Supreme Court (SC) – accords literal (narrow) interpretation to the word “solely” appearing under section 10(23C) of the Income tax Act, 1961 (the Act) for educational institutions. Overrules Division Bench rulings in Queens Education Society and American Hotel.

SC in a recent ruling1 dismisses batch of appeals arising from a judgment of the Andhra Pradesh High Court (HC) that denied the appellant Trusts the benefit of exemption under section 10(23C) of the Act. Key highlights of the ruling are summarized below. Civil Appeal No. 3795 of 2014 M/s. New Noble Educational Society v. The Chief Commissioner of Income Tax 1 and ANR. with Civil Appeal No. 3793 of 2014; Civil Appeal No. 3794 of 2014; Civil Appeal No. 9108 of 2012; Civil Appeal No. 6418 of 2012.

1. Section 10(23C) of the Act provides for tax exemption to charitable trusts, societies or institutions existing “solely” for educational purposes and not for the purposes of profit;
2. The word “solely” was, however, interpreted by two previous Division Bench rulings in 2008 (American Hotel and Lodging Association2) and 2015 (Queen’s Education Society3) to mean that the test for determination was whether the principal or main activity was education or not, rather than whether some profits were incidentally earned. The SC in those rulings followed the “predominant object” test laid down by the Constitution Bench ruling in Surat Art Silk4.
3. The three-judge bench of the SC headed by Chief Justice of India Uday Umesh Lalit overruled the previous judgments, declaring that the word “solely” must be accorded a literal interpretation since the intent of the legislature is clear that tax exemption should be granted to only those institutions which impart formal scholastic learning. “Education” has been interpreted to be essentially in the nature of a “charitable activity” conducted for upliftment of the society-at-large. The SC, while interpreting the law, relied on the 11-judge bench judgment in the TMA Pai Foundation case of 2002.