Mere Generation Of Surplus From Year To Year Cannot Be A Basis For Rejection Of Application U/s 10(23C) (vi) Income Tax Act: Rajasthan HC

In the present matter, the petitioner-Trust claiming that it was being run solely for educational purposes, had sought an exemption under Section 10 (23C) (vi) of the Act of 1961, arguing that the generation of surplus from year to year cannot be bar in seeking such exemption.

Accordingly, while referring to Queen’s Educational Society v. Commissioner of Income Tax, (2015) 8 SCC 47 and the clarificatory circular so issued, a Bench of Justice Dr. Pushpendra Singh Bhati and Justice Munnuri Laxman was of the opinion that the petitioner’s case needs to be duly considered by the respondents.

Advocate Sharad Kothari appeared for the petitioner and Advocate K.K. Bissa for the respondents.

In the present matter, a dispute arose between a charitable trust and tax authorities regarding the eligibility for tax exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The petitioner, a Charitable Trust registered both as a Trust and a Society, filed an application seeking exemption for the financial year 2011-12. However, the application was rejected by the Chief Commissioner of Income Tax.

It was submitted by the respondents that the petitioner did not fall under Section 10 (23C) (vi) of the Act of 1961 for the purposes of exemption, because the surplus being generated is not incidental to educational purposes.

However, the petitioner had argued that even for carrying on an education institution for charity, some surplus is bound to follow for various reasons, and therefore, the impugned action of the respondents in not extending the exemption to the petitioner was arbitrary and illegal.

The Ministry of Finance, Department of Revenue, Central Board of Direct Tax issued a Circular dated August 17, 2015, providing clarification on issues pertaining to the grant of approval and the claim of exemption under Section 10 (23C)(vi) of the Income Tax Act, 1961. The circular addressed concerns raised regarding the generation of surplus income by educational institutions and its impact on tax exemption eligibility.

According to the circular, the mere generation of surplus income from year to year by an educational institution cannot be a basis for rejecting its application for tax exemption under Section 10(23C)(vi) of the Act. It emphasizes that accumulation of income is permissible if it is used "wholly and exclusively" for the objectives for which the institution is established.

Therefore, it was clarified that surplus generation alone does not disqualify an educational institution from seeking tax exemption unless the accumulation is contrary to prescribed legal provisions.

Resultantly, the Bench while partly allowing the appeal, remanded the matter back to the respondents with a direction to re-consider and decide the application in question preferred by the petitioner under Section 10 (23C) (vi) of the Act of 1961, strictly in accordance with law, including due adherence to the aforesaid precedent law as well as the aforementioned clarificatory circular..

Appearances:

Petitioner: Sharad Kothari

Respondents: K.K. Bissa

Cause Title: Chandigarh Manav Vikas Trust C/o Chandigarh Hospital v. Chief Commissioner Of Income Tax, Ayakr Bhawan [Neutral Citation: 2024:RJ-JD:10456-DB]