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Mahi yadav By: Mahi yadav
August 5, 2022
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The Income Tax Act 1961 is the legislation governing the implementation of direct taxation in India. The government is conscious of its role and importance as a welfare state and in fulfilling its duty as enumerated in the directive principles of state policy, protection in mode of exemption from income tax has been provided to the educational institutions including universities and colleges.


The meaning of "education" under Section 2(15) of the Income Tax Act 1961 (hereinafter referred as IT Act or Act) has been deciphered by the Hon'ble Gujarat High Court in GUJARAT STATE CO-OPERATIVE UNION VERSUS COMMISSIONER OF INCOME-TAX[1] whilst placing reliance upon the judgment of the Hon'ble Supreme Court in SOLE TRUSTEE, LOKA SHIKSHANA TRUST VERSUS COMMISSIONER OF INCOME-TAX, MYSORE[2] whereby the conventional meaning was widen to include new forms of educations. The said principle was used by the learned Income Tax Appellate Tribunal, New Delhi in the matter of NIIT FOUNDATION VERSUS CIT (E) , NEW DELHI [3],  wherein the learned Tribunal held that narrow and conventional meaning of the term "education" cannot be employed in the present time where the education is restricted to the brick and mortar classrooms having benches and blackboard, resultantly, the assessee in the present case which is collaborating with the Universities and Colleges to impart information technology (IT) educations in remote areas shall be eligible for benefits as per the provisions of the Act.

The Hon'ble Delhi High Court in the matter of DELHI MUSIC SOCIETY VERSUS DIRECTOR GENERAL OF INCOME TAX [4], has held that

"11.    Even if these tests are applied to the case of the petitioner the petitioner fulfils them. As has already been noticed, the petitioner is teaching and promoting all forms of music and dance, western, Indian or any other. In accordance with the object, it is running a music school in Delhi, collecting tuition fee and admission fee from the students. Teachers have been employed and they have been paid salaries. Expenditure is also incurred on the maintenance of musical instruments. All these are reflected In the income and expenditure account for the years ended 31st Match, 2006 to 31st March, 2010. The petitioner has also filed audited account for these years. In annexure P-5 to the writ petition, the petitioner has annexed a write up of its activities. From this, it is seen that there are S49 students enrolled with the petitioner who are taught western instruments according to their choice such as Piano, Guitar, Electronic Key Board, Wind Instruments, Drums and Vocal. The school faculty comprises of 30 teachers with 25 of them being Grade 8 and above in western music. There is reference to scholarships that are open to the students including waiver of fees from 25% to 90%. It has been stated that several students of the school have gone on for higher musical studies to places like Moscow, London, New York, Prague and Rome. The schedule of fees effective from April, 2011 is also made part of the annexure. There are rules and regulations governing the running of the school which are also made part of the annexure. The main rules and regulations are that the school works for all seven days a week and remains closed only on national and public holidays; that the school year is divided into four terms of three months each; that students who are attending instrumental music classes would be taught individually by the teachers; that dance students would be taught in groups; that there would be workshops/lecture demonstrations arranged for the benefit of the students from time to time and that attendance in such workshops would be compulsory; that students who report late by more than 20 minutes may be marked absent and so on. There is also a rule that the students who are irregular in attending the classes or absent themselves frequently for long periods without prior intimation, would be removed from the rolls and if any of the students are found lacking in application or discipline, they are liable to be terminated by the Principal.

12.     It is seen from the above that the petitioner is being run like any school or educational institution in a systemic manner with regular classes, vacations, attendance requirements, enforcement of discipline and so on. Those provisions in the rules and regulations satisfy the condition laid down in the judgment of the Hon'ble Supreme Court, Sole Trustee, Loka Sikshana Trust, cited (supra) that there should be a process of training and developing the knowledge, skill, mind and character of the students by "normal schooling". It cannot be doubted that, having regard to the manner in which the petitioner runs the music school, that there is imparting of systematic instruction, schooling or training given to the students so that they attain proficiency in the field of their choice - vocal or instrumental in western classical music."

The learned ITAT in another matter of DY. DIRECTOR OF INCOME TAX (E) VERSUS THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA [5] has held that the assessee which is a statutory body and conducting coaching classes for the students pursuing professional course of chartered accountancy, then such activity of the assessee is incidental to the primary object of the assessee and thereby, eligible for availing appropriate benefits under Section 11 and other related provisions of the IT Act.

Thus, from the hereinabove cases, it is abundantly clear that the meaning of "education" has been expanded to cover not only conventional education but also other modes of skill development.


