As per the Section 10 (23C) (iiiab) of the Income Tax Act, it clearly specifies that apart from the applicant looking for exemption being any education institution or another university, such exemptions to educational institutions under section 10(23c) would be granted if such educational institution existed “exclusively or solely” for the purpose of providing educational service and “not for the purpose of profit making”.
Should such exemptions to educational institutions under section 10(23c) be available only when funded by Government?
Further, it should be either wholly or substantially financially funded by the Government. However, there was no dispute regarding that the existence of the University, as the University was established solely for educational purpose and not for profit making.
Is the Institute earning good profits eligible for exemption u/s 10(23)
The dispute rose by the revenue, whether the University exists solely and exclusively for educational purpose and not for profit making; whether the University thoroughly started earning income by collecting fund under various heads from students in the colleges associated to it and thereby make huge profit; and whether the University is wholly or substantially financially funded by the Government.
An institute which recurrently makes more than 10% to 15% of surplus is running for profit & is not eligible for exemption which is available to charitable institutions as per the income tax. The University was not a defined “State” under the article 289(1) of the Constitution of India.
In Instant Case, Education Institution got just 1% of Government Assistance. Would it be eligible for exemption under section 10(23)
In Visvesvaraya Technological University vs. ACIT 384 ITR 37 (SC), the court observed that the University gets hardly 1% financial assistance from the Government out of its gross total receipts. It is also apparent from the record that the University used the financial assistance by the Government only for developing purpose and not for othe purposes as provided under the provisions of the Section 23 of the Act of1994.
Surplus should be reasonable Surplus to be Tax Exempt
Until that “surplus” is considered as “reasonable surplus”, the exemption can be granted without any difficulty under section 10(23C) (iiiab) of the Income Tax Act. “Surplus” cannot exceed the limit prescribed under the income tax act which is 10% – 15% so as to meet unforeseen expenditure or contingencies.
If any educational institution or any University under the costume of “surplus” start making a huge profit, then such educational institution or University would cease to exist for not making a profit and in that case, it would not be eligible to claim any exemption under this provision of the Income Tax Act. (AY. 2004-05 to 2009-10)
The court held that the appeals filed by the University stand dismissed. All the issues formulated by the court are answered arrived in favor of the tax department and against the assessee.
Related Read- Tax Exemptions of Educational institutions under section 10(23C) (iiiad)
