUCATIONAL SOCIETY v. COMMISSIONER 859
OF INCOME TAX [R.F.NARIMAN, J.]
18. Secondly, the extracted portion from the said A
judgment in the judgment of the Uttarakhand High Court
concerned itself with question two, namely, whether the
educational society is supported wholly or in part by
voluntary contributions. It is part of paragraph 80 of the said
judgment. If the sentences after the quoted portion are also B
set out, it becomes clear that the passage relied upon by
the High Court has absolutely nothing to do with the present
case. The entirety of the passage is now set out
herein below:
"82 .... In other words, what we want to stress is, where
a society or body is making systematic profit, even
though that profit is utilised only for charitable purposes,
c
yet it cannot be said that it could claim exemption. If,
merely qualitative test is applied to societies, even D
schools which are run on commercial basis making
profits would go out of the purview of taxation and could
demand exemption. Thus, the test, according to us,
must be whether the society could survive without
receiving voluntary contributions, even though it may E
have some income by the activities of the society. The
word "part" mean an appreciable amount and not an
insignificant one. The "part" in other words, must be
substantial part. What is substantial would depend upon
F
the facts and circumstances of each case."
19. It is clear, therefore, that the Uttarakhand High Court
has erred by quoting a non existent passage from an
applicable judgment, namely, Aditanar and quoting a portion
of a property tax judgment which expressly stated that G
rulings arising out of the Income Tax Act would not be
applicable. Quite apart from this, it also went on to further
quote from a portion of the said property tax judgment which
was rendered in the context of whether an educational H
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[2015) 3 S.C.R.
A society is supported wholly or in part by voluntary
contributions, something which is completely foreign to
Section 10(23C) (iiiad). The final conclusion that if a surplus
is made by an educational society and ploughed back to
construct its own premises would fall foul of Section 10(23C)
B is to ignore the language of the Section and to ignore the
tests laid down in the Surat Art Silk Cloth case, Aditanar
case and the American Hotel and Lodging case. It is clear
that when a surplus is ploughed back for educational
purposes, the educational institution exists solely for
C educational purposes and not for purposes of profit. In fact,
in S.RM,M.CT.M. Tiruppani Trust v. Commissioner of
Income Tax, (1998) 2 SCC 584, this Court in the context
of benefit claimed under Section 11 of the Act held:
D
E
F
G
H
"9. In the present case, the assessee is not claiming
any benefit under Section 11 (2) as it cannot; because
in respect of this assessment year, the assessee has
not complied with the conditions laid down in Section
11 (2). The assessee, however, is entitled to claim the
benefit of Section 11 (1 )(a). I~ the present case, the
assessee has applied Rs 8 lakhs for charitable
purposes in India by purchasing a building which is to
be utilised as a hospital. This income, therefore, is
entitled to an exemption under Section 11 (1 ). In
addition, under Section 1.1 (1 )(a), the assessee can
accumulate 25% of its total income pertaining to the
relevant assessment year and claim exemption in
respect thereof. Section 11 (1 )(a) does not require
investment of this limited accumulation in government
securities. The balance income of Rs 1,64,210.03
constitutes less than 25% of the income for Assessment
Year 1970-71.