Section 10 of the Income Tax Act titled as "Incomes not included in total income" under sub-section (23C) provides exemption hereunder:-

  • The university or other educational institution which are wholly or substantially financed by the government and has been setup solely for education purpose and not for profit purpose are entirely exempted from income tax as stated under Section 10(23C)(iiiab).
  • The university or other educational institution which are not funded by the government but are established solely for educational purposes and not for profit shall be eligible for exemption of income tax if the annual receipts of such organization are less than Rs. 5 crore.
  • University or other educational institutions beyond the scope of Section 10(23C)(iiiab) or 10(23C)(iiiad) who are established solely for education and not for profit would require approval from the Principal Commissioner or Commissioner as stated in Section 10(23C)(vi) of the Act.
  • The university or other educational institution setup under "charitable purpose"[6] approved by the Principal Commissioner or Commissioner in that regard shall be eligible for exemption as stated under Section 10(23C)(iv) or (v) of the Act.

The Hon'ble Supreme Court in M/S. QUEEN’S EDUCATIONAL SOCIETY VERSUS COMMISSIONER OF INCOME TAX [7] laid down principles to adjudge whether an organization would fall within the scope of Section 10(23C), entitling for exemption from income. The Hon'ble Court held that:-

"11.    Thus, the law common to Sections 10(23-C)(iii-ad) and (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 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 cease to be one existing solely for educational purposes.

(5)      The ultimate test is whether on an overall view of the matter in the assessment year concerned the object is to make profit as opposed to educating persons."

The Hon'ble Supreme Court placed reliance on the aforesaid test in another matter titled as CHIEF COMMISSIONER OF INCOME TAX, CHANDIGARH VERSUS ST. PETER'S EDUCATIONAL SOCIETY, CHANDIGARH AND GULAB DEVI MEMORIAL HOS. TRUST [8]

The Hon'ble Supreme Court in the matter of VISVESVARAYA TECHNOLOGICAL UNIVERSITY VERSUS ASSISTANT COMMISSIONER OF INCOME TAX [9] has again examined the scope of various clauses under Section 10(23C) of the IT Act which will entitle the different organization of taking benefits. The Hon'ble Apex Court observed as hereunder:-

"12.    Universities and educational institutions entitled to exemption under the Act have been categorised under three different heads, namely, those covered by Sections 10(23-C)(iii-ab); 10(23-C)(iii-ad) and 10(23-C)(vi) of the Act. The requirement of the University or the educational institution existing “solely for educational purposes and not for purposes of profit” is the consistent requirement under Sections 10(23-C)(iii-ab), 10(23-C)(iii-ad) and 10(23-C)(vi). However, in cases of universities covered by Section 10(23-C)(iii-ab) funding must be wholly or substantially by the Government whereas in cases of universities covered by Section 10(23-C)(iii-ad) the aggregate annual receipts should not exceed the amount as may be prescribed. Universities covered by Section 10(23-C)(vi) are those other than mentioned in sub-clause (iii-ab) or sub-clause (iii-ad) and which are required to be specifically approved by the prescribed authority.

13.     Having regard to the text and the context of the provisions of Sections 10(23-C)(iii-ab), 10(23-C)(iii-ad) and 10(23-C)(vi) it will be reasonable to reach a conclusion that while Section 10(23-C)(iii-ab) deals with government universities, Section 10(23-C)(iii-ad) deals with small universities having an annual “turnover” of less than rupees one crore (as prescribed by Rule 2-BC of the Income Tax Rules). On a similar note, it is possible to read Section 10(23-C)(vi) to be dealing with private universities whose gross receipts exceeds rupees one crore. Receipts by way of fee collection of different kinds continue to be a major source of income for all universities including private universities. Levy and collection of fees is invariably an exercise under the provisions of the statute constituting the university. In such a situation, if collection of fees is to be understood to be amounting to funding by the Government merely because collection of such fees is empowered by the statute, all such receipts by way of fees may become eligible to claim exemption under Section 10(23-C)(iii-ab). Such a result which would virtually render the provisions of the other two sub-sections nugatory cannot be understood to have been intended by the legislature and must, therefore, be avoided."

The first proviso of Section 10(23C) provides the eligible person to apply for grant of approval (fresh or renewal) for falling within the scope of sub-clauses of (iv) or (v) or (vi) under Section 10(23C) and the limitation. The second proviso prescribes that on receiving the application, the Principal Commissioner or Commissioner shall either grant the approval for 5 years or reject the application. Further, the Act requires that income of such institutions shall apply to foster its aims or object or may also accumulate not more than 15% and if accumulation is exceeding the threshold of 15% then such accumulation ought not to be more than 5 years. Also, restriction has been casted upon investing or depositing of funds other than the permitted mediums as specified under the Act. The explanation 1 of the proviso clarifies that the income of the university or any other educational institutions shall not include voluntary contributions if such contributions form the part of the corpus of the institution.

The Finance Act 2022 has inserted new provisions i.e. explanations 3, 4 and 5 to 3rd proviso of Section 10(23C) with regard to accumulation which shall come into effect from 01.04.2023. The explanation 3 of the 3rd proviso of Section 10(23C) explains the treatment of the remaining 85% of the income not invested towards the aim or object of the institutions during the previous year whereby, if the conditions as stipulated under the Act such as accumulation not exceeding 5 years in totality and money invested in terms of Section 11(5) of the Act shall result in not inclusion of the income accumulation in the total income of the previous year of the persons in receipt of the income. Also, the accumulation is exceeding 5 years on account of injunction or any other order by a court, such accumulation will not form part of the accumulation. However, if the accumulation does not fulfill the conditions as stipulated in explanation 3 then it shall be deemed to be the income of the person for the previous year as per explanation 4. In exceptional circumstances which are "beyond the control of the person", the Assessing Officer on receipt of application may allow non-inclusion of the accumulation to the income of previous year despite not investing the accumulation as per clause (b) of Explanation 3.


The application of Section 10(23C) of IT Act shall be applicable on the trust as the trust/society shall be the assessee and if eligible would apply for exemption accordingly. The Hon'ble Bombay High Court in THE COMMISSIONER OF INCOME TAX (EXEMPTIONS) , PUNE VERSUS DECCAN EDUCATION SOCIETY [10], has explained the principle as:-

"5.      Section 10(23C)(iiiab) grants exemption in relation to any income received by any person on behalf of any university or other educational institution existing solely for educational purposes and not for the purpose of profit, and which is wholly or substantially financed by the Government. This provision, thus, exempts the income received by a person on behalf of the institutions specifying the requirements of the said clause. The exemption is not relatable to the individual institution run under the common umbrella of a Trust. Therefore, if the assessee trust satisfies the statutory requirement noted above, the exemption provision would apply, irrespective of the fact that in isolated cases of a few institutions runs by such Trust, the requirement may not be seen to have been fulfilled. From the above, it is very clear that it is the trust or the society that has to apply for registration and claim exemption. Had it been the intention of the legislature to grant exemption only to the institutions individually or independently and not to the society as a whole, the language would have been different. The society or trust may run more than one institutions. Therefore, the argument of the Revenue that it should be institution specific and not the society as a whole in our opinion is not correct."


The 7th proviso states that the benefit enumerated under clause (vi) of Section 10(23C) of the Act shall be eligible to university and educational institution only if the profits and gains of business is incidental to attainment of aim and object of the institution and separate book of accounts are maintained, otherwise, the benefit shall not be extendable to the institution.


It is important to note that Section 2(24) of the IT Act defines "income" wherein under clause (iia), income includes any voluntary contribution received by the university or other educational institution. Thereby, aid or grants or donations received shall be included as "income". Section 12 of the IT Act prescribes that the income shall comprise of voluntary contribution (except made with a specific directions), however, voluntary contribution with specific directions shall form corpus but not be treated as income as per 13th proviso of Section 10(23C). Further, who receive voluntary contribution shall be deemed to be income derived from property in terms of Section 11 and resultantly Section 13 shall apply accordingly. The treatment of voluntary contribution has to be dealt in accordance of provisions under Section 10(23C), 11 and 12 of the IT Act.

For competence under Section 12, the organization/institution is required to be registered under Section 12A in the prescribed manner by the Principal Commissioner or Commissioner. Section 12AA provides the procedure for registration.          


Section 80C(1) prescribes that an assessee is eligible for a deduction of not more than Rs. 1,50,000/- and sub-section (2) under clause (xvii) provides that the tution fee paid to a school, university or college or other educational institution is eligible for deduction for any two children of the individual assessee. 


Section 80E permits deduction on account of interest of education loan.


The Income Tax Act 1961 provides multiple relieves to the educational institutions from complete to partial exemption from the income generated solely from education. Such relaxations have significantly contributed in development of education sector in the country resultantly helping in upliftment of the society in entirety.

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[6] Defined under Section 2(15) of the IT Act as "(15) "charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

 (i)    such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii)    the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;"

[7] 2015 (3) TMI 619 - SUPREME COURT



By: Mahi yadav - August 5, 2022



